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Armenia: The Challenges of Growth
Armenia: The Challenges of Growth

COMPETITIVE EDGE: THE PITFALLS OF MONOPOLIES, AND THE CHALLENGES OF A BUSINESS-INFLUENCED PARLIAMENT


by Haroutiun Khachatrian

Competition is the basis of the free market economy, which is why state regulations exist for the protection of fair business practice. In countries such as Armenia, still finding their way in their evolving commercial structure, the need to ensure fair competition is especially critical. In Armenia's case, a country of only three million and about 30 percent poor, there is little to fight over, further underscoring the absolute necessity for an even playing field for all.

Most major trade in Armenia is controlled by relatively few tycoons—better described in Armenia as oligarchs. With the dismantling of the Soviet Union, previously non-existent opportunities for personal wealth opened like vaults at a bank for those in place to walk in and take the goods. Opportunists wasted no time in easing, or in some cases muscling, their way into positions of proprietorship that re-funneled the flow of cash from state coffers to their own.

Like many facets of business life in Armenia, some things are simply "understood," which may or may not be officially transacted, legalized, or publicly documented when it comes to ownership or control. Authority over some of Armenia's major markets, though, is well known.

The most evident is the market for sugar, in which the Salex Group enterprise, belonging to businessman Samvel Alexanian, controls 91 percent of the market. Less pressing monopolies are registered in some other sectors, such as cement, which is controlled by two monopolist businessmen, Gagik Tsarukian and Mikael Baghdasarov. Three companies combine to control the import of petrol, including one with Tsarukian ties. Fleetfood, another company belonging to Alexanian, dominates the import of butter and ethanol.

Economic advisors have cautioned Armenian leadership against allowing the welfare of the republic (i.e., its major trade markets) to rest in the hands of only a few. Following this advice, the government of Armenia, in January 2001, established the State Commission for the Protection of Economic Competition.

Members cannot be dismissed by the government. The Commission's duty is to monitor activity and to identify areas influenced by "dominating positions"—a category defined by control of more than one-third of a particular market.

Being a "dominant" player or even a monopolist in a given market is not prohibited by law. Only when the Commission determines that a business entity misapplies its dominating position (through, for example, intimidation of potential competition), may fines be imposed.

Currently, a Commission list contains the names of 60 companies having dominating positions in Armenia. Many on the list are true monopolies, and in some cases—such as natural gas supply, postal service, railroads –monopoly ownership can hardly be avoided. (And industries that in other countries might be state monopolies, in Armenia have been sold to foreign investors. The Russians, for example, control natural gas delivery, and a Dutch company recently acquired operation of the postal service.)

And in some cases, the government has encouraged monopoly ownership as a bargaining tool for attracting investors, the most commonly known example being ArmenTel.

In 1997, this company, then mostly state-owned, was awarded a 15-year monopoly to ensure its privatization, as there was no guarantee that foreign investors would be attracted to Armenia with its economic blockade, and no clear prospect of growth. The monopoly covered practically all areas of telecommunication. A year later, 90 percent of ArmenTel's shares were sold to a Greece-based company, OTE. The monopoly was partly broken in 2005 when ArmenTel was deprived of the monopoly rights on mobile telecommunication. A second mobile operator, Vivacell (owned by a Lebanese investor), entered the market in July 2005, which was followed by rapid development of the market, propelled by fierce competition between the two operators. As a result, in two years the number of mobile phone subscribers jumped from 260,000 to almost 1.5 million, and Vivacell alone claims to have more than one million users. In parallel, the two operators were involved in another race, to make their services cheaper (prices are now on average half as much as two years earlier).

Armenian authorities have on several occasions expressed their commitment to avoid monopolies as far as possible. President Robert Kocharian, himself, has made efforts to restore sugar production in the Lori province which, if achieved, could encroach on Alexanian's import business. The president even attended a founding ceremony in 2001, announcing a new refinery. (In Soviet times, a plant in Shirak processed sugar that was consumed by Armenia and other members of the USSR. The plant was destroyed in the 1988 earthquake.) Similar to other initiatives that look good on paper, the sugar plant has yet to be realized.

Whereas many of these monopolies are seen as a sort of "necessary evil," usually not of general consequence to the population (after all, the prices for sugar are not very high in Armenia, hardly influenced by who the importer is), there are some cases where the monopoly can have negative impact.

