Thursday, April 3 2014

 

Armenia
is intensively moving towards signing of the agreement on accession to the
Customs Union. This is how the Government imagines this process, which is to be
over by late 2014. However, it is hard to imagine how our country will manage
to format hundreds of earlier adopted laws, bylaws, regulating documents and
international agreements, as well as to considerably change the vector of
international trade relations and the logic of economic development within such
a short period of time. In fact, many independent experts believe that Armenia
is not so well prepared for that hundred meter race, however, it is certainly
able to get through that test if it properly thinks over each of its steps in
the very complicated negotiations with the Eurasian Commission. Below is
ArmInfo’s interview with Armenian Minister of Economy Vahram Avanesyan, who
describes the main difficulties and the key tasks of the country in fulfillment
of the road map on accession to the Customs Union.         

 

Mr. Avanesyan, my experience of
communication with certain political and economic circles of Belarus and
Kazakhstan demonstrates that our future partners in the Customs Union are not
so pleased with the real state of affairs in the Customs Union. Russia, which
is building the future Eurasian economic community, is harshly defending its
own market and insisting on numerous waivers. Belarus and Kazakhstan disagree
with so many waivers from the common customs regime. Russia’s market attracts
them with its sizes. Armenia, a small country, intends to sit at the
negotiating table with its long list including nearly 800 items. I can’t even
imagine the response. After all, the Customs Union is a union and there should
be as few waivers as possible or there should be no waivers at all. As an
importing country, we are interested in a maximally free regime for both import
and export items. On the one hand, we want no rise in import duties to protect
our producers and the population against the price boost, and on the other
hand, we are interested in the lack of export restrictions because our
producers face the prospect of immense market. The situation is so tense that
one doubts whether we will be strong enough to wangle the needed preferences
from the Customs Union members.               

 

We ought to
be strong. But for the moment we are at the first stage of negotiations, which
are being held within the Eurasian Economic Commission.  We have not yet started discussions with the
countries. We have submitted our list of waivers to the Eurasian Commission.
Later, each group of goods will be negotiated.
It is not a matter of
commodities as such. The matter concerns the role they are playing for the
economy today and what role they will play as raw materials for production or
as consumer goods. All this is still being discussed at a technical
professional level on the basis of rather serious analytical work. Moreover,
today we should take into account the importance of these commodities for our
future partners.

 

Yes, it
will be difficult to do this. Of course, all countries are as moody as we are.
Don’t these negotiations cover the third countries yet?  

 

They don’t.
The matter concerns the Customs Union countries. At the first stage of
implementation of the so-called “road map” we are to clearly substantiate the
commodity groups that need waivers from the current customs regime in the
Customs Union. After the discussions at the Eurasian Commission, we will switch
to the second stage – to more detailed discussions with the member-states of
the Customs Union.   

  

Let’s
speak of the raw materials for our manufacturers. They are mostly imported from
the third countries and the rise in tariffs will directly lead to the growth in
the prime cost and ultimate price and will also result in reduction of
competitiveness.      

 

Certainly,
we are seriously working at it. For instance, we receive timber, would
laminate, etc. from many countries and manufacture local inexpensive furniture.
Wood is also used in construction. We are also working at future-oriented
commodities, i.e. primary goods we may need tomorrow to fulfill the key
directions of industrial production development. Our reasoning is that the
economy will develop and the import of raw materials and components will grow.
It this light, it is important to do everything possible for rehabilitation of
chemical industry and other fields related to low-tonnage chemistry and
pharmacy. 

 

The
Government has decided to rehabilitate the lapidary industry and strengthen the
jewelry industry. Here we cannot depend on ALROSA’s supplies or on Russian gold
only. Moreover, the few lapidary enterprises in the country have recently
refused to receive Russian raw materials at all.

 

We have
already launched the talks on lapidary industry. Certainly, we cannot depend on
the Russian raw materials only, even on those supplied at low prices. We’ll
have to look for compromises here, and I think we’ll find them. We have signed
an agreement, under which no export duty will be levied on the Russian border.
It is very important. Today our share in the lapidary industry is very little.
We have idle production facilities and we are short of professionals. We’ll
have to train people again. I think we’ll cope with that task and will breathe
new life into the sphere. Anyway, in order to do that, we need to maintain the
advantages on gold and diamonds implied by our legislation. Generally speaking,
diversified supplies of rough diamonds to Armenians will pose no threat to the
Russian manufacturers.          

 

How will
we manage to ensure the balance between the commitments to the World Trade
Organization and the requirements of accession to the Customs Union? 

 

This is
quite a different part of negotiations concerning the World Trade Organization.
We should find optimal rate zones between the WTO and the Customs Union with
due regard for the fact that the CU tariffs will be declining.  

 

Russia
is currently working at issues related to unification of currency and monetary
legislation within the Customs Union. I think the decline in tariffs will go on
along with formation of a currency union, the so-called ruble zone. According
to the Russian mass media, the regulatory framework is already being prepared.
Otherwise, I think, the effect from the Customs Union will not be big. It is my
personal point of view. Otherwise, Russia will have to put the political cart
before the economic horse. It is not pragmatic, because it is almost impossible
to create an economic union with literal lack of borders between the partners
with so much different weight categories.

