The state should establish strict rules for its relations with  investors, rather than engaging in promiscuous partnerships with them  - Artur Ashugyan

ArmInfo.Yerevan, In late September, the Mining Armenia Forum was held in Armenia, organized by the Union of Miners and Metallurgists of Armenia. The forum was attended by representatives from almost all  mining companies in the country, specialists in various fields, environmentalists, representatives from various NGOs, and foreign guests.

The government was poorly represented, with only the head of  the Ministry of Territorial Administration and Infrastructure Gnel  Sanosyan, speaking at the forum. The Ministry of Economy, the Finance  Ministry, and tax authorities deemed their presence unnecessary,  despite the industry being the foundation of the country's economy.  ArmInfo News Agency has interviewed  Artur Ashugyan, a former head of  the Mining Industry Department of the Ministry of Economy and now an  independent expert in the field to discuss the role the state should  play in the development of the mining industry in Armenia.

- How do you think the mining conference went? What are your  impressions, given your extensive experience coordinating the  sector's activities for many years, even before privatization?

- To be honest, I found the conference to be quite enjoyable. It was  a first of its kind in Armenia, with impressive organization, large  number of participants, and meaningful discussions on industry issues  and challenges. A lot of credit  goes to the leadership of the Union  and ZMMC for identifying  key industry challenges. Despite the packed  agenda, the conference successfully highlighted the industry's main  issues that need to be addressed. And to be honest, I couldn't help  but feel a sense of deja vu during the conference. It was as if the  past 25 years of reforms in legislation had not taken place, with the  same questions, problems and same approaches being discussed. It made  me feel somehow younger. And of course, the fundamental question that  emerged was the relationship between the State and investor. Why the  basic one? The situation is similar to a couple in a long-term civil  partnership or cohabitation - they have children, a home, and one of  the partners consistently demands "let's get married, let's sign a  marriage contract", only to be met with "these are all formalities,  we are doing well as is, why do we need these formalities"? What do  you mean, why? To move to a new legal phase of the relationship! For  having confidence in the future! No marriage contract is necessary  when things are going well, it becomes essential - when they are not.  From this perspective, it was important to listen and communicate  with our foreign guests. While there were only a few foreign  participants, and they were presented at the expert level,  nevertheless, in my opinion, they still made a valuable contribution  to the discussion regarding the industry's future  prospects. I was  especially impressed by the speech given by a Kazakh colleague  regarding the legislative reforms in the mining sector  in  Kazakhstan. These reforms have  played a significant role in the  advancement of mining and in attracting investment to this country.  One piece of advice that resonated with me was the importance of not  initiating reforms unless you are  certain that you will complete the  reforms. Unfortunately, this phrase accurately reflects the current  state of  reforms in our country.

- And why are there no regulations in place currently? After all, as  far as I remember, the legislation in this field was once considered  the most advanced. Has this important component ceased to be  effective now?

- The need for reforms in mining was acknowledged at the start of the  millennium, leading to the prioritization of the industry and  adjustments to the privatization program. Mining enterprises were  privatized following the adoption of the Law on CONCESSIONS, that is,  the adoption of the rules of the game . The Law on  Concessions was adopted and in 2003 it received the main prize in the  nomination of the best legislation .  I would like  to proudly note that the ideology of this law and its verification  remain relevant even now. The law established new ethics and rules of  relations between the State and the investor, a kind of strong  marriage of convenience, with a contractual agreement. Discussions at  the forum, especially behind the scenes, underscored the necessity of  clearly defined rules for these interactions. But enacting and  implementing  a law is one thing, while comprehending its  implications is another: well, as a result, the advice from a Kazakh  colleague. Often, even now, the question of the states' role  is  oversimplified, focusing solely on technical and regulatory  standards, and viewing the state's role  as complete control and the  authority to regulate the rules of the game. However, the unique  nature of mining requires a different approach. Firstly, the added  value is generated from scratch, secondly, we trade in exchange  goods, meaning that the prices for products are determined by  exchange rather than the manufacturer. Thirdly, and most importantly,  the state has a dual role in mining. In addition to its regular  business relationships, there are also relationships of business  partners, as the subsoil is the state inalienable property, from  which it actually earns additional income in the form of royalties.   This second role is the stumbling block. Therefore, it is crucial to  establish stable rules of the game.

