Although the economic crisis that hit the world last year has also staggered the Armenian economy, some light can now be seen more and more clearly at the end of the tunnel, which gives hope of rebound.
While the economy contracted by 16.3 percent in the first half of 2009 as compared to the same period of last year, the state slowly but surely manages to stay consistent in its adopted anti-crisis strategy and register some positive developments in business.
Among the crucial determinants of the government's anti-crisis program is the attraction of foreign funds and their targeted channeling into the sphere of social spending, as well as the development of construction, high technologies and small and medium-sized enterprises. Authorities see this as a sign that recovery is nearing.
In late summer, Prime Minister Tigran Sarkisian stated that as a result of the anti-crisis steps taken by his government in the first half of the year, the economic decline should slow by year's end and cause a positive influence on annual economic indicators.
"The annual economic contraction will be 12 percent; a cycle of recovery will begin at the end of the year. This is our preliminary forecast," said Sarkisian.
Certain statistics back up the prime minister's optimism.
Decrease in decline portends growth
Some positive signs surfaced by late spring. For example: about a 40 percent growth of economy was registered in June against the previous month. And the month-to-month growth in construction in June against May was 230 percent. (For clarity, though, it should be noted that "growth" effectively represents a slowing down of decline.)
Construction accounted for high rates of growth for six consecutive years and likewise accounted for the high pace of decline in Gross Domestic Product that started this year. Considering this circumstance, the Armenian government made a decision in spring to provide more than $50 million-worth of credit guarantees for construction.
Politeconomia Research Institute director Andranik Tevanian estimates that the steps taken by the government for the construction sector are sufficient to boost economic activity in the sphere and ensure its growth.
"The fact that 20 billion drams (more than $50 million) were allocated to developers as credit guarantee and the same amount is expected to be provided to the mortgage market, may stop the decline in the construction sector," says the economist.
In the coming months, construction will also be assisted, thanks to the launch in early July of the first National Mortgage Company (NMC).
NMC is the much-heralded loan supervision project set up by the government through the Central Bank of Armenia. Central Bank put up about $14 million for the program, with supplemental financing coming from Russia's $500 million "stabilization" loan extended early this year.
Its founders believe that the NMC's operations will help achieve the reduction of mortgage rates and growth in the amount of mortgage loans issued by commercial banks.
"This will open a window of opportunities for commercial banks in terms of issuing mortgage loans with more reasonable terms and boosting the market," said Central Bank Chairman Arthur Javadian.
Eight selected commercial banks will receive refinancing if they provide mortgage loans according to NMC terms and the amount of credit might reach up to $55,000.
Financial consultant Manuk Hergnian, head of the Economy and Values Research Center in Yerevan, praises the idea of setting up such a mortgage program.
"The idea of setting up a mortgage foundation is an important initiative. The thing here is that in order to achieve success, the number of loans needs to increase. On the other hand, government resources are limited," says Hergnian.
Loans, in fact, had increased by early September (through support of the NMC's guarantees), as participant banks had refinanced some 30 loans totaling about $150 million. According to special advisor to the Prime Minister, David Harutiunian, NMC expects to refinance another 60 loans, totaling $300 million.
Nevertheless, even economists find it difficult to make forecasts under the conditions of the continuing economic crisis.
Analysts consider unequivocally positive the government efforts to attract outside financing, and Nienke Oomes, the Armenia resident representative of the International Monetary Fund (IMF), which has provided Armenia with a credit of more than $820 million, says the credits borrowed by Armenia have not yet reached the risk limit.
The government has used some of a total of more than $1.8 billion of loans acquired from foreign agencies to shore up the mining industry, which was the first and one of the most heavily crisis-hit sectors of the economy. In particular, a loan of $10 million was provided to the copper-molybdenum plant in Kajaran and $14 million loaned to the copper-molybdenum plant in Agarak.
Representatives of the hi-tech sector have also received government support.
Minister of Economy Nerses Yeritsian says the government has stretched a helping hand to IT companies that have a potential but have lost foreign customers because of the crisis.
"We offer participation of capital and crediting to such companies. And if they really manage to demonstrate a professional approach to business, including marketing of their own products, we are ready to help them solve the problems caused by the crisis," says the minister.
The Instigate Design company, which has been engaged in design and automation of microelectronic devices in Armenia since 2005, was among IT sources in need of such assistance.