 

That
question exists, but I cannot say to what extent it is connected with the
tariff policy reduction. Another important thing is that there should be no
waivers in the Customs Union at all, because, the Union implies a different
open ideology. But our countries’ economies cannot be compared by their interests,
first of all. There is a big difference between those producing petrochemicals
and those who do not. There is also a big difference between those having a
large sale market and those with a too small market or between those having 12
thsd USD revenue per capita and those having only 3 thsd USD per capita. But I
am convinced that in this very context we are on the winning side.  

 

As regards
the WTO, Russia assumed certain commitments when joining the Organization 10
years after we joined the WTO. When the Customs Union was being established,
Russia signed an agreement saying that the foreign (general) customs tariffs of
the CU countries will be declining in compliance with Russia’s commitments to
the WTO. Therefore, we won’t have to be guided by the WTO tariffs but we’ll
need to consider the issue in general, i.e. we’ll need to find out how much
important certain commodities are for our economy and population.     

 

Does it
mean that we will put the tariff policy under manual control and consider each
commodity group?

 

Yes, it
does. And we’ll need to do that with due regard for the available structure of
economy and industry. For instance, it is no secret that the tariff structure
of Europeans and the CU member-states is differentiated not only by the
commodities but also seasons. They apply seasonal tariffs. We did not do that because we thought that we
need no administrative red tape and that we should not play with the resource
prices. This was theoretically considered to reduce the economy efficiency,
because in this case resources would make their way to where their tariff
burden is smaller rather than where they operate better. This is a constant
theoretical dispute in the field of regulation of foreign trade activities and
tariff policy, and the dispute has not been over so far.

 

I think
the Ministry of Economy will not be enough here. Serious analytical centers and
institutions are needed. In the meantime, we should do something with the total
corruption, oligopoly, and monopolies… 

 

Yes, we
should inquire into the situation in economy, receive signals from the market,
entrepreneurs, and manufacturers. And today we are doing it to give a good
account of ourselves. To achieve economic efficiency, many countries study the
inner structure of wages, the level of interchangeability of products, etc. We
should also learn to do that. It is very important to have clear arguments in
the negotiation process.

 

Let’s return to the weight categories.
From the viewpoint of the real sector, our economy is very weak and can fail to
withstand the commodity pressing of the partners in the Customs Union. While we
are adjusting to their immense sales market, our partners may glut small
Armenia with high-quality and inexpensive goods and it will be impossible for
Armenia to create its own significant goods. We’ll merely be trampled
underfoot.   

 

If this
were to happen, it would have already happened. Why? We have an open market
with the CIS countries, but the transport costs are big. Therefore, the import
from Russia and other CIS countries is not cheap. Against this background, we,
a small country, are developing our processing industry (for instance, the food
industry) well enough.    

 

However,
not only importers but also exporters have transport costs. Exporters have even
more transport costs given the Armenian logistics, which is not developed well
enough. Nevertheless, we should admit that this field has recently registered
some progress.   

 

This is why
Armenia should be an open country. Given the narrow domestic sales market, we
should focus on export. It is the only opportunity to survive and develop. The
Customs Union provides us with an opportunity of a vast export market.
Certainly, the European market is larger, but it has higher competition and more
technical regulations. In the Customs Union we will receive numerous
preferences and if we manage to retain the European preferences at the same
time, there will be no better foreign economic regime for us. Therefore, the
Government is working at an export-oriented policy and it realizes that it is
impossible to do without serious technologies in the current competitive
division of labor in the world. And our business community is not so much ready
for that yet. The technologies I mean concern not only the quality standards of
services and commodities made in Armenia, but also the manufacturing process
management, entry into new markets, etc.

 

We have
been trying to adjust our standards, legislation, and regulatory framework to
the European standards for almost 10 years. Europeans have spent a lot on this
process. What do we see now? It has turned out that no one needs that.       

 

This is a
wrong conclusion. On the contrary, the new rules and regulations have been of
good service to us. It’s good that the state was pushing the business to high
standards by means of these programs. If you are ready to work with Europe, you
are undoubtedly ready to work with your CU partners. In general, each country
has its own standards and regulations and if you enter a particular country’s
market, you should be ready for it, because there are no unified standards.
These programs have been of good service to both officials and businessmen. The
East and the West focus on two parallel processes – unification process on the
one hand, and protection of their own market on the other hand. The entry into
other markets demands product certification, and if you have managed to receive
the needed certificate under international standards, it does not yet mean that
your goods can easily be imported to any country. All countries want to be
export-oriented; therefore, our technologies should produce high-quality goods
to enter particular markets.           

 

I am a
little bit skeptical about the possibility of the technological breakthrough of
our industrial production. If big economists of Russia say that it lags behind
the West for 20-30 years, in case of Armenia, I am simply sad. As for the basis
of the Customs Union, everybody is for its development on the basis of
industrial-technical innovation. Although, this way is extremely difficult, but
it is our last hope, otherwise we will lag behind forever. China needed more
than 25 years and huge resources so that to come closer to this way.

