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Chemical Industry in Armenia

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  • Chemical Industry in Armenia

    July 30 2004


    The chemical industry, once a leading industry in Armenia, is having
    a difficult time. Armenia has been unable to restore the chemical
    industry after years of inactivity.

    The government is attracting foreign investors to help solve the
    problem but Nairit-1 was the only large plant to begin production in
    the middle of last year.

    As a result, production in the chemical industry increased in the
    first few months of this year after dropping 17.5% in 2003.


    Before the collapse of the Soviet Union the chemical industry played
    a major role in Armenia's economy, producing mineral fertilizers,
    synthetic stones for instruments and watches, and fiberglass. The
    Nairit production center, the only producer of rubber in the Soviet
    Union at the time, formed the foundation of chemical production.

    The industry was hurt by the Karabakh conflict and the environmental
    movement that arose in 1988. The collapse of the Soviet Union
    essentially shut down Armenia's chemical industry for a long period,
    with some enterprises idle for more than 10 years.

    Some said the industry could not be restored after standing idle for
    so long, but attempts were made to restart chemical production.
    Armenia first tried on its own and then attracted foreign investors.
    Unfortunately most of these attempts were unsuccessful. Once
    production was resumed various factors forced plants to shut down and
    change owners. Some enterprises have changed hands several times and
    the industry continues to operate unsteadily.

    Industry specialists say the chemical complex needs state support.
    Companies need tax breaks and subsidies on gas and electricity rates.

    The industry also lacks qualified specialists and the ones they do
    have are approaching retirement. A source at Nairit, the leading
    chemical enterprise in Armenia, said the average age of employees at
    the plant is 56 and more than 250 specialists are 70 - 75. Teaching
    at colleges and universities has also declined.

    Once these problems are resolved and the chemical industry begins to
    function normally again, it could become one of the most profitable
    industries in the country. The production of household chemical
    products, paints, and so on is considered the main area for
    development of the industry. Armenia could also develop
    pharmacological and biological production. But so-called big chemical
    production by Nairit, the Vanadzor complex and Yerevan Tire Plant,
    will continue to form the foundation of the industry.

    Armenia has the capability to produce various chemical products,

    Plastics for manufacturing and household use;

    Technical rubber and asbestos products;

    Rubber and latex,

    Acids, oxides, and salts,

    Paint materials,

    Perfumes and cosmetics,

    Polymers, plastics, resin,

    Agri-chemical products and fertilizers,

    Household chemical products,

    Chemical elements and compounds.

    Production of paint materials grew 25.1% last year, chemical and
    pharmaceutical production grew 8.9%, and plastics production was up
    6.7%. Production of synthetic rubber and detergents dropped by 50%
    and 28.1%, respectively, which resulted in an overall drop in
    production in the chemical industry by 17.5%.

    The industry is growing this year with the resumption of production
    at Nairit, and was up 290% in the first four months. Production of
    paint materials grew 40.1% year-on-year in the period, chemical
    pharmaceutical production was up 33.4%, while production of plastics
    and cleaning agents and detergents dropped 17.5% and 1.3%,

    Chemical Rubber &
    industry Plastics
    2003 Jan-Apr 2003 Jan-Apr
    2004 2004
    Production in
    current prices (Mln dram) 7345.4 4732.9 1478.7 605.9
    ------------------------------------------------------------ --------
    Sale of finished products
    in current prices (Mln dram) 6606.8 3687.6 1463.3 516.7
    Physical index in comparable
    prices to same period of
    previous year (%) 82.5 3.9 times 181.5 164.7
    Share in processing
    industry (%) 2.6 4.9 0.5 0.6
    Source: National Statistics Service of Armenia.


    Nairit-1 is one of six companies in the world that produce
    chloroprene rubber and the only producer in the CIS. Chloroprene
    rubber is also produced by U.S. company DuPont, Germany's Bayer,
    France, Japan, and China.