- What's wrong? What's the issue?

It's all about the lack of rules in the game and the lack of  guarantees for investors. This is despite the fact that the mining  industry in Armenia is the most investment-intensive sector of our  economy, and until now the largest direct foreign investments have  been made here, creating high-paying jobs and forming social  infrastructure around enterprises and at the expense of enterprises  in the regions. But, unfortunately, no progress has been made in the  last 15-20 years in terms of  reforms and stimulating industry  development.  If the state were to wash its hands of everything, I  probably wouldn't be too worried, but on the contrary, it doesn't  just interfere, it interferes when it pleases. The state should act  as a guarantor of investments in the industry. And these guarantees,  first of all, consist of creating legislatively prescribed rules of  the game and strictly following them.

 And how did the destruction of what was established at the  non-regulatory level start ?

 - It was a gradual process. Certain rules were simply violated and  the Law on Concessions was dismantled bit by bit through various  related laws. There is no longer a unified law and there are no  guarantees for investors seeking stable, serious long-term  commitments. In the 2000s, we dedicated considerable efforts to this  matter, recognizing its importance in attracting strategic  investments. We had hoped that both past and future governments,  would acknowledge the significance of this task and fully commit to  the reform. We succeeded here, as everywhere else. We enacted the  law, received global acclaim and praise, and that's it! The reform  process didn't advance as expected.  There were no well - defined  by-laws, structures governing the industry. After all, it was  initially assumed that the Law on Concessions would be integrated  into a comprehensive Mining Code, that would address all aspects of   the relationship  between the state and the investors,  investment,   and the technical aspects of the industry.

- And now all this is gone?

-  No. And this is sad. There are no established rules of the game,   no long-term strategic investments in place. It appears that we are  not yet at a mature stage in this regard. In Kazakhstan they are, but  we are not! After all, the Law on Concessions is the cornerstone of  this strategy,  regulating economic relations between  investors and  the state by 90%. Unlike other industries, the peculiarity of mining  as a business is that the investor creates added value from scratch,  using state property - the country's ore reserves. On the other hand,  this is a long-term business. This is not commerce, and not even  construction, this is a serious business, where the  investments may  take 5, 10, or even 15 years to pay off. All of this necessitates  thorough calculations based on serious research and huge investments.  The concession agreement serves precisely the purpose of regulating  the relationship between the state and the investor for many years,  legally binding them and establishing the rules of the game for at  least 25, or even more years. And no one has the right to violate  these rules. But in our country, this principle has not worked. The  state is constantly tempted to make changes, recalculate something,  or snatch something. As a rule, this is usually either driven by the  interests of specific individuals, or, more commonly, for fiscal  motives, based on the principle of . And the fact  that you can't do that with an investor doesn't seem to interest  anyone. It reflects a shopkeeper mentality that overlooks reputation  and is generally unable to work for the long term.

-  I understand your point. There are many examples from both the  distant and recent past. We can recall how tax officials, following  directives from their superiors, simply intractable  investors by recalculating taxes and royalties. After these investors  had invested  millions in building an enterprise, they were then  given ...

-  Yes, unfortunately, this is true. Calculating royalties for our  tax officials has proven to be a . They didn't  know how to do it, and since they lack the knowledge, they don't want  to do it. The size and calculation of royalties have undergone  multiple changes in recent years. Royalty is a fee paid for the use  of state property. In our initial royalty scheme, the maximum  percentage was up to 10.8%, applied to all super profits. This  percentage has now increased significantly. Currently, we have one of  the highest royalty rates in the world.

- What is the problem with high royalties?

-  They come from selling the resources that you extracted. For  example, if you produced a certain amount of copper concentrate and  sold this copper at a certain price based on the exchange rate, you  would than pay royalties from it. Royalty reduces the profit tax  base. That is, before calculating the profit tax, you pay your  royalty. The more you pay royalties, the less the profit tax. And the  challenge lies in the base royalty rate, as metal prices are  determined by the exchange, and may not always increase. If  the base  royalty rate is high, it could make the project unprofitable. By the  way, the law and the royalty formula were established in 2001-2002  when metal prices were at their lowest in 25 years. We can discuss  the definitions of super profits, increasing additional percentages,  but increasing the base percentage is highly undesirable. And yes, of  course, the percentages in the royalty calculation formula should  remain unchanged or don't become more burdensome.