"We did not have staff layoffs conditioned by the economic crisis as we received assistance from the government due to cooperation with the Small and Medium-size Enterprise Development and Assistance Center. (a USAID-sponsored project). We received resources in order not to cut jobs and in order to work for our own production," says Arman Poghosian, executive director of Instigate Design, which has a staff of 110.
"However, we suffered the loss of a total of $25,000 because of the instability of the euro," he adds.
Nevertheless, according to Poghosian, the department in charge of the company's business development also anticipates new opportunities.
"Of course, it is possible that the companies that have not yet entered the market with their products will close, since, for example, they are financed by some foreign banks or companies. But on the other hand, we expect also an increase in orders, because it is possible that many customers will turn to Armenian companies to save some money," says Poghosian.
Many economists have said on numerous occasions that it is necessary to make adjustments in due time in order not to suffer great losses from the crisis and, on the contrary, earn benefits.
"Such global economic crises offer countries like ours an opportunity also to reap some benefits. It is possible to import new technologies that we could only dream about a few months ago, at lower prices," says Economics Professor Tatul Manaserian.
According to the economist, in this case much depends not only on the government, but also on companies, which should show business activity and build competitiveness.
Network of support
The government is not alone in its help to the business community in building competitive and healthy businesses. One of several organizations, the American Chamber of Commerce in Armenia (AmCham) is one of the oldest, which has been operating in Armenia since 2000.
Currently, AmCham has around 80 member companies, which represent various business sectors, such as financial services, insurance, banking, energy and mining, information technologies, consumer goods, manufacturing, tourism, marketing and promotion, infrastructure development, etc.
"One of the most important areas of AmCham activities is lobbying for the business interests of its members in its efforts to create a more competitive business environment in Armenia," says the executive director of AmCham Diana Gaziyan.
AmCham is a member of the Business Support Council (BSC), chaired by Prime Minister Sarkisian. Within the framework of the BSC, AmCham members have chances to submit their legislative comments and suggestions. For example, recently, AmCham members submitted their feedback on a proposed government tax code.
AmCham is well known for its lobbying activities in the area of Value-Added Tax (VAT) refunds to businesses (exporters). The amount of VAT refunds owed by the state to exporters of Armenia has reached tens of billions of drams, amounting, in some cases, to up to 3 billion drams (about $10 million) to a single company.
"This is causing profound frustration among U.S. and other investors and negatively affecting the business climate of the country," says David Atanessian, president of the AmCham Board of Directors. "Furthermore, delays in VAT refunds substantially increase the cost of doing business in Armenia."
As a result of AmCham advocacy, the state included VAT refunds in its 2009 budget—the first time ever VAT refunds were so budgeted. Atanessian says many companies have succeeded in getting their VAT refunds, but the general economic slowdown may negatively affect this process.
Besides lobbying activities and advocacy work, AmCham serves as a strong networking tool for its member companies. It creates opportunities for its members to enlarge the scope of their business contacts and find new partners. One example is the AmCham Member to Member program.
"The idea of the program is, on one hand, increasing business turnover of members by providing discounts and therefore getting new clients, and, on the other hand, enjoying discount rates on services and products provided by other program participants. In the past the program was limited to AmCham members only. Currently, it includes companies outside of AmCham membership who can offer but cannot enjoy discounts in their turn," says Gaziyan.
AmCham is also actively involved in promoting the Corporate Social Responsibility (CSR) concept in Armenia along with other organizations, namely UN Global Compact, Eurasia Partnership Foundation, and British Council. A recent survey by AmCham shows that while emerging, the concept of CSR has only just begun to have relevance here.
CSR a new concept
While progressive companies such as communications leader VivaCell-MTS invest in cultural and social projects, the notion of corporate contribution to social welfare is still in its infancy in Armenia.
"As a corporate citizen, we feel lonely," says VivaCell-MTS general manager Ralph Yirikian. "Certain organizations do some things, but it isn't CSR. Of course, we are not discouraged, because we know that time is needed for the formation of a sense of corporate responsibility. But if we stand together, we can solve many more problems."
AmCham executive director Gaziyan says the major misunderstanding is between the concept of CSR and philanthropy: "We are trying to assert that CSR is not philanthropy. It is something more strategic; it should relate to the business and, in the long term, affect a company's competitiveness and profitability."
