US Department of State on Armenia`s Investment Climate: A Critical  Look

ArmInfo.  The US Department of State has presented  an overview of the state of the investment climate in Armenia ''2020  Investment Climate Statements: Armenia''. Analysts of the Department  of State in addition to the achievements aimed at improving this  area, a review of the legal economic framework, have identified the  weaknesses of the investment climate that do not facilitate the  foreign direct investment (FDI).

As the report notes, Armenia imposes few restrictions on foreign  control and rights to private ownership and establishment. There are  no restrictions on the rights of foreign nationals to acquire,  establish, or dispose of business interests in Armenia. Business  registration procedures are straightforward. According to foreign  companies, otherwise sound regulations, policies, and laws are  sometimes undermined by problems such as the lack of independence,  capacity, or professionalism in key institutions, most critically the  judiciary.  Armenia does not limit the conversion and transfer of  money or the repatriation of capital and earnings. The banking system  in Armenia is sound and well-regulated, but investors note that the  financial sector is not highly developed. 

Overall, the competitive environment in Armenia is improving, but  several businesses have reported that broader reforms across  judicial, tax, customs, health, education, military, and law  enforcement institutions will be necessary to shore up these gains.  Despite progress in the fight against corruption and improvements in  some areas that raise Armenia's attractiveness as an investment  destination, investors claim that numerous concerns remain and must  be addressed to ensure a transparent, fair, and predictable business  climate. An investment dispute in the country's mining sector  (related to Lydian Armenia company- ed. note) has attracted  significant international attention and remains outstanding after  several years. 

Armenia has strong human capital and a well-educated population,  particularly in the science, technology, engineering, and mathematics  fields, leading to significant investment in the high-tech and  information technology sectors. Many international companies have  established branches or subsidiaries in Armenia to take advantage of  the country's pool of qualified specialists and position within the  Eurasian Economic Union (EAEU). However, many businesses have  identified challenges with Armenia's investment climate in terms of  the country's small market (with a population of less than three  million), relative geographic isolation due to closed borders with  Turkey and Azerbaijan, per capita gross national income of $4,230,  and concerns related to weaknesses in the rule of law.

As the report notes, after a dramatic change of government in  April/May 2018, major sectors of Armenia's economy have ostensibly  become more open to competition. Large businesses backed by  oligarchic interests are notionally less able to draw on government  support to prop up their market positions. An anti- corruption  campaign was launched after the 2018 change of government, and a  series of high-profile cases have resulted as part of efforts to  eliminate systemic corruption. These developments serve to improve  Armenia's investment climate and competitive environment, though the  fight against corruption needs to be institutionalized in the long  term, especially in critical areas such as the judiciary, tax and  customs operations, and health, education, military, and law  enforcement sectors. Foreign investors are still concerned about the  rule of law and equal treatment.

There have been concerns regarding the lack of an independent and  strong judiciary, which undermines the government's assurances of  equal treatment and transparency and reduces access to effective  recourse in instances of investment or commercial disputes.  Representatives of U.S. entities have raised concerns about the  quality of stakeholder consultation by the government with the  private sector and government responsiveness in addressing concerns  among the business community. 

The Armenian government nominally uses transparent policies and laws  to foster competition.  Some report that Armenia's new government has  pursued a more consistent execution of these laws and policies in an  effort to improve market competition and remove informal barriers to  market entry, especially for small- and medium-sized enterprises.   Armenia's legislation on the protection of competition has been  improved with clear definitions and newly introduced concepts on  issues such as price manipulation, imposition of fines as a  percentage of revenue versus fixed amounts, and penalties for state  officials.  However, companies regard the efforts of the State  Commission for the Protection of Economic Competition (SCPEC) alone  as insufficient to ensure a level playing field. They indicate that  improvements in other state institutions and authorities that support  competition, like the courts, tax and customs, public procurement,  and law enforcement, are necessary.  Numerous studies observe a  continuing lack of contestability in local markets, many of which are  dominated by a few incumbents. 

Businesses tend to perceive that many Armenian courts suffer from low  levels of efficiency, independence, and professionalism, which drives  a need to strengthen the judiciary.  According to UNCTAD, rent  seeking and inefficiencies are among the key constraints on investing  and doing business in Armenia. Very often in proceedings when  additional forensic expertise is requested, the court may suspend a  case until the forensic opinion is received, a process that can take  several months.  Businesses have noted that many judges at courts of  general jurisdiction may be reluctant to make decisions without  getting advice from higher court judges. 

There are also problems related to Intellectual Property Right (IPR).  Despite the existence of relevant legislation and executive  government structures, the concept of IPR remains unrecognized by a  large part of the local population. The onus for IPR complaints rests  with the offended party.  The police assert that the majority of  cases are settled through out-of-court proceedings. While the  Armenian government has made some progress on IPR issues,  strengthening enforcement mechanisms remains necessary. UNCTAD  reports that low awareness and poor monitoring of IPR violations harm  the business climate.

Financial intermediation tends to be poor. Banking sector assets  account for over 80 percent of total financial sector assets. Nearly  all banks require collateral located in Armenia, and large collateral  requirements often prevent potential borrowers from entering the  market.  U.S. businesses have noted that this creates a significant  barrier for small- and medium-sized enterprises and start-up  companies.

There is not a widespread understanding of responsible business  conduct (RBC) in Armenia, but several larger companies with foreign  ownership or management are introducing the concept. Initiatives,  where they do exist, are primarily limited to corporate social  responsibility efforts. However, RBC programs that do exist are  viewed favorably.  Some civil society groups and business  associations are playing a more active role to promote RBC and  develop awareness. 

Corruption remains a significant obstacle to U.S. investment in  Armenia, particularly as it relates to critical areas such as the  justice system and concerns related to the rule of law, enforcement  of existing legislation and regulations, and equal treatment.   Investors claim that the health, education, military, corrections,  and law enforcement sectors lack transparency in procurement and have  in the past used selective enforcement to elicit bribes.  

https://www.state.gov/reports/2020-investment-climatestatements/armenia /?fbclid=IwAR06sq6AZ6m- BaRJuLXn_K4HlrjxQ4mzHJVc1PfRSCOP3XCSw7IIZPYRBXw