 

I think
that the CU may give us markets as well as joint projects in the innovation
spheres. In case of good management, the countries of the CU may reach much for
a short period of time. All of us have a great scientific and staff potential.
We simply need drawing out of priorities and certain stable general policy for
development of the innovation sector. Integration will open very much
interesting prospects for the branches that need markets. Big business, the
monopolist state structures and the government should be the customers of the
IT production. We should support these processes at the state level. At the
same rime, it is wrong to take all this only within the frames of the CU
borders. Members of the CU are not going to build a fence around themselves. On
the contrary, they want to join efforts, markets, innovations and technologies
with a purpose of developing towards the world. As for Armenia, it should
concentrate at the markets close to us, and later gather potential, enter the
European market, Asia and wherever else.

 

As a
minister and analyst, do you imagine the structure of our economy in 10 years?

 

I think it
will be more diversified than today. I think that the mining industry will be
3.5-4% of GDP and not more. The processing industry, including metalworking and
agriculture products processing will be about 12.5%-13.5%. The pharmacological
industry is still low technological in our country, but has been developing not
so badly. I think that in 10 years the share of the industrial sector of the
country will be about 21-22% of GDP. Energy will remain at the 3-4% level, the
IT sector - at 4% level. Production of jewelry and diamonds will grow much. I
think that a very serious niche for the textile industry will be opened in the
country, as there are certain signs of that. The niche will open as China, the
world textile monopolist, has been gradually developing technologies and
opening new ways for other countries to restore their own light industry
sectors. I think that in the current geo-political conditions heavy engineering
and machine tool building will hardly be able to develop in our country. But we
shall be able to concentrate at two-three groups of light goods by producing
some IT production means for our production. Do you remember that 10 years ago,
when lapidary industry was well developing in the country, we started producing
modern lapidary machines? There was higher demand for them. Nevertheless, I
think that the share of engineering will not exceed 1.5-2%.

 

You
know, I used to study the viewpoints of the consulting companies about the
pilot projects of the export-oriented companies. And sometimes it seemed to me
that these projects were made as an order. For instance, the government wants
pharmacy to make an unprecedented leap or to surpass Georgia in wine
production. So let’s draw figures and top. They decided to open an office for
the Armenian cheese export, but failed. If you do not have professionals, if
nobody can fulfill the decisions and conceptions of the government, maybe, you
should invite specialists from abroad, offer them a specific job and demand
true results.

 

I don’t
want to comment on all your assessments, as like an economic journalist, you
have such a right. However, I do not agree with you. As for the priority
directions of industry drawn out under the order of the government, I think
that the priority directions were chosen correctly. They are based on a rather
professional analysis but not on the wish list of the government. Moreover,
drawing out of the strategy and programme of events in different sectors did
not and could not suppose drawing out of the ready-made business-projects.
Their goal is to guide the industrial policy when adopting decisions for the
sake of the given sector. As for the specific investment projects, they should
be chiefly ordered, drawn out and fulfilled by the private sector. In this
context, the more predictable is the government, the easier for the private
sector to determine its development strategy.

 

But
where are you going to take money from for all this? The volume of foreign
investments dropped by 40%, local investments do not grow. Do you hope for the
pension reform? The entire macroeconomic stability reposes on the $2 billion
transfers from the Diaspora per year, which our economy cannot even absorb. It
turns out that this money, which was not earned in the country, preserving an
illusion of the macroeconomic stability, is chiefly spent to finance import,
leaving less taxes and big profit to our big importer-monopolists.

 

On the one
hand, I would not place stake only on foreign investments jumping for the last
years. For instance, in 2008 only two sectors – telecommunication and energy
provided 80% of foreign investments. One should remember that foreign
investments to such countries as Armenia are of a short-term nature and very
much mobile. It means that they are not stable. I think that the level of
foreign investments within 20-25% out of the total investments would not be a
bad result for us. As for the local investments, one of the priority tasks for
the mid-term outlook is to create in the country the opportunities for
accumulation of stable money and to put our stake on these resources.   

 

Does it
mean that it is more important for us to make local investments in the total
capital?

 

The level
of foreign investments is a unique barrier of the quality of business climate
in the country. This is very much important, although it partly reflects the
situation in the world economy. As for the volumes of local investments in the
total capital, this is what we should link our hopes with, first of all. This
indicator is stable in the country. It is bad that this indicator does not grow
but good that it does not fall. This process should be supported and given
impulses. Actually, 25% - 27% level of foreign investments is not a bad
indicator for Armenia. The 7-8% industrial growth is not bad either. You see,
not everything is spent to cover import. Now we understand that it is
impossible to gain serious results only by means of standard reforms. We need
other measures. Moreover, we need industrial zones according to the territorial
principle, new tools for financing of projects and very much risky venture
capital. We need grants, help for certification, for entering new markets, for
transportation. To be short, we need to use all the tools, which are called the
industrial policy. 

 

You are
an optimist, and I am jealous of your optimism.

 

Otherwise,
I would not occupy the position of the minister.

 

Thank
you for the interview.