For example, ArmenTel is believed to have delayed the development of modern Internet service in Armenia, with prices that were comparatively higher than in developed countries which offered better service at cheaper rates. (Armentel's Internet monopoly is expected to end by next year.) And, in the World Bank's mostly flattering report last year in which Armenia was called "The Caucasus Tiger," the authoritative institution also identified several bottlenecks hindering further economic progress. The existence of a "National Carrier" (currently it is Armavia, also controlled by Baghdasarov)—which is given a de facto monopoly in air traffic—has thrown Armenia well behind similar countries, the report says, resulting in poor service in the company and high prices of airline tickets.

Former Prime Minister Hrant Bagratian, who was the main ideologist behind the market reforms of the early 1990s in Armenia, estimates that 55 percent of Armenia's Gross Domestic Product (GDP) is controlled by 44 families. By comparison: In Russia, 40 families control 16 percent of GDP; in the United States 400 families control 10 percent.

The market reformer says a more troubling trend than monopolization is the blurring of lines between business and politics, created when businessmen become politicians.

At least 25 of Armenia's 131 Members of Parliament are businessmen or are known to own a controlling stake in lucrative businesses.

Alexanian became a Member of Parliament in 2003 and is affiliated with the ruling Republic Party of Armenia, led by Prime Minister Serge Sargsian. Tsarukian, who is believed to be the wealthiest man in Armenia (though reliable estimates of his wealth do not exist), created his own political party—Prosperous Armenia—and won 25 seats in the current National Assembly.

Khachatur Sukiasian, millionaire owner of Sil Concern, which includes shopping plazas, a chain of restaurants, and factories that produce food, furniture and plastics, has been an MP since 1999, elected as an independent. He has publicly stated the value—if not, in fact, the necessity—of having businessmen in charge of lawmaking. Sukiasian says his entry into politics was not so that he could influence law that would favor his enterprises and the well-being of his several hundred employees, but rather to protect his businesses from ill-conceived laws that would damage him.

"I don't think that it is a long road from economy to politics if a businessman has leverage, is literate, has an image, experience and is accepted by society," he told 168 Hours newspaper during last spring's parliamentary campaign. "We shouldn't separate a businessman from an intellectual, (nor) an athlete from a politician. I want to understand: What is the profession of a politician that it should exclude the businessman who has manifested himself capable and has shown competitive results?"

Election to parliament in Armenia carries with it exemption from criminal prosecution. In the 16 years of independence, the National Assembly has only twice revoked an MP's immunity. Thus, a situation is created by which men (only 12 MPs are women) who own businesses are empowered to enact laws governing business, while enjoying immunity from felonious wrongdoing.

"I don't think you can protect your business through membership in the National Assembly," Sukiasian told Radio Free Europe/Radio Liberty in 2006. "On the contrary, you are more likely to face various political problems (as a result of the position)."

An argument favoring parliamentary immunity is that, in countries such as Armenia where the ruling regime exerts nearly totalitarian control, no opposition would exist at all, if lawmakers feared trumped-up prosecution simply for voting contrary to pro-government ideology.

Not unlike the occasional Washington D.C. controversy when lawmakers are scandalized for receiving kickbacks from Beltway lobbyists, the impact of votes on Yerevan's Baghramian Avenue sometimes falls into gray areas related to the coziness of business and politics here.

Recently the government adopted a decree regulating taxi services, according to which cars more than 10 years old would not be able to get a taxi license. It is, of course, a good thing to improve regulations for public transport. But even good intentions fall under suspicion in this system . . .

Standing in line to benefit from the new decree is businessman Andranik Manukian, whose company, Ararat Lada, is on the Commission's list as having a dominating position in importing cars from Russia. The company is the main source of taxis in Armenia. Nothing wrong there, except that the Lada-import owner is also a member of the government of Armenia, serving as its Minister of Transport and Communications (the very body that oversees taxi regulations).

The State Commission for the Protection of Economic Competition has a considerable task, challenged by operating in an environment where business ownership is not always transparent, and where the major players are not only well known, but frequently feared. But strides are being made.

Last December, the Commission suspected that egg suppliers were colluding to artificially raise prices to benefit from the New Year holiday season, its most lucrative period. In fact, the Commission's investigation confirmed its suspicion and three suppliers were fined an amount believed to be about one-fifth of their December sales. (Exact amounts were not disclosed, but were levied according to one percent of annual income.) The producers contested the fines in the Economic Court, but the Commission's decision held.

Originally published in the November 2007 ​issue of AGBU Magazine. Archived content may appear distorted on your screen. end character

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