    Though there are few companies that produce this type of rubber
    competition is fierce because the market is limited and shrinking.
    The Russian market is estimated at 5,000 tonnes of chloroprene
    rubber, the European market at 50,000 tonnes, the United States at
    100,000 tonnes, East Asia at 100,000 tonnes, and the entire world
    market is about 300,000 tonnes.

    Nairit can produce 30,000- 35,000 tonnes of rubber and must produce
    20,000 - 25,000 for production to be profitable.

    Nairit sells to Russia and the former Soviet republics, but periodic
    shut downs have resulted in a loss of the market and the company was
    able to restore its position only last year.

    Nairit was the monopoly chloroprene rubber producer in the Soviet
    Union until 1989. The company included two enterprises - Nairit-1,
    the production center, and Nairit-2, the research end of the
    business. Nairit also produced nitrogen (liquid and gaseous),
    carbonic acid, acetylene, liquid chlorine, various acids, chloroprene
    latex, various technical rubber products, and bleaching agents.

    Nairit was shut down in 1989 for environmental reasons and production
    was partially restored in 1992 - 1993, but the company closed again
    several times due to gas and electricity debt.

    Nairit had debt of $40 million in 2001 and the government decided to
    reorganize the company. Production capacity for chloroprene rubber
    production was spun off (Nairit-1) to create a debt-free enterprise,
    but some of the old debt was transferred to the new enterprise.
    Nairit-1 had debt of $35 million when it was transferred to Britain's
    Ransat Plc in early 2002.

    Ransat agreed to pay the debt and invest $25 million in the plant by
    2005. It also promised to increase chloroprene rubber production to
    25,000 tonnes in three years from 4,000 tonnes in 2001 (to 6,100
    tonnes in 2002, 10,000 tonnes in 2003, and 25,000 tonnes in 2004).

    Ransat was also supposed to invest $1.5 million in Armsvyazbank, the
    main creditor of Nairit-2 by February 6, 2003 and provide $5 million
    for bank capital by July 1, 2005 and pay debt of $14 million on loans
    made to Nairit.

    The company resumed production in 2002, but the plant worked only
    until November when electricity supplies were cut due to debt.
    Ransat-Armenia filed a lawsuit against the power company and Ransat
    suspended financing for Nairit.

    Nairit stood idle during the lawsuit and financing was cut off. The
    Armenian government in February 2003 said Ransat was not meeting
    contract obligations and froze Nairit-1 shares. Ransat had failed to
    invest $1.5 million in Armsvyazbank by February 6 and produced just
    3,500 tonnes of rubber in 2002, not 6,100 tonnes as planned.

    Ransat President Anil Kumar in April 2003 signed an agreement to
    transfer the Economic Development Ministry 100% of Nairit-1 to
    Armsvyazbank, which the company owed $14.2 million. The bank received
    600,009 shares with a par value of 10,000 worth 6 billion dram.

    The shares were transferred in management to Nairit Trust, owned by
    Russia's Runa-Bank. The bank invested $3.5 million in June 2003 and
    Nairit resumed production and produced 1,700 tonnes of rubber last
    year. It resumed exports to Russia, as well as to Ukraine, Iran,
    Kazakhstan, and Bulgaria.

    Armenia began preparing the chemical plant for sale to a Russian
    investor, namely Volgaburmash, which includes Runa-Bank and Samarsky
    Credit, 14 plants that produce drilling equipment, and 11
    construction divisions.

    The deal to sell 100% of Nairit to Volgaburmash was signed on April
    16, 2004. Officials said at the time the deal would take three and a
    half months to close as certain details were addressed. The deal is
    supposed to close July 30.

    The investor demanded a clarification of the accounts payable and
    receivable at Nairit-1. An audit conducted by a French company showed
    the company has payables of about $23 million and receivables of $15
    million, but the Finance Ministry decided to conduct its own audit,
    which was still in progress in mid-June.

    The results of the audit will determine the financial situation at
    the company and the cost of the contract.

    The new investor plans to introduce butadiene technology for
    production of rubber instead of acetylene technology. Volgaburmash
    will invest $5 million in the plant soon. The first production line
    using butadiene technology should be launched three or four months
    after the deal is signed.

