the basic features of export promotion policy in developing countries 2006 eng_q2_06 karen grigoryan...

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ARMENIAN - EUROPEAN POLICY AND LEGAL ADVICE CENTRE

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3

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ÐÆØÜ²Î²Ü êàòÆ²È-îÜîºê²Î²Ü òàôò²ÜÆÞÜºðÀ ÐÐ-àôØ. 2006 Â. ÐàôÜì²ð-êºäîºØ´ºð .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Ø²ÎðàîÜîºê²Î²Ü Æð²ìÆÖ²ÎÀ ÐÐ-àôØ. 2006 Â. ÐàôÜì²ð-ÐàôÜÆê …………...........................................................………... 7

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¶Ý³×………………………………………………………………………………. 12

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ä»ï³Ï³Ý µÛáõç»………………………………………………………………... 16

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§Ð¼¦ Ø²ÎðàîÜîºê²Î²Ü Î²ÜÊ²îºêàôØ`

Àêî 2006Â. ºè²ØêÚ²ÎÜºðÆ ............................................................. 22

Ð²ð²ì²ÚÆÜ ÎàìÎ²êÆ ºðÎðÜºðÆ îÜîºê²Î²Ü

Æð²ìÆÖ²ÎÀ ²ÜÎ²ÊàôÂÚ²Ü 15-ð¸ î²ðàôØ.

Ð²ØºØ²î²Î²Ü ìºðÈàôÌàôÂÚàôÜ ............................................................... 23

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Êáßáñ³·áõÛÝ ÁÝÏ»ñáõÃÛáõÝÝ»ñÝ Áëï ÁÝ¹Ñ³Ýáõñ

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÷áË³ñÅ»ùÝ»ñÁ 2006-Ç û·áëïáë-ÑáÏï»Ùµ»ñ ³ÙÇëÝ»ñÇÝ ................... 42

ÐÐ Î´-Ç ÏáÕÙÇó ë³ÑÙ³Ýí³Í` Ã³ÝÏ³ñÅ»ù Ù»ï³ÕÝ»ñÇ

ëï³Ý¹³ñï³óí³Í ÓáõÉ³ÏïáñÝ»ñÇ ·Ý»ñÁ ............................ . . . . . . .... 43

ì³é»ÉÇùÇ ÙÇçÇÝ ·ÇÝÁ Ð³Û³ëï³ÝáõÙ .................................. . . . ......... 44

ØÆæ²¼¶²ÚÆÜ ÞàôÎ²Üºð . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

²é³ÝÓÇÝ ³åñ³Ýù³ï»ë³ÏÝ»ñÇ ·Ý»ñÁ ÙÇç³½·³ÛÇÝ

ßáõÏ³Ý»ñáõÙ ................................................................................ 45

Â³ÝÏ³ñÅ»ù Ù»ï³ÕÝ»ñÇ ·Ý»ñÁ ÙÇç³½·³ÛÇÝ ßáõÏ³Ý»ñáõÙ ................. 45

¶áõÝ³íáñ Ù»ï³ÕÝ»ñÇ ·Ý»ñÁ ÙÇç³½·³ÛÇÝ ßáõÏ³Ý»ñáõÙ ..................... 46

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²ðî²Ð²ÜØ²Ü ÊÂ²ÜØ²Ü ø²Ô²ø²Î²ÜàôÂÚ²Ü ÐÆØÜ²Î²Ü ²è²ÜÒÜ²Ð²îÎàôÂÚàôÜÜºðÀ ¼²ð¶²òàÔ ºðÎðÜºðàôØ ................................................................................. 47

Æ±Üâ ¾ ²¼²î ²èºìîðÆ Ð²Ø²Ò²ÚÜ²¶ÆðÀ .................................................... 55

Ð²Ú²êî²ÜÚ²Ü ¼²ð¶²òàôØÜºð

Ð³Ý¹»ëÁ Ññ³ï³ñ³ÏíáõÙ ¿ºíñ³ÙÇáõÃÛ³Ý ýÇÝ³Ýë³íáñÙ³Ùµ

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î³ëÝÙ»Ï»ñáñ¹ ÃáÕ³ñÏáõÙ (Q2/O6)

ÂàÔ²ðÎàÔ` îÝï»ë³Ï³Ý ù³Õ³ù³Ï³ÝáõÃÛ³Ý ¨Çñ³í³Ï³Ý ËáñÑñ¹³ïíáõÃÛ³Ý Ñ³Û-»íñáå³Ï³Ý Ï»ÝïñáÝ (AEPLAC)

²Úê ÂàÔ²ðÎàôØÀ ä²îð²êîºÈ ºÜ

²ñï³ß»ë Þ³µáÛ³ÝÁ,ÈáõëÇÝ» êï»÷³ÝÛ³ÝÁ,²ñÙ»Ý ØÇñ½áÛ³ÝÁ, ÈÇÉÇÃ º½»ÏÛ³ÝÁ

Ð³ëó»Ý` ù.ºñ¨³Ý â³ñ»ÝóÇ 28

Ð»é./ü³ùë` (374 10) 55 30 81

¾É-÷áëï` [email protected]

http://www.aeplac.am

î»Õ»Ï³ïí³Ï³Ý ûÅ³Ý¹³ÏáõÃÛáõÝÁïñ³Ù³¹ñ»ó

§²ñÙÇÝýá¦ ·áñÍ³Ï³ÉáõÃÛáõÝÁ

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îå³·ñí³Í ·áí³½¹Ç µáí³Ý¹³ÏáõÃÛ³Ý¨ Ñ³í³ëïÇáõÃÛ³Ý Ñ³Ù³ñå³ï³ëË³Ý³ïáõ »Ý ÙÇ³ÛÝ·áí³½¹³ïáõÝ»ñÁ:

Ð»ÕÇÝ³Ï³ÛÇÝ Çñ³íáõÝù

ºíñáå³Ï³Ý Ñ³ÝÓÝ³ÅáÕáí

´áÉáñ Çñ³íáõÝùÝ»ñÁ å³ßïå³Ýí³Í »Ý:

²Ûë Ññ³å³ñ³ÏáõÙÁ Ï³Ù ¹ñ³ ³é³ÝÓÇÝÙ³ë»ñÁ áñ¨¿ ï»ëùáí Ï³ñáÕ »Ýí»ñ³ïåí»É, ï³ñ³Íí»É Ï³Ù÷áË³Ýóí»É ÙÇ³ÛÝ îÝï»ë³Ï³Ýù³Õ³ù³Ï³ÝáõÃÛ³Ý ¨ Çñ³í³Ï³ÝËáñÑñ¹³ïíáõÃÛ³Ý Ñ³Û-»íñáå³Ï³ÝÏ»ÝïñáÝÇ (AEPLAC)` Ç ¹»Ùëºíñáå³Ï³Ý Ñ³ÝÓÝ³ÅáÕáíÇ,Ý³ËÝ³Ï³Ý ·ñ³íáñ Ñ³Ù³Ó³ÛÝáõÃÛ³Ùµ:

îä²ø²Ü²ÎÀ` 250 ûñÇÝ³Ï

AEPLAC-Ç ï»ËÝÇÏ³Ï³Ý³é³ç³¹ñ³ÝùÇÝ Ñ³Ù³å³ï³ëË³ÝÍñ³·ñÇ ÑÇÙÝ³Ï³Ý ß³Ñ³éáõÝ»ñÇÝÃáÕ³ñÏáõÙÁ ïñ³Ù³¹ñíáõÙ ¿ ³Ýí×³ñ:

ØÛáõë ÁÝÃ»ñóáÕÝ»ñÇ Ñ³Ù³ñ ·áñÍáõÙ »Ýµ³Å³Ýáñ¹³·ñáõÃÛ³Ý Ñ»ï¨Û³É ·Ý»ñÁ`

Ü»ñ³éáõÙ ¿ ³é³ùÙ³Ý ·ÇÝÁ

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Armenian Trends Q2/O6 (#11)

4

²²Ð(FTA)

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ì»ñ³Ï³éáõóÙ³Ý ¨ ½³ñ·³óÙ³Ý»íñáå³Ï³Ý µ³ÝÏ

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AEPLACîÝï»ë³Ï³Ý ù³Õ³ù³Ï³ÝáõÃÛ³Ý ¨Çñ³í³Ï³Ý Ñ³ñó»ñáí ËáñÑñ¹³ïíáõ-ÃÛ³Ý Ñ³Û-»íñáå³Ï³Ý Ï»ÝïñáÝ

ITUØÇç³½·³ÛÇÝ Ñ»é³Ñ³Õáñ¹³ÏóáõÃÛ³ÝÙÇáõÃÛáõÝ

KOTRAÎáñ»³ÛÇ ³é¨ïñÇ ËÃ³ÝÙ³Ý Ïáñåá-ñ³óÇ³

TDB ²é¨ïñÇ ½³ñ·³óÙ³Ý ËáñÑáõñ¹

MATRADEØ³É³½Ç³ÛÇ ³ñï³ùÇÝ³é¨ïñÇ ½³ñ·³óÙ³Ý Ïáñåáñ³óÇ³

Ð²ä²ìàôØÜºðÆ ò²ÜÎ

ºðºì²ÜàôØ ÆÜîºðÜºîÆ Ø²îâºÈÆàôÂÚ²Ü ºì ú¶î²¶àðÌØ²Ü ÀÜ¸Ð²Üàôð ÜÎ²ð²¶ÆðÀ.

ÆÜâ ¾ öàÊìºÈ ºðÎàô î²ðì² ÀÜÂ²òøàôØ......................................................................................................................... 58

1. Ð³Ù³Ï³ñ·ãÇ ³éÏ³ÛáõÃÛáõÝÁ ïÝ»ñáõÙ........................................................................................................................ 59

2. Ð³Ù³Ï³ñ·ã³ÛÇÝ ·ñ³·ÇïáõÃÛáõÝÁ, ³ÝóÏ³óñ³Í Å³Ù³Ý³ÏÁ ¨ Ñ³×³Ë³Ï³ÝáõÃÛáõÝÁ........................................... 60

3. Ð³Ù³Ï³ñ·ãÇÝ Ñ³ïÏ³óñ³Í Å³Ù³Ý³ÏÁ, Ñ³×³Ë³Ï³ÝáõÃÛáõÝÁ ¨ í³ÛñÁ................................................................ 61

4. ÆÝï»ñÝ»ïÇ ÏÇñ³éáõÙÁ................................................................................................................................................ 62

5. ÆÝï»ñÝ»ïÇó û·ïí»Éáõ Ñ³×³Ë³Ï³ÝáõÃÛáõÝÁ, Ñ³ïÏ³óíáÕ Å³Ù³Ý³ÏÁ ¨ í³ÛñÁ.................................................. 64

6. ÆÝï»ñÝ»ïÇ áñ³ÏÁ ¨ Ù³ï³Ï³ñ³ñÝ»ñÇ Ñ»ï ß÷áõÙÝ»ñÁ.......................................................................................... 65

7. ÆÝï»ñÝ»ïÇ Í³é³ÛáõÃÛáõÝÝ»ñÇó û·ïí»Éáõ ·ÇÝÁ........................................................................................................ 66

8. ÆÝï»ñÝ»ï ³Ûó»É»Éáõ Ýå³ï³ÏÁ.................................................................................................................................. 67

9. ²ÛÉ Ñ³ñó»ñ..................................................................................................................................................................... 69

º¼ð²Î²òàôÂÚàôÜÜºð.......................................................................................................................................................... 70

ÆÜâäºê ºÜø ²ÜòÎ²òÜàôØ Øºð ²ðÒ²Îàôð¸À. Ðºî²¼àîàôÂÚ²Ü ²ð¸ÚàôÜøÜºðÆ ìºðÈàôÌàôÂÚàôÜ....................................................................................................... 71

1. ²ñÓ³Ïáõñ¹Ç ³ÝÑñ³Å»ßïáõÃÛáõÝÁ ¨ Ý³Ë³ëÇñáõÃÛáõÝÝ»ñÁ....................................................................................... 71

2. ²ñÓ³Ïáõñ¹Ç û·ï³·áñÍáõÙÁ, Ó¨Á, í³ÛñÁ.................................................................................................................... 73

3. îáõñÇëï³Ï³Ý áõÕ¨áñáõÃÛáõÝÝ»ñ, Í³Ëë»ñ................................................................................................................. 75

4. îáõñÇëï³Ï³Ý ÁÝÏ»ñáõÃÛáõÝÝ»ñÇ Í³é³ÛáõÃÛáõÝÝ»ñ................................................................................................... 76

5. Ð³Û³ëï³ÝáõÙ ³ñÓ³Ïáõñ¹Ç Ï³½Ù³Ï»ñåÙ³Ý ÑÝ³ñ³íáñáõÃÛáõÝÝ»ñÇ ·Ý³Ñ³ïáõÙÁ............................................... 77

6. Þ³µ³Ã-ÏÇñ³ÏÇ ûñ»ñÇ Ñ³Ý·ÇëïÁ............................................................................................................................... 78

º¼ð²Î²òàôÂÚàôÜÜºð..................................................................................................................................................... 75

Î²ðºìàð Æð²¸²ðÒàôÂÚàôÜÜºðÆ Ä²Ø²Ü²Î²òàôÚò . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

5

DEAR READERS,

As you may recall, two years ago the Armenian Trends published a survey analyzing Internet

accessibility and Internet usage in Yerevan. In this issue, we publish a comparative analysis of the

changes that have taken place in this sphere over the past two years.

Also in this issue we are presenting the results of a survey about the recreational preferences of

Yerevan residents: how and where holidaymakers spend their vacations, how much they spend,

and what problems they encounter.

We are also presenting a comparative analysis of the economic development achieved in the last

15 years by the republics of the South Caucasus.

An area of such economic importance as exports can not be ignored, and creation of incentives for

an increase in exports is a major task for any developing economy. We are presenting the experi-

ence of various countries in stimulating exports.

As usual, you will also find our traditional analysis of the macroeconomic situation, quarterly projec-

tions, an analysis of the performance of the largest enterprises, the exchange rates of the

Armenian dram in relation to major currencies, the prices on basic goods on the Armenian and

international markets, and a schedule of important events, etc.

We wish you enjoyable reading.

Kenneth MuntherEuropean Director, AEPLAC

Tigran JrbashyanArmenian Director, AEPLAC

Population, thousands (average for period) 3 220.0 0.10

GDP, million AMD, current prices 1 720 063.0 12.5GDP, per capita, USD 1 242.2GDP Deflator, % … 105.1 (a)

Consumer Price Index, % 102.3 (b) 102.0 (a)Producer’s Price Index, % 100.7 (b) 100.4 (a)

Economically Active Population, thousands 1 209.5 0.7Official Unemployment, thousands 89.8 -10.6Unemployment Rate (%) 7.4

Gross Consumption/GDP, % 96.3 (c)Gross Investments/GDP, % 28.7 (c)

Current Account Balance, million USD -187.7 (c)Current Account Balance/GDP, % -10.3 (c)

Volumes of Industrial Production, million AMD 468 010.6 -1.6Electricity Production, million kWh 4 530.6 -5.2Gross Agricultural Product, million AMD 370 568.0 0.0Volumes of Construction, million AMD 393 803.0 39.6Volume of freight turnover of transport of general use, million ton/km 1 566.2 -1.4Volumes of Rendered Services, million AMD 338 880.9 22.1

Base Money, million AMD (as of 30 September 2006) 231 092.0Currency Outside the Central Bank, million AMD (as of 30.09.06) 182 931.0Money Supply, M2X (w/out accrued interest), million AMD (as of 30.09.06) 405 395.0Money Supply, M2 in dram (w/out accrued interest), million AMD (as of 30.09.06) 276 875.0

Average of less than a year Lending Rate of Commercial Banksby drams, % (September) 16.49Average of less than a year Deposit Rate of Commercial Banks by drams, % (September) 5.92

External Trade Turnover, million USD 2 208.2 12.1Exports, million USD (FOB) 699.4 -0.9Imports, million USD (CIF) 1 508.7 19.4Trade Deficit, million USD -809.3 44.9

Net Investment Position of RA, million USD (as of 30 June 2006) -1 910.0Assets, million USD (as of 30 June 2006) 1 156.2Liabilities, million USD (as of 30 June 2006) 3 066.2

State External Debt, million USD (as of 30 June 2006) 1 168.1 4.6

AMD/USD Exchange Rate, Period Average 430.04 -6.4 (d)AMD/EUR Exchange Rate, Period Average 534.23 -8.1 (d)AMD/Russian Ruble Exchange Rate, Period Average 15.69 -3.9 (d)


6

January-September

2006

January-September2006 to January-

September 2005, %

a) Indexb) September 2006 to December 2005c) January-June 2006d) The decline indicates appreciation of the AMD

MAIN SOCIO-ECONOMIC INDICATORS IN ARMENIA:JANUARY-SEPTEMBER 2006

ECONOMY

In the first half of 2006, two-digit GDP growth accompa-nied by the appreciation of the national currency unit,the dram, continued in Armenia's economy. Comparedwith the first half of the previous year, inflation growthhas been observed. Compared with the end of 2005,the late June 2006 inflation indicators amounted to4.3%; the AMD appreciation with respect to the USDwas 7.0%, and with respect to the EUR, 1.4%.

As of January-June 2006, the real value of the pro-duced GDP in this country exceeds the indicator for thesame period in the previous year by 11.9%. The GDPgrowth indicator for the first half over the last threeyears has been demonstrating an increase tendency,although the growth indicators are lower than the onesfor 2002-2003. (In the first half of 2004-2006, the aver-age growth was 10.6% while in 2002-2003, 13.9%. SeeChart 1.) It can be seen in the chart that the growth ofthe past three years, in contrast with the previousyears, has been accompanied by the appreciation ofthe national currency with relation to other currencies(especially the USD).

Below we will consider the developments in Armenia'seconomy in the first half of 2006 by individual sectors.

Production

In the first six months of 2006, the following distinctivefeatures determined the GDP production.

If we consider the GDP growth structure, significant dif-ferences can be observed in the indicators for the firstsix months over the past five years (Chart 2). Thus,compared with 2005, the weight of net taxes in thegrowth structure has increased by eight percentagepoints. The net taxes indicator (15.1%) is the highest inthe GDP growth structure for the past five years. Theweight of other sectors contributing to the GDP growthstructure has declined (or other services without trans-

Economy: Macroeconomic Overview

7

THE MACROECONOMIC SITUATION IN THE REPUBLIC OF ARMENIA: JANUARY-JUNE 20061

port and communication) which in the first half of 2006accounted for 19.3% of the growth, whereas, in 2003 itaccounted for 41% of the GDP growth. The share of the

Chart 1. GDP growth in the first half of 2002-2006,inflation and AMD appreciation with relation to theUSD, %

GDP CPI Appreciation of AMD to USD

2003 2004 20062005

20

15

10

5

0

-5

2002

12.3

4.6

-2.7

Prr

ce

nt

15.5

6.8

0.0

9.5

4.55.6

10.3

1.4

9.0

11.9

4.3

7.0

1 Various parts of the article were prepared by the AEPLAC Economic Team members: Artashes Shaboyan, Lucine Stepanyan, Lilit Yezekyan andArmen Mirzoyan.

Chart 2. GDP growth structure in the first sixmonths of 2002-2006, %

Basic industries Other industries Net taxes on products

1816141210

86420

-22002 2003 2004 2005 2006

13.6

33.0

53.6

8.0

74.5

-0.4

17.2

59.0

41.2

64.2

28.5

7.1

65.5

19.3

15.1

Growth rate to the first halfof the previous year

Contribution to GDPgrowth, percentage points

Share in the structure ofGDP, %

2004 2005 2006 2004 2005 2006 2004 2005 2006

GDP, market prices 109.5 110.3 111.9 9.5 10.3 11.9 100 100 100

Industry 105.2 104.6 98.9 1.3 1.2 -0.3 25.3 25.2 20.8

Agriculture 108.2 110.2 107.2 1.3 1.5 1.0 14.8 14.3 14.4

Construction 111.3 127.8 135.3 1.2 2.9 4.9 10.6 13.7 17.1

Transport and Communications 115.9 109.5 118.5 0.7 0.4 0.8 4.6 4.1 4.6

Trade and Catering 110.2 104.9 113.8 1.1 0.6 1.4 11.2 10.4 10.4

Total, basic branches 108.5 109.9 111.5 5.6 6.6 7.8 66.5 67.7 67.3

Other branches 118.5 113.3 110.8 3.9 2.9 2.3 22.0 21.2 21.3

Net taxes on products 99.7 106.4 116.2 0.0 0.7 1.8 11.4 11.1 11.4

Table 1. GDP production in the first six months of 2004-2006 by basic sectors of the economy


8

basic sectors of economy contributing to the GDPgrowth structure remains relatively stable.

Relatively small deviations in the weight of basic sec-tors in the GDP structure are determined by the factthat each year the deviations of this or that sector areneutralized at the expense of the growth in other sec-tors. This was so in the first half of 2006, as well (Table1). The 35.3% growth in construction is accompaniedby a 1.1% decline in industry. Despite the 7.2% growthin agriculture, the latter is lower than the relevant indi-cator for the same period in the previous year.

Nevertheless, in the first six months of 2006 the generalgrowth rate of the basic sectors exceeded the indicatorsfor the previous year by 1.6 percentage points or con-tributed more to the GDP growth by 1.2 percentagepoints. In addition to construction, compared with the pre-vious year, significant growth acceleration is observed intrade as well as transport and communication.

As for net indirect taxes in the GDP structure (net taxeson products), here too, growth indicators have variedsignificantly over the recent years (Chart 3). These vari-ations are accounted for by numerous reasons, onebeing the amount of subsidies granted to organizationswhich have a negative impact on the net production taxindicator and the growth thereof. Another cause may bedisproportionate tax collection during the year, betweenquarters. However, if we compare the growth of nettaxes in the first six months over the past eight years,the 16.2% real growth indicator of 2006 is only inferiorto the one of 2001. However, the 2001 annual growthindicator is nearly the same as the one observed in thefirst six months of 2006. The comparison of growthrates for the first six months and annual indicatorsdemonstrates that annual growth is higher than in thefirst six months. Hence, if the tendency of the past twoyears is maintained, the annual 2006 results for nettaxes on products growth will be the highest for theeight previous years in Armenia.

Although over the recent years, in the first six monthsthe growth of net taxes on products has varied signifi-cantly, in the last three years (since 2004) specific grav-

Current prices,billon AMD

Share to GDP, %Growth to the fist sixmonths of the previ-

ous year, %

Contribution to GDPgrowth, percentage

points

2005 2006 2005 2006 2005 2006 2005 2006

Final Consumption Expenditures 679.9 779.8 95.7 96.3 8.9 13.3 9.1 12.7

Private final consumption 577.6 652.5 81.3 80.6 6.8 12.1 6.0 9.9

Public final consumption, of which 102.4 127.2 14.4 15.7 22.8 19.6 3.1 2.8

Individual services 37.9 52.9 5.3 6.5 36.0 31.2 1.7 1.7

Collective service 64.5 74.4 9.1 9.2 16.0 12.8 1.4 1.2

Gross Formation 184.9 232.7 26.0 28.7 17.9 20.3 3.9 5.3

Export and Import Balance -131.4 -178.7 -18.5 -22.1 -1.3 32.0 0.3 -5.9

Statistical Discrepancy -22.8 -24.2 -3.2 -3.0 - - -3.0 -0.2

Gross Domestic Products 710.7 809.5 100.0 100.0 110.3 111.9 10.3 11.9

Table 2. Total demand structure in the first six months of 2005-2006

ity of net taxes on products in the GDP structure is verystable, 11.0-11.4%. It is inferior to the same 2001-2003indicator by two percentage points on average. Webelieve the stability of net taxes on products in the GDPstructure must become an incentive for the imple-menters of tax policy to take more decisive steps, main-ly for the improvement of tax administration.

The Structure of Aggregate Demand

The GDP analysis in the first six months of 2006 byexpenditure components demonstrates the followingdistinctive features.

For the first time, the comparison of the indicators forthe first six months of the past seven years has demon-strated growth in the GDP share of final consumptionexpenses (96.3% vs. 95.7% in 2005). The latter meansthat in 2006 the economy saved less than in 2005(3.7% of GDP in 2006 vs. 4.3% in 2005). However, if wecompare this with the ten previous years, the increasein savings is significant (but the weight declines).

In the first six months of 2000, the weight of finalexpenses in the GDP amounted to 119.6% (i.e. in the

Chart 3. Growth of net taxes on products and GDPfor the first six months and annual results in 1999-2006, %

GDP, 6 months GDP, annualNet taxes, 6 months Net taxes, annual

30

25

20

15

10

5

0

-51999 2000 2001 2002 2003 2004 2005 2006G

row

th t

o c

orr

es

po

nd

ing

pe

rio

d o

f th

ep

rev

iou

s y

ea

r, %


9

economy, consumption exceeded production by19.6%). In the first six months of 2006, it was 96.3%.Compared with 2005, the increase in the weight of finalconsumption expenses in the GDP is the result of theacceleration of the real growth of final consumption.The growth in the first six months of 2006 comparedwith the same period in the previous year amounted to13.3%, which is the highest indicator over the last tenyears in the comparison of the first six months.

The growth of final consumption expenses is deter-mined by both the increase in private expenses andpublic final expenses. Owing to the public sector devel-opment, the specific gravity of public expenses growsonly in the final consumption expenses, as well as inthe GDP. In particular, in 1996 the weight of public con-sumption expenses in final consumption expensesamounted to 8.9% and 11.1% in the GDP. In first sixmonths of 2006, it amounted to 16.3% and 15.7%,respectively.

Acceleration has also been observed in the real growthof the domestic investment indicator (gross capital for-mation). In the first half of 2005 this growth amountedto 17.9%, and in 2006 it was 20.3%. The high increasein gross formations in the recent years causedunprecedented high domestic investment in the firsthalf of 2006 in the GDP: 28.7% (Chart 4).