- I see, and what happened to the law and the reform? 

-  They have ceased to exist, they have slowly and quietly passed  away: In Armenia, a genuine concession agency has never been  esablished. It turned out to be functionally castrated by the split  of decision-making powers between two ministries. As of now, one can  only speculate on what might have been. Then they gradually  eliminated one of the most basic instruments of the new law - a  complex license, requiring a license agreement. This is no longer  just a piece of paper. Beneath the document lies a full-fledged  license agreement outlining the economic conditions for field  development and serving as a long-term investment project. The main  thing is that any changes made by the state, such as tax legislation,  don't take immediate effect. Instead, there is a temporary adjustment  period, for example, 5 years, granted to the investor. The investor  gets the right to either work under the old taxation scheme, or  switch to a new one, if he wishes.  The agreement excludes many  outdated concepts that hinder the progress. The main principle is  that products, like copper concentrate, are considered exchange  commodities, and their price are determined not by the will of the  investor, but by the of the free exchange market.  Additionally, new postulates are replacing  old approaches and  calculations. Essentially it's a return to traditional principles.   No matter how we try to reform, we seem to end up with a Soviet state  farm.

- Much of what you are referring to was outlined in the first foreign  investment law, which was successfully forgotten just two years  later.

-  Yes. We can say that the law on concessions was an extension of  this legislation designed to encourage investments in businesses  related to state owned assets, such as subsoil resources. The repeal  of these laws and a significant setback in reforms resulted in a  decrease in investment appeal, both nationally and within the mining  sector, specifically. The reason, as I have already emphasized, is  the lack of clear initial conditions and rules of the game that are  understandable to the investor. The law was written for them and in  their . And as one of the ministers once told me, . I responded by saying  that . Our system is still burdened with  remnants of past economic relations, with many structures having  unclear control functions. The belief that only hardware  transformations can solve all problems is still alive. It is quite  natural for an investor to seek additional guarantees for the best  conditions for themselves,  which can hinder business development  when these guarantees are lacking. As a result, additional agreements  are concluded, and there are still no strict general rules. A notable  example of this is the suspended Amulsar project. No matter what  anyone says, this was a big blow to the country's investment  attractiveness. And, to be fair, this is not the first setback for  this project. There was also 2013, when the project was on the verge  of closure. After all, initially this project was given the green  light and a dedicated lane was provided. Investors spent more than  250 million dollars and... a classic of the genre, .  Base on my analysis, if the Amulsar project  had not been halted in 2018, it would have started operating in 2019  and generated close to half a billion dollars by 2020. At the current  gold price and production rate of 210 thousand ounces per year (about  $2,700 per ounce), the project would have yielded about $600 million  in sales annually. It seems that the budget didn't factor in  significant tax deductions amounting to hundreds of millions. I am  not even talking about the high multiplier effect of these  investments, as well as the uniqueness of this project, in terms of  both technological and economic efficiency. After all, the gold  content stands at 0.7 grams per ton of ore:

- But it is clear that Amulsar became a victim of domestic political  processes to "rock the boat".

- If there had been a strong legislative framework, this situation  could have been avoided! In this and similar cases, the laws should  function regardless of  changes in government. These are  the  guarantees for concession I am talking about. However, they do not  currently exist, and we naively ask ourselves, why serious investors  do not come to the country? The Amulsar project emerged in the  mid-2000s when Armenia ranked first  as a country with the best  legislation, providing investors in this area with the best  opportunities. Who suffered the most as a result? I believe the ones  who suffered the most  were not just the various investors of Western  pension funds, but our own country.

- Today, the new government appears to be tackling this issue by  receiving shares of the same Amulsar mine as a gift. Some shares of  the Zangezur Copper and Molybdenum Plant have already been  transferred.  What kind of mechanism is this? To be honest, I do not  understand it. Supposedly, the government will advocate for and  safeguard.

- From whom? From itself? Where to lobby? Like you, I could not  understand what kind of measure this is. Why do this? This is not a  function of the state at all. The state should establish strict rules  in its relationship with the investor, and not enter into a  relationship with them without a marriage contract.  After all,  if  there is a concession agreement, the state must protect both the  investments and the agreed rights of the investor, and ensure the  protection of its own  interests and property. After all, no one has  yet canceled marriage swindlers! The key aspect of the Concession  Agreement is that the state retains ownership of the resources being  invested in and it is responsible for ensuring their protection to  promote efficiency and attractiveness.