According to Gaziyan, many companies believe themselves socially responsible after making a one-time donation toward a public good. "Most companies, when they start doing CSR, are looking for immediate returns, which is not going to happen. It is about long-term investment and long-term returns. It is not a one-time act, it is a strategy."
Theoretically, CSR is part of corporate management and a means for the business to influence the public.
Sociologist Tatevik Simonian says this phase of corporate management, that is, the businesses being more forthcoming to the public, is only in conception in Armenia: "CSR is one of the basics of corporate management, and many companies now try to implement it. Banks have particularly become active recently.
"We, nevertheless, have the VivaCell-MTS Company leading PR and social responsibility policies quite intensively; we constantly hear about it. And it seems the company implements all those approaches described in theoretical literature, which are close to ideal."
Since 2005, VivaCell (which became VivaCell-MTS last year) has spent $16.5 million for Corporate Social Responsibility programs, implementing educational, cultural, healthcare, and environmental projects. "CSR focuses only on social issues, and CR (Corporate Responsibility) goes beyond the limits of social assistance and targets education, science, healthcare, and so on," says Yirikian.
The general manager mentions with certainty that no matter how many projects his company implements, there is still much more to be done: "Especially as our income comes from the pockets of the people, a designated portion, then returns to the people, in the form of programs that solve certain problems."
"This way, our subscribers become part of those CSR programs and receive their support," Yirikian adds.
The gift of apartments to 20 families in Gyumri on the 20th anniversary of the 1988 earthquake was one of the company's programs that received the greatest feedback. After that, many new customers signed up for VivaCell-MTS, thus trying to have their share of contribution, even a small one, in the company's social activities.
"People see that this company thinks not only about making money, but returns some of its revenues to society. It is very good that our activities establish the beginning of volunteer activities; for example, certain departments in our company do small volunteer projects with their own means," Yirikian says proudly.
Sociologist Simonian mentions that people in Armenia identify Yirikian and VivaCell-MTS with charity: "But in fact it is an investment, a long-term investment in the business. Indeed, VivaCell-MTS realizes that if the company develops, it needs to develop parallel to the society."
Yirikian considers the tendency in society of identifying him with a philanthropist as logical: "For many years we have not seen such an attitude, but in my opinion it is a normal and natural responsibility. The young state is not yet capable of providing everything by itself; it needs assistance for the benefit of the country and the nation."
Hopeful indicators
The state has managed to have some success by itself, even in conditions of the crisis. Some reassuring indicators in economic tendencies were registered in the first half of 2009.
A 38 percent increase in exports was registered in June against exports in May, due to which the overall export vector has turned in the direction of growth. In particular, the export of apricots has nearly doubled compared to 2008—from 6,910 tons to more than 12,000 tons.
Another hope-inspiring indicator is the absence of inflationary pressures in Armenia, which is positively evaluated by Premier Sarkisian.
"The level of inflation is three times as low as during the same period last year—inflation in seven months of last year was 10.5 percent, and during the same period of 2009 was around three percent; moreover, 1.5 percent is conditioned by the rise in gas and electricity tariffs. The inflationary environment is favorable, and we will close the year with a low level of inflation," says Sarkisian.
A 0.9 percent growth was registered in the services sphere in the first six months of this year, as compared to the same period of last year.
An extension program for Women's Entrepreneurship organized at the American University of Armenia (AUA) indirectly contributes to the cause of increasing the number of companies in the services and production sphere.
The program operating with the assistance of the Armenian International Women's Association (AIWA) has organized six courses since 2006 (two of them in provinces—Ashtarak and Gavar). A total of 90 women have acquired skills necessary for starting a business as part of these programs.
Special program manager at AUA Anahit Ghazarian says 20 of the participants have already started their own enterprises after completing the courses, such as a hairdresser's salon, a medical center, a café, a print-house, a kindergarten, a bed-linens factory, etc.
"The most successful was the course organized in Ashtarak. At the end of that course, all participants presented impressive business plans that we had difficulty in selecting the best," says Ghazarian.
She places importance on AIWA's financial assistance and stresses that participation in courses is free of charge. However, contact with participants is not limited to courses alone. Upon completion they also have an opportunity to communicate through a network of other participants.
"We ourselves try to use the services of the companies started by the women. For example, we do all our printing activities at the print-house opened by one of our participants. The participants themselves help each other. As an example, the director of the kindergarten buys all linens for the kindergarten from the participant who runs a bed-linens factory," says Ghazarian.