Expenditure analysis of the GDP components showsthat in the recent years the most disconcerting develop-ments have taken place in export and import. Thus, theexport-import balance indicator for the first half of 2006increased by 32% compared with the respective periodof 2005, which means that the difference betweenimport and export has grown by this amount. The latterfact has deterred by 5.9 percentage points the 11.9%growth of the GDP in the first half of 2006. The growthof export in the first half of 2006 was not only lower thanimport growth but also the real amount decreased by4.6%; whereas, the real import growth amounted to7.4%. We believe these developments should not seemunexpected since the appreciation of the national cur-

rency with respect to basic currencies over the recenttwo years has not favored the growth of export.

Industrial output

In the period of January-June 2006, the physical vol-ume of the industrial output in Armenia underwent a1.0% decline over the same period of the previous year.This has been the first case of industrial output declineover the past five years.

As compared to the industrial output growth averageindicator of CIS countries (107.5%), Armenia's indicatoris 8.5 percentage points below. In terms of the indica-tors for the first half of 2006, Armenia exceeds onlyKyrgyzstan and Moldova by 5.8 and 5.4 percentagepoints, respectively. The greatest growth in the volumeof industrial output was demonstrated by Azerbaijan(over 40%), which is due to the oil industry growth andthe increase of world oil prices.

Chart 4. GDP structure by expenditure compo-nents in the first six months of 2002-2006

Private final consumption

Gross capital formation Public final consumption

Statistical Discrepancy Export minus import

2006

2005

2004

2003

2002

-40 -20 0 20 40 60 80 100

Share in GDP, %

-22.1

-3.2-18.5

-0.5-22.9

-27.0

-20.8

21.913.5

2.421.9

13.7

-5.1

18.312.6

2614.4

81.3

88

89.1

95

-3.0

28.7

80.615.7

CountriesIndustrial output growth,

%Difference from RA indicator,

percentage pointDifference from CIS indicator,

percentage point

Azerbaijan 141.1 42.1 33.6

Turkmenistan 122.4 23.4 14.9

Belarus 112.6 13.6 5.1

Uzbekistan 109.7 10.7 2.2

Tajikistan 106.3 7.3 -1.2

Kazakhstan 105.1 6.1 -2.4

Russia 104.4 5.4 -3.1

Ukraine 103.6 4.6 -3.9

Armenia 99.0 0.0 -8.5

Moldova 93.6 -5.4 -13.9

Kyrgyzstan 93.2 -5.8 -14.3

Georgia … … …

Table 3. Growth rate of industrial output in the CIS countries in January-June


10

The following distinctive development patterns can betraced when examining Armenia's industrial output pat-terns across the three key sub-branches (Table 4).

• The volume of the mining industry sub-branch hasgrown by 1.6% over the previous period.

• The manufacturing volume diminished for the firsttime over the past five years by 0.8%, as comparedto the same period of previous year.

• The sub-branch of electricity, gas and water supplydevelopment is unstable; in 2004 and 2005 therewas a considerable growth in the volume of produc-tion of the sub-branch by 2.5% and 10.2%, respec-tively. In the first half of 2006, it declined by 4.4% ascompared to the same period in 2005 due to a 5.5%decline in the subdivision of electricity, hot waterand steam supply.

• The volume of the manufacture and distribution ofgaseous fuel subdivision continues to grow by12.8% (as compared to the same period of the pre-vious year), while the volume of the collection,purification and distribution of water subdivisiondeclined by 20%.

It should be mentioned that the manufacturing branchwith the biggest share in industry (64% in the first halfof 2006) declined by 0.8% as compared to the sameperiod of the previous year, which is mainly caused bya 21% decrease in the volume of the jewelry productssubdivision. The biggest growth of 15% was recordedin the subdivision of other non-metal minerals as com-

pared to the previous period. 2.8% growth was record-ed in the largest subdivision of the manufacturing sec-tor, food products, including beverages, in contrast to2005 when the same indicator declined by 1.0%.

As to the share of main sub-branches in manufacturing,the biggest growth was recorded in the subdivision ofother non-metal minerals. The 15% growth recorded inthis subdivision brought to the increase in the share ofmanufacturing by 2.2 percentage points as compared tothe same period of the previous year. The share of the

2 Excluding value-added and excise taxes.

Production vol-ume, current

prices2, billion drams

Sales volumes,current prices,billion drams

Physical production volume index, to thecorresponding period of previous year, %

20062001-2003average

2004 2005 2006

Industry, total 300.7 305.2 111.1 104.5 105.3 99.0

Mining 52.1 53.3 115.7 104.9 98.1 101.6

Manufacturing 192.3 195.7 118.4 104.8 106.1 99.2

Electricity, gas and water supply 56.2 56.2 94.3 102.5 110.2 95.6

Table 4. Development dynamics of industrial output in key sub-branches in January-June

Physical production volume index, to the corresponding period of pre-vious year, %

2001-2003 average 2004 2005 2006

Manufacturing 118.4 104.8 106.1 99.2

Food products, including beverages 109.2 110.4 99.0 102.8

Metal processing 133.8 89.8 145.2 107.4

Jewelry products 149.9 89.2 92.8 79.0

Tobacco products 120.3 105.8 129.1 105.0

Chemical production 71.7 3.7 times 100.0 94.6

Other non-metal minerals 120.0 145.6 119.8 115.0

Table 5. Development dynamics in the main sub-branches of manufacturing over the recent years (first sixmonths indicators)

Chart 5. The share of main sub-branches in themanufacturing for the first half of 2003-2006, % intotal manufacturing

2003 2004 2005 2006

Jewelry products

Chemical production

Tobacco products

Other non-metal minerals

Metal processing

Food products, including beverages

0 10 20 30 40 50 60

1.9

9.73.9

1.84.1

5.0

6.8

4.328.1

16.544.1

50.7


11

food products, including beverages subdivision has alsogrown (1.5 percentage points). As to the jewelry prod-ucts subdivision, its share decreased twice due to itsconsiderable decline as compared to the same period ofthe previous year.

The volume of produced energy in Armenia declined by4.4% in the first half of 2006 as compared to the sameperiod of the previous year. However, gas productionand distribution volume increased by 12.8% and theshare in the sub-branch of electricity, gas and watersupply grew by 1.1 percentage points.

As to the industrial output by marzes, it should be notedthat the biggest growth was recorded in Tavush marz(11.2%) and Syunik marz (5.2%). The highest declinewas recorded in Gegharkunik and Kotayk marzes by34% and 13.4%, respectively. Nationwide, the biggestcontribution to the increase in industrial output wasmade by Yerevan and Syunik marz by 2.3 and 1.0 per-centage points, respectively. The decline was mostlycaused by industrial output decrease in Kotayk marz,1.2 percentage points.

Inflation

As of end of June 2006, consumer prices compared withDecember 2005 grew by 4.3% which, compared withthe corresponding indicator of the previous year, washigher by 2.9 percentage points (the period averageindicator compared with that of the previous yeardeclined by 0.2%). In particular, in the five months of2006 the continuous growth of consumer prices (the lateMay 2006 indicator exceeds that of late December 2005by 5.6%) was followed by 1.2% decline in June, whichis accounted for by a price decrease on food and serv-ices by 2.4% and 0.2%, respectively, caused by season-al factors (Chart 7). At the same time, it should be notedthat the indicator of food prices as of late June 2006amounting to about 7.5%, compared with lateDecember 2005, exceeded the corresponding 2005indicator by 5.3 percentage points.

Chart 6. Structure of the sub-branch of electricity,gas and water supply during the first half of 2004-2006, %

Electricity Gas Water

2006

2005

2004

0 20 40 60 80 100

77.6 7.115.3

78.0 7.814.2

84.9 5.29.9

Table 6. Development dynamics of industrial output in marzes in January-June 2006

MarzShare in the overall industrial

output, %Growth rate: January-June 2006

to January-June 2005, %Contribution to growth

(decline), percentage points

Yerevan 44.4 105.0 2.3

Aragatsotn 1.1 100.2 0.0

Ararat 7.3 99.3 -0.5

Armavir 5.0 101.5 0.1

Gegharkunik 1.4 66.0 -0.8

Lori 8.0 100.3 0.0

Kotayk 9.8 86.6 -1.2

Shirak 2.1 101.5 0.0

Syunik 19.3 105.2 1.0

Vayots Dzor 0.8 91.6 -0.1

Tavush 0.6 111.2 0.1

Total, RA 100.0 99.0 -1.0

Source: NSS

Chart 7. Increase in food (F), non-food (N/F) andservices (S) prices in 2001-2006, %

June against December of previous year

June against May

10.2

9.2

8.2

7.2

6.2

5.2

4.2

3.2

2.2

1.2

0.2

-0.8

-1.8

-2.8 F S

N/F

2001

F S

N/F

2002

F S

N/F

2003

F S

N/F

2004

F S

N/F

2005F S

N/F

2006


12

compared with the previous year, unemploymentincreased by 30.3%. The unemployment indicators inGegharkunik and Aragatsotn marzes remainunchanged, while the highest decline in the unemploy-ment numbers is observed in Yerevan, 20.1% (Table 8).As for the individuals looking for jobs by marzes, thisindicator also declined in all the marzes except Vayots-Dzor and Tavush.

Table 7 presents price changes in other sectors of theeconomy in the first half of 2006. Freight transportationprices have been the most impacted: as of late April,there was 20.3% price increase compared with Marchin this sector caused by a price increase on gas import-ed to Armenia in April. In the period in question, theprices on industrial goods have increased by 1.9%compared with the 4.3% price decline in the first half of2005. Although sales prices of agricultural products asof late June 2006 were lower than those of March 2006and late December 2005 (due to seasonal factors), theaverage indicator for the first half of 2006 exceeds thecorresponding indicator of the previous year by 11.3%.

When considering the behavior of the Armenian dramover the first six months of 2006 (Chart 8), we see thatin the first four months the dram depreciated in compar-ison with the December 2005 exchange rate. In Junethere was a 6.3% appreciation of the dram against thedollar while the euro and ruble exchange rates, due tothe late May appreciation of the dram by 5.2% and4.2%, respectively, nearly equalized with the averageDecember 2005 exchange rates. In general, it can bestated that the dram appreciation tendency, which start-ed in 2003, is still underway.

Employment

According to NSS estimates, in January-June 2006 theaverage number of economically active populationamounted to 1,186,900 people which is by 24,000 lessthan the relevant indicator for the same period in theprevious year. 1,096,900 people were engaged in theeconomy in the same period. 90,000 people (or 7.6% ofthe economically active population) had no jobs, wereregistered at the RA State employment service at theMinistry of Labor and Social Issues, and were grantedthe status of unemployed.

In the period in question of 2006, the decrease in theofficially registered unemployment continued as inrecent years (Chart 9). Even if we ignore the value ofthe indicators,3 the decrease must be considered posi-tive in the context of this country's socio-economic situ-ation.

As of June 2006, the indicator of the officially registeredunemployed, compared with 2005, declined in all themarzes of this country except Tavush marz where,

3 The officially registered unemployment rate is significantly lower than that obtained as a result of a sample survey of the labor force (31.3% as of2005) which is determined by differences in the definition of the unemployed and the calculation methodology.

Table 7. Price changes in certain sectors of economy in the first half of 2006, %

Producer price indexof industrialproduction

Price index forconstruction

Freight transporta-tion tariff index

Sales price index ofagricultural products

June of 2006 against December of 2005 1.9 4.4 19.3 -0.4

January-June of 2006 against that of 2005 -1.2 7.9 10.3 11.3

June of 2006 against March of 2006 8.1 1.7 19.8 -15.8

Chart 8. Changes in consumer prices and the dramexchange rate in the first half of 2006 with respectto December 2005, %

EUR/AMD USD/AMD

RUB/ AMD SPI

February March JuneMayApril

7

5

3

1

-1

-3

-5

-7January

Chart 9. Officially registered unemployment, %

12 m

onth

3 m

onth

6 m

onth

9 m

onth

12 m

onth

3 m

onth

6 m

onth

9 m

onth

12 m

onth

3 m

onth

6 m

onth

9 m

onth

12m

onth

3 m

onth

6 m

onth

11.0

10.5

10.0

9.5

9.0

8.5

8.0

7.5

7.0

2002 2003 2004 2005 2006


13

Along with the decrease in the unemployment indicator,the tendency of increase in the average nominalmonthly salary continues. Thus according to the NSSdata, in January-June 2006 in this country the averagenominal monthly salary amounted to 64,821 AMD,which exceeds the previous year's average indicator by24.5%. The salary in the budget sector progressivelyincreased by 22.2% and owing to that the gap betweensalaries in budget and non-budgetary organizationsnarrowed. In January-June 2004, the salaries in non-budgetary organizations exceeded the salaries in budg-et organizations by about 2.0% and in January-June2005 by 1.8%. Presently (January-June 2006) the gapdeclined to 1.7% amounting to 73,331 and 41,939 AMDrespectively.

Financial/banking sector

According to the Central Bank data, as of 30 June 302006, the monetary base amounted to 199.1 billionAMD, which in the first half of 2006 declined by 1.5 bil-lion AMD or 0.2%. Over the same period the cash out-side the CB decreased by 0.1%. As a result, the shareof cash in the monetary base increased by 0.1 percent-age points amounting to 77.5%. Let us note that in thefirst six months of 2005, 75.2% of the monetary basewas the cash outside the Central Bank. In fact, as of thefirst half of 2006 the share of cash grew which differsfrom the cash share decline tendency observed overthe recent years (as of late June 2003 it amounted to83.8% of the monetary base).

As for the other components of the monetary base,required dram and foreign currency reserves, theirshares declined compared with end of December 2005.Thus the share of required dram reserves in the mone-tary base declined by 0.2 percentage points andamounted to 10.9%, while the share of required foreigncurrency reserves increased by 0.1 percentage pointsamounting to 11.2%. In general, the share of requiredreserves grew compared with June 2005 by 0.3 per-centage points.

As of 30 June 30 2006, the money supply amounted to370.8 billion AMD having grown over six months by 5.2billion AMD or 1.5%. Over the six months, a 0.7%increase in cash outside the banking system and a0.6% increase in foreign currency deposits wereobserved. At the same time, growth was registered indram deposits by about 10.5%, which was determinedby the increase in term deposits by 3.1% and demanddeposits by 7.4%. As a result of the above develop-ments, the share of dram deposits in the structure ofthe money supply has grown by 3.0 percentage points,amounting to 23.0%. The dynamics in the money sup-ply structure over the past four years, as of late June, ispresented in Chart 10.

Over the first six months of 2006, logical changes wereobserved in the deposit structure of commercial banks.The dram deposits grew by 26.7 billion AMD or 43% inlate June 2006, compared with late June 2005. Foreigncurrency deposits, conversely, declined by 1.6 billionAMD or 0.9%. The dram deposits as of late June 2006

Job seekers From them unemployed

thousand personsGrowth (decline)

compared to 2005, %thousand persons

Growth (decline) compared to 2005, %

Table 8. Officially registered labor force supply by marzes in June 2006

Total, RA 113.6 -12.6 90.1 -7.1

Yerevan 22.9 -20.2 19.9 -20.1

Aragatsotn 2.6 -7.1 1.3 0.0

Ararat 4.1 -18.0 2.9 -12.1

Armavir 4.5 -26.2 3.1 -13.9

Gegharkunik 7.7 -0.5 4.8 0.0

Lori 23.5 -12.6 20.5 -1.0

Kotayk 5.7 -21.9 4.8 -4.0

Shirak 22.5 -6.4 17.4 -3.9

Syunik 11.8 -9.2 9.8 -7.5

Vayots Dzor 2.3 4.2 1.3 -7.1

Tavush 6.0 7.1 4.3 30.3

Chart 10. Structure of money supply as late June2003-2006, billion AMD

Deposits by foreign currency

Term deposits by dram

Demand deposits by dram

Cash money outside banking system

400

350

300

250

200

150

100

50

02003 2004 2005 2006


14

amounted to 88.9 billion AMD4 and compared withDecember 2005 grew by 3.4% or 4.0%. The amount offoreign currency deposits as late June 2006 was 172.0billion AMD and declined by 66.6 billion AMD or 3.7%compared with December 2005. In fact, under dramappreciation, there is a tendency towards a decrease inforeign currency deposits. Thus, as of the end of thefirst half of 2006, the deposits made in commercialbanks by residents and non-residents amounted to260.9 billion AMD of which 65.9% in foreign currency.This indicator is lower by 1.7 percentage points than inlate December 2005, and compared with June of previ-ous years, it is inferior to 2005 and 2004 indicators by7.7 percentage points and 11.8 percentage points,respectively.

The loans extended by commercial banks as of lateJune 2006 amounted to 223.4 billion AMD (of which59.4% in foreign currency) and, compared with the endof the previous year, declined by 2.2%. In contrast withdeposits, in the structure of loans there is growth in thecase of both the dram and foreign currency. Theamount of foreign currency loans in June 2006, com-pared with December 2005, grew by 10.3% and dramloans by 21.1% (Chart 11).

At the same time, a decline is observed in the interestrates for one-year dram deposits and loans offered bycommercial banks. In June 2005, the average interestrate5 for dram deposits was 6.08%. In December it was6.45%, and in June 2006 the average interest rate was5.57%. The loan interest rates were 18.02% in June2005, 17.29% in December, and 15.56% in June 2006.It is also noteworthy that although slow, there is adecrease in the gap between deposit and loan interestrates (in 2003, 14.0% on average; in 2004, 13.7%; in2005, 12.2%; and in the first half 2006, 10.7%).

In the first half of 2006, 500 million AMD worth of treas-ury bills were distributed on the primary market for the3-6 month maturity period with 4% average annualnominal profitability, 544 million AMD worth for the 6-9month maturity with 4.7% average annual nominal prof-itability, and 2.3 billion AMD worth for the 9-12 monthmaturity. The average nominal profitability of the 9-12month maturity treasury bills issued in March was 4.6%,which is by 0.6 percentage point higher than the prof-itability of the treasury bills issued in the same period ofthe previous year (4.0%). A significant decline isobserved in the profitability of treasury notes with par-tial repayment coupons. In June 2006 it amounted to5.2%, and 6 billion AMD worth of treasury notes weredistributed. There was a marked decline in the prof-itability of medium-term government coupon securitieswith partial payments.

State budget

According to the information provided by RA Ministry ofFinance and Economy, and RA State Social Security

4 Including non-residents' deposits. 5 For deposits and loans with a term of 15 days to 1 year.

Fund on state, community and social security fundbudgets, in the first half of 2006 the revenues and offi-cial transfers of the consolidated budget amounted to239.3 billion AMD (or 122.3% of this indicator for thesame period in the previous year), and the expendi-tures equaled 241.3 billion AMD (or 123.5% of this indi-cator for the same period in the previous year).Compared with the data for the first half of 2005, theshare of revenues of the RA State social security fundhas grown in the structure of budget revenues by 1.2percentage points and reached 15.2%. Certain growthhas also been observed in the share of communitybudget revenues, 0.1 percentage point, although it isstill low in the structure of the consolidated budget andamounts to 3.7%. At the same time, the share of statebudget revenues has decreased which in the first halfof 2006 amounted to 81.1%. Such changes in the struc-ture of the consolidated budget are determined by the

Chart 11. Changes in volumes of deposits and loanin the first half of 2004-2006 (June to previousDecember), %

Foreigncurrency

Loans Deposits

30

25

20

15

10

5

0

-5

-10

-15

-20Dram Foreign

currencyDram

13.2

19.221.1 20.2

12.110.3

24

46.3

-3.6 -3.7

-16

2004 2005 2006

Chart 12. Dynamics of average interest rates forloans and deposits by AMD during 2003-2006

3 6 9 12 3 6 9 12 3 6 9 12 3 6

25

20

15

10

5

0

2003 2004 2005 2006

Loans Deposits


15

growth rates of the three mentioned budgets. Thus,compared with the first half of the previous year, therevenue of the social security budget increased by32.4%, the community budget revenues increased by28.0%, and the state budget revenue increased by20.4%. It is noteworthy that last year's tendencytowards the increase in the share of the consolidatedbudget in the GDP has also continued. In the first halfof 2004 this share amounted to 25.8%, in 2005 it was27.8%, and as of the first half of 2006, the consolidatedbudget revenue share in the GDP was 29.6%. Chart 13presents the structure of consolidated budgets in thefirst six months.

The greatest share in the structure of consolidatedbudget revenues belongs to current revenues, 79.5%,although compared with the same period in the previ-ous year, there is a 1.5 percentage point decrease inthe share. The latter is determined by a progressiveincrease both in the revenue of the social security fundand the revenue generated from transactions with cap-ital, 32.4% and 50.5%, respectively, which resulted inthe growth of their shares in total revenues (includingofficial transfers) by 1.2 and 0.6 percentage points. Atthe same time, there is a decline in the share of officialtransfers (by 0.3 percentage points), which according tothe data of the first half of 2005 increased by about 69%and reached 2.1% share.

Most of the consolidated budget revenue was providedby tax revenue (67.7% of revenue, compared with69.3% in the same period of the previous year). Theincrease in tax revenue amounted to 19.5%, which pro-vided 22.3 percentage points growth of consolidatedbudget revenue (including official transfers).Interestingly, most tax revenue was contributed bydirect tax collection. Thus, the amount generated byprofit tax increased by 41.5% (which can be explainedby the expiration of the period of tax exemption for for-eign investment, as well as by the application of theminimal 1% profit) and revenue by 37.7% (directlydependent on the increase in social contributions). As aresult of the latter, the share of direct taxes in tax rev-enue has also increased which amounted to 16.0% inthe first half of 2003 and 29.7% in the same period of2006 (Chart 14).

The profit tax growth was mainly contributed by thepayments of non-governmental organizations and non-residents. Profit tax amounts received from othersources also have grown. In the reporting period, theprofit tax revenue to the state budget amounted to 15.4billion AMD, which is by 37.7% more than in the sameperiod of the previous year.

Out of indirect taxes, although an increase has beenobserved from the VAT, it is inferior to the relevant indi-cator for the same period of 2005. Thus, through theVAT 13.5% growth has been observed (compared withthe relevant indicator for the same period of 2005,

18.8%). 45.7% of the collected 69.5 billion AMD (or47.7 billion AMD) were contributed by customs bodiesthrough duties paid on the border, and 53.3% by taxbodies from the domestic turnover of goods and servic-es.

In the first half of 2006, growth was observed in termsof customs duties determined by increased rate ofimportation. Over this period, this revenue amounted to8.2 billion AMD, increasing by 11.8% from the sameperiod in 2005.

As for excise tax collection, it has increased by 5.2% orby more than 870 million AMD. (The same indicator forthe first half of 2005 decreased by 11.9%.6) More than11.2 billion AMD were collected from the taxation ofexcise goods, of which 5.0 billion AMD was from thetaxation of tobacco. Excise tax revenues from thegoods produced in this country amounted to about 6.2billion AMD, of which 2.9 billion was AMD from tobaccosales.

Chart 13. Structure of consolidated budget rev-enues in the first six months of 2003-2006, % ofGDP

35

30

25

20

15

10

5

0

% t

o G

DP

2003 2004 2005 2006

1.9

3.3

20.5

1.9

3.6

21.1

1.9

3.9

22.5

2.1

4.5

23.9

Communities budget revenues

Social fund budget revenues

State budget revenues

Chart 14. Structure of tax revenue in the consoli-dated budget in the first half of 2003-2006, % oftotal

180

160

140

120

100

80

60

40

20

0

bil

lio

n A

MD

2003 2004 2005 2006

10.4

73.7

16.0

9.3

69.3

21.4

11.9

25.3

58.8

29.7

62.8

11.5

Direct taxes indirect taxes Other taxes

6 The decline was determined by the decrease of revenue from petrol import and locally produced tobacco.


16

Revenues from other taxes maintain the growth ten-dency characteristic of the same period in the previousyear. In particular, the budget revenue from simplifiedtax amounted to 3.5 billion AMD or has grown by 7.6%,which is mainly determined by the increase in revenuesfrom commercial activity.

Compared with the first half of the previous year, non-tax revenues have grown by more than 33.2%, which ismainly determined by the budget revenue paid from thesale of Zangezur copper molybdenum plant as a resultof privatization. Non-tax revenues have also beenimpacted by the complete incorporation into the statebudget of extra-budgetary accounts opened for stateinstitutions by a RA government decree (according tothe 2006 RA Law on State Budget).

The expenditures of the consolidated budget in the firsthalf of 2006, compared with the same period in the pre-vious year, have grown by 23.5%. The growth wasmainly determined by the increase in current expendi-ture of 23.3% (contribution to the growth amounted to13.5 percentage points). Growth has been observed inthe current expenditure structure by all budget items(Table 9).

A 19.6% increase was observed from payroll, which wasmainly determined by the raise of official salaries for

public servants starting January 1, 2006. In the relevantperiod, an increase was observed in terms of capitalexpenditure (by 36.1%). The increase was mainly deter-mined by the growth of expenditure on education, sci-ence, apartment building, utilities and transport.

The consolidated budget deficit in the first half of 2006amounted to 2 billion AMD. It is noteworthy that in thesame period of 2005, 230.4 million AMD worth of sur-plus was observed.

