July 30 2014

In Russia's Orbit, Searching The Sleepy Economy Of Armenia

by Aleksei Boyarskii (2014-07-29)

YEREVAN -- There used to be trains that connected Moscow and Armenia's
capital of Yerevan. But for different reasons, mostly an array of
regional tensions in former Soviet republics, Armenia is no longer
connected to Russia by rail.

To get to Yerevan from Moscow, you can either drive for 48 hours
through the North Caucasus and Georgia, or you can take a flight of
less than three hours. I chose the latter.

The entire time I was in Armenia, I was struck by how calm it was. The
country has the lowest crime rate among all of the former Soviet
states, and has a per-capita crime rate nine times lower than
Russia's. What's more, 90% of the criminal activity in the country
happens in Yerevan, the capital. But that is Armenia's best statistic.
In terms of its economy, Forbes ranked Armenia the second-worst
economy in the world in 2011.

Indeed when people learned that I'd come here to write about Armenia's
economy, the response I got over and over again was something like,
"Wait, you are trying to write about something that doesn't exist."

According to the 2012 census, Armenia has 3.2 million residents, 3
million of whom live in the country permanently. But according to the
economist and former Yerevan Mayor Vahagn Khachatryan, Armenia has
closer to 2.2 to 2.5 million residents. "Our GDP is around $10
billion," Khachatryan says. "Private transfers -- remittances sent back
from Armenians working abroad -- make up $1.8 billion per year. That
sum doesn't take into account the money that is brought back in cash.
If you count the cash transfers, I think it would add up to $2.5
billion per year." He estimates that 90% of that money is coming from

This total dependency on Russia is about more than remittances.
Russian companies own 100% of Armenia's electrical grid, and the
majority of the power plants. All of the gas pipelines, including the
one that comes from Iran, are owned by Russia. Of Armenia's three
mobile phone companies, two are Russian and the third is French. In
the banking sector, 21 of the 25 banks active in Armenia are

Gold, cognac and high-tech

Have you ever heard that Armenia is an international center for
jewelry manufacturing? People tell me that 7% of the world's famous
jewelers are Armenian. I'm not so sure about the world leadership bit,
but it's true that after mining for copper and molybdenum, jewelry
production is the second most important industry in the country.

Yerevan's gold market is in a building that used to house the city's
public baths. It has nine floors: The first two are shops, the others
are jewelry workshops. There are 800 shops and up to 6,000 salespeople
and jewelers. Everything sold in the building is also made there. I
see gold bullion with the stamp of Swiss banks that is going to be
melted down for jewelry. The jewelers also melt down gold that people
sell in the jewelry shops downstairs. You can buy knock-offs of Rolex
and Tissot watches, made to order within 24 hours.

Agriculture is the Armenian economy's third-largest industry. Most of
the income in agriculture comes from making cognac. Yerevan's most
important tourist sites are two famous cognac factories next to each
other: Ararat and Noi. Both factories formerly made the famous
"Ararat" cognac, but now only one company has the rights to that
brand. That company's stocks have long been owned by Pernod Ricard, a
French company.

In addition to "Ararat," Armenia has another 27 cognac producers.
Shakhnazaryan, one of the newer cognac producers, has a factory
located near Yerevan in the city of Yeghvard. The company's owner,
Samvel Shakhnazaryan, had lived in Ukraine for years before returning
to Armenia eight years ago. At first he sold liquor, then he decided
to get into cognac production. The factory opened, from nothing, in
2010, and in 2014 it is expected to sell four million bottles.

Shakhnazaryan says that 95% of the sales go to Russia. I noticed,
though, that although the company has only been around for four years,
its oldest cognac is aged 15 years.

"Does that mean that you buy other people's cognac to resell?" I asked
the older head of wine production. "Here in Armenia, there is no
'other.' It's all ours," he responded. In fact, they do think there is
no such thing as "fake" Armenian cognac. As long as it is made from
local grapes, it is genuine.

Lastly, in fourth place in Armenia's economy is the IT sector. It
makes sense for a small, mountainous country without many natural
resources to orient itself towards intellectual products. In Yerevan,
the Tumo Center for Creative Technologies holds classes in digital
technology, web development and game development, among other
subjects, for children from 12 to 18 years old. The classes are open
to all and are completely free, and in total around 5,500 kids take
classes there twice a week.

PicsArt, a photo editor for mobile devices, is located on the
building's second floor. The company is American, but its founder is
from Armenia and all of the operations are in Yerevan. It's still a
start-up, but it's gaining traction, and now has 45 million active
users per month.

Looking at Ararat

Armenia is poised to join the Customs Union with Russia, Belarus and
Kazakhstan, but people here feel trepidation about joining its former
Soviet States. "Until last September, when we were told that we would
be joining the Customs Union, Armenia was preparing to join the
European Union, along with Georgia, Moldova and Ukraine," says Vahagn

In 2013, Armenia exported $334.5 million worth of goods to Russia,
$8.6 million to Belarus and $7.3 million to Kazakhstan. The total GDP
of the Customs Union countries is 230 times larger than Armenia's GDP,
and the per capita GDP is 3.5 times higher. Theoretically that could
help Armenia's economy. Armenia's economy can expect more investments
and more exports due to joining the Customs Union, and it will also
likely add jobs.

But there are also clear disadvantages. First of all, it will be in a
different camp from Georgia, which is joining the EU, and that could
complicate trade and transit. In addition, the Customs Union will
cause a large number of imported goods to become more expensive --
everything from food to cars. Most experts say Armenia's decision to
join the Customs Union is a tribute to history, not based on economic

For Armenia, Mount Ararat is everything. It is the famous cognac
brand, the legendary soccer team, the name of the hotel I stayed in.
The snow-covered peak is easily visible from Yerevan, but the mountain
itself is in Turkey. The loss of Ararat, as well as memories of the
genocide of Armenians living in Turkey in 1915, still influences

Turkey is so close that on the road through Ararat's valleys my mobile
phone switched to a Turkish mobile network. "Do you see over there, on
the other side of the Aras River (the border between Armenia and
Turkey), those bright lights?" our driver asked, pointing into the
darkness. "That is a NATO base." Which is why Russian military bases
in Armenia give the locals peace of mind.

In Armenia, no matter what you ask, you will get an answer that makes
reference to war with Turkey or to the genocide. "There are bells on
the historic gates to warn of the arrival of the Turks," someone might
say. Or, "this is a watch tower to look out for Turks," etc.
Azerbaijanis are also called "Turks," and Armenia's borders with both
Turkey and Azerbaijan are closed.

With its other neighbor, Iran, it has a normal relationship, but Iran
is also a Muslim country. With these sorts of neighbors, the small
country needs a strong ally. Historically, that strong ally has always
been Russia.