Friday, July 29 2022 23:29

ArmInfo.Armenia's small market size, relative geographic isolation due to closed borders with Turkey and Azerbaijan, weaknesses in the rule of law and judiciary, and a  legacy of corruption are obstacles to investment. This is stated in  the statement of the US State Department on the investment climate in  Armenia for 2022.

"Over the past several years, Armenia has received consistently  respectable rankings in international indices that review country  business environments and investment climates.  Projects representing  significant U.S. investment are present in Armenia, most notably  ContourGlobal's Vorotan Hydroelectric Cascade and Lydian's efforts to  develop a major gold mine. U.S. investors in the banking, energy,  pharmaceutical, information technology, and mining sectors, among  others, have entered or acquired assets in Armenia. Armenia presents  a variety of opportunities for investors, and the country's legal  framework and government policy aim to attract investment, but the  investment climate is not without challenges",  the document notes.   According to the source, obstacles include Armenia's small market  size, relative geographic isolation due to closed borders with Turkey  and Azerbaijan, weaknesses in the rule of law and judiciary, and a  legacy of corruption.  "Net foreign direct investment inflows are  low.  Armenia had commenced a robust recovery from a deep 2020  recession prior to the introduction of new sanctions against Russia.   GDP growth reached five percent in 2021 and had been expected to  continue to grow in 2022 by at least five percent.  As a result of  the war and sanctions imposed on Russia, Armenia's 2022 GDP growth  forecast is now just above one percent."

The State Department reminded that ,"In May 2015, Armenia signed a  Trade and Investment Framework Agreement with the United States. This  agreement established a United States- Armenia Council on Trade and  Investment to discuss bilateral trade and investment and related  issues. Since 2015, Armenia has been a member of the Eurasian  Economic Union, a customs union that brings Armenia, Belarus,  Kazakhstan, Kyrgyzstan, and Russia into a single integrated market.   In November 2017, Armenia signed a Comprehensive and Enhanced  Partnership Agreement with the European Union, which aimed in part to  improve Armenia's investment climate and business environment."

According to the State Department report, there are no restrictions  on the rights of foreign nationals to acquire, establish, or dispose  of business interests in Armenia. "Business registration procedures  are generally 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. The U.S.- Armenia Bilateral  Investment Treaty provides U.S. investors with a variety of  protections.  Although Armenian legislation offers protection for  intellectual property rights, enforcement efforts and recourse  through the courts are in need of improvement," the statement says.

"Armenia experienced a dramatic change of government in 2018, when a  democratically elected leader came to power on an anti-corruption  platform after street protests toppled the old regime. Following the  2020 NK hostilities, in June 2021, the incumbent retained power in  snap parliamentary election that met most international democracy  standards.  The government continues to push forth with economic and  anti-corruption reforms that have improved the business climate.   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,"  the authors of the report note.

"Despite improvements in some areas that raise Armenia's  attractiveness as an investment destination, investors claim that  numerous issues remain and must be addressed to ensure a transparent,  fair, and predictable business climate. A number of investors have  raised concerns about the quality of dialogue between the private  sector and government.  Investors have also flagged issues regarding  government officials' ability to resolve problems they face in an  expeditious manner. An investment dispute in the country's mining  sector has attracted significant international attention and remains  outstanding after several years," the document reads.

Policies towards foreign direct investment

"The government of Armenia officially welcomes foreign investment.   The Ministry of Economy is the main government body responsible for  the development of investment policy in Armenia. Armenia has achieved  respectable rankings on some global indices measuring the country's  business climate. Armenia's investment and trade policy is relatively  open; foreign companies are entitled by law to the same treatment as  Armenian companies. 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), limited consumer buying  power, relative geographic isolation due to closed borders with  Turkey and Azerbaijan, and concerns related to weaknesses in the rule  of law," the statement notes.

It is noted that "Following a peaceful revolution in 2018 fueled in  large measure by popular frustration with endemic corruption,  Armenia's government launched a high-profile anti- corruption  campaign. 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 remain concerned about the  rule of law, equal treatment, and ethical conduct by government  officials. U.S companies have reported that the investment climate is  tainted by a failure to enforce intellectual property rights. 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," noted in the State Department.

Transparency of the regulatory system 

According to the authors of the report, "the Armenian government  increasingly makes efforts to uses transparent policies and laws to  foster competition. Some contacts have reported that over the last  few years the Armenian 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 clarifications  regarding key concepts. There have been some procedural improvements  for delivering conclusions and notifications of potential  anti-competitive behavior via electronic means. 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. Banking supervision is relatively well developed and  largely consistent with the Basel Core Principles." 

Legal system and judicial independence

"Armenia has a hybrid legal system that includes elements of both  civil and common law. Although Armenia is developing an international  commercial code, the laws regarding commercial and contractual  matters are currently set forth in the civil code. Thus, because  Armenia lacks a commercial court, all disputes involving contracts,  ownership of property, or other commercial matters are resolved by  litigants in courts of general jurisdiction, which handle both civil  and criminal cases.  Judges that handle civil matters may be  overwhelmed by the volume of cases before them and are frequently  seen by the public as corrupt. Despite the ability of courts to use  the precedential authority of the Court of Cassation and the European  Court of Human Rights, many judges who specialize in civil cases do  not do so, increasing the unpredictability of court decisions in the  eyes of investors.  

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. 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. Thus, the public opinion is  that decisions may be influenced by factors other than the law and  merits of individual cases. In general, the government honors  judgments from both arbitration proceedings and Armenian national  courts.

Due to the nature and complexity of commercial and contractual issues  and the caseload of judges who specialize in civil cases, many  matters involving investment or commercial disputes take months or  years to work their way through the courts. In addition, businesses  have complained of the inefficiencies and institutional corruption of  the courts. Even though the Armenian constitution provides investors  the tools to enforce awards and their property rights, investors  claim that there is little predictability in what a court may do." 

Corruption 

Corruption remains an 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.  Judges who  specialize in civil cases are still widely perceived by the public to  be corrupt and under the influence of former authorities. The  effectiveness and independence of newly formed anti-corruption  institutions remains to be seen.  Some individuals have voiced  concerns around whether certain judicial representatives and law  enforcement leaders have been selected objectively. The potential for  politically motivated, outside influence on these anti-corruption  institutions, as well as law enforcement bodies and prosecutorial  services, also remains a concern," noted in a State Department  statement.