External debt

Armenia's gross external debt as of end of June 2006constituted 1,936.2 billion USD, which was by 0.32%more compared to the end of the March 2006 indicator.At the same time, Armenia's gross external assets havegrown by $6.71 million, amounting to about $1,109.6million; as a result, net external debt decreased by$0.61 million (Table 10). As can be seen from the table,the lion's share (over 60%) in the gross external debtbelongs to the public sector, in particular to the publicand monetary administration bodies with 50.2% and10.0%, respectively. It should be noted that in the sec-ond quarter of 2006, the gross external debt of the stategovernance grew most (nearly 6%); whereas, in the pri-vate sector there was more than a 10% decrease in thesame indicator. In April-June 2006 (second quarter), sig-

The structure of expenditures, %

Growth rate, % Contribution to growth, %

2004 2005 2006 2004 2005 2006 2004 2005 2006

TOTAL EXPENDITURES 100.0 100 100 107.9 121.7 123.5 7.9 21.7 23.5

Current expenditures 65.9 63.6 62.5 115.4 117.4 121.3 9.5 11.4 13.5

Wages 8.1 8.9 8.6 185.2 133.2 119.6 4.1 2.7 1.7

Interest payments 2.9 2.3 1.8 74.5 97.0 98.3 -1.1 -0.1 0.0

Subsidies 5.9 4.1 3.4 148.1 83.8 103.5 2.1 -1.0 0.1

Current transfers 6.3 7.9 9.5 125.5 153.6 146.8 1.4 3.4 3.7

Goods and Services 42.7 40.4 39.1 107.1 115.0 119.7 3.0 6.4 7.9

Capital expenditures 12.1. 14.4 15.8 71.6 144.3 136.1 -5.2 5.4 5.2

Credit minus repayment 3.3 3.2 3.6 134.8 119.3 140.8 0.9 0.6 1.3

Social Security Fund expenditures 18.7 18.8 18 115.6 121.9 118.6 2.7 4.1 3.5

Table 9. Dynamics of expenditures of consolidated budget in the first half of 2004-2006

Source: NSS data

Gross external debt Gross external assets Net external debt

SectorsAs of 30

June 2006

Changes com-pared to that of 31

March 2006, %

Share in total, %

As of 30June 2006

Changes com-pared to that of 31

March 2006, %

Share in total, %

As of 30June 2006

Public administration bodies 971.03 5.87 50.15 63.7 -40.30 907.34 11.95

Monetary administrationbodies 193.01 -1.91 9.97 748.94 14.03 -555.93 20.85

Banks 175.03 -2.72 9.04 189.76 -11.55 -14.73 -57.46

Other sectors 373.16 -10.01 19.27 107.18 -14.13 265.98 -8.23

Direct Investment:

Intercompany lending 223.92 1.07 11.57 - - 223.92 1.07

Total 1 936.16 0.32 100.00 1 109.58 0.61 826.58 -0.07

Table 10. RA gross external debt, gross external assets, and net external debt as late June 2006, million USD


17

nificant changes took place in state governance bodiesin terms of gross external assets governance: in thisperiod more than 40% of gross external assets availableas of late March 2006 were sold. In addition, the netexternal debt was reduced mostly in the private sector.

As of the end of June 2006, RA gross external debtconstituted 1,158.36 million USD, which exceeds thesame indicator for end of 2005 by 59.2 million USD orabout 5.4%. The increase is determined by the growthof the external debt of the largest borrower, the RAGovernment by about 7.6% (or 70.1 million USD). Letus note that since the second quarter of 2005, parallelto the continuous increase in the RA Government'sexternal debt, the external debt of the Central Bank hasbeen decreasing (Chart 15). In the same period, RAstate debt in terms of long-term loans guaranteed bythe Government and the CB has decreased twice: from4.2 million USD to 2.1 million USD, whereas in case ofspecial loan programs, the state debt in 2002decreased by more than 80% and has not significantlychanged over the past three years, varying within theinterval of 3-3.5 million USD.

The structure of the RA state external debt, by creditors,and the dynamics of relevant indicators over the periodfrom mid-2005 to mid-2006 are presented in Table 11. Itcan be seen that in terms of bilateral creditors, the exter-nal debt had a sustainable growth tendency in the lastyear unlike the external debt in terms of multilateral cred-itors. The growth mainly took place due to the increaseof Germany's share, which exceeds 62% of the amountof liabilities in the group of bilateral creditors. The liabili-ties to multilateral creditors in 2006 had a growth tenden-cy in general, although there was a decrease in the lasttwo quarters of 2005. Compared with September 2005,the share of the external debt to the World Bank hasgrown by 60.3 million USD. There is a decrease in thedebts to the EBRD and IMF. It should be noted that interms of multilateral creditors, the debt increase wasmostly deterred by the fulfillment of commitments of theCB towards the IMF for 26.7 million USD.

External trade

In January-June 2006, external trade turnover inArmenia amounted to 1.4 billion USD representing animprovement by 12.6% in nominal value over the sameperiod of the previous year. Expressed in Armeniandram, the total turnover amount is 614.9 billion AMD,and the growth is equal to 9.5%.

The increase in the external trade turnover in the firsthalf of 2006 (12.6%) is notably lower than the indicatorfor the same period of the previous year (27.8%) by 15.2percentage points. The dynamics of changes in exportvolumes are considerable. The export volumes declinedby 0.6% as compared to the same period of the previ-ous year, while in 2005 export volumes increased by29.5%. As to the import volumes, the growth amounted19.9%, which is lower by 7.0 percentage points as com-pared to 2005. The decrease in export volumes is dueto the appreciation of the Armenian dram against nearlyall currencies; hence, for exporters the conditions con-tinue to remain unfavorable.

Chart 15. External debt of the Government of RAand of the Central Bank (as of end of period, mil-lion USD)

Central Bank Government

2005 June

2005December

2006 June

2006 March

1200

1000

800

600

400

200

0

193

914

176.4

916.4

173

932

166.3

986.5

ì³ñÏ³ïáõÝ»ñÇ ËÙµ»ñÁAs of

30 June 2006,million USD

Change of debt volume of corresponding period compared to that of previous quarter, %

2005-Q3 2005-Q4 2006-Q1 2006-Q2

Multilateral creditors 1 033.09 -0.42 -1.79 0.88 4.20

World Bank 811.42 0.39 -0.42 1.69 6.27

European Bank for Reconstruction and Development 10.86 -5.58 -16.45 -7.07 -21.20

International Fund for Agricultural Development 44.55 4.45 -1.71 0.93 8.27

International Monetary Fund 166.26 -4.08 -4.70 -1.95 -3.87

Bilateral creditors 125.27 6.34 -0.08 2.18 5.36

Germany 78.08 12.28 0.10 4.16 8.11

France 4.51 -0.42 -2.04 2.60 5.03

USA 40.37 -1.41 -0.11 -2.80 0.62

Japan 2.31 -1.49 -1.89 44.78 2.12

Total 1 158.36 0.24 -1.61 1.01 4.32

Table 11. RA state external debt structure by creditors as of late June 2006 and quarterly changes


18

While considering the export and import volumesaccording to countries and groups of countries, it canbe seen that the share of EU countries in the export vol-umes was continuously growing, and in January-June2006 it amounted to 51.7%, which exceeds the indica-tor for the previous year by 3.8 percentage points. Thesame is not true for import volumes. The share of EUcountries decreased by 4.5 percentage points as com-pared to the previous year and amounted to 30.5%.The share of CIS countries also increased both inexport and import volumes as compared to 2005amounting to 20.3% and 26.8%, respectively. As to theexports to other countries, nearly no changes havetaken place (as 0.2 percentage point increase) com-pared to the same period of the previous year, where-as in import there was a 4.9% decrease.

As to the changes in export and import volumes bycountries with the biggest impact on growth, it can beseen that as in the first quarter, the Netherlands had thebiggest growth in total exports (3.2 percentage points),while the export volume to this country has grown by49%. The situation in imports remains unchanged. As inthe first quarter, Russia and Ukraine mostly contributedto the increase in import volumes, 4.5 and 3.0 percent-age points, respectively.

The biggest decline in trade turnover recorded withIsrael where export volumes have declined by 26.1%.In import volumes, the biggest decline was recordedwith Great Britain (34.4%).

As to the export-import structure by basic commoditygroups, the increase in the export volumes of the min-ing production group has significantly contributed to theexport growth. As in the first quarter, the export andimport volumes of the precious and semiprecious

Chart 16. Dynamics of the components of externaltrade in the first half of 2004-2006, %

Trade turnover Export Import

2005 2006 200620052004

35

30

25

20

15

10

5

0

-5

-10

2004by USD By AMD

5.5

8.8

3.7

-0.6 0.5

4.1

-1.4

4.1 3.6 4.4

9.5

-2.2

27.829.5

26.9

12.6

19.9

15.8

Chart 17. The structure of exports and imports in thefirst half of 2003-2006, %

CIS countries EU Other countries

2006

2005

2004

2003

2006

2005

2004

2003

0 20 40 60 80 100

26.8 42.730.5

22.5 42.535.0

31.3 39.739.0

23.8 44.731.5

20.3 28.051.5

19.2 32.947.9

17.7 44.238.1

19.3 43.437.3

Impo

rtE

xpor

t

Growth rateto the first

half of 2005,%

Contributionto growth,

percentagepoints

Structure inthe first half

of 2006

Growth rateto the first

half of 2005,%

Contributionto growth,

percentagepoints

Structure inthe first half

of 2006

Exports, total 99.4 -0.6 100.0 Imports (by trading 119.9 19.9 100.0

countries), total

Countries with higher contribution to growth Countries with higher contribution to growth

Netherlands 128.4 3.2 14.5 Russia 129.9 4.5 16.5Georgia 110.3 0.6 6.2 Ukraine 177.9 3.0 5.7Ukraine 133.7 0.5 1.8 Italy 205.3 2.4 4.6USA 108.7 0.5 5.7 Greece 247.4 2.1 1.2Canada 148.2 0.4 1.2 Iran 138.8 1.9 5.8Italy 112.5 0.4 3.3 Georgia 184.1 1.9 3.5Great Britain 42.8 times 0.4 0.4 China 252.9 1.7 2.3

Countries with higher contribution to the slow down of Countries with higher contribution to the slow down ofgrowth growth

Israel 73.9 -3.6 10.3 Great Britain 65. 6 -2.2 3.9Belgium 89.1 -1.6 13.2 Luxemburg 9.2 -2.0 0.3Germany 96.3 -0.6 16.9 Belgium 88.7 -1.3 8.3Russia 94.5 -0.6 10.8 Israel 83.4 -1.2 5.2UAE 49.7 -0.6 0.6 Bulgaria 27.3 -0.4 0.1Iran 87.9 -0.4 3.1

Table 12. External trade data by countries in the first half of 2006


19

stones, metals and articles thereof group continue todecline, by 21.3% and 17.2%, respectively. This com-modity group mostly contributed to the slow down ofexports growth by 6.6%, and to imports growth by

5.1%. The machinery, equipment, and mechanismscommodity group contributed most to the growth inimports, which amounted to 5.9% and the import vol-ume has grown 1.5 times.

Growth rate tothe first half of

2005, %

Contribution togrowth, percentage

points

Structure in thefirst half of

2006

Exports, total 99.4 -0.6 100.0

Commodity groups with higher contribution to growth

Mineral production 167.0 5.2 13.1Plastic, rubber 7.1 times 2.8 3.3Oils of animal and vegetable origin 329 times 0.5 0.5Products of vegetable origin 149.8 0.5 1.4Stone, plaster, cement 191.2 0.4 0.8Instruments and devices 186.5 0.4 0.9

Commodity groups with higher contribution to the slow down of growth

Precious and semiprecious stones, metals and articles thereof 82.8 -6.6 31.7Non-precious metals and articles thereof 90.7 -3.1 30.2Finished food products 89.0 -1.0 8.3Paper and articles thereof 39.8 -0.5 0.3Machinery, equipment and mechanisms 92.9 -0.2 2.1

Imports, total 119.9 19.9 100.0

Commodity groups with higher contribution to growth

Machinery, equipment and mechanisms 155.7 5.9 13.7Non-precious metals and articles thereof 2.1 times 4.9 7.8Mineral production 128.8 4.1 15.3Transport means 132.0 2.7 9.2Chemical products and preparations of chemical and allied industries 129.9 2.1 7.6Plastic, rubber 139.9 1.0 3.0

Commodity groups with higher contribution to the slow down of growth

Precious and semiprecious stones, metals and articles thereof 78.7 -5.1 15.8Animals and products of animal origin 75.1 -0.7 1.7Products of vegetable origin 94.3 -0.3 4.5Works of art 36.4 0.2 0.1

Table 13. External trade data by the most changed commodity groups in the first half of 2006

In the first half of 2006, the real growth of the GDP amounted to 11.9%. This growth exceeds that of the same periodin the previous year by 1.6 percentage points and that of 2004 by 2.4 percentage points.

In terms of production in the GDP growth structure, compared with 2005, the weight of other branches of the econo-my decreased by 9.2 percentage points, and the weight of taxes in the growth structure, compared with January-June2005, has grown more than twice and amounted to 15.1. The weight of basic branches in the GDP growth is almostunchanged (65.5% vs. 64.2% in 2005).

Among the branches of economy, the greatest contributor to the GDP growth was construction with 4.9 percentagepoints and 35.3% growth. The added value of trade and public catering has grown by 13.8% (1.4 percentage pointscontributed) and agriculture by 7.2% (1.0 percentage points contributed). The real growth of net taxes from produc-tion amounted to 16.2% and contributed 1.8 percentage points to the GDP growth. Among the basic branches of econ-omy, the added value of industry declined by 1.1%.

The GDP analysis in terms of expenditure demonstrates that compared with the previous years, in the first half of2006 the growth of final consumption has accelerated which amounted to 13.3% (the growth in the previous year was8.9%). The real growth of private final consumption in the first half of 2006 amounted to 12.1%, and public consump-tion, 19.6%. In addition, gross formations have grown by 28.7%. As for net export of goods and services, a negativebalance has grown here by 32.0%, which deterred the GDP growth by 5.9 percentage points.

SUMMARY


20

In January-June 2006, the physical amount of industrial output declined by 1.0% compared with the same period inthe previous year. The main cause of the decline was the decrease in the output of the jewelry industry. Among CIScountries, the physical amount of industrial output also declined in Moldova and Kyrgyzstan.

Consumer prices as of late June 2006, compared with late December 2005, grew by 4.3%, which, although close tothe mean inflation rates of 2002-2004, exceeds the relevant indicator of 2005 by about 3 percentage points.

The AMD exchange rate in the first half of 2006 was relatively stable with respect to the EUR and Russian ruble.Nevertheless, the tendency towards the devaluation of the USD has continued, which as of late June 2006, comparedwith December 2005, and amounted to about 6.3%.

In January-June 2006, the average number of economically active population amounted to 1,186,900; 1,096,900 wereengaged in economy, and 90,000 (or 7.6% of the economically active population) were unemployed and were official-ly granted the status of unemployed. In January-June 2005, the unemployment rate was 8.6%.

The average nominal monthly salary in January-June 2006 was 64,821 AMD, which exceeds the relative indicator forthe same period in the previous year by 24.5%.

As of 30 June 30 2006, the monetary base amounted to 199.1 billion AMD, having declined in the first half of 2006 by1.5 billion AMD or 0.2%. In the same period, cash outside the CB dwindled by 0.1%.

The money supply as of 30 June 30 2006 amounted to 370.8 billion AMD, having grown over the half-year by 5.2 bil-lion AMD or 1.5%. The totals of AMD deposits in commercial banks in late June 2006 amounted to 88.9 billion AMDand compared with late December 2005 have grown by 4.0%. Foreign currency deposits in late June 2006 amountedto 172.0 billion AMD and decreased by 3.7% compared with December of the previous year.

In the first half of 2006, the revenues and official transfers of the consolidated budget amounted to 239.3 billion AMD(or 122.3% of the previous year's indicator), and the expenditure amounted to 241.3 billion AMD or 123.5% of the pre-vious year's indicator).

Armenia's gross foreign debt as of late June 2006 was 1,936.2 billion AMD, which, compared with late March 2006indicator, increased by 0.32%.

In January-June 2006, RA foreign trade turnover was 1.4 billion USD and, compared with the same period in the pre-vious year, the nominal value increased by 12.6%. In AMD the foreign trade turnover amounts to 614.9 billion AMDand the growth, 9.5%.

In the first six months of 2006, the export of goods in USD declined by 0.6%, whereas the export in the first half of2005 had grown by 29.5%. Import has grown by 19.9% (compared with a 26.9% increase in 2005).

APPLIED ARIMA* MODELS(1) D(LOG(GDP),0,12) C AR(1) MA(1) MA(16) GDP - Real Gross Domestic Product(2) D(LOG(CPI),0,12) C AR(1) MA(1) SMA(12) CPI - Consumer Price Index

The stationarity of the forecasted series in all models was tested and achieved after adequate transformations (e.g. log transformation, simple/season-al differencing, etc.). The identification of the models was done on the basis of stationary series. The final selection of the model was made on thebasis of RMSE, AIC and SBC statistics._______________________________* ARIMA in an econometric forecasting method, which combines the autoregressive (AR) and moving average (MA) models.

ARMENIAN TRENDS MACROECONOMIC FORECAST (BY QUARTERS, 2006)

ACTUAL AT FORECAST

January -December,

2005

January -March,2006

January -June,2006

January -September,

2006

January -December,

2006

Real GDP, % change as compared with the previousyear (1)

13.9 8.0 11.8 12.5 12.7

CPI, % change as compared with the previousDecember (2)

-0.2 2.8 4.3 -2.3 6.4


21

HAROUTIUN KHACHATRIANIndependent Expert

The year 2006 was pivotal for the three SouthCaucasus countries in two aspects. First, these coun-tries marked the 15th anniversary of their independ-ence, which is a sufficient period to discuss and sum upthe economic performances thereof. Second, accord-ing to estimates, in 2005-2006 Armenia and Azerbaijanregained their GDP levels of the 1980s. This factenables us to make a comparison of economicchanges in these countries.

GDP changes

As a basis for the GDP changes, we assumed the esti-mate made by the European Bank of Reconstructionand Development (EBRD).1 It is common knowledgethat expert opinions differ as to the GDP estimates inthe Soviet period and early independence years; how-

ever, we believe the estimates of this authoritativeorganization is acceptable as a basis. The following twoconsiderations can support this assumption. First, in allprobability, this institution applies the same criteria to allcountries impartially and without serious deviations.Second, we do not have access to other comparativedata bases on the economy of the union republics ofthe USSR and the newly independent states; the EBRDis unique in this respect.

As can be seen from Chart 1, according to the 2005EBRD estimate Armenia nearly regained its 1989 GDPlevel. Azerbaijan's GDP amounted to 90% of its 1989GDP. Georgia's economic situation is much worse: itsGDP amounts to approximately half of the 1989 GDP.These estimates were made in the autumn of 2005based on the GDP growth rate projections for that year:10% for Armenia and 20% for Azerbaijan. Actually, it isknown that in 2005 the GDP growth rate in Azerbaijanwas not 20% but 26% and in Armenia, 14%. Moreover,this year (2006) the GDP growth rate in Azerbaijan wasat least 30%. Hence, one can claim that if not in late2005, then in 2006, Azerbaijan also regained the 1989GDP level and, in this respect, is comparable withArmenia. Therefore, the comparison below, which is notsupposed to contain very accurate data, is justified.

According to the same data, Armenia, at the lowestpoint of its economic decline in 1993, had a GDP

1 Transition Report, Business in Transition EBRD 2005.

THE ECONOMIC STATUS OF SOUTHCAUCASUS COUNTRIES IN 15YEARS OF INDEPENDENCE: COM-PARATIVE ANALYSIS

Chart 1. GDP change dynamics in the countries ofthe South Caucasus in late Soviet period and 15post-Soviet years

Armenia Average, transition countries

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

110100

908070605040302010

0

Azerbaijan Average, transition countries

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

110100

908070605040302010

0

Gorgia Average, transition countries

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

110100

908070605040302010

0

* ²ÝóáõÙ³ÛÇÝ »ñÏñÝ»ñÝ »Ý` ²äÐ »ñÏñÝ»ñÁ, ³ñ¨»ÉÛ³Ý »íñáå³ÛÇ»ñÏñÝ»ñÁ ¨ ØáÝÕáÉÛ³Ý (29 »ñÏÇñ):

Source: Transition Report, EBRD 2005


22

amounting to 42% of that in 1989. The economicdecline in Azerbaijan and Georgia was deeper: 38% in1995 and 25% in 1994, respectively. At the same time,it is noteworthy that in terms of the recovery of its eco-nomic growth and GDP Armenia was one of the bestperforming among the former Soviet republics.According to the data in the same publication, by theend of 2005 only six out of the fifteen former unionrepublics succeeded in regaining the GDP dating backto the last Soviet years. In addition to Armenia, thesesix republics included Uzbekistan, Estonia,Turkmenistan, Belarus and Kazakhstan. In these for-mer five republics, the lowest economic decline com-pared with 1989 did not exceed 63-65% (Belarus andEstonia, respectively), whereas in the other republicsthe decline did not exceed 80-85% of the Soviet level.Against this backdrop, Armenia's recovery rate is evenmore impressive. As it was mentioned above,Armenia's economy plummeted to 42% of the 1989level (some researchers believe it was even lower). Inaddition, Armenia achieved this recovery rate withoutthe natural resources possessed by the republics ofCentral Asia and without the support enjoyed byBelarus from Russia and by Estonia from the EU.Lastly, Armenia is the only country out of these six thatwas engaged in an interethnic conflict; moreover, inwar, which has not beet settled to-date and restricts thedevelopment of the country to some extent.

Changes in the GDP structure

Table 1 demonstrates the GDP structure in the coun-tries of the South Caucasus during the last of the Sovietyears. They attest that these three republics had arather high industrial potential.2

The first consideration when comparing the GDP struc-ture in 1990-1991 and 2005 (Fig. 2) is that the share ofindustry, or to be more exact, the processing industry,has dramatically declined. Indeed, in the case ofArmenia the share of industry decreased nearly twice,from 44% to 20% in 2005 (in 2000-2004 this sharesometimes amounted to 22% but not more).

In the case of Georgia, the decline was even lower:from 30% to 13%. In Azerbaijan, the industry grew from

37% to 51%. However, this was not exclusively due tothe growth of oil industry since in 2005 40 percentagepoints out of the 51% were contributed by the oil indus-try (in the Soviet period, the oil industry contributed 11%of Azerbaijan's GDP). At the same time, it is very impor-tant to note that the growth of the industrial share in thegross output is mostly determined by the growth of oilprices and not production growth. Indeed, in the sur-veyed period, although oil production under the"Contract of the Century" started, in Azerbaijan it evenhas not doubled: in 1989 it was 12 million tons; in 2005,22.2 million tons. At the same time, its share in the GDPnearly quadrupled, which can be only the result of oilprice growth especially after the 2003 Iraq war. If the oilcontribution to the GDP is withdrawn, we will see thatthe remainder of the industry (the official statistics ofAzerbaijan uses a special term, non-extraction indus-try) has decreased more than twice, from 27% to 11%.Thus, it can be concluded that over the past 15 yearsdeindustrialization has taken place in all three SouthCaucasus countries; however, this process is lessacute in Armenia than in the neighboring countries.

Naturally, the decline of industry must have led to thegrowth in other sectors, especially, agriculture andservices in the GDP. In this respect in Armenia, we seethe classical picture: in 2005 agriculture accounted for19.6% of the gross output, and services 34.6%. In bothcases this was 50% more than in the Soviet period. Theshare of construction in 2005 accounted for 23.5% ofoutput, and the growth compared with 1990 (when itwas 18%) amounted to 30.5%. However, it is character-istic that in 2000-2005 the construction share inArmenia's GDP doubled.

Conversely, the share of agriculture and construction inAzerbaijan's GDP compared with the Soviet perioddecreased from 19% to 9.6% and 17% to 10.8%,respectively, due to growth in oil production. Over thepast five years there has been absolute output growthboth in agriculture and construction; however, the shareof the latter in the GDP continuously decreased.6

It can be concluded that owing to the oil factor the shareof the non-oil sector in Azerbaijan will be very variable

2 The Georgian data can raise doubts since according to them the share of industrial output in this country was lower than agricultural output. We donot have a possibility to look into this problem in detail; however, we can just add that at least in late 1970s the share of industry in Georgia was over40% and agriculture was under 35%. See for example: Íàðîäíîå õîçÿéñòâî Ãðóçèíñêîé ÑÑÐ çà 1977ã. Òáèëèñè, 1978ã. (People's Economy ofGeorgian SSR in 1977, Tbilisi, 1978).

3 Source: Armenia: Economic Trends, January-March 1998, p.17: the 1990 estimate quoted. 4 Source: K. Imanov. Azerbaijan, in: Economic Consequences of Soviet Disintegration, J. Williams, ed.., Washington, 1993, p 415-428. Also compared

with the official Soviet statistical data. 5 Source: the data of the Georgian state tax service given to the author. 6 It could not be otherwise if we take into consideration that Azerbaijan's GDP in 2005 grew by 26.4% while its non-oil sector grew only by 8%.

Armenia3 1990 Azerbaijan4 1991 Georgia5 1990

Industry 44.5 37 30

Agriculture 12.6 19 35.8

Construction 18 11 11.5

Services 24.9 27 20

Table 1. The GDP structure in the South Caucasus countries prior to the demise of the USSR

and hardly predictable: small changes in the oil sectorwill have large impact on the "weight" of the remainingsectors.

While the GDP picture in Armenia and Azerbaijan aremore or less predictable, in Georgia the situation canbe described as somewhat paradoxical. In this countrydeindustrialization was not accompanied by a growth ofagriculture: in the true sense of the word, it collapsedfrom 35% to 15%. A decline, although on a small scale(from 11.5% to 9.2%), took place in construction. As aresult, the total contribution of the three major sectorsof the economy (industry, agriculture and construction)in Georgia's GDP amounted to the unprecedented37.6%. (In Armenia this sum total amounts to 63% andin Azerbaijan to 72%). Thus, what took place in Georgiawas not classical deindustrialization but an economicshift from modern technologies to small-scale, home-grown manufacture and services, which can be seen inFig 3. under "services". For example, an economicactivity as "processing of material by households" hasa greater contribution to Georgia's GDP than energy(3.7% and 0.3%, respectively). In 2005 the miningindustry (which is potentially an important sector since10% of the global manganese resources are inGeorgia, and the latter produced 36% of manganese inthe USSR) contributed 0.8% to the GDP, whereas "realestate rent and sales" contributed 3.1% to the GDP.

Industrial transformations

The changes in the share of industry in the GDP werealso accompanied by a profound transformation in thestructure of industry. Charts 4 and 5 show the changesin the structure of industry in Armenia and Azerbaijanover the 15 post-Soviet years.