    Switching to this technology will increase production and
    profitability. Capacity will increase to 25,000 tonnes a year from
    about 10,000 tonnes using acetylene technology.

    Volgaburmash also plans to install a new packaging line, produce 50
    kinds of chloroprene rubber and obtain certification to U.S. and
    European standards.

    Volgaburmash Holding President Andrei Ischuk said state support is
    needed to rehabilitate the plant, which will involve substantial
    expenses. He said the company should be given subsidies on gas and
    electricity rates as Nairit consumes 10% of Armenia's gas and 5% of


    Prometei-Khimprom was formed under a government decision in February
    1999. It includes the Rubin Chemical Plant and Khimvolokno in the
    city of Vanadzor, 150 kilometers from Yerevan, and the Vanadzor Heat
    and Power Plant.

    Following an analysis of the financial and technical situation at the
    companies and restructuring their debt in May of that year, the
    chemical complex was sold for $1.5 million to Russia's
    Zakneftegazstroi Prometei, which agreed to implement a two-stage
    investment program worth $55 million - $60 million.

    The first stage to 2001 included investment of $10 million to restore
    the chemical complex to half of its design capacity. The complete
    reconstruction of the enterprise should be completed in 2006, and
    Prometei-Khimprom will be able to produce 10,000 tonnes of melamine,
    40,000 tonnes of carbamide for use at the plant, 5,000 tonnes of
    acetate thread, 4,000 tonnes of acetate braid, and 80 tonnes of
    synthetic corundum. The product would be sold in Russia, China, and
    the Middle East.

    The Vanadzor Heat and Power Plant planned to produce 70 megawatts of
    electricity and 220 gigacalories of heat to supply the chemical
    complex and nearby residential consumers.

    The Russian company invested about $20 million in the company to
    increase capacity for ammonia production to 20,000 tonnes a year,
    melamine to 10,000 tonnes, calcium carbide to 15,000 tonnes, acetate
    tape to 3,500 tonnes, and corundum to 20 tonnes. After 13 years of
    standing idle the Vanadzor complex in November 2001 resumed
    production. But high prices for gas and changes in market trends
    forced the company to suspend production in 2002.

    The Russian company held talks to attract a partner in 2003 to resume
    production and announced at the start of this year that 51% of the
    company would be sold to Slovakia's Divident Group.

    First Deputy Trade and Economic Development Minister of Armenia Ashot
    Shakhnazarian said Prometei-Khimprom was in good technical condition
    and did not require substantial investment to resume production,
    which should take a couple of months.


    The Yerevan tire plant is one of Armenia's oldest enterprises. It was
    formed in 1943 and produced continually until 1998. The plant was the
    only tire producer in the southern Caucasus at the time and exported
    to more than 35 countries. But like most petrochemical enterprises in
    the country it too stood idle for a long time. The plant was
    liquidated in early 2001 and Shinnik-1 was formed in its place.

    American company TS Investment Corp bought 75% of Shinnik in April
    2002 for $1.287 million and the company renamed in December of that
    year to General Transworld Manufacturing Company (GTMC).

    The American company repaired and updated the plant and production
    resumed in February 2003 after a nine-year hiatus. By the end of 2003
    the plant was producing eight kinds of car tire tubes and 12 kinds of
    treads. Production totaled 80,000 tires a month and the new owners
    planned to increase production to 100,000 tires with capacity of
    200,000 tires. The product would be sold to Armenia and nearby

    TS Investment Corp planned to invest $10 million in production by the
    end of 2005.

    However, the company ran into problems exporting diagonal tires,
    transporting raw materials, selling products on the domestic and
    foreign markets, and installing new lines to produce radial tires.
    Production was suspended in January 2004 due to financial problems
    and 75% of the employees were placed on leave without pay.

    Reports in April indicated the plant would resume production in May,
    but the owner said in the Armenian media it is concerned with the
    situation at the plant and will either sell it or seek partners.

    This article was written by the Interfax Center for Economic
    Analysis. E-mail: [email protected]