The past two years’ political developments of our region dictate a new agenda to politicians and businesspeople  alike. These developments mostly go in two directions: on the one hand, Iran is becoming more and more open for foreign investments, on the other Russia determinedly shifts the integration vector from West to East.

In  such geopolitical  environment Armenia, having expressly good relations both with Russia and Iran and comparative economic advantages, is becoming an investment oasis which can successfully host foreign investors wishing to enter Russian and Iranian markets . Furthermore, Armenia itself can present certain investment interest for businesses that already operate in Russia and Iran, which due to various economic reasons, might choose to relocate to other neighboring  countries.

Off course, Armenia is far from becoming a Caucasian Singapore; there is much to be done to improve the investment climate and infrastructures to be able to make the most out of this strategic window, let alone several strong primary and secondary competitors. Among primary competitors are Georgia and Azerbaijan which lately have been actively working towards improving their economic and political relations with Russia and Iran alike. And still, comparing all factors, it becomes clear that currently Armenia has certain competitive advantages which are expressed in an aggregate way in international investment climate rankings. In particular, according to World Bank’s Doing Business report, in 2016 Armenia ranked 35th out of 189 countries; in our region only Georgia has better indicators (figure 1). On the other hand, the relations between Georgia and Russia are rather  constrained, and between Georgia and Iran rather wary, which means that among peers Armenia definitely has comparative advantages for those investors who wish to enter Russian and Iranian markets.

Picture Figure 1. Rating of Armenia and peers according to WB Doing Business report 2016

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WB, Doing Business 2016

The main advantage of Armenia is, of course, favorable tax climate. In particular, according to PwC Paying Taxes 2016 report, while in Russia and Iran total tax rate (tax burden) is 47% and 44.1% respectively, in Armenia it is 19.9%, in Georgia 16.4% and in Azerbaijan 39.8%. When considering the opportunities in Armenia and Georgia from this angle it is clear that the average time spent on tax administration in Armenia is 13% less than in Georgia (313 and 362 hours). Furthermore, Armenia and Russia are members of one economic area – Eurasian Economic Union with customs-free trade, whereas in case of Georgia standard customs rates of Russia apply. In case of Iran neither Armenia nor Georgia have any customs benefits, however, Armenia has a better geo-economic location; besides, there are some expectations that an EEU-Iran agreement will be signed defining more favorable terms for mutual trade.

The other essential factor is the amount of time and money spent on export. According to WB Doing Business report 2016, Armenia has clear advantages over both Azerbaijan and Georgia.

Table 1. Amount of time and money spent on export in Azerbaijan, Georgia and Armenia, WB, 2016

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Business entities in Armenia spend 12-14 times less time and 3.9-4.5 times less money on export than in Georgia or Azerbaijan. However, when considering what Georgia and Azerbaijan are doing to get a share in the pie, is becomes quite clear that Armenia is not in a favorable position. It is especially dangerous to “move one step forward and two steps back”, as was the case with tax reforms (the bill endorsed by the Government on March 31). The way we are going, we will not just fail to attract investors, but will face the risk of outflow of existing ones; for it is beyond any reason to raise the income tax rate from 26% to 28% when our competitors Georgia and Azerbaijan apply 20%[1] and 14%[2] rates with similar level of salaries. The list of such “reforms” can go on and on: taxation of dividends, increase of term of amortization – neither of these tallies with the policies we promulgate.

On the other hand, there is an objective question: what do we do to make foreign investors wishing to enter Russian or Iranian markets realize that the best way to do that is to  establish a business in Armenia? The question is a big one and we do not assume to give answers in this article, however, we would like to share the roadmap we have been visualizing.

Firstly, the economies of Russia and Iran should be studied to identify those markets which volume-wise can be attractive for foreign investments. Second, comparative analysis should be carried out and business needs should be identified for each sector to see what possible problems companies might face in these sectors in Armenia compared to other countries. Third, prepare a detailed action plan to deal withexisting challenges. Fourth, inform appropriate business communities about achieved positive results through road shows among others for target investors.

To sum up it should be noted that we by no means maintain that Armenia is an ideal place for starting up a business, but even with all our upsides and downsides we have significant comparative advantages in relation to our neighbors, which we must develop and expand to attract potential investors. According to our estimates, Armenia has the potential to attract about 800 million to 1 billion USD in the form of direct foreign investments annually.

AmCham magazine

[1] http://investingeorgia.org/en/georgia/taxation

[2] Guide to doing business in Azerbaijan, EY, 2015