As can be seen in Armenia, two major branches ofindustry, machine building and light industry (each con-tributed 20% of output), are presently extinct (theirshare does not exceed 1%). The share of chemicalindustry declined from 7% to 3% of the total. Instead,the share of the food industry has grown from 17% inlate 1980s to 36% in 2005. The second major industri-al branch in modern Armenia is metallurgy: its share inthe total output has grown from 5% to 25%. Lastly, thegrowth of the energy sector is rather characteristic:from 3.5% to 17%. It is important to emphasize that thismore than quadruple growth means that power gener-ation in monetary terms in 2005 exceeded that of theSoviet period (the general share of industry in the GDPdecreased only twice). Actually, however, the physicalamount of power generation over the past 15 years didnot grow, but vice versa, and declined more than twice(see below). This means that the growth of power gen-eration is determined only by the price growth.

In the case of Soviet Azerbaijan, only the contribution ofoil production is known for sure in the total amount ofAzerbaijan's output, 13 million tons. In the reference


23

Chart 2. Major GDP components in the SouthCaucasus countries in the late Soviet period

Industry Agriculture

Construction Services

100

80

60

40

20

0Armenia Azerbaijan Georgia

Chart 3. Major GDP components in the SouthCaucasus countries in 2005

100

80

60

40

20

0Armenia Azerbaijan Georgia

Source, see Table 1

Source: official statistics of the relevant countries

Industry Agriculture

Construction Services

Chart 4. Changes in the structure of Armenia'sindustrial output in 1987 and 2005 (output percent-ages)

Machinery Light industry

Food Chemical

Energy Metal processing

2005

1987

0 20 40 60 80 100


24

books available to the author, there were no accuratedata on other industrial sectors of Soviet Azerbaijan.7

Under "other" Fig. 5 contains such highly developedbranches as light industry, oil drilling machinery,domestic appliances, etc. Thereafter, the analysis ofdata for 2005 enables us to conclude that most of thesebranches collapsed. For example, the production ofsteel pipes amounted to 500,000 tons annually inSoviet times, while in 1993 it decreased to 9,500 tons,and in 2005, 1,300 tons. The decline of light industry issimilar (which was natural under open markets). Theproduction of domestic air conditioners is described asfollows: 1,100 in 2005, while in 1987, 428,000. The pro-duction of oil drilling machinery also declined, althoughnot as dramatically. The largest non-extraction branchwas oil processing (contributing 39% of the whole pro-cessing industry). Next come the metallurgy, food andchemical industries (15%, 13% and 8.6%, respective-ly). It is characteristic that despite the dramatic oil pro-duction growth, the physical output of the oil processingindustry has declined. For example, in 2005, 906,000tons of petrol and 2.1 million tons of fuel oil (mazut)were produced, whereas, in Soviet times these figuresamounted to 1.4 million and 6.8 million tons, respec-tively.

In Georgia, like in its neighboring countries, high ton-nage production suffered most mainly because themain client and consumer disappeared: the former"Soviet center." In Soviet years Georgia annually pro-duced up to 20,000 cars and 120 locomotives; where-as, in 2004 (the 2005 data are still unknown) Georgiaproduced five cars and four locomotives. Manganesemine output declined nine times (218,000 tons in 2004).The production of fertilizers declined by "only" 36%amounting to 100,000 tons in 2004. In terms of output,the largest industrial branch is food production (38%),followed by the metallurgy and the chemical industries(15% and 8.2%). Nevertheless, even the physicalamounts produced by food industry give way to theSoviet outputs; for example, wine production in 2005amounted to 2.7 million deciliters, which is 2.5 times asless than in Soviet Georgia, and the production of fruit

preserves (20 million tins) amounted to 1/40 of theSoviet time output.

Agriculture

Table 2 presents the changes in the agricultural outputof the three South Caucasus republics in the post-Soviet years (averaged figures, since the Soviet datawere taken for various years, 1987-1991).

As can be seen from the table, Armenia managed tomaintain or even increase the output of major agricul-tural produce. Obviously, the agrarian reform imple-mented by Armenia earlier than in its neighboring coun-tries contributed to this. The situation is also compara-tively favorable in Azerbaijan although two major crops,grapes and cotton, have had a dramatic decline here.Evidently, this is not a failure but a thought-out policyaimed at the displacement thereof as unproductive forthe conditions of this country. This is proven by the factthat according to official statistics of Azerbaijan, the pro-duction of both grapes and cotton has gradually dwin-dled in the post-Soviet period. Instead, according to thesame source, potato production has grown about ten

Chart 5. Changes in the structure of Azerbaijan'sindustrial output in 1987 and 2005 (output percent-ages)

Oil and Gas Oil processing

Metal processing Food

Chemical Other

2005

1987

0 20 40 60 80 100

7 For example, People's Economy of Azerbaijan SSR in 1983 (Íàðîäíîå õîçÿéñòâî Àçåðáàéäæàíñêîé ÑÑÐ â 1983ã). provides data only on physicalamounts of output, but there were no monetary data.

Armenia Azerbaijan Georgia

Meat +0% -15% - 40%

Milk +75% +-0% -

Eggs +12% +-0 - 40%

Grain +44% +84% -

Fruits +85% +54% -

Grapes -2% - 22 times - 3 times

Cotton -- - 3.6 times --

Potatoes +90% +10 times + 20%

Citrus -- -- - 3 times

Table 2. Changes in the agricultural output in 2005 compared with Soviet times (growth +, decline -)


25

times. Lastly, in Georgia the situation leaves much to bedesired as nearly all forms of produce are on thedecline, including the most important one for the coun-try, citrus, which has declined three times.8

Resource consumption

A major shortcoming of the Soviet economy was itshigh resource consumption. It was expected that in theevent of the transition to market relations and privateenterprise9 the former Soviet republics would manageto significantly get rid of this shortcoming. According tocurrent statistics, (Table 3) in this respect Armeniaundoubtedly surpasses its neighbors.

As can be seen from Table 3, Armenia's economy over15 years of independence has become much moresparing. Possessing (as mentioned above) approxi-mately the same GDP as in the late Soviet period,Armenia now consumes 3.5 times as less natural gasand half as much power. External cargo turnover hasdeclined six times, which means that the production inthis country has been dramatically re-oriented towardsthe domestic market and became incomparably lessdependent on external factors than in the early years ofindependence (which resulted in the crisis in the early1990s caused by the blockade of communications).Indeed, the blockade has not lessened since thoseyears, but the national economy continues to grow inthese conditions.

In Azerbaijan there has been no improvement inresource consumption since independence. If the factorof external cargo turnover for Azerbaijan (and Georgia)is unimportant, since they are free from blockade, the

same is not true for energy consumption. As can beseen from Table 3, presently Azerbaijan consumesnearly as much natural gas and power as in the Sovietperiod. As a result, even though it is an oil-producingcountry, Azerbaijan, has to import not only gas10 butalso some amount of power. (In 2005, Azerbaijanimported more than one third of its consumption.) Inaddition, Azerbaijan is the only state in the SouthCaucasus that commissioned new power generatingcapacities, thermoelectric power plants.11 Thus, theenergy consumption of Azerbaijan's economy in thepost-Soviet period remained at least the same; if wetake into consideration that the country's populationdecreased by about 2 million compared with the previ-ous years (all the three republics had significant emi-gration), then per capita power consumption inAzerbaijan is obviously higher than in the Soviet period.In general, energy security in Azerbaijan is lower thanin Armenia both in terms of gas supply to the populationand power supply.

As for Georgia, as can be seen from Table 3, in post-Soviet years gas and power consumption in this coun-try have decreased as much as in Armenia. However,in Armenia the Soviet-time GDP level has beenregained, while in Georgia it has been regained by half.As for power supply, it was much worse as 2005: evenin the capital there was no uninterrupted power supply.

To sum up we can conclude that as a result of econom-ic decline and reforms Armenia's economy has becomeless vulnerable and more flexible which enables it to bemore optimistic for the future. In this respect Armeniahas achieved more favorable results than its neighbors.

gas consumptionbillion m3/year

power billion kW/h/yearExternal cargo turnover

million ton/year

1987 2005 1987 2005 1987 2005

Armenia 6.3 1.7 15.7 6.3 20 2.8

Azerbaijan 9.9 9.2 23.2 22.6 40 ---

Georgia 7.0 1.7 19.0 7.6 40 30

8 Georgia's official statistics insists that its information also incorporates data on Abkhazia and South Ossetia not controlled by the central authorities.9 According to the EBRD data, (see footnote 1 above) 65-75% of the GDP in the South Caucasus countries was produced by the private sector in

2005. 10 Interestingly, in the Soviet period Azerbaijan, on the contrary, imported oil and exported gas. 11 Caucasus. Yearbook of the Caucasus Media Institute. 2006, pp. 111-128. (À. Õà÷àòðÿí Ïðîáëeìû ýíåðãåòè÷åñêîé áåçîïàñíîñòè ñòðàí Þæíîãî

Êàâàêàçà. Ðîëü ñòðàí ðåãèîíà è âíåøíèõ ñèë. Êàâêàç Åæåãîäíèê Êàâàêàçñêîãî Èíñòèòóòà ÑÌÈ, 2006, ñòð. 111-128).

Table 3. Consumption of major resources in the South Caucasus countries


26

Presented for your attention is the analysis of the eco-nomic indicators of 14 enterprises working in variousspheres and branches of the Armenian economy as ofJanuary-June 2006.

The survey includes the enterprises working in thesphere of import and sales of fuel and natural gas, min-ing, metallurgy, power generation and distribution, pro-cessing of precious stones, manufacture and sale ofalcoholic beverages, construction materials, communi-cation, as well as passenger and cargo transportation.

As of the first half of 2006, a major energy sector rep-resentative, Electric Networks of Armenia CJSC, heads

the list of the ten largest companies. The sales of thiscompany amounted to about 39.6 billion AMD andincreased by 5.7% compared with the same period inthe previous year. In US dollars, this indicator equaled89.2 million USD and has grown by 10.4%.1

Compared with the same period of the previous year,the total amount of power supplied by the company hasgrown by 1.7%, which is mainly determined by theincrease in power supplies to non-basic consumers.The amount of power supplied to this group of con-sumers as well as the share in the general amount overthe past three years has grown and in 2006 reached8.4% and 24%, respectively (Tables 2 and 3).

ARMENIAN BUSINESS AND THE LARGEST COMPANIES

BUSINESS

LILIT YEZEKIAN, AEPLACARMEN MIRZOYAN, AEPLAC

1 Hereinafter, the discrepancy between change indicators denominated in AMD and USD are determined by a 4.2% appreciation of AMD with respectto the USD (based on average exchange rates of January-June 2005 and 2006: 463.15 and 443.59 AMD per 1 USD, respectively). In this survey,dollar indicators were calculated based on AMD indicators with respect to the USD average exchange rate in January-June 2006.

2 In this and all other cases, some indicators of the Armenian Railways CJSC are not cited due to the lack of data as of January-June 2005.

Place Company Sector of Activity

Sales volumes as of 2006,first half

Changes compared to the sameperiod of the previous year, %

million AMD million USD in AMD in USD

Table 1. Largest Armenian enterprises by sales volumes of products or services (as of the first half of 2006)

1 Electric Networks of Purchase and sales ofArmenia CJSC electric energy 39 567.0 89.2 5.7 10.4

2 Armenian Telephone Company JV CJSC Communications 36 821.0 83.0 20.3 25.6

3 ArmRusgasprom CJSC Import and sales of natural gas 32 851.2 74.1 6.0 10.7

4 Pure Iron Plant CJSC Processing of non-ferrousmetals 21 130.0 47.6 -38.0 -35.3

5 Armenian Copper Program(ACP) CJSC Metallurgy industry 17 309.3 39.0 71.5 79.0

6 Lori LLC Processing of precious stones 16 891.0 38.1 -18.1 -14.4

7 Shoghakn CJSC Processing of precious stones 16 822.0 37.9 -26.7 -23.5

8 Flash LLC Import, wholesale and retail trade of oil products 14 607.9 32.9 18.1 23.3

9 Armenian Molybdenum Production (AMP) LLC Metallurgy industry 12 635.9 28.5 -20.1 -16.6

10 Yerevan Brandy Production of alcoholicFactory CJSC beverages 6 907.6 15.6 -33.9 -31.0

11 Apaven LLC Freight 5 073.3 11.4 16.3 21.5

12 Vorotan HPP Production and salesSystem CJSC of electric energy 4 592.9 10.4 37.6 43.7

13 Armenian Passenger carriageRailways CJSC and freight 3 675.6 8.3 - -2

14 Mika-Cement CJSC Cement production and sales 2 857.6 6.4 114.5 124.0

Total 231 842.3 522.5

Business: The Largest Companies

27

The share of industry has remained nearly unchanged.Compared with the previous year, the growth of theshare amounted to 0.2 percentage point, and theamount supplied has increased by 2.4% (Table 3 andChart 1).

Considering the company's investment policy, we canobserve that in 2006-2007 they plan to invest 20 millionUSD for the improvement of the national energy sys-tem. The investment made by the company over thepast three years amounted to 11 million USD.

As for the developments in the company, it should benoted that 100% of the company's shares were sold toInter RAO UES in 2006 for 70 million USD. Let us notethat in the past the shares of the company belonged tothe British Midland Resources Holding CJSC, which in2002 purchased 100% of the company's shares for 37million USD, of which 25 million USD was paid to theRA state budget and as payroll arrears.

According to the company, power consumptiondeclined by 4%, which we believe was caused bylarge-scale nationwide gasification. According to thecompany's estimates, in 75-80% of Armenia's territorynew subscribers can be connected. There are prob-lems with quality of power supplied and the increase inthe number of subscribers which is determined by poorpower supply of Yerevan's outskirts. To solve this prob-lem, the company plans to build two 110-kWt substa-tions and three 35-kWt substations. According to the

company, one of the causes of poor power supply isthe installation of outdated substations in newly builtbuildings.

As for electricity tariffs, against the backdrop of heated dis-cussions over the recent months on the reduction ofpower and gas tariffs, the company believes that 25AMD/kW is optimal and its reduction is not on the agenda.

Among the largest companies, the leader in nationalcommunications, ArmenTel, occupies the second line.

3 The indicator was calculated based on the changes in the amounts in the relevant period of 2006 and the 2005 weights.

Consumer groups First half of 2003 First half of 2004 First half of 2005 First half of 2006

Table 2. Amount of power supplied by Electric Networks of Armenia CJSC (by aggregated consumer groups),million kWh

Households 697.7 725.4 769.0 766.6

Budgetary organizations 106.9 109.1 111.0 110.7

Industry 368.7 474.1 478.0 489.7

Transport 62.0 60.6 56.2 55.1

Irrigation 79.0 89.2 77.8 74.4

Water supply and sewerage 130.1 106.5 95.5 86.5

Others 377.7 399.2 460.4 499.2

Total 1 822.1 1 964.1 2 047.9 2 082.1

Consumer groupsFirst half of

2004First half of

2005First half of 2006

Contribution to growth,3

percentage points

Table 3. Changes in the supplies of power, %

Households 4.0 6.0 -0.3 -0.1

Budgetary organizations 2.1 1.7 -0.3 0.0

Industry 28.6 0.8 2.4 0.6

Transport -2.3 -7.3 -2.0 -0.1

Irrigation 12.9 -12.8 -4.4 -0.2

Water supply and sewerage -18.1 -10.3 -9.4 -0.4

Others 5.7 15.3 8.4 1.9

Total 7.8 4.3 1.7 1.7

Chart 1. Amount of power supplied by ElectricNetworks of Armenia CJSC by the weight of con-sumer groups, %

2003 2004 2005 2006

Others

Water supply and sewerage

Irrigation

Transport

Industry

Budgetary organisation

Households

0 5 10 15 20 25 30 35 40 45

24.0

20.74.2

7.1

3.6

4.32.6

3.423.5

20.25.3

5.936.8

38.3


28

Its sales, compared with the relevant period in the pre-vious year, have grown significantly by 20.3%, amount-ing to 36.8 billion AMD or 83 million USD and haveincreased by 25.6% in dollar terms.

In the current year, the owners of the company havechanged. 90% of the company's shares were pur-chased by the Russian VimpelCom JSC (known on themarket under the BeeLine brand). The deal was worth437.9 million USD (341.9 million euro); in addition, thecompany must pay an additional 51.2 million USD (40million euro) under ArmenTel's liabilities. The RAGovernment is ready to sell its 10% share, providedVimpelCom foregoes the monopoly over a number ofservices, including the Internet. Let us note that in 1997the Greek OTE company purchased by tenderArmenTel's 90% share for 142.47 million USD.

According to the statements made previously, in 2006the company invested 30 billion AMD (81 million USD)and 80% of the automatic telephone systems will bedigitized by the end of the year. According to the com-pany's estimates, by late 2009 fixed telephone commu-nication will be liberalized which will enable the compa-ny to make this domain competitive and repay theexpenditures. Let us note that in 2005 the companyinvested 74.3 million USD into telecommunicationsdevelopment.

ArmenTel's new owner announced that telephone tariffswould remain unchanged until 1 March 2007. Presently,the number of fixed telephone communication sub-scribers in Armenia is 600,000, and the number ofmobile phone subscribers is 400,000. The number ofthe subscribers to VivaCell mobile phone services is600,000.

The company also intends to invest sizable amountsinto the connection of subscribers to digital stationssince only 50% of the telephone lines in Armenia aredigitized.

Let us note that in the second quarter of 2006, the com-pany's net profit compared with the first quarterincreased by 64.1% and amounted to 14 billion AMD(31.6 million USD), which amounts to 47.7% of theannual net profit for 2005.

The third major company is the gas import and salecompany, ArmRusgasprom. As of the first quarter, thecompany's sales amounted to 32.8 billion AMD (74.1million USD) and compared with the same period of theprevious year have grown by 6% in AMD and 10.7% inUSD.

Considering the company's activities, let us note that in2002-2006 they invested 32.9 billion AMD (83.2 millionUSD) of which:

26.4 billion AMD (66.8 million USD) into gasifi-cation projects;6.5 billion AMD (16.4 million USD) into develop-ment projects.

Also from 2002-2006, the company's total payments tothe RA state budget amounted to 54.2 billion AMD, ofwhich for 2006 the payment totaled 16.7 billion AMD.The average number of employees is 6,335, and theaverage salary is 87,000 AMD.

According to the company, as of the current year about41 towns and more than 388 rural communities havebeen supplied with gas, and an additional 97 previous-ly not supplied towns have been provided with gas.Presently the number of gas consuming organizationsamounts to 3,890 and the number of gas consuminghousehold subscribers is 421,661.

According to the company's estimates, by the end of2006 the number of possible subscribers will be630,000, which is 84.7% of the 743,500 power con-sumers in Armenia. The number of actual subscribersby the end of the year should exceed 450,000.

It should be noted that in November 2006, the RA reg-ulatory commission for public services, based on theapplication filed by ArmRusgasprom, reviewed the tarifffor natural gas. According to its decision, starting 1January 2007, 1000 cubic meters of gas will cost84,000 AMD for the population (as well as for other con-sumers that consume up to 10,000 cubic metersmonthly) instead of 90,000 AMD as previously. Forlarge-scale consumers the tariff will be 153.26 USD(instead of 146.51 USD).

Considering the amount of imported gas, let us notethat as of 1 November 2006, 1.31 billion cubic meterswere imported to Armenia and over the period men-tioned 1.17 billion cubic meters were sold, of which theenergy sector accounted for 33%, industry, 22.6%, andthe residential sector consumed 23.2%.

As mentioned in the previous issue of the ArmenianTrends, the company plans to reconstruct and modern-ize the Abovian underground gas storage. For this pur-pose in September of 2006 ArmRusgasprom signed acontract with Gas de France as represented by its affil-iate Fragas. According to this contract, in six monthsFragas will survey the unsafe gas storage areas in thefacility and will present to ArmRusgasprom the techni-cal and financial proposals on the upgrade. If the pro-posals are competitive, the company will reconstructthe storage areas and increase its storage volume.

The fourth in the list of the largest Armenian enterpris-es is the Pure Iron Plant. Compared with the previousperiod, the sales of the company decreased by 38%and amounted to 21.1 billion AMD. In USD, thedecrease amounted to 35.3%.

The main products manufactured by the company areferromolybdenum, pure molybdenum, metallic molyb-denum, ferrotungsten, and rhenium. In the first half of2006, the company produced 1,232 tons ferromolybde-num, which is 13% less than the indicator for the sameperiod in the previous year as ferromolybdenum salesdeclined by 7% and amounted to 1,274.8 tons. Pure


29

molybdenum production increased by 120% to 257.5tons. Its sales amounted to 43 tons instead of 6.3 tonsin the relevant period of 2005. As for rhenium produc-tion, it significantly dwindled to 18% of the amount pro-duced in the same period of the previous year, and, forthis reason, the company stopped selling rhenium.

According to the estimates of the RA Ministry of Tradeand Economic Development, in 2008 Armenia will sat-isfy 3.5-4% of the molybdenum demand on the globalmarket (or 130,000 tons). This is possible as a result ofthe investment programs that have been implementedat the two leading molybdenum producers, ArmenianMolybdenum Production and Pure Iron Plant, since2003. Presently one ton of molybdenum on the interna-tional market is worth 50,000 USD, which is half of theamount for the previous year.

The fifth largest company is ACP whose sales as of thefirst half of 2006 amounted to about 17.3 billion AMD(39 million USD), which in AMD is 71.5% more than inthe same period of the previous year (the sales in USDincreased by 79%). The increase in the sales (in AMD)in the first half of 2006 is again explained by the contin-uous increase in the copper prices on the internationalmarket: thus, in the first half of 2006 the average priceof 1 ton of copper was worth 6,070 USD compared with3,332 USD in the same period of 2005 (Chart 2).

Let us note that in the period in question, comparedwith the same period in the previous year, the compa-ny produced 5.4% less blister copper (4,916 tons) com-pared with 5,197 tons in the same period of 2005. Theproduction of copper concentrate decreased by 7.1%amounting to 24,880 tons versus 26,778 tons in the firsthalf of 2005.

Presently under the company's mid-term developmentproject, it is planned to start the exploitation of theTeghut copper molybdenum deposit in 2011. For thispurpose, the company plans to implement preparatorywork in 2007 and in four years start the exploitation ofthe deposit. The company is negotiating a 150 millionUSD loan with the Russian Vneshtorgbank to obtainfunds for the implementation of the project.

Among the largest businesses, the sixth and seventhplaces belong to the precious stone and diamond pro-cessing companies, Lori and Shoghakn, respectively.

The income of Lori in the first half of 2006 amounted to16.9 billion AMD (38.1 million USD). Compared with thesame period in the previous year, the AMD and USDincome declined by 18.1% and 14.4%, respectively.

The sales of Shoghakn in the first half of 2006 amount-ed to 16.8 billion AMD (37.9 million USD), which is26.7% and 23.5%, respectively, less than the indicatorsfor the same period in the previous year.

It should be noted that in the first half of 2006 inArmenia the amount of diamond production dwindledcompared with the same period in the previous year by

20.4%, amounting to 47 billion AMD (101.4 millionUSD). The decline was observed both in diamondsales, by 18.1%, and exports, by 20.2%. Let us notethat in the first half of 2006 raw diamonds were notimported from Russia due to their comparatively highcost. Instead, equal amounts of raw diamonds wereimported from Belgium and Israel.

The eighth largest Armenian business is the leader infuel import and sales in Armenia, Flash Ltd., which sig-nificantly retreated from the previously occupied thirdplace (in the third quarter). This is mainly explained bythe large sales of the other companies, newcomers inthis issue. Flash Ltd.'s sales grew by 18.1% in AMD(14.6 billion AMD) and increased by 22.5% in USD(32.9 million USD).

In the first half-year the net profit amounted to 726.9 mil-lion AMD (1.6 million USD) compared with the first quar-ter of 2006. This indicator increased more than six times.

The ninth largest business is another metallurgy enter-prise, Armenian Molybdenum Production, whose salesexceed 12.5 billion AMD (28.5 million USD). Comparedwith the relevant indicator for the previous year, in thefirst half of 2006 the results in AMD and USD declinedby 20.1% and 17.2%, respectively. One of the possiblecauses of this decline is the decrease in the molybde-num price on the global market.

As we mentioned in the previous issue, the companycontinues to develop science-intensive production,especially as a result of experimental work, amongother projects. In late 2006 it was planned to mass pro-duce ferrotitanium, which is in great demand on theinternational markets.

Compared with the previous quarter, the YerevanBrandy Factory CJSC retreated to the tenth place. Thesales of the company in AMD decreased by 33.9%amounting to 6.9 billion AMD, while in USD salesdecreased by 31.0% and amounted to 15.6 million USD.

In 2006 the company invested about 1 million eurosinto grape purchasing which enabled the company toincrease grape purchases. The bulk of the investmentwas made into the enlargement of the Armavir and

Chart 2. Average copper prices on the internation-al market in the first half of 2005-2006, USD/ton

2005 2006

January February JuneMarch April May

8000

6500

5000

3500

2000


30

Aigavan branches, whose storage capacity has grownby 33,000 decaliters.

In the current year, the increase in grape purchases inArmenia has grown by 10.9%. In terms of grape pur-chases, Yerevan Brandy Factory is a leader inArmenia. The amount of grape purchases by the com-pany are 28,000 tons, and the purchase price of 1 kgof grapes was on average 130-145 AMD.

According to the company, the production of 15-20 yearold cognac (super premium) has increased by about35% or 180,000 liters. The distillery has 15 million litersof high quality cognac alcohol, which will enable it to pro-duce cognac without interruption for the next 10 years.

Since March 2006, the company has resumed the sup-plies of Ararat cognac (which incorporates seven titles:Ararat 3 Stars, Ararat 5 Stars, Ani, Select, Akhtamar,Festival, and Nairi) to Russia; its suspension wascaused by the introduction of new excise stamps inRussia. According to the annual data for 2005, thecompany exported 71% of its output to Russia (about2.5 million liters of cognac) and is a major alcohol sup-plier of Russia.