- If I remember correctly, the idea was that setting up processing  plants locally instead of exporting raw materials would help to  revive the country's lost industrial potential, particularly in cable  production and other  heavy industries. About 10 years ago, you were  directly involved in a project to build a smelter - a copper smelter.  What are your current thoughts on this topic? 

- Well, not 10 years, but 20 or even 25, these and similar ideas are  periodically brought up. I can't offer any optimistic outlook. What  is preventing the revival of cable production? Is it the historical  reluctance of the Armenian people towards cable? No. The main issue  is the necessity of cheap, easily accessible cathode copper  for  competitiveness. But where can we get it? Of course, from the local  copper smelter.  And where can we get copper concentrate for the  plant. It's right there. However, challenges arise at this point. We  don't have that much copper, as it's not currently being extracted  alas. We need to boost copper production by at least 2.5-3 times. And  how can we achieve that? That's correct, through investments, but  what is that? Let's return again to the QUESTION of the  relationship. Currently, very large smelters are  being constructed, and as a rule, near the coast or close to it and  with relatively cheap energy. Or, perhaps  ironically - we need to  have the Soviet Union, where both transport and energy cost pennies.  And today, unfortunately, we are dealing with inefficient and costly  logistics, expensive energy and limited resource base. That is, all  the fundamental basic conditions for building a smelter are not  suitable, in principle. Even if we were to try  to build the  smallest,  least efficient smelter with a capacity of 100,000 units-  we would  still not have enough raw materials for it. At most, half.  Just think, if we were to ship ore from Chile,  it would be more precious than gold.  At one point, our neighbors,  the Iranians, built the Sar-Cheshmeh plant near the Persian Gulf, in  the port of Bandar Abbas, with the capacity to accommodate 50,000  tons of dry cargo ships. Despite having significant copper reserves,  Iran imports additional copper-rich concentrate from Chile. We cannot  afford to do the same, as it would result in zero efficiency. I am  not saying anything about the gas price. Why not consider exploring  other options? For example, during the privatization of ZMMK, a  condition was set that all molybdenum supplied by ZMMK must be  processed in Armenia. As a result, with the expansion of capacity and  production, new plants were opened for the production of  ferromolybdenum. This is a widely used product in the steel industry,  with high demand and value. Now new enterprises are being  established: profitable and effective! No need to "blow the wool over  the hedgehog", it will not work. We need to identify profitable  niches with low logistics costs that are still open  in global  markets. Many markets are already saturated so  it is not advisable  for newcomers to enter those. The same applies to gold refining,  which is a fairly simple procedure and building a plant is not an  issue. We can engage in gold mining, and aim to reach a production  level of 7-8 tons with the launch of Amusar. However, certifying this  product will be very difficult due to huge costs, challenges and  standards. Not everyone is allowed, not everyone is welcome. Why? The  dore alloy we produce in the country is a completely exportable  product.  It is important to understand that  mining and processing  plants, metallurgy, traders, and portfolio investors are all distinct  and specialized components of the global mining industry.  You  understand, this is no longer the USSR, where hundreds of train cars  of ore from Kazakhstan and Uzbekistan were sent to the gold  extraction plant in Ararat. Now such cooperation is no longer  feasible, even within the EAEU. We have a lot of goods that are  almost ready for export. These includes almost all industrial  building materials and non-metallic materials, which are affordable,  but heavily reliant on logistics. You cannot, for example, transport  tuff and basalt to Russia in large quantities. While smaller  quantities can be exported for exclusive projects like constructing a  palace for a rich Armenian or an Armenian church, mass export is  impossible, as it is very expensive. However, there are niches, we  need to break through, we need to attract investors.  We must entice  them with stability, immutability and clarity of rules and  legislative guarantees from the state. Naturally, the long overdue  reform of investment legislation, particularly, the concession law is  not a panacea for all issues, but a necessary condition for further  development. This modernized Union can be the initiator, otherwise  why identify problems without implementing solutions? It is vital  to  avoid repeating past mistakes. The Government has accumulated a large  information base. And yes, do not embark  on reforms unless you are  committed to seeing them through to completion. And you need to  start, it is imperative!