It should be noted that the company also producescognac for the European countries (especially, forGermany: 30,000 liters; Czech Republic, and Greece)as well as Israel and Japan. Annually, 100,000 liters ofcognac are exported to the Baltic States and nownegotiations are underway to export the distillery's out-put to England.

In addition, the owner of the company, Pernod RicardSA, is the second largest producer of alcoholic bever-ages in the world. In FY 2005-20064 the company'searnings increased by 67.4% amounting to 4.57 billioneuro versus 2.73 billion euro in the previous FY.

The largest cargo and passenger transporters, Apavenand Armenian Railways, occupy the 11th and 13thplaces, respectively. Both companies are newcomers

in this issue. It should be noted that Armenian Railwaysis reporting data for the first time, which is why the datafor previous years is lacking. Apaven's sales in AMDincreased by 16.3% and amount to 5.1 billion AMD(11.4 million USD). As for Armenian Railways, its salesamount to about 3.7 billion AMD (8.3 million USD). InJanuary-June 2006, Armenian Railways transported1.9 million tons of cargo, which exceeds the indicatorfor the previous year by 0.2%.

Let us note that cargo export has grown by 13% andamounted to 371,900 tons, and import increased by10.2% and amounted to 892,000 tons. However, insideArmenia cargo shipment declined by 16.1%. As for pas-senger transportation, the amount also decreased by10.9% and amounted to 269,300 people.

It should be noted that according to an RA governmentdecree, Armenian Railways will be granted entrustedmanagement for 30 years. Under the tender conditions,the best bidder will commit to invest 170 million USDover 10-15 years.

In terms of sales, the power generator and sellerVorotan Hydropower Plant System CJSC retreated tothe 12th place. In the first half of 2006, the sales of thecompany in AMD amounted to 4.6 billion AMD (10.4million USD) and significantly exceeded last year'sresults by 37.6% (in USD terms by 43.7%).

Considering the company's output level, compared withthe previous year, it increased by 8.3%. The company'scontinuous decline in the total power generation sharein 2003-2005 gave way to an increase in the first half of2006 by 2.4 percentage points (Tables 4 and 5).

Since July 2006, the tariff for the power generated bythe company was lowered by resolution of the RAPublic Services Regulatory Commission and amountedto 7.89 AMD per 1 kWt/h (instead 9.46 AMD).

In accordance with the instructions of the RAGovernment, it is planned to increase the company's

4 It ends on 31 May of each year.

IndicatorFirst half of

2003First half of

2004First half of

2005First half of

2006

Table 4. Total power generated by Vorotan Hydropower Plant System

Electric power output, million kWt/h 611.9 610.1 430.2 466.1

Share in total electric power output in Armenia, % 22.3 19.0 12.8 15.0

Change, % -0.3 -29.5 8.3

IndicatorFirst half of

2003First half of

2004First half of

2005First half of

2006

Table 5. Useful supply of the power generated by Vorotan Hydropower Plant System

Useful supply of electrical power, million kWt/h 610.5 608.6 427.0 463.0

Share in Armenia's total, % 23.5 20.1 13.6 15.8

Change, % -0.3 -29.8 8.4

Power generating stations' own needs, % 0.2 0.2 0.7 0.7


31

authorized capital by 952.4 million AMD (2.5 millionUSD) by means of increasing the nominal value of theshares starting 1 December 2007. This is determinedby the increase in company's profit in 2005. Let us notethat the company's net profit in January-June 2006amounted to about 2 billion AMD (4.4 million USD) andexceeded that of the same period of the previous yearby 3%.

The last in the list of the largest businesses is Mika-Cement. Compared with the same period in the previ-ous year the company's sales increased significantly,nearly 2.1 times and amounted to 2.8 billion AMD. Thisis mainly determined by the sizable increase in con-struction sales in Armenia: it amounted to 38.8% as ofthe first ten months of 2006.

To estimate the economic performance of the largestbusinesses, let us analyze the data in Chart 3. Thechart presents two indicators: the share of net profit insales and profit per employee. Obviously, the indicatorsare greatly determined by the company's type of activ-ity, which can be the main reason for the differences.However, the comparison of indicators produces inter-esting results.

This time Pure Iron Plant is the leader in terms of thetwo indicators: its net profit amounts to 37.3% of itssales and profit per employee amounts to about 17.5million AMD. Although the highest indicator for theshare of net profit in sales belongs to ArmenTel, 38.1%,the economic efficiency of the company is rather lowsince the net profit generated by one employee is 2.8million AMD. Apaven and Armenian MolybdenumProduction are most prominent in terms of high eco-nomic efficiency; in their sales, net profit accounts for10.1% and 11.4%, respectively, whereas net profit peremployee in Apaven is twice as high as that ofArmenian Molybdenum Production.

The position of ArmRusgasprom is also noteworthy: theshare of net profit in sales amounts to 9.1%, and netprofit per employee is 0.5 million AMD. This discrepan-cy is probably caused by the fact that the company isthe second largest in terms of the number of employ-ees.

This time the performance of Vorotan HydropowerPlant System was not as good. By the first quarterresults, the company was a leader in terms of econom-ic efficiency, now the picture is different. This dramaticchange is determined by the losses incurred by thecompany in the second quarter that amounted to 481.3million AMD.

Let us also note that Electric Networks of Armenia andArmenian Railways also suffered losses in the first halfof this year.

To sum up the performance of the largest Armenianenterprises in the first half of 2006, let us note that inthe period in question the total sales of the surveyedcompanies amounted to about 232 billion AMD (523

million USD). In January-June the companies paidabout 24 billion AMD (54 million USD) to the statebudget, which accounts for 14.8% of the tax revenuesof the consolidated budget. Chart 4 presents the per-centage value of the ratio of the taxes and sales of thecompanies. The major exporters, Armenian CopperProgram, Lori, Shoghakn, and Armenian MolybdenumProduction are not included since their share of taxes isvery small at 0.2-1.7%.

Largest enterprises by paid-in taxes, fixed assets,total assets, export, and number of employees.

Table 6 presents the first twenty largest taxpayers as ofthe first half of 2006.

Compared with the first quarter of 2006, as of the firsthalf of the same year, the first four largest taxpayershave not changed. Thus, the list of the largest taxpay-ers is again headed by the metallurgical leader,Zangezur CMC CJSC with a nearly 13.5 billion AMD taxcontribution. The second and third are ArmenTel CJSCand gas importer and seller ArmRusgasprom with 8.3

Chart 3. Largest Armenian enterprises in terms ofthe share of net profit in sales (%) and net profit peremployee (million AMD)

Net

pro

fit

per

em

plo

yee,

millio

n A

MD

20

15

10

5

0

-510 0 10 20 30 40 50

Share of net profit in sales volume %

Pure Iron

Apaven

ArmRusgasprom

ArmenTelFlash

AMP

ACP Vorotan HPS

ENA

ArmReilways

Chart 4. Ratio of taxes and sales, %

30

25

20

15

10

5

0F

lash

LLC

Yer

evan

Bra

ndy

Fac

tory

CJS

C

Pur

e iro

n P

lant

CJS

C

Ele

ctric

Net

wor

ks o

fA

rmen

ia C

JSC

Arm

Rus

gasp

rom

CJS

C

Arm

enia

Tel

epho

nC

ompa

ny J

V

Vor

otan

HP

PS

yste

m C

JSC

Arm

enia

nR

ailw

ays

CJS

CM

ika-

Cem

ent

CJS

C

Apa

ven

LLC


32

billion AMD and 5.6 billion AMD, respectively. Thefourth is oil importer and retailer Flash with about 4 bil-lion AMD (9.2 million USD) worth of taxes.

The sum total of the 20 companies exceeds 61 billionAMD (137 million USD), which accounts for about37.8% of tax revenue to the consolidated budget in thefirst half of 2006. It is noteworthy that only 57 companiescontributed over 50% of the tax revenue of the consoli-dated budget out of more than 50,000 companies (withindividual entrepreneurs, over 100,000). (Chart 5)

Considering the fixed assets of the companies, itshould be noted that Apaven, ArmenTel, and ArmenianMolybdenum Production are prominent for the sizableamount of their fixed assets, 128.3%, 110.7%, and104.7%, respectively. This is mainly determined by theactive investment implemented by these companies.As it has already been mentioned, the investment byArmenian Molybdenum Production is made for the pur-pose of modernizing the production process. As for

ArmenTel, let us note that in accordance with License#60 this company has already started to digitize thetelephone communication of 800 villages.

5 Data from the List of 1000 largest taxpayers published by RA Tax Service.

Place Company name Sector of ActivityTax payments

Million AMD Million USD

Table 6. The twenty largest taxpayers in Armenia as of the first half of 2006.5

1 Zangezur CMC CJSC Metallurgy industry 13 447.39 30.32

2 Armenian Telephone Company JV CJSC Communications 8 331.98 18.78

3 ArmRusgasprom CJSC Import and sales of natural gas 5 647.40 12.73

4 Flash LLC Import, wholesale and retail trade of oil products 4 065.13 9.16

5 Electric Networks of Armenia CJSC Purchase and sales of electric energy 3 442.80 7.76

6 Qagh Petrol Service Import, wholesale and retail trade of oil products 3 417.67 7.71

7 Pares-Armenia JV CJSC Tobacco import and sales 3 243.11 7.31

8 K-Telecom CJSC Communications 3 120.47 7.04

9 Grand Tobacco JV CJSC Tobacco production 2 158.52 4.87

10 International Masis Tabak JV CJSC Tobacco production 2 067.98 4.66

11 Salex Group Import and trade of foodstuff 1 920.51 4.33

12 Armenian NPP CJSC Electric power production 1 862.55 4.20

13 Armenia International Airports Transport and flight servicing 1 250.54 2.82

14 Armenia Lada JV CJSC Vehicles, vehicle spare parts and accessories, servicing 1 168.56 2.63

15 Vorotan HPP System CJSC Production and sales of electric energy 1 059.54 2.39

16 Karcomauto LLC Vehicles, vehicle spare parts and accessories, servicing 1 044.90 2.36

17 Pure Iron Plant CJSC Processing of non-ferrous metals 1 035.65 2.33

18 Armjrmughkojughi CJSC Water supply and sewerage 991.52 2.24

19 Delta Way 936.69 2.11

20 Mika Armenia Trading LLC Import, wholesale and retail trade of oil products 935.72 2.11

Total 61 148.62 137.86

Share in total paid-in taxes volume performed by 1,000 largest taxpayers, % 44.73

Share in tax revenues of consolidated budget, % 37.77

Chart 5. Changes in the tax contributions of the1000 largest taxpayers to the consolidated budget

Tax p

aym

en

ts b

y a

scen

din

g c

um

u-

lati

ve v

olu

me,

perc

en

t in

to

tal

Number of taxpayers by descending volume of paid-in taxes

96

80

64

48

32

16

00 100 200 300 400 500 600 700 800 900 1000


33

Place Company name Sector of Activity

Fixedassets of

the compa-ny, million

AMD

Change compared tothe same period of

the previous year, %

Table 7. Largest Armenian enterprises in terms of fixed assets, as of the first half of 2006



3 Electric Networks of Armenia CJSC Purchase and sales of electric energy 59 032.0 -6.7

4 Vorotan HPP System CJSC Production and sales of electric energy 42 810.5 -5.7

5 Armenian Railways CJSC Passenger carriage and freight 12 378.2 -

6 Yerevan Brandy Factory CJSC Production of alcoholic beverages 7 432.4 12.3

7 Armenian Copper Program (ACP) CJSC Metallurgy industry 4 937.9 -2.3

8 Armenian Molybdenum Production (AMP) LLC Metallurgy industry 1 348.8 104.7

9 Mika-Cement CJSC Cement production and sales 795.0 -7.3

10 Shoghakn CJSC Processing of precious stones 732.0 -24.8

11 Pure Iron Plant CJSC Processing of non-ferrous metals 693.0 33.8

12 Lori LLC Processing of precious stones 580.0 0

13 Flash LLC Import, wholesale and retail trade of oil products 244.0 35.6

14 Apaven LLC Freight 146.1 128.3

Considering the export amounts of the companies, itshould be note that the major producing companiesare the leaders here. The share of their export in thetotal export of the RA amount to 16.7%, and as for thetotal exports of the companies, it declined by 10.4%compared with the same period in the previous year,which is probably first of all determined by the appre-ciation of the AD, unfavorable conditions forexporters, as well as the developments on the inter-national market.

It should be noted that unprecedented export growthhas been observed in Mika-Cement, nearly twice,which is due to the increase in export to Georgia. Thedramatic increase in construction activities inAzerbaijan created an incentive for the export ofGeorgian cement to Azerbaijan, in its turn Georgia pur-chases cheap Armenian cement for its domestic pur-poses. As a reminder, the global price of cement is 100-120 USD per ton, whereas the Armenian cement is soldat 65-67 USD per ton.

Place Company name Sector of Activity

Total assetsof the com-pany, mil-lion AMD

Change compared tothe same period of

the previous year, %

Table 8. Largest Armenian enterprises in terms of total assets, as of the first half of 2006



3 Electric Networks of Armenia CJSC Purchase and sales of electric energy 80 528.0 2.1

4 Vorotan HPP System CJSC Production and sales of electric energy 63 338.8 8.8

5 Yerevan Brandy Factory CJSC Production of alcoholic beverages 46 627.7 -6

6 Armenian Railways CJSC Passenger carriage and freight 18 962.8 -

7 Armenian Molybdenum Production (AMP) LLC Metallurgy industry 15 158.1 -6

8 Pure Iron Plant CJSC Processing of non-ferrous metals 13 283.0 2.1

9 Armenian Copper Program (ACP) CJSC Metallurgy industry 12 143.2 -6.3

10 Flash LLC Import, wholesale and retail trade of oil products 6 653.0 61.3

11 Mika-Cement CJSC Cement production and sales 2 895.0 28.9

12 Apaven LLC Freight 2 114.9 26.8

13 Shoghakn CJSC Processing of precious stones 1 190.0 -16.2

14 Lori LLC Processing of precious stones 766.0 -2.2

6 Indicator is lacking due to the unavailability of January-June 2005 data.


34

The exports of ArmRusgasprom have declined moredramatically, by 70.1%, which is determined by the ter-mination of power export to Georgia starting the springof 2006. As the main cause, the company cites the lowprofitability of power export to Georgia; however, this isprobably also related to the dwindling interest ofGeorgia towards electricity produced in Armenia. Thesituation may change next year since Russia raised thegas tariff for Georgia. Let us note that the main compa-nies exporting power to Georgia are Electric Networks ofArmenia and ArmRusgasprom, which supplies power at2.9 US cents per kWt/h through the three main high-volt-age lines: Ashotsk-Ninotsminda, Lalvar, and Alaverdi.

Among large exporters, Armenian Copper Program (thesecond in our list) has significantly increased itsexports, which is due to nearly doubled copper priceson the international market as mentioned above.

In contrast with the Armenian Copper Program,the first company on the list, the Pure Iron Plant,reduced its exports by 1/3, which is determinedby the reduction of global molybdenum prices byhalf and as a result the decline of production rateof the company.

A dramatic decline in production was also observed inthe output of the Yerevan Brandy Factory amounting to33%. This is probably due to the temporary terminationof the export of Armenian cognac to the Russian mar-ket in 2005 due to the introduction of new excisestamps in Russia.

As expected, taking into account the dramatic increasein Mika-Cement exports, it is no wonder that it exceedsthe same indicator for 2005 in the total sales by about11 percentage points (Table 10).

Place Company name Sector of activityExport vol-umes, mil-lion USD

Changes comparedto the same period ofthe previous year, %

Table 9. Largest Armenian enterprises by export volumes, as of the first half of 20067

1 Pure Iron Plant CJSC Processing of non-ferrous metals 47.6 -35.32 Armenian Copper Program (ACP) CJSC Metallurgy industry 38.8 79.83 Lori LLC Processing of precious stones 38.1 -14.44 Shoghakn CJSC Processing of precious stones 37.9 -23.55 Armenian Molybdenum

Production (AMP) LLC Metallurgy industry 28.3 -16.06 Armenian Telephone Company JV CJSC Communications 18.3 63.97 Yerevan Brandy Factory CJSC Production of alcoholic beverages 14.0 -33.08 Electric Networks of Armenia CJSC Purchase and sales of electric energy 4.08 -9 Mika-Cement CJSC Cement production and sales 3.4 181.9

10 Armenian Railways CJSC Passenger carriage and freight 1.0 -11 ArmRusgasprom CJSC Import and sales of natural gas 0.9 -69.9

Total exports 232.3 -10.4

Total exports/Total RA exports, % 16.7

7 The table does not demonstrate the data on Flash LLC, Vorotan Hydroelectric power plant system, and Valletta Ltd. due to the absence of exports.8 The list includes only the data as of the first half of 2006, while the relevant 2005 data is unavailable.

Place Company name Sector of activity

Share of exports in sales volumes, % Change, %

2005 first half 2006 first half

Table 10. Largest Armenian enterprises in terms of export, as percentage of sales

1 Pure Iron Plant CJSC Processing of non-ferrous metals 100 100 02 Armenian Copper

Program (ACP) CJSC Metallurgy industry 99.0 99.4 0.43 Lori LLC Processing of precious stones 100 100 04 Shoghakn CJSC Processing of precious stones 100 100 05 Armenian Molybdenum

Production (AMP) LLC Metallurgy industry 98.7 99.5 0.76 Yerevan Brandy Factory CJSC Production of alcoholic beverages 92.8 90.1 -2.77 Mika-Cement CJSC Cement production and sales 42.0 52.8 10.88 Armenian Railways CJSC Passenger carriage and freight - 11.6 -9 ArmRusgasprom CJSC Import and sales of natural gas 4.4 1.2 -3.2

10 Electric Networks of Armenia CJSC Purchase and sales of electric energy - 4.5 -

11 Armenian Telephone Company JV CJSC Communications 16.9 22.0 5.1


35

Chart 6 demonstrates the changes in the weight ofexport in the sales of the companies. It can be seen thatPure Iron Plant, Lori, and Shoghakn are entirely exportenterprises since their output is completely exported.As for the representatives of metallurgy sector - ACPand Armenian Molybdenum Production - export nearlythe entire output. It should be noted that compared withthe same period of the previous year the weight ofexport increased by 0.4% and 0.7% respectively andsales by 99.4% and 99.5%.

The decline in the exports of ArmRusgasprom andYerevan Brandy Factory are obvious. This is reflectedin the decline in export share, 3.2% and 2.7%, respec-tively. Let us also note that the significant increase inMika-Cement and ArmenTel exports has a direct impacton the weight of export in the sales, and the increaseamounted to 10.8% and 5.1%, respectively.

Table 9 presents the largest Armenian enterprises bythe number of employees. Let us note that 14 compa-nies employ a total of 28,447 people, which accountsfor 0.03% of the economically active populationemployed in various sectors of national economy.

Out of the presented companies, the leader is ElectricNetworks of Armenia CJSC (7,859 employees); howev-er, it should be noted that compared with the same peri-od of the previous year this figure has decreased signif-icantly by 282, which is probably due to the new per-sonnel policy of the new owner.

In the second company, ArmRusgasprom the picture isdifferent. Compared with the same period of 2005, inabsolute terms, the personnel have grown by 414 peo-ple. This situation is probably due to the enlargement ofgasification and, hence, the need to create new jobs.

It should be also noted that compared with the previousquarter ArmenTel retreated to the third position. Thelargest decrease in manpower was observed here com-pared with the same period of the previous year by 356people. Let us note that only compared with the firstquarter of 2006, the company's manpower dwindled by335 people.

Significant reduction has also taken place in Shoghakn,which is mainly due to the significant decline inArmenia's diamond industry. The company's manpowerdwindled by 308 people, however, the company stillmaintains its leading position as the largest diamondprocessing enterprise (the total number of employees is1,089).

Chart 6. Changes in the weight of export in thesales of the largest Armenian enterprises (percent-age points) compared with the first half of 2005 andthe 2006 exports9

Ch

an

ge o

f exp

ort

s s

hare

in

sale

s

vo

lum

e,

perc

en

tag

e p

oin

ts

Exports, million USD

12

10

8

6

4

2

0

-2

-4

Mika-Cement

Pure Iron

YBF

ArmenTel

Shoghakn

AMPACP

Lori

ArmRusgasprom

0 10 20 30 40 50 60

9 The figure does not present Electrical Networks of Armenia and Armenian Railways due to the lack of data as of January-June 2005.

Place Company name Sector of activityNumber ofemployees,

person

Changes comparedto the same period

of the previous year,person

Table 11. Largest Armenian enterprises in terms of manpower, as of the first half of 2006

1 Electric Networks of Armenia CJSC Purchase and sales of electric energy 7 859 -2822 ArmRusgasprom CJSC Import and sales of natural gas 6 109 4143 Armenian Telephone Company JV CJSC Communications 4 940 -3564 Armenian Railways CJSC Passenger carriage and freight 4 654 -5 Shoghakn CJSC Processing of precious stones 1 089 -3086 Mika-Cement CJSC Cement production and sales 923 237 Armenian Copper Program (ACP) CJSC Metallurgy industry 881 1758 Pure Iron Plant CJSC Processing of non-ferrous metals 452 789 Yerevan Brandy Factory CJSC Production of alcoholic beverages 372 2

10 Lori LLC Processing of precious stones 350 -211 Armenian Molybdenum

Production (AMP) LLC Metallurgy industry 297 6612 Vorotan HPP System CJSC Production and sales of electric energy 240 313 Flash LLC Import, wholesale and retail

trade of oil products 222 1314 Apaven LLC Freight 59 6

Total 28 447


36

AM

D/E

UR

AM

D/U

SD

AM

D/R

UR

US

D/E

UR

(cro

ss c

ours

e)

Currency exchange rates set by the Central Bank of Armenia for theperiod of August-October of 2006

At the beginning of the period 527.70 508.76 485 527.70

At the end of the period 508.28 485.00 481.89 481.89

Appreciation (-)/ Depreciation (+), %* -9.09 -11.46 -10.94 -10.48

Average 514.69 494.20 481.09 496.69

Maximum 527.7 508.76 485.74 527.70

Minimum 505.48 484.53 476.55 476.55

Standard Deviation 6.60 8.16 2.67 15.27

Standard Deviation/ Average (%) 1.28 1.65 0.56 3.07

Amplitude 22.22 24.23 9.2 51.15

At the beginning of the period 413.33 395.89 381.50 413.33



Average 401.85 388.03 381.35 390.44

Maximum 413.33 395.89 382.95 413.33

Minimum 396.54 381.50 378.93 378.93



Amplitude 16.79 14.39 4.02 34.40




Average 15.02 14.51 14.20 14.57

Maximum 15.41 14.81 14.26 15.41

Minimum 14.82 14.26 14.12 14.12



Amplitude 0.59 0.55 0.14 1.29

AM

D/1

00 I

RR




Average 4.44 4.29 4.22 4.32

Maximum 4.57 4.38 4.24 4.57

Minimum 4.39 4.22 4.19 4.19



Amplitude 0.18 0.16 0.05 0.38

AM

D/G

EL




Average 228.48 222.67 219.16 223.45

Maximum 234.18 227 220.15 234.18

Minimum 213.47 219.76 217.9 217.90



Amplitude 20.71 7.24 2.25 16.28

2006August

2006September

2006October

2006August-October



Appreciation (-)/ Depreciation (+), %* 4.21 3.76 4.93 4.26

Average 1.28 1.27 1.26 1.27

Maximum 1.29 1.29 1.27 1.29

Minimum 1.27 1.27 1.25 1.25



Amplitude 0.02 0.02 0.02 0.04

ARMENIAN MARKETS IN FIGURES

523

511

499

487

475

415

407

399

391

383

375

15.5

15.1

14.8

14.4

14.1

1.29

1.27

1.26

1.25

4.6

4.5

4.4

4.3

4.2

233230224224221218215

August September October






Business: Armenian Markets

37

Prices for precious metals set by the Central Bank of Armenia for the period of 2005 andJanuary-April of 2006

Source: Central Bank of RA* Calculated for AMD with respect to the corresponding period of the previous year, (average values) in percents

AM

D/T

RY




Average 273.83 264.51 257.58 265.32

Maximum 279.48 271.99 263.17 279.48

Minimum 267.94 251.81 251.09 251.09



Amplitude 11.54 20.18 12.08 28.39

AMD

/AZM

(cro

ss c

ours

e)




Average 453.79 441.53 436.19 443.86

Maximum 465.25 449.21 437.95 465.25

Minimum 448.74 435.50 433.91 433.91



Amplitude 16.51 13.71 4.04 31.35

Go

ldP

lati

nu

m

At the beginning of the period 8 428.93 7 913.73 7 380.77 8 428.93

At the end of the period 7 836.84 7 402.23 7 367.60 7 367.60


Average 8 142.83 7 532.43 7 191.87 7 641.75

Maximum 8 581.99 8 048.13 7 380.77 8 581.99

Minimum 7 836.84 7 180.53 6 967.32 6 967.32



Amplitude 745.15 867.60 413.45 1 614.67

At the beginning of the period 16 274.27 15 693.82 14 044.01 16 274.27

At the end of the period 15 553.85 14 093.07 13 194.06 13 194.06

Appreciation (-)/ Depreciation (+), %* 19.93 11.95 -0.39 10.72

Average 15 964.17 14 906.14 13 362.26 14 777.78

Maximum 17 038.68 16 028.01 14 111.35 17 038.68

Minimum 15 553.85 13 890.47 13 011.85 13 011.85

Standard Deviation 418.60 781.05 338.29 1 217.40


Amplitude 1 484.83 2 137.54 1 099.50 4 026.83

Price for 1 gram standardized bars(AMD)

2006August

2006September

2006 October

2006 August-October

AM

D/G

BP




Average 760.26 732.32 714.68 735.79

Maximum 774.3 758.21 721.39 774.30

Minimum 749.58 716.24 708.41 708.41



Amplitude 24.72 41.97 12.98 65.89

280

274

268

262

256

250

462

456

450

444

438

432

766

754

742

730

718

706

8 435

8 135

7 835

7 535

7 235

6 935

17 03016 44015 85015 26014 67014 08013 49012 900

2006August

2006September

2006October

2006August-October







38

WholesaleAMD per 1 liter

2006August

2006September

2006 October

2006August-October

RetailAMD per 1 liter

2006August

2006September

2006 October

2006August-October

Petrol (91) 354.3 319.5 303.0 332.8

Petrol (95) 371.1 340.5 326.5 352.3

Petrol (98) 390.6 372.6 340.1 373.4

Diesel fuel 273.3 288 273 276.9

Petrol (91) 379.0 357.0 332.5 361.9

Petrol (95) 399.0 377.0 359.5 383.6

Petrol (98) 415.0 401.5 388.5 405.0

Diesel fuel 293.8 300.0 291.0 294.6

Source: ArmInfo information agency (based on prices at the filling stations of Flash Co. Ltd. and at the Yerevan Commodity Exchange)

Average fuel prices in Armenia

Petrol (95)Petrol (91)

Diesel fuelPetrol (98)

Silver




Average 156.79 148.78 141.29 149.21

Maximum 162.56 166.39 147.78 166.39

Minimum 145.51 134.88 134.38 134.38



Amplitude 17.05 31.51 13.40 32.01

* Source: ArmInfo information agency* Calculated with respect to the corresponding period of the previous year, (average values) in percents

170

162

154

146

138

130

395

375

355

335

315

295

2752006 August 2006 September 2006 October 2006 August-

October

Wholesale Retail

400

380

360

340

320


October

Wholesale Retail

410

390

370

350

330


October

Wholesale Retail

310

300

290

280

270

260


October

Wholesale Retail


Price for 1 gram standardized bars(AMD)

2006August

2006September

2006 October

2006 August-October

Business: Armenian Markets

39

SELECTED COMMODITY PRICES ON INTERNATIONAL MARKETS

INTERNATIONAL MARKETS

Price of 1 bushel corn, cents Price of 1 bushel wheat, cents

INTERNATIONAL PRICES FORPRECIOUS METALS

Note: 1 troy ounce = 31.104 gram

Price for a troy ounce of gold, USD Price for a troy ounce of silver, USD

Price for a troy ounce of platinum, USD Price for a troy ounce of palladium, USD

305

290

275

260

245

230

215

200

185

479

465

451

437

423

409

395

656

644

632

620

608

596

584

572

560

1 260

1 230

1 200

1 170

1 140

1 110

1 080

1 050

351

343

335

327

319

311

303

295

13.1

12.7

12.4

12.0

11.7

11.3

11.0

10.6

August September October August September October



Source: Mineapolis Grain ExchangeNote: 1 bushel = 35.23907 liter


40

Aluminium, USD per US/tonne

INTERNATIONAL PRICES FORNON-FERROUS METALS

Source: www.lme.co.uk (London metal exchange)

Nickel, USD per US/tonne

Tin, USD per US/tonne

Lead, USD per US/tonne

Copper, USD per US/tonne

2 830

2 750

2 670

2 590

2 510

2 430

2 350

8 050

7 900

7 750

7 600

7 450

7 300

7 150

34 500

33 300

32 100

30 900

29 700

28 500

27 300

1 602

1 510

1 418

1 326

1 234

1 142

1 050

10 350

10 050

9 750

9 450

9 150

8 850

8 550

8 250

Zinc, USD per US/tonne

4 250

4 100

3 950

3 800

3 650

3 500

3 350

3 200




41

²ñï³Ñ³ÝÙ³Ý ËÃ³ÝÙ³Ý ù³Õ³ù³Ï³ÝáõÃÛáõÝ

The reasons and the maintenance of exportpromotion

Export growth and economic development, driven byglobalization and deep integration processes, arebecoming more and more positively correlated andinterdependent. Exports affect and are affected bylong-term economic growth through various channelssuch as production and demand linkages, learningeffects and improvement of human resources, adoptionof superior technology embodied in foreign-producedcapital goods, and the general easing of the foreignexchange constraint associated with the expansion ofthe export sector (Delano Villanueva, 1993). Thus,because of the important role of exports, relevant pro-motion policy should be drawn for development of thissector.

Today's export promotion programs often provide com-prehensive and sophisticated services to the businesscommunity. There are some characteristic differencesbetween export promotion in developed and developingcountries. In developing countries, the export promo-tion is mostly considered as an instrument of economicdevelopment, whereas in the developed countries, thefocus of export promotion programs is one of strength-ening the competitiveness of companies. Anyway, thepromotion policy in developing countries also seeks thisgoal.

Countries with an outward orientation were seen to per-form better than those with an inward orientation overthe 1960-2000 period. Strongly outward oriented coun-tries, like South Korea, Hong Kong, and Singapore,have developed internationally competitive export sec-tors through investment in export production and infra-structure, as well as carrying out export promotion pro-grams.

Obviously many developing countries are now followingthis experience, carrying out policies and various pro-grams to assist their industries and companies to com-pete successfully in the world market.

Today most developing countries have an export pro-motion organization (EPO), for instance South Korea(KOTRA-Korea Trade Promotion Corporation),Thailand (Department of Export Promotion), Malaysia(MATRADE-Malaysia External Trade DevelopmentCorporation), Singapore (TDB-Trade DevelopmentBoard), and others. These organizations play a signifi-cant role in export development not only within the busi-ness community but also within the public sector (RolfSeringhaus, 1990). The five stages of governmentinvolvement in exporting are shown in Chart 1, andEPOs play the key role throughout this process. Byhelping companies to transform foreign market oppor-tunities into sales, EPOs, remarkably, facilitate exportdevelopment.

THE BASIC FEATURES OFEXPORT PROMOTION POLICY INDEVELOPING COUNTRIES

KAREN GRIGORYANPhD in Economics, Armenian State University of Economics(ASUE) Lecturer

Stage Focus Evaluation measures

Table 1. Five stages of export involvement by public organizations

1 Export marketing and improvement of infrastructure knowledge, resource level, infrastructure network development

2 Export orientation motivation level

3 Export promotion need, awareness level

4 Export potential and supply opportunity survey

5 Export development export growth and optimization of structure of exports


42

We should indicate some nuance between promotion oftraditional exports and new export products. The firstone can lead only to export growth, whereas the lastone concerns diversification (both-geographic andproduct diversifications), which is very important forexport development.

Generally, export promotion is the most important partof the commercial policy of many countries. Export pro-motion means carrying out an active trade policy. Inthe last decades, it concerned, first of all, developingcountries and countries in transition.

The policy of export promotion, as a rule, is only aphase of a commercial policy under certain social,economic and political conditions. In developingcountries, export promotion policy was carried out atvarious stages of their industrialization, which had deepinfluences on the forms and methods of realization ofthe policy.

Export promotion is closely connected with a dis-mantling of import restrictions. A number of actionsin the field of import regulation can render direct influ-ence on the prices and qualities of the export goodsthrough the decrease in import duties or the cancellingof quantitative restrictions of import.

Import tariffs and export taxes have symmetrical effectson domestic relative prices. Both instruments raise thedomestic price of imports relative to exports (StephenTokarick, 2006). Moreover, they discourage all types ofexports, since they cause a country's exchange rate toappreciate. Additionally, tariffs and other import barriersdiscourage exports by raising the price of importedintermediate inputs used by exporters.

The Korean experience illustrates an interesting aspectof timing. Direct export promotion was initiated beforeimport liberalization had taken place in order to relaxthe balance of payment constraints in a period ofdeclining foreign assistance. It then became the majorimpulse of sustained export growth (Jamuna P.Agarwal, Rolf J. Langhammer and others, 1995, p.9).

The policy of export promotion is also connectedwith industrial policy. Export promotion includes thedevelopment of national production, including exportproduction. In turn, the state can purposefully influencethe development of separate export branches, produc-tions, and regions. Policymakers should encouragecompetition in domestic markets and innovation so thatincumbent firms that are close to the technology frontiercan become more productive and thereby increaseexports.

An important direction of export promotion andexport production is the complex of measuresdirected to the attraction of foreign direct invest-ments (FDI). The policy of FDI attraction provides thecreation of special export zones and the encourage-ment of export through the decrease in taxes for the

exporting enterprises with foreign investments or inclu-sion as an obligatory condition of an "export" compo-nent.

At the beginning of the 1980s, Thailand resolved major-ity participation of foreigners in the enterprises with for-eign participation only in export manufacturing, notallowing it in the manufacturers focused on a domesticmarket (at 100% export production of manufacturerscompletely belonging foreigners was authorized). Suchfirms also were allowed to own the land, and they wereexempted from many restrictions. Now a significant partof the Thai export is made at the enterprises with for-eign participation. Thus, there were also appreciableshifts in its structure aside from increases of a share ofindustrial products.

Generally, it is considered that investments and exportsare engines of growth. Evidence can be found in theEast Asian economies, particularly in the Four Tigers,which displayed exceptional investment rates.

There is no uniform successful policy of exportpromotion. The countries use various strategies con-cerning the state's encouragement of export. In manyrespects, it depends on the contemporary issues of anational economy, the stage of development on whichit is, and the general economic and political situation inthe world. Nevertheless, it is possible to note a numberof important features in their policy that have led to pos-itive results in growth of their export and perfection of itsstructure.

A number of countries stimulated their exports on thebasis of industrial policy, having beforehand identifiedthe most prospective commodity from their point ofview. In general, this was characteristic for the coun-tries with inconsistent reforms. In some cases, suchpolicy yielded positive results, especially when it was aquestion of the development of a non-traditional exportor the export of modern technically complex productsdemanding significant capital investments for the man-ufacturer and promotion on the world markets. In thiscase, financial support from the state, intervening aftermobilization of private capital, creation of an infrastruc-ture, etc. were of great importance and supported theoptimization of the export structure in rather shortterms. South Korea can serve as the most indicativeexample of such policy.

However, the policy of promotion of separate commodi-ties comprises a high degree of risk. Efficiency of exportpromotion directly depends on the correctness of defin-ing prospective branches and products. Administrativemistakes in this area for some countries resulted in sig-nificant losses (failures with large export projects inSouth Korea, Thailand, Singapore, Malaysia,Indonesia, and Brazil).

The negative consequence of such policy can also bethe backlog of branches and the manufacturers workingon the domestic market. The same South Korea has

43


entered the world markets with color TVs earlier thansuch merchandise had been created for servicing theirdomestic market.

Other countries to a greater degree relied on marketmechanisms (on the macro, and micro level). Thussome countries, for example, the majority of export-ori-ented states among new industrial states-NIS (Taiwan,Thailand, Malaysia) practically did not interfere withquestions of export. Other states, like China, on thecontrary, alongside with creation of favorable macro-economic conditions for exporters also used specialmeasures for export promotion.

As a rule, the development of export should be coordi-nated with liberalization of foreign trade. Only separatecountries have applied rigid restrictions on imports for asolution of problems in balance of payment and bal-ance of trade (for example, South Korea in 80s. But,they more likely are an exception of the general rule. Itis necessary to note that liberalization of imports canpromote the deterioration of the balance of paymentand the balance of trade of the country. For preventionof negative impacts on the balance of payment, thecountry used a uniform package of other tools ofmacroeconomic regulation, such as exchange rate, taxreform and foreign credits.

It is worth mentioning Uruguay's experience in trade lib-eralization when the average tariff protection fell from43% to 14%. The policy analysis (Carlos Casacuberta,Nestor Gandelman 2006) shows that trade opennessaffected the adjustment functions of all three factors ofproduction (in this case-capital, blue-collar, and white-collar employment). In reality, trade protection maydecrease rather than create jobs within industries, asfirms in highly protected branches do not welcome somuch to hire and are more oriented to fire than firms inlowly protected branches.

There are some different responses of trade liberaliza-tion. The highest level is multilateral trade liberalizationon MFN (Most Favored Nations) basis, but actually thishas been undermined by many preferential tradeagreements. They slow down multilateral trade liberal-ization unless they have a lower common external tariffand allow for internal transfers. For example, theEuropean Union's preferential trade agreements haveclashed with its multilateral trade liberalization-and theeffect is quantitatively significant (Baybars Karacaovali,Nuno Limao, 2005).

The other nuance is that the degree of openness(imports and exports as a percentage of GDP) mainlydepends on the geographical size of the country. Smallcountries need to trade more than large countries withbig domestic markets. Reflecting this, Hong Kong andSingapore had a high degree of openness both during1960-90 and at the beginning of the same period. Onthe other hand, Korea and the Taiwan Province ofChina, which are geographically much larger, were not

particularly open in 1960, neither in absolute terms norrelative to other countries of comparable size.

In cases of state-owned foreign trade monopolies(China's reform of 1980), decentralization policies playa prominent role in the first stage of export promotionstrategy. "Export promoting approaches towardsreforms of external economic relations consist of grad-ually progressing decentralization of the foreign tradesystem and of the foreign exchange allocation system.

Any decentralization of international trade systems canbe organized either

- by delegating direct trading rights to a largervariety of independent national, provincial andlocal Foreign Trade Corporations (FTC) and toother provincial authorities, or

- by granting foreign trade decision making pow-ers to those enterprises, which are producingtradables.

The first approach to trade system reform might betermed administrative decentralization (see Reinold,B.L. 1987 p. 484), whereas the second approach couldbe described as market economy-oriented decentral-ization. Administrative decentralization preserves asystem where foreign trade is conducted through inter-mediation of authorized trading companies'' (DieterBender 1991, p. 34-35).

The methods of export promotion

Worldwide experience shows that stimulation ofexport occurs in two basic ways: through the for-mation of a favorable macroeconomic climate andthe creation of export stimuli for manufacturers.

The first way is, certainly, preferable, because of thesuccessful experience of the countries with marketeconomies, but it is used within the limits of some inter-national economic organizations, the integrationunions, and is a subject of regulation of trade. Theexperience of developing countries proves that themacroeconomic stabilization should be sufficientlyadvanced before the program of liberalizing foreigntrade is embarked upon, because otherwise, due toexcessive inflation and the wrong rate of exchange,imports will rise too steeply, while exports would hardlygrow (Dieter Bender, 1993, p.19). The successful expe-rience of East Asian countries in maintaining macroeco-nomic stability, for example, was one of the main rea-sons for success in attracting foreign direct investmentsand other forms of international cooperation (ErichGundlach and Peter Nunnenkamp 1997, p.81).

At the same time, the situation can make it impossibleto carry out quick macroeconomic transformations tocreate a favorable environment for manufacturers,investors and exporters. In these conditions, use of aspecial stimulus on the development of export can be


44

an effective way for the development of export manu-facturers and the expansion of exports.

In the latter case, however, the combination of bothvariants (in that degree in which to carry out the macro-economic policy directed to the growth of export) isdesirable. Most important of such transformations cer-tainly is the maintenance of the real or rather lowexchange rate, which can be supplemented by othermeasures for export development. Measures on exportpromotion are accepted both at the state and at locallevels (within the limits of powers of the latter).

On the other hand, the macroeconomic uncertainty indeveloping countries can be caused by export instabil-ity. Therefore, the question is how various agents in anational economy should react to significant uncertain-ty about the prices of a principal export and, therefore,declining real export earnings and real incomes.

Instruments of export promotion

Export subsidies. the financial privileges given by thegovernment or private institutes to exporters on theexport of certain goods abroad.

In many cases, it is not only exports that are subsi-dized, but also manufacturing as a total productionprocess, meaning the creation of hidden protection bar-riers.

Subsidies are especially widely used for agriculturalexport and capital-intensive products (for example, theaviation industry and shipbuilding).

The WTO Agreement on Subsidies and CountervailingMeasures (SCM) recognizes three categories of devel-oping country members: least-developed members(LDC), members with a GNP per capita of less than$1000 per year, and other developing countries. Thelower a member's level of development, the more favor-able the treatment it receives with respect to subsidiesdisciplines. Special rules exist regarding subsidies foragricultural products. Agricultural exports subsidies,which are in full conformity with the AgriculturalAgreement, are not prohibited by SCM Agreement,although they remain countervailing duties.

Export credits extend basically on finished goods,mainly on the most prospective machine-building prod-ucts. Including both long-term and short-term credits,crediting is carried out by payments from special funds,refinancing, subsidizing or insurance. It is realizedthrough banks and the intergovernmental bank organi-zations and the creation of special funds of crediting.

Insurance of export is carried out through the grantingof the state guarantees on export credits. Guaranteesstand out to the banks giving export credits. Insurancecovers not only traditional commercial risks but alsopolitical risks. Various terms of insurance extend now tothe broad audience of the goods and the countries.

They are realized through special establishments suchas the Export-Import Bank (USA), the Export CreditsGuarantee Department (Great Britain), or through pri-vate insurance companies having public funds for thesepurposes (Germany, Belgium).

In Malaysia exporters are eligible for a deduction fromtaxable income of twice the amount of relevant busi-ness expenditure and receive premiums on exportcredit insurance to encourage penetration of non-tradi-tional markets.

In their turn, each kind of insurance can play an impor-tant role in export promotion (exchange rate risks,transportation, marine, aviation, automobile, property,merchandise, business liability, theft insurances andothers).

Tax and customs privileges are given by clearingexporters of the payment of direct or indirect taxes. Forexample, the reduction of tax from the firms creatingforeign branches, the exception of taxation on theresearch leading to the creation of marketing branchesabroad, tax exemption on accessories and the materi-als used in the manufacture of the export goods, cre-ation of tax-free monetary funds for the development ofexport, and the decrease and return of customs dutiesare possible tax and customs privileges.

The Asian experience gives preference, for example, toduty exemptions rather than to drawbacks. The latterinvolves financial costs for exporters since duty pay-ments on imported inputs are reimbursed only after theexport has taken place (Jamuna P. Agarwal, Rolf J.Langhammer and others, 1995, p.15).

The exchange rate is extremely important from thepoint of view of the allocation of resources in the econ-omy. Many countries successfully stimulating exports(Chile, Colombia, Mexico, Taiwan, China, South Korea,and Indonesia) resorted to the undervaluation of theircurrencies in foreign exchange markets. For these pur-poses they made use of the progressive depreciation ofthe national currency, sometimes by means of "a crawl-ing currency peg," or made sharp devaluations of cur-rency. Thus, the growth of export was the basic targetpursued by depreciation of the exchange rate.

The use of an undervalued rate of exchange for stimu-lation of export was resisted by various social and eco-nomic agents in the country. It is connected with dam-ages to the manufacturers focused on producing non-tradables, to the importers, and a number of other par-ticipants of the economic process.

It is important to mention that in the short run, the nom-inal and real exchange rates can be adjusted. In thelong run, however, the real exchange rate is anendogenous macroeconomic variable that cannot becontrolled via nominal exchange-rate changes. Theequilibrium real exchange rate is affected both by vari-ables which are exogenous to the domestic economy

45


and by domestic policy variables. Since commercialpolicy is itself one of the factors that affects the bal-anced real exchange rate, the amount of incentivegiven to exports by a once-and-for-all outward-orientedtrade reform will, in general, change over time.

Mussa (1986) and Edwards (1987) have examined theeffects of certain financial policies on the equilibriumreal exchange rate. Mussa notices that a permanentincrease in the real rate of return available to privateasset holders results in long-term real appreciation,whereas Edwards concludes that capital account liber-alization also has this effect. Therefore, financial liber-alization may at least partially undermine the export-promoting effects of outward-oriented trade reform.

Eventually, in developing countries in most devaluationepisodes the real exchange rate responded significant-ly to the nominal exchange rate shock, at least in theshort run. As for the impact of real exchange ratechanges on trade flows, an older empirical literature ontrade commonly found evidence that relative pricesplay a significant role in the determination of tradeflows.

The traditional specifications (Carmen M. Reinhart,1994) appear to fare better when modeling developingcountry demand for imports than when applied toindustrial country demand for developing countryexports. For the majority of cases, relative prices arefound to be a significant determinant of the demand forimports and exports. Although relative prices have apredictable and systematic impact on trade, price elas-ticities tend to be low, and in most instances well belowunity. This result suggests that large relative priceswings are required to have a significant impact ontrade patterns.

Connected with exchange rate policy, ''IMF-statistics ofofficial exchange rate regimes confirm that a majority ofdeveloping countries prefer exchange rates pegged toa single currency-the USD. Among Southeast Asiannations Malaysia, Singapore and Thailand are recordedas basket peggers. The growing number of basket pegshas been accompanied by a spread of managed float-ing. Under so-called 'managed floating' the manage-ment of exchange rates can follow rules, which comeclose to a single currency USD peg or to a basket peg''(Dieter Bender 1986, p. 197).

Standards and technical regulations are also theinstruments of trade policy and, of course, an importantpart of the trade debate. The results of a World Banksurvey of 619 firms in 17 developing countries (MaggieXiaoyang Chen, 2006) indicate that technical regula-tions in industrial countries adversely affect the firms'propensity to export in developing countries. The diver-sity of standards across foreign countries reduces theeconomy of scale for firms and influences to decisionsabout entering export markets. Moreover, the firms thatoutsource components are more challenged by compli-ance with already multiple standards. There is scope

for considering that the costs associated with more lim-ited exports to countries with import regulations maynot conform to WTO rules assisting harmonization ofregulations to international standards; for instance, pol-icy solutions then might be sought by identifying theextent to which subsidies or state assistance projectsare needed to offset the cost disadvantages that arisesfrom nonharmonized technical regulations (Keith E.Maskus and others, 2005).

Criteria of a choice of the scheme of exportpromotion

The choice of this or that scheme of stimulation of exportis made by the country on the basis of the following cri-teria:

- choice of a strategic direction of policy of export(state regulation, market forces, market forcesin a combination to special measures on exportpromotion) on the basis of the general macro-economic policy realized by the country;

- definition of internal restrictions on ways ofdevelopment of export;

- highlighting external barriers to export;

- identifying sectors with perspectives from thepoint of view of export;

- definition of opportunities for export promotionas a whole, and also separate ways of exportpromotion;

- comparison of benefits from export promotion inthe long term with the expenses connected withsimilar promotion (in some cases the countrysimply does not have means for carrying out ofpolicy of export promotion);

- selection of the countries, the goods, regions,which can be addressed to schemes of exportpromotion; and

- definition of measures of promotion.

Use of various schemes of export promotion

The country can resort to enough complex schemes ofexport promotion. In Brazil the Ministry of the Industry,Trade and Tourism and the Ministry of External Affairesare engaged in export promotion. Their activity consistsin granting to exporters the necessary commercial andother information, export assistance to small and mod-erate-sized firms, development of new areas of exportactivity, export diversification, and to increase of com-petitiveness of Brazilian production.

In South Korea during 1961-1973, the aggressive poli-cy of export assistance was spent simultaneously with


46

protection in the field of import. The rigid control overtrade and the exchange rate was combined with a con-secutive financial and industrial policy. The commercialpolicy has been precisely directed on export promotion,being neutral enough in relation to the structure ofexport. Exporters were supported through multiplerates of exchange, direct financial injections, the oppor-tunity to use the earned currency on the import of thegoods necessary to them, and an opportunity to takecredits in a foreign currency. Simultaneously, on theKorean exporters significant withdrawals concerning theimport control and also tariff privileges were extended.Support went also on a line of bank system controllableby the state. The state defined the kinds of activity or theindustries required for bank credits. Similar credits oftenwere preferential. Export activity served as a means ofmaintenance of the credit status of borrowers.

Basic elements of successful export promotion strategy

Access of exporters to import at their world pricesserves as the first condition of effective policy ofexport promotion. The policy of protection againstimport of the market will be badly coordinated with theencouragement of export. In this case, exporters of thegiven country are laid initially down in more adversecompetitive conditions in comparison with exportersfrom other countries that in conditions of escalatingglobalization of economy and manufacture has enor-mous significance for penetration on the world markets.

Therefore in the presence of greater restrictions or hightariffs, creation of special conditions for exporters whodifferently can lose the export advantages and to main-tain their access to import the world prices (type of spe-cial export zones, withdrawals from tariffs, etc.) usuallyis required.

Optimal, however, is a combination of liberalizationof foreign trade and FDI attraction and active exportpolicy. In practice, such a combination is difficult to pro-vide, but it is possible as shown by the experience ofsome NIS countries.

The presence of scale financing of export promo-tion is the second obligatory condition of success-ful export policy. Sources and ways and a measure oftheir combination thus depend on opportunities of thestate, a choice the list of donors on whom it relies. So,the state can finance promotion of export to the detri-ment of other branches and the manufacturers aimedat a domestic market. Or, it can use for these purposesbudgetary funds in a combination to wide mobilizationof private sources of financing. At last, with a view ofexport promotion external sources of financing arewidely used: loans, credits, etc.

State support in penetration on the markets was thethird condition of export "push." It was present atany variants of policy of export promotion, even in themost extreme when externally the state was eliminated

from the decision of export problems, leaving them atthe discretion of the market. Also, in this case the suc-cess of export was provided with the creation of a favor-able investment climate for national and foreigninvestors and manufacturers, exporters, which was oneof the major economic tasks of the state.

The flexibility of policy of export promotion was thefourth factor defining its success. Many NIS'srepeatedly changed measures on the stimulation ofexport during its development, rejecting the unsuccess-ful and expanding the application of successful meas-ures.

In this plan the experience of Argentina, which was flex-ible enough, is very interesting. This was not limitedonly to macroeconomic measures of export promotionor carrying out of policy of assistance of development toexport, but also carried out the broad audience ofactions on development of efficiency and competitive-ness of national production.

Additionally, chronic government deficits and monetarymanagement running out of control will erode the effec-tiveness of export promotion. Thus, the particularexport stimulus itself will not lead to the expectedresults without a stable, but in the meantime flexible,macroeconomic policy.

The role of differentiation and specialization inexport competitiveness. Theoretical models have dis-cussed the importance of horizontal and vertical prod-uct differentiation through the production of greatervarieties of goods or goods of higher quality for main-taining export markets (Krugman, 1980; Flam andHelpman, 1987; and Grossman and Helpman, 1991). Away to achieve this differentiation is through productinnovation. In the dynamically developing world econo-my, a crucial role is specialization in technology-inten-sive and skilled-labor-intensive goods, rather than nat-ural resource-intensive, unskilled labor-intensive andprimary products. For example, the first two accountsfor about two-thirds of Slovenia's total exports.Furthermore, since 2003, the Revealed ComparativeAdvantage (RCA) for technology-intensive exports hasbeen greater than one suggesting that Slovenia'sexports to the EU-15 have been more competitive thanrest of the world's (IMF Country Report N 06/250, Rep.of Slovenia, 2006). Nevertheless, Slovenia's high-income level relative to other new EU member coun-tries creates a disadvantage in terms of cost competi-tiveness. Furthermore, entering the euro zone and theloss of an exchange rate instrument will create a newchallenge to its competitive position.

It should be remarked that there is some trade-offbetween diversification and specialization. It is wellknown that specialization benefits efficiency, but diver-sification may eliminate the negative impact of shocksto the economy. Several theories view the above-men-tioned trade-off in the presence of uninsurable shocksas key determinants of economic development (see

47


Obsfeld, 1994; Saint-Paul, 1992; Acemoglu andZilibotti, 1997).

Sequences of export promotion policies can beclassified in the following manner.

1. macroeconomic stabilization (exchange rate-based stabilization), infrastructural developmentand financial sector development

2. gradual trade liberalization (reducing tariffs,quotas changed into tariffs), export subsidies(direct/indirect), FDI promotion

3. liberalization of international capital flows (open-ing the capital account)

Additionally, there is one possible negative conse-quence of export promotion. The domestic prices ofexporting goods can increase and affect the living stan-dards of the exporting country if these products areincluded in the consumer's basket.:

Conclusions

Reforms in the field of foreign trade of the countries arelong-term and can be carried out only stage-by-stage.At separate stages, the direct help of the state toexporters and manufacturers of export production canbecome the important component of these reforms.

However, the different starting economic and, why not,initial political conditions to the integration of worldeconomy, the cultural and geographical differences, aswell as character of development of democracy andrespecting rules affect the export development and thechoice of methods of export promotion in the case ofeach country.

The experience of particularly East and South Asiancountries shows us that export development was and isbased on technological expertise. Therefore, thenational capabilities to adapt imported new technologyas well as an advanced educational system are funda-mental preconditions for export development of devel-oping countries.

We should take into account that the realization of anyspecial measures to support export manufacturers andthe development of export demand means or are con-nected with losses for the budget in short-term andintermediate-term. It assumes either the necessity tohave means for these purposes in the state treasury(direct crediting the enterprises-manufacturers andexporters), or mobilization of private sources, whichalso demands means from the state though on a small-er scale (the state warranting of export credits), or theshort-reception by the budget of some receipts (in caseof subsidizing production, the decrease in import dutieson the goods used to produce exports).

In the case of the absence at the state level of themeans for the given purposes, more preferable indirectmeasures on export promotion (which will not bringadditional incomes in the budget, but also will notdemand from it allocation of additional significantcharges) are represented. In a number of such meas-ures, it is necessary to note the state warranting ofexport credits first of all. It is the normal practice widelyused practically by all countries for promotion of export,including the countries with a market economy.

The relevant promotion policy should be distinguishedin the case of exporters attempting to export more, andin the case of new firms trying to enter the export mar-ket. If market entry costs are important, policy shouldbe aimed at easing bottlenecks such as providing infor-mation about potential markets, developing exportinginfrastructure, and eliminating bureaucratic obstacles toexport rather than on providing direct subsidies basedon the value of exports.

In addition to this, the economic policy of the countryshould protect and maintain the domestic competitive-ness as a main ingredient of market mechanism ofexport promotion. The economic policy should alsoconsider the structural changes as a result or conse-quences of export and, in general, economic develop-ment, rather than the purpose of the policy.


48

The free trade agreement (FTA) is the most commoncategory of the regional trade agreements (RTA), whichaccounts for 84% of all RTAs in force. Partial scopeagreements and customs union agreements accountfor 10% and 6%, respectively (see Chart 1).

In 2006 some main RTA related trends are apparent:first, countries across the world, including those tradi-tionally reliant on multilateral trade liberalization, areincreasingly making RTAs the centerpiece of their com-mercial policy; for some countries RTAs are on a parwith multilateral trade objectives; however, for manyothers RTAs have become the priority. Second, RTAsare becoming increasingly complex, in many casesestablishing regulatory trade regimes that go beyondmultilaterally agreed trade regulations. Third, reciprocalpreferential agreements between developed-develop-ing countries are on the increase pointing to a decreas-ing reliance by some developing countries on non-reciprocal systems of preferences; also significant isthe emergence of preferential agreements amongsome developing countries.

Compared to previous decades, the proliferation ofregional trade agreements during the last ten years hastaken place at an unprecedented rate. There are cur-rently 197 RTAs notified to the WTO (including acces-sion agreements), 165 of which are free trade and serv-ices agreements, 12 are customs unions and 20 arepreferential arrangements (see Chart 2).

WTO rules allow individual countries to afford preferen-tial treatment to partners in an RTA, provided that the

Since the early years of independence, the Republic ofArmenia has undertaken the policy of liberal trade.Bearing in mind a clear understanding of all the bene-fits of external trade liberalization, in the early 1990sArmenia and other 11 former Soviet Republics foundedthe Commonwealth of Independent States, the mainfeature of which became the Agreement establishing afree trade area. Another essential event in the history ofArmenia indicating the adherence to liberal trade wasaccession to the World Trade Organization in 2003. It isalso worth noting that the Customs Code of RA, whichcame into force in 2001, provides for a liberal two-tariffbased scheme - 0% or 10% tariff rates imposed onimports into Armenia.1

Significant changes have taken place since those years.The CIS countries yielded the pas of the first tradingpartner of Armenia to the EU Member States, the shareof which in Armenia's external trade is rapidly growingyear by year. These trends, as well as the will of theRepublic of Armenia to have a deeper integration intoEurope and its structures, raise the necessity to look fornew ways of enhancing the efficiency of Armenia'sexternal trade with its new main trading partner. As it isprovided by the EU-Armenia Action Plan recently adopt-ed in the framework of the European NeighborhoodPolicy, "The EU and Armenia will jointly explore possibleoptions to further enhance bilateral trade relations,including the possible establishment of a free tradeagreement between the EU and Armenia." The conclu-sion of such an agreement between Armenia and theEU and the successful implementation thereof can bringfor a higher level of welfare and improved economicenvironment for the Armenian society.

So, what is a free trade agreement? A free trade area isa designated group of countries that have agreed toeliminate tariffs, quotas and preferences on most (if notall) goods between them. Free Trade Agreements(FTAs) and Customs Unions, such as the EuropeanUnion, together comprise the main exception to theMost-Favored-Nation (MFN) principle, the fundamentalrule guiding trade in goods among members of the WorldTrade Organization (WTO). Under the MFN rule, mem-bers of the WTO must not give other WTO members noless favorable treatment in terms of tariff rates and othertrade measures than they afford to any other country.

WHAT IS A FREETRADE AGREEMENT?

PAVEL HOVHANNISYANCapacity Building Team Expert, AEPLAC

1 There are exemptions for some spirit drinks for which specific (fixed)rates are applied.

Chart 1. Notified RTAs in force, as of February2005, by type of agreement

Partial Scope,10%

FTA, 84%

Customs Union,6%

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49

RTA conforms to certain strict conditions. The rationalefor allowing this exception is set out in Article XXIV ofthe General Agreement on Tariffs and Trade (GATT).Article XXIV recognized the desirability of increasingfreedom of trade by the development of closer integra-tion between member countries through agreementsestablishing customs union or free-trade areas. At thesame time, strict conditions apply to RTAs to ensurethat they perform a truly liberalizing function in interna-tional trade and do not encourage the establishment ofnew barriers, or provide an easy route to introduce newmeasures discriminating between trading partners.

The crucial test of an FTA or Customs Union is that it musteliminate all tariffs and other restrictions on substantiallyall the trade in goods between its member countries.Although WTO members have differed over how precise-ly to define "substantially all trade", few would disagreethat this means, at the very least, that a high proportion oftrade between the parties - whether measured by tradevolumes or tariff lines - should be covered by the elimina-tion of tariffs and other restrictive trade regulations.

While free trade in goods has been the focus of virtual-ly all FTAs concluded to date, the WTO also providesfor bilateral or regional agreements liberalizing trade inservices. Technically, these are called "economic inte-gration agreements" (EIA), sometimes described as"services FTAs." The conditions for concluding EIAs asexceptions to the Most Favored Nation principle are setout in Article V of the General Agreement on Trade inServices (GATS). EIAs are allowed so long as they (a)have substantial sectoral coverage, and (b) provide forthe absence or elimination of substantially all discrimi-nation between parties, through (1) elimination of exist-ing discriminatory measures, and/or (2) prohibition ofnew or more discriminatory measures. To date, no EIAcovering services has been concluded separately froman FTA covering trade in goods as well.

While an FTA as defined under the WTO does not haveto include trade in services, most contemporary agree-ments that are labeled "Free Trade Agreements" coverboth goods and services, reflecting the growing impor-tance of the services in the global economy. Suchagreements are effectively a combination of FTAs andEIAs. In fact, FTAs together with EIAs provide a frame-work under which countries can negotiate a range ofother bilateral undertakings governing their economicrelations. In addition to trade in goods and services,Free Trade Agreements frequently cover such issuesas investment protection and promotion, governmentprocurement, and competition policy, which are eithernot yet encompassed by WTO rules or only partiallycovered. Thus, FTAs often also contain practical provi-sions in areas such as harmonization or mutual recog-nition of technical standards, customs cooperation,application of subsidies or anti-dumping policies, elec-tronic commerce, and protection of intellectual propertyrights. Such provisions are not binding for the inclusionin FTAs under WTO rules, but they can play an impor-tant role in facilitating trade between the parties and ina broader regional context.

Unlike a customs union, members of a free trade area donot have the same policies with respect to non-mem-bers, meaning different quotas and customs. To avoidevasion (through re-exportation) the countries use thesystem of certification of origin most commonly calledRules of Origin, where there is a requirement for the min-imum extent of local material inputs and local transfor-mations adding value to the goods. Rules of origin(RoOs) are an inherent feature of FTAs (where eachcountry maintains its own tariff structure with third par-ties) as a means of determining whether goods are eligi-ble for preferential treatment in the importing country andto prevent "trade defection", i.e. the transshipment ofproducts from non-parties to an RTA through a low-tariffRTA-party to one which maintains higher tariffs. RoOsare also frequently used in custom unions, particularly asa transitional measure. Goods that do not cover theseminimum requirements are not entitled for the specialtreatment envisioned in the free trade area provisions.

The predominance of FTAs over custom unions is prob-ably due to the fact that they are faster to conclude andrequire a lower degree of policy coordination amongthe parties since in a FTA each party maintains its owntrade policy with third parties. Of the RTAs not yet inforce, 96% are FTAs and 4% are partial scope; thereare no custom unions. Custom unions on the otherhand, require the establishment of a common externaltariff and harmonization of external trade policies,implying a greater loss of autonomy over the parties'commercial policies and longer and more complexnegotiations and implementation periods. Furthermore,the majority of FTAs are concerned with strategic mar-ket access, often unbound by geographical considera-tions; in custom unions, on the other hand, geographi-cal consideration play a pivotal role in defining theobjective of economic integration among parties con-cerned. As for membership in partial scope agree-ments, their limited trade coverage and poor implemen-tation record, makes them much less attractive to coun-tries, including developing countries that are committedto comprehensive trade liberalization.

Chart 2. Notified RTAs to the WTO (1948-2006) byentry into force (in force as of 15 June 2006)

RTAs yearly (left scale)

RTAs comulative (right scale)

35

30

25

20

15

10

5

0

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

250

200

150

100

50

0

GENERAL OVERVIEW OFINTERNET ACCESSIBILITY ANDUSAGE IN YEREVAN: WHATHAS CHANGED IN TWOYEARS?

ARTASHES SHABOYANSenior Economic Expert, AEPLAC

In the present-day world, the operation and advance-ment of both individuals and large corporative enterpris-es can hardly be pictured without information technolo-gies, especially the Internet and newly developed audio-visual and telecommunications systems. That is why theEuropean Union has recently attached great importanceto the creation of the Information Society and implement-ing numerous events in this domain. Thus, in 1999 theCommission adopted the "eEurope: Information Societyfor all" communique welcomed by the Council of Europe.The document suggests the use of Internet and telecom-munications capabilities in such diverse fields aseGovernment, eLearn-ing, eHealth, eBusiness, etc.

Remarkable developments in the sphere of informationtechnologies have also taken place in Armenia.According to various surveys and expert assessments,information technologies have become a most dynamicand rapidly developing domain in Armenia's economy.For the purpose of this country's competitiveness andfurther development and attaching great importance tothe creation of an information society, the RAGovernment has been implementing a number of activi-ties. Thus, the sphere of information technologies hasbeen declared a priority of the national economy. A num-ber of forums and exhibitions have been organized. Thefirst and foremost step in the creation of information soci-ety is the proliferation of the Internet in the society.

According to the World Bank development indicators, asof 2004 there were 66 computers in Armenia per 1,000of population. The indicator for Internet users per 1,000is 50. Chart 1 demonstrates the relevant indicators for anumber of countries that are of interest for us.

Let us note that in 2004 in terms of Internet users, Armeniawas only the 116th out 190 countries. If we take into con-sideration the dynamics of this indicator's development,and compare it with 2001, in terms of the growth rate ofInternet users Armenia is the 64th (in 2004 the number ofInternet users was 3.04 times as many than in 2001).

In general, the distribution of Internet users worldwide israther different. According to the International

Telecommunications Union (ITU), as of 2004, worldwide,Internet users were nearly evenly distributed between theG8 countries (the USA, Canada, France, Germany, theUK, Italy, Japan and Russia) and the rest of the world,429 and 444 million people, respectively. Whereas, world-wide the Internet user indicator amounts on average to134 per 1,000 as demonstrated by continent: Europe,306; America, 306; Asia, 86; and Africa, 18. If we consid-er only Europe, then the CIS countries obviously lagbehind. As of 2003, there were 415 Internet users inWestern Europe per 1,000, 314 in the Baltic countries,161 in Central and Eastern Europe (without the CIS), andon average 56 in the CIS.

The World Bank and ITU data is mainly confined to 2004indicators. What has been the dynamics of the indicatorsin this sphere over the past two years? To analyze thedevelopments over the past two years and owing to thesample survey1 of Internet accessibility and usage in

Chart 1. Computer availability and Internet usageper 1,000 of population (as of 2004)

Computer Internet

Latvia

Croatia

Bulgaria

Lithuania

Romania

Turkey

Russia

Iran

Ukraine

FYR Macedonia

Armenia

Azerbaijan

Georgia

0 100 200 300 400

350217

293190

28359

282155

208113

14252

111132

82110

7928

7869

5066

4918

3942

Source: the International Telecommunications Union (ITU) and WorldBank estimates.


50

1 General overview of Internet accessibility and usage in Yerevan,Armenian Trends, Q3/04, pp. 42-48, AEPLAC, Yerevan 2004.


51

As two years ago, Arabkir and Davitashen are among thefirst three leading communities in terms of computer avail-ability in the households, while the highest concentrationof computers was observed in the Kanaker-Zeytun com-munity. The shortage of computers again strikes the eyein the Ajapniak and Avan communities. In terms ofInternet accessibility in the household, Kanaker-Zeytunjoined the leading Arabkir and Kentron communities.

It is logical that the availability of the computer in this orthat apartment is determined by such factors as theeducational level of family members and, naturally, thehousehold income.

In terms of computer availability in the household, theindicators (both for the 2004 and 2006 survey results)decline with the increase in the respondents' age andgrow with the years of education (Table 2). However,

Yerevan held in October 2004, the Armenian Trends incollaboration with Strategic Development Agency con-ducted the second sample survey of Internet accessibilityand usage in Yerevan among 500 respondents.2

This survey not only enabled us to obtain the latest dataon Internet usage but also to compare this data with thatof two years ago and get an idea of the developments inthis sphere of the past two years.3

According to the summary data of the survey, as ofOctober 2006, the weight of the people over 15 years ofage using the Internet in Yerevan amounted 39.2%, whichexceeds by 8.4 percentage points the 2004 indicator.

1. Computer availability at home

As in the previous survey, a number of questions con-cerned the general computer literacy in Yerevan andcomputer accessibility, particularly personal computeravailability, at home.

In 2004, 23.0% of the respondents indicated that theyhad computers at home, and in 2006 this was indicatedat 37.6%. In fact, according to the obtained data, overthe past two years the number of computers in Yerevanhouseholds has increased by more than 60%.

The Internet connectivity has also grown in the house-holds. In 2004 nearly half of the household computerswere connected to the Internet (about 49%), and in2006 this indicator is nearly 68%. If we consider theweights of the computers connected to the Internet,then it can be seen that in two years the growth (about40%) is less than the increase in computers. Table 1presents the computer availability in Yerevan by com-munity as of the latest survey.

2 The respondents were selected by Yerevan community taking into consideration the proportions of sex/age structure. 3 Owing to the insufficient time, funds and other factors, the survey concerns only Yerevan residents, hence this reservation must be taken into account

when making general conclusions about Armenia.4 Taking into account that the residents of Nork-Marash and Nubarashen communities account for a small percentage in the population of Yerevan, as

well as the small number of surveyed people, individual data for these communities were not summarized.

Community

Number of peopleowning a computerat home, % to totalrespondents in the

community

Number of computers withInternet connection, as % to total

respondents in the community

Share of computersconnected to the

Internet, % to total

Share of respon-dents in the

whole sample, %

Table 1. Computer availability in households by Yerevan communities4 (2006 data)

Ajapniak 18.0 50.0 6.4 10.0

Avan 24.0 33.3 4.5 5.0

Arabkir 51.7 76.0 35.2 12.0

Davitashen 55.0 44.4 22.2 4.0

Erebuni 45.5 76.5 27.1 11.0

Kentron 46.7 68.0 29.8 12.0

Malatia-Sebastia 29.2 80.0 20.0 13.0

Nor Nork 35.4 71.4 17.9 13.0

Shengavit 23.1 77.8 11.9 13.0

Kanaker-Zeytun 60.0 57.9 33.3 7.0

Total, Yerevan 37.6 68.3 21.4 100.0

2004 2006

Table 2. Availability of computers in the householdby the respondents' education level and age group,% of respondents (compared with the 2004 survey)

By education level

secondary 11.9% 26.8%

special technical 11.6% 20.5%

incomplete graduate 37.7% 35.8%

graduate (high) 29.2% 46.5%

postgraduate 58.3% 78.3%

By age groups

15-29 32.0% 52.3%

30-44 25.8% 23.0%

45-59 14.4% 41.8%

60 and above 10.1% 17.9%

over the past two years, the impact of age and educa-tion factors on the availability of computers at homehas declined. In the 2004 survey, the average age ofthe one who has a computer at home was 32.8 years,and the duration of education was 14.0 years on aver-age. This differed from the age and education of theone who did not possess a computer by 8.6 and 1.5years, respectively. In the 2006 survey, the indicatorsfor the one who possessed a computer (average age34.6, education 12.6 years on average) differ less fromthe indicators of the one who does not possess a com-puter, by 7.7 and 1.0 years, respectively.

The possession of the computer is mostly determinedby the household income level (Chart 2).

The respondents were divided into five equal quintilegroups by their income levels. The first quintile consistsof those who indicated the lowest income level; the fifthgroup is those who indicated the highest income group.In addition to the above five groups, the chart alsoshows the group which did not share income informa-tion, which in the 2006 survey accounted for 10.6% (in2004, 16.6% did not indicate their income). It can beseen from this chart that there is a direct relationshipbetween the income group and computer possession.

2. Computer literacy, time spent, and fre-quency

In both surveys attempts were made to estimate thecomputer literacy of Yerevan residents based on theself-assessment of the respondents. The comparisonof the obtained estimates obviously demonstrates atendency towards the increase in computer literacyover the past two years. Thus in 2004, 52.0% of therespondents indicated that they did not master thecomputer at all, whereas in 2006 this indicatordecreased by nearly 10 percentage points (42.6%).However, the number of those who master the comput-er well has not changed according to self-assessments(in both cases, 10.8%) while the number of those whomaster the computer excellently even decreased a lit-tle (in 2004, 5.2% and in 2006, 4.6% of the respon-dents). Nevertheless, we believe these indicators cannot belittle the general tendency towards the increasein the computer proficiency over the past two years(Chart 3).

Self-assessment contains certain subjectivism whichdepends on the education level. The results of bothsurveys demonstrate that there is a clear direct rela-tionship between education and computer proficiency(Table 3). The only deviation from the general tenden-cy is the greater percentage of higher educationrespondents who do not master the computer than inthe incomplete higher education group which, however,is accounted for by the age of the respondents.5

Chart 2. Possession of the computer as deter-mined by the household income level, % of respon-dents (comparison of the 2004 and 2006 surveys)

2004 2006

No inform on income

V quintile

IV quintile

III quintile

II quintile

I quintile

0 10 20 30 40 50 60 70

43.431.3

61.741.3

45.828.4

43.312.8

26.317.4

15.88.1


52

5 The average age of the respondents with incomplete higher educa-tion is lower than those with higher education owing to the fact thatpresently the respondents with an incomplete higher education aremainly students.

Chart 3. Computer skills self-assessment, % ofrespondents (comparison of the 2004 and 2006surveys)

2004 2006

non literate

a bit literate

mediumlevel

excellentgood

60

50

40

30

20

10

0

52.0

42.6

13.416.6 18.6

25.4

10.85.2 4.6

Chart 4. Computer proficiency self-assessment byage group, % of each age group of respondents(comparison of the 2004 and 2006 surveys)

non literate less medium good

100

80

60

40

20

015-29 30-44 45-59 60+ 15-29 30-44 45-59 60+

2004 2006

20%

52%75%

92%

16%

42%

57%

86%


53

When considering the age factor, the relation betweenage and computer proficiency is again obvious (Chart 4).Nevertheless, compared with 2004, the 2006 datademonstrate that both age and education factors level off,i.e. the gap between the high and low groups narrows.

3. The time allocated to the computer, fre-quency and venue

According to the 2006 survey data, about half of therespondents in Yerevan (48.4%) do not use the com-puter (in 2004 this figure was higher at 55.8%).Although over the past two years a 7.4 percentagepoint increase was observed in the weight of computerusers, their number is still rather low compared withmore developed countries. Over the past two years,growth has also been observed in the weight of dailycomputer users. Thus, in 2004 this figure amounted to23.4% of the respondents, whereas in 2006, 29.4%.The weight of the ones who use the computer less fre-quently (weekly, monthly, etc.) almost has not changed(in 2004, 20.8% and in 2006, 20.2%).

When considering the time allocated by the respon-dents to computer usage, a dramatic increase can beobserved in the past two years. Thus in terms of all therespondents, the average duration of computer usagein 2004 was 1.05 hours (1 hour 3 minutes) while in2006 it was 1.49 hours (1 hour 29 minutes). If we takeinto account only the responses of computer users, in

2006 they allocated 2.9 hours daily, while in 2004, 2.2hours. It is also notable that the difference between thetime allocated to the computer by permanent, tempo-rary or seasonal employees and unemployed hasdecreased. Thus, in 2004 the employed spent on aver-age 2.9 times as much time at the computer than theunemployed. In 2006 this ratio was 2.6. The latterattests that the need for the computer is recognized notonly by the employed. The same is true for the timeallocation by education level (Table 4). It follows fromthe indicators that the figures have a tendency to leveloff; hence, we can conclude that the computer is appre-ciated by all regardless of the education level and otherfactors.

The survey data enable us to consider the time spent atthe computer by venue. Interestingly, in 2004 therespondents spent most of the time at the computer(44.0%) at their work place, while the duration of com-puter usage at home came second (40.1%). In 2006the time spent at the computer at home was 52.1%,while at work only 32.3% of their time was spent. Interms of computer usage, the third venue is the com-puter club whose weight declined. In 2004, 11.6% ofthe total time allocated to the computer accounted forthe computer club, whereas in 2006 it was only 10.3%.The main cause for the decline of this percentage, webelieve, is the increase in the number of personal com-puters at home. The time distribution of the time spentat the computer by age group is presented in Chart 5.

Year of survey

EducationSelf-assessment of computer literacy, % to total answers in group

non literate a bit literate medium level good and excellent

Table 3. Computer proficiency self-assessment, % of each education group of respondents (comparison ofthe 2004 and 2006 surveys)

secondary 73.0 11.3 14.5 1.3special technical 66.3 11.6 14.0 8.1

2004 incomplete graduate 13.2 20.8 39.6 26.4graduate (high) 42.7 14.0 20.2 23.0postgraduate 16.7 12.5 4.2 66.7

secondary 63.0 13.8 18.1 5.1special technical 54.8 17.8 23.3 4.1

2006 incomplete graduate 28.3 17.0 41.5 13.2graduate (high) 32.4 18.8 27.7 21.1postgraduate 8.7 8.7 17.4 65.2

Education levelAverage time spent at the computer, minutes per day

2004 survey 2006 survey

Table 4. Average time spent daily at the computer per one respondent

secondary 20 minutes 52 minutes

special technical 43 minutes 52 minutes

incomplete graduate 1 hours 23 minutes 58 minutes

graduate (high) 1 hours 16 minutes 1 hours 56 minutes

postgraduate 4 hours 39 minutes 4 hours 11 minutes

Total, Yerevan 1 hours 3 minutes 1 hours 29 minutes

4. Internet usage

Computer proficiency is surely a prerequisite, however,but not a sufficient one for the usage of the Internet.Internet usage also depends on its affordability anddemand. The comparison of the relevant indicators inthe surveys demonstrates that over the past two yearsnot only computer users multiplied but also Internetusers.

According to the 2004 survey data, 48.0% of therespondents (or 240 people) master the computer tothis or that extent and only 154 of them use the Internet(30.8% of all respondents and 64.2% of computerusers). The 2006 survey results are as follows: 57.4%of the respondents master the computer to this or thatextent and 39.2% use the Internet (or 67.2% of comput-er users). The increase in the number of Internet usersis noticeable when considering the age groups of therespondents. In 2004 in the group of age 45+ only 6.8%used the Internet, and in 2006 it was 20.6%. Chart 6demonstrates the percentages of Internet users in thefour age groups.

It is also remarkable that in 2004 the Internet was almostequally used by the respondents of both sexes (30.2% ofmen and 31.2% of women), whereas in the 2006 surveyresults men started to use the Internet more: 49.5% com-pared with 32.6% of women. The difference in 2006 wasmainly caused by the change in the behavior of theunemployed. If the employed respondents of both sexesuse the Internet almost equally (on average, 56%), thenthe unemployed men (about 40%) exceed the Internetusage by the unemployed women by more than 16 per-centage points.

The survey data also enable us to consider Internetusers by household income groups (Table 5). The figuresin the last column of the table show that the number ofInternet users has grown in all income groups, butgrowth rates are larger in high-income groups.

The analysis of the reasons why the Internet is not usedaccording to different surveys is presented in Chart 7.Although the number of those who do not use the Internethas declined over the past two years, the reasons whythe Internet is not used have not changed significantly. As

Chart 5. The time spent daily at the computer by agegroup (comparison of the 2004 and 2006 surveys)

at home at workplace internet club other

60

50

40

30

20

10

015-29 30-44 45-59 60+ 15-29 30-44 45-59 60+

2004 2006

Ave

rage

tim

e at

the

com

pute

r (m

inut

es p

er d

ay

expected, the most prevalent reason is the inability to usethe computer, which has a lower value than in the self-assessment of computer users. Part of those who do notuse the computer as a reason for that indicated other fac-tors of which the most significant was the lack of need forthe Internet.


54

Chart 6. Internet user percentages by age group(comparison of the 2004 and 2006 surveys)

2004 2006

15-29 30-44 45-60

Age groups

60+

70

60

50

40

30

20

10

0

57.963.2

28.8 30.1

9.9

2.5

10.7

28.2

Income groups (quintiles, 20%-age groups)

Number of Internet users in group, % to totalrespondents Growth, percentage

points2004 2006

Table 5. Percentage of Internet users by income groups

I quintile (with less income) 7.0 14.7 7.7

II quintile 20.7 24.2 3.5

III quintile 33.3 47.8 14.5

IV quintile 39.5 49.5 10.0

V quintile (with higher income) 55.0 68.3 13.3

Group that didn't share income information 32.5 41.5 9.0

Total, Yerevan 30.8 39.2 8.4

²ßË³ï³ßáõÏ³

55

5. Frequency of Internet usage, time allo-cated and venue

The obtained data attest that over the past two yearsthe number of Internet users and the frequency ofusage have increased. In 2004 39.0% of Internetusers used the Internet daily and 41.6% used it week-ly, in 2006 47.4% used the Internet daily and 36.2%weekly.

However, in terms of the duration of Internet usage theprogress is not so visible. Thus, in 2004 in Yerevan anInternet user on average spent 1 hour 4 minutes on theInternet and in 2006, 1 hour 7 minutes. If we comparein the time spent on the Internet with the total time ofcomputer usage, we will see that in 2004 the Internetaccounts only for 38.1% of the computer usage time,while in 2006 it decreased to 32.7%. If using these indi-cators we try to estimate the time in the Internet for thewhole population of Yerevan (over 15 years old), thenevery Yerevan resident above 15 years old in 2004spent on the Internet on average 20 minutes and in2006, 26 minutes. The latter indicators also testify thatalthough over the past two years the number of Internetusers and Internet usage frequency has increased, thetime spent on the Internet has not increased significant-ly. If we consider the weight of the time spent on theInternet in the total time spent at the computer, then ithas declined by more than 2 percentage points (in2004, 31.5% and in 2006, 29.4%). Chart 8 presents thetime spent on the Internet and at the computer by agegroup.

The two charts below (9-10) indicate the ratio of thetime on the Internet and household income. As can beseen in Charts 9 and 10, although there is a positiverelationship between the Internet usage time and therespondents' income, over the past two years it has hada declining tendency.

If we consider the time on the Internet by venue, thenover the past two years the weight of the time allocatedto the Internet at home and Internet clubs has some-what decreased, whereas this weight increased at thework place. Thus in 2004, 51.3% of the total time spenton the Internet accounted for home usage, 23.4% atInternet clubs, 21.2% at the work place, and the

Chart 7. Reasons for not using the computer as %of the total number of the respondents who do notuse the Internet.

2004 2006

No computer orinternet skills

No need

Material means

Lack of time

Other reason

0 10 20 30 40 50 60

46.4

52.6

40.1

39.6

7.2

6.6

3.3

1.2

3.0

Chart 8. Average time spent at the computer(including the time on the Internet) by age (min-utes/day)*

other use of computer Internet

160

140

120

100

80

60

40

20

015-29 30-44 45-59 60+ 15-29 30-44 45-59 60+

2004 2006

Tim

e (m

inut

es/d

ay)

3723

32

4

32

21

29

22

* The percentages indicate the weight of Internet usage in the totaltime spent at the computer in each age group.

Age group

Place of Internet connectionTime sparedfor internet

Total timespared forcomputerHome Workplace

Educationinstitution

Internet club Other place

Year 04 06 04 06 04 06 04 06 04 06 04 06 04 06

Table 6. The time spent on the Internet by venue and age groups (for all the respondents) min/day

15-29 17.9 22.6 5.3 9.9 1.0 1.2 11.3 13.2 0.3 0.4 35.7 48.3 96.3 148.9

30-44 7.8 6.8 7.5 7.2 0.5 0.1 1.5 0.4 0.9 0.2 18.3 15.0 81.1 73.0

45-59 7.9 10.2 1.5 2.3 0.0 2.0 0.9 1.0 0.0 0.0 10.3 15.6 32.1 53.4

60 and above 0.0 0.4 0.0 4.1 0.0 0.0 0.0 0.1 0.0 0.0 0.1 4.6 1.3 20.7

Total, Yerevan 10.2 12.6 4.2 6.7 0.5 0.9 4.6 5.4 0.4 0.2 19.8 26.3 63.0 89.2

remaining 4.2% at educational institutions and otherplaces. In 2006 the indicators were as follows: 48.0%,20.6%, 25.4% and 4.3%, respectively. Table 6 presentsthe time spent on the Internet by age groups.

If we consider the ratio of the time on the Internet andthe total time spent at the computer (Chart 11) then thedramatic decline in the time spent at the computer athome over the past two days strikes the eye.

In 2004 the Internet accounted for more than 40% ofthe time spent at the computer at home, presently itsweight is only 27.4%.6 At other venues, the time on theInternet has not dramatically changed.

6. Internet quality and contacts with theproviders

Another set of survey questions is related to theassessment of Internet quality in Armenia. The answersof the respondents to the general question aboutInternet quality testify that the satisfaction with Internetquality has arisen over the past two years, which canbe considered evidence of the improvement in Internetquality. Thus, in 2004 Internet quality in Armenia wasgraded as "bad" by 42.6% of the respondents, while in2006 by only 30.4%. It should be noted that at the sametime that the percentage of those who graded Internetquality as "good" or "very good" has not changed much(17.4%-17.5%). It is also notable that in 2004 the opin-ion about Internet quality among those who hadInternet at home was lower than among all the respon-dents (Internet users). In 2006 an opposite tendencycan be observed: home Internet users grade Internetquality higher than the total respondents. The lattercomparison enables us to conclude that over the pasttwo years the work of Internet providers of individualservices has improved.

The survey results enable us to consider Internet usersby preferred providers. Thus, in 2004 Internet usersindicated only one provider of Internet services, and in2006 some Internet users were provided by varioussuppliers (one Internet provider supplies services to71.6% of Internet users, 16.8% are supplied by twoInternet providers, and 2% are supplied by threeInternet providers, 9.5% found it hard to answer orcould not choose a provider). If we consider Chart 12,we can see that over the past two years no significantchanges have taken place in terms of provider choice.The five major providers are the same as two yearsago. The leading provider, Arminco, also has notchanged and whose services are used by about 34% ofInternet users. Among the above five providers, Websuffered the greatest decline in terms of user share(14.7% in 2006, 19.0% in 2004). The remaining threeleading providers improved their standing on theInternet services market. Notably, the tendencytowards the decline in the clients of Web could be fore-casted based on the results of the 2004 survey. Duringthe survey conducted in October 2004, the clients weremainly satisfied by the Internet quality of the other

Charts 9 & 10. Average Internet usage time bymonthly household income rate (minutes per day)

2004

Internrt usage (minutes/day)

Linear (Internrt usage (minutes/day))

200

160

120

80

40

00 200 400 600 800

Income, thousand dram

Tim

e fo

r In

tern

et (

min

utes

/day

)

y=0.169x-0.946R2=0.335

2006

Internrt usage (minutes/day)

Linear (Internrt usage (minutes/day))

200

160

120

80

40

00 200 400 600 800

Income, thousand dram

Tim

e fo

r In

tern

et (

min

utes

/day

)y=0.08x+4.62

R2=0.18


56

Chart 11. The time on the Internet in the time spentat the computer (comparison of the 2004 and 2006surveys)

2004 2006

Home

Workplace

Educational institution

Internet club

Other

0 10 20 30 40 50 60 70

27.4

40.4

23.3

15.2

23.2

29.3

59.6

63.6

29.4

32.0

6 The latter change can be caused by various factors. For example,parallel to the increase in computer proficiency, the work at the com-puter becomes longer, than "Internet entertainment." In addition, thetime allocated to the Internet has increased, which also can causethe decrease in the time spent on the Internet at home.


57

leaing providers, though most clients of Web were dis-satisfied. If we consider the assessment of servicequality in the 2006 survey, most clients of Web weresatisfied with service quality. Besides, the satisfactionwith the service quality of other providers is rather infe-rior to that of Web.

As the main cause of dissatisfaction, the respondentsindicated the low communication speed (about 80%)and frequent disruption of communication (8%).Actually, it can be concluded that Internet quality hasimproved over the past two years since in 2004 thecomplaints mainly concerned the difficulty in establish-ing communication and disruption thereof, whilepresently, mainly the speed.

Over the past two years, certain changes have alsotaken place in the preferences of Internet users con-cerning the forms of communication (Chart 13). Thus,most Internet users both in 2004 and 2006 preferredconnection with time limits (64.3% and 62.9%), and theweight of 24-hour communication has arisen signifi-cantly (27.8% compared with 10.8% in 2004). The lat-ter suggests that both the demand for the Internet andaffordability have increased.

Some changes can be also observed when comparingthe methods of connecting the computer to the Internet.In 2004, 94% of those who had the Internet at homeconnected by a modem, the rest (6%) by cable. Duringthe 2006 survey, more detailed data were obtainedabout the preferences. 78.4% of those who had theInternet at home connect to the Internet through dial-up(modem), 5.2% by radio modem, and more than 13.4%by cable.

7. Internet service prices

The World Bank development indicators include the so-called Internet basket price that shows the price for theInternet services in the given country. It is calculated inthe amount of the monthly price of 20 hours of Internetconnection in the country. Although such data by coun-try was available only for 2003, the comparison of somenational indicators is rather interesting (Chart 14).

Chart 14 demonstrates Internet prices in most CIS andEast European countries (and some others) as well asthe annual share thereof in the national gross nationalincome (GNI). As can be seen from the chart, inArmenia the Internet price is among the highest both inabsolute value (44.8 USD monthly) and in the GNI(36.6%).7

If we compare the opinions of Internet users in 2004and 2006 about Internet prices in Armenia, then it canbe seen that these almost have not changed. As two

years ago, in 2006 about 17.5% of Internet usersbelieve that Internet prices in Armenia are very high,however, those who believe that the prices are afford-able have multiplied in 2006 (from 52.3% in 2004 to45%). It is beyond doubt that this increase is deter-mined by price decrease as much as by a certainincrease in the population's income.

As for the prices paid for the Internet, here too a certaindecrease is observed. In 2004, on average, homeInternet users paid monthly 7400 AMD, and in 2006nearly 2000 AMD less.8 However, in Internet clubs theaverage price almost has not changed. In 2004 theaverage price was about 316 AMD and in 2006, 300AMD.

Chart 12. Internet providers by the number ofusers, %

2004 2006

Arminco

Web

Netsys

Xter.net

Cornet

Other

Hard to say

0 10 20 30 40

Chart 13. Forms of Internet communication, as %of total Internet users

2004 2006

unlimited duringmonth

limited megabytes

limited hours

night hours in themonth

hard to say

0 10 20 30 40 50 60 70

7 The chart does not show the indicators for Azerbaijan which are evenhigher: 108.3 USD and about 105% of the GNI.

8 Such a comparison, however, must be treated with great reserva-tions since the difference of the indicators for the two years can bealso determined by other factors, e.g. the change in communicationforms, new services provided, etc.

8. Purposes of Internet browsing

Internet users can pursue various purposes on theInternet. A set of survey questions was devoted to thisissue; a respondent could indicate multiple choices(purposes). As expected, most frequently the need touse the Internet arises in the people who need to checktheir e-mail.

Thus, 81.4% of Internet user respondents (in 2004,74.7%) indicated e-mail usage as a purpose of using theInternet, 66.0% (in 2004, 41.6%) cited browsing for newsas a purpose of Internet usage, and 29.9% (in 2004,25.3%) to find acquaintances. Other frequently men-tioned purposes are as follows: entertainment, recreation,and games, 25.8% (in 2004, 28.6%) and the search forconcrete answers or information, 26.8% (24.9%).

Taking into account the usage of e-mail as the most fre-quent purpose, during the 2006 survey more detailedinformation was collected about the availability of e-mail, and its placement. Thus, about 30% of therespondents (or about 76% of Internet users) indicatedthe availability of e-mail. E-mail availability by agegroups is presented in Chart 15.

Most respondents who indicated the availability of e-mail (98%) have a personal address and 9% have acorporate addresses (at work). The latter suggests thatin Armenia (Yerevan) the usage of e-mail is not devel-oped in business contacts, which is common in devel-oped countries.

If we consider the placement of e-mail addresses (Chart16), then we will see that nearly half of the respondentshave addresses at Russian sites and only 13.8% on anArmenian (.am) site. If we also take into account that afew respondents have e-mail at a number of sites, thenwe can claim that only 16.4% of the respondents haveaddresses at the Armenian sites, whereas at the Russiansites, 58.9%, and with the .com extension, 43.8%.

To get a general idea of the most frequently visited sites;during the two surveys (2004 and 2006), the respon-dents were given an opportunity to indicate their threemost frequently visited sites. In both surveys, the mostfrequently visited sites were the ones which enableaccess to e e-mail and (or) have search capability (Table7). The table data suggests that over the past two years,the number of visited sites has increased significantlyand their concentration decreased.

In 2004, as in 2006, the indicators presented in Table 7suggest that three out the ten most visited sites areArmenian (or have the .am extension). In this respect, itis interesting to consider the respondents' opinions aboutthe Armenian sites (Table 8). In fact, according to therespondents, the disadvantage of the Armenian sites isin the low speed of connection and not the lack of infor-mation or poor design.

If we group the sites indicated by the respondents bylanguage, then in 2006 the most frequently visited siteswere Russian (about 84% of the respondents), English-


58

Chart 14. Price for Internet in some countries

Internet value per GNI per capita, %

Internet basket price (USD/month)

Tajikistan

Uzbekistan

Kyrgyzstan

Armenia

Moldova

Georgia

India

Kazakhstan

Albania

Ukraine

Latvia

Romania

FYR Macedonia

Lebanon

Lithuania

Belarus

Turkey

Serbia-Mont.

Bulgaria

Bosnia-Herz.

Slovakia

Russia

Poland

Croatia

Czech Republic

Israel

Estonia

Slovenia

Hungary

Belgium

Ireland

Switzerland

0 10 20 30 40 50 60

Chart 15. E-mail availability by the respondents'age (2006 data), as % of the respondents in thegiven age group

100

80

60

40

20

015-29 30-44 45-59 60+

48.7

22.1 20.9

7.1

non Internet users

using Internet, but no e-mail address

have e-mail address


59

language sites, 73.4%, and only 38.5% visit theArmenian sites. In comparison with the two-year olddata, the percentage of Armenian site visitors hasdecreased (in 2004, 43.5%). In 2004 Russian siteswere visited by 81.2% of Internet users and English-language sites by 75.3%. The above indicators enableus to conclude that most Internet users do not confinethemselves to one language (Chart 17-18).

9. Other issues

The survey questionnaires also contained other ques-tions more or less related to Internet usage and infor-mation technologies.

Both in 2004 and in 2006, a question on e-commerceexperience was included. In both surveys the respons-es suggested that so far the usage of this option inArmenia is not common at all (the percentage of respon-dents who have ever shopped this way is about 1%).

Another sphere of Internet usage, the IP telephony, hasbecome incomparably more common in the recentyears. According to the 2006 survey, 56.7% of therespondents had such experience, and more than 25%of the respondents use this option rather often.

Chart 16. The placement of e-mail addresses of therespondents.

.com36.8%

.ru49.4%

.am13.8%

9 Each respondent was given the opportunity to indicate their three most frequently used sites.

2004 2006

Internet site umber of users Share of users, % Internet site umber of users Share of users, %

Table 7. Classification of indicated sites by the number of users9

yahoo.com 78 59.1 yahoo.com 79 44.4rambler.ru 62 47.0 mail.ru 72 40.4mail.ru 30 22.7 google.com, .ru, .am 47 26.4yandex.ru 29 22.0 rambler.ru 42 23.6mIRC 16 12.1 yandex.ru 14 7.9google.com 14 10.6 port.am 7 3.9port.am 9 6.8 myhayastan.am 6 3.4freenet.am 5 3.8 erevan.ru 4 2.2hotmail.com 4 3.0 realmadrid.com 3 1.7careercenter.am 3 2.3 travel.am 3 1.7other sites (33) 37 28.0 other sites (79) 84 47.2

Chart 17. Distribution of the respondents by thelanguage of the visited Internet sites

2004

2 languages,47%

4 andmore, 3%

3 languages,25%

1 languages,25%

Chart 18. Distribution of the respondents by thelanguage of the visited Internet sites

2006

2 languages,30%

4 andmore, 1%

1 languages,57%

3 languages,12%

Another question included in the 2006 questionnairewas related to the development of the IT sphere. As itis known, the Government of Armenia attaches greatimportance to this sphere in the general context of theeconomy. For this purpose, the IT sphere was declareda priority for the Armenian economy. As for the opinionsof Yerevan residents on this issue, the survey resultsare presented in Table 9.


60

To sum up the comparative study of the 2004 and 2006surveys of Internet accessibility and usage, it should benoted that over the past two years significant progresshas been observed in the sphere of computer literacy,which in its turn caused the increase in Internet usage.

The gap between the indicators for computer andInternet usage for various strata and groups of Yerevanresidents (age, education, and income) has narrowedsignificantly, which attests to the increased role of thecomputer and the Internet in the society.

Speed Update frequency Quality of Information Design

Table 8. Respondents' opinions about the Armenian sites (2006 data), as % of all responses

very bad 11.9% 4.1% 4.6% 1.5%bad 29.4% 21.1% 12.9% 10.3%medium level 39.2% 47.9% 49.0% 43.3%good 13.4% 16.0% 18.6% 28.9%very good 1.0% 0.0% 0.5% 5.2%hard to say 5.2% 10.8% 14.4% 10.8%

Opinions

Education levelTotal,

YerevanSecondarySpecial

TechnicalIncompleteGraduate

GraduatePost-

graduate

Table 9. The opinions on the IT sphere as a priority for the Armenian economy, by education level of therespondents, %.

Completely acceptable and necessary 18.8% 15.1% 22.6% 20.2% 34.8% 20.0%Is acceptable, but more active steps are needed 19.6% 26.0% 24.5% 29.1% 30.4% 25.6%There is no sense, because it is quite difficult for Armenia to compete with other countries in this sphere 8.7% 13.7% 5.7% 16.4% 4.3% 12.2%Is not correct, because there are more productive directions for developing the economy 9.4% 15.1% 11.3% 13.1% 17.4% 12.4%Hard to say 43.5% 30.1% 35.8% 21.1% 13.0% 29.8%Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

In 2004, 44.2% of the respondents worked with the computer and 30.8% of the respondents used the Internet. In2006, 51.6% worked with the computer and 39.2% used the Internet.

There is a significant increase (by 60%) in the number of computers at home. In 2004 in Yerevan 23.0% of therespondents indicated that they had computers at home, and in 2006 it was 37.6%.

The computer literacy of the respondents has increased. The share of those who have no computer proficiencydecreased by about 10 percentage points (from 42.6% to 52.0%). The percentage of low and middle proficiencycomputer users has increased among computer users, whereas the share of good and excellent users is almostthe same. The difference between the computer literacy levels by age and education groups has decreased.

The duration of computer use per respondent has increased. In 2004 on average daily 1 hour 3 minutes was allo-cated to the computer, and in 2006 it was 1 hour 29 minutes. The time allocation to the computer has changed. In2004, 44.0% of the total time accounted for the work place, 40.1% at home, and 11.6% at Internet clubs, and in 2006,32.3% at work, 52.1% at home, and 10.3% at Internet clubs.

As two years ago, in 2006 the greatest share of Internet users falls on the youngest group of the respondents.Nevertheless, the highest concentration of Internet users is in the 45-60 year old age group. (18.3 percentage pointincrease). In the 15-29 year old group, the increase was 3.3 percentage points, from 30-44 years, 1.3% percentagepoints, and above 60 years, 8.2 percentage point increase.

Although the number of Internet users has grown dramatically, time allocation to the Internet per respondentincreased insignificantly (in 2004, it was 1 hour 4 minutes daily; in 2006, 1 hours 7 minutes).

By general estimates, on average each Yerevan resident above 15 years of age spent 20 minutes daily on theInternet in 2004 and 26 minutes in 2006.

According to the respondents, a certain improvement can be observed in the Internet quality in Yerevan. In 200442.6% of the respondents graded Internet quality in Armenia as "bad," and in 2006 it was 30.4%.

The five major Internet providers are the same. The leaders in the order of importance are as follows: Arminco,about 34%, Netsys, Xter.net, Web, and Cornet.

The main purpose of using the Internet is still checking e-mail. About 30% of the respondents (or 76% of Internetusers) indicated that they had e-mail.

CONCLUSIONS


61

HOW WE SPEND OUR HOLIDAY:SURVEY ANALYSIS

ARTASHES SHABOYANSenior Economic Expert, AEPLAC

If at the time of economic crisis the bulk of resourcesare used for the provision of man's minimal needs, thenwith the development of the economy, a broader scopeof needs must be attended. Among the emerging needsare education, healthcare, as well as the organizationof recreation. The need for full-fledged recreation is aphysiological requirement for any person. Recreationenables a person to regenerate their spent resources,which, in its turn, promotes the maintenance of healthand efficient work later on. The need to rest and unwindafter work and the duration thereof depends on the typeone's work, individual features, and one's way of life.

"How much and how we rest?" To get answers to thisquestion, in November 2006 the Armenian Trends joint-ly with the Armenian Sociological Association conduct-ed a sample survey of 500 respondents.1 The purposeof the survey was to find out the recreation require-ments of Yerevan residents, the possibilities and prefer-ences, as well as to learn about the forms of recreation,places, and costs incurred.

1. Need for recreation and preferences

The first set of questions in the questionnaire con-cerned the respondents' preferences with respect togoing on vacation for recreational purposes. Thus, therespondents were given an opportunity to estimate theduration of the period needed for any employed personfor full-fledged recreation over the year. According tothe majority of the respondents, (53.4%) the best dura-tion of recreation is one month. 12.6% and 12.4% of therespondents believe that two and three weeks, respec-tively, per year are sufficient. Fewer respondents sup-ported the other options: 1.5-2 months, 5.6%; 1 week,4.8%; and over 2 months, 2.2%. Interestingly, accord-ing to 3.6% of the respondents, the Saturday andSunday rest period was sufficient for full-fledged recre-ation. 5.6% of the respondents found it hard to answer.

If we group the above responses together by variousdistinctive features of the respondents, the comparisoncan be rather remarkable. Chart 1 presents the opin-ions of various economic groups of the population onthe duration of recreation. It can be seen that those who

are presently employed are mostly supportive of the upto one-month long recreation, whereas 74.4% of theunemployed prefer not less than one month. It is alsonotable that according to the respondents working atinternational organizations, on average, 36 days ofvacation is necessary. Individual entrepreneurs believeit should be about 31 days long; the employees of stateinstitutions and organizations, about 26 days; and theprivate sector workers, about 23 days. In our opinion,the data can be accounted for by the fact that the pri-vate sector workers are remunerated for their amountof work done and want to keep their jobs despite thesizable unemployment in this country, hence their will-

1 The respondents were selected from Yerevan communities taking intoaccount age/sex proportions.

Chart 1. The distribution of opinions on the dura-tion of recreation by economic activity of the pop-ulation

weekend 1-2 week 3 weeks

1 month 1.5 and more months

unemployed

employed

pensioners

students

housekeepers

0 20 40 60 80 100

11.6 72.111.6 2.3

21.5 50.913.6 9.3

13.8 62.119.0 5.2

17.6 52.98.8 13.2

16.3 63.812.5 5.0

2 The respondents were divided into five equal groups (quintiles)depending on their household income. The first quintile includes therespondents who cited the lowest income, while the fifth quintileincludes the respondents with the highest income.

ingness to have shorter vacations. The employees ofstate institutions and, especially, international organiza-tions wish to have longer vacations.

Chart 2 presents the differences in the opinions of thequintile income groups of the population.2 Here one cansee that the respondents with higher income areinclined towards up to one-month long vacation, where-as low-income respondents mostly prefer a longervacation.

Let us consider the preferences of the respondents withrespect to the form of their vacation. Seaside recreationobviously prevails in the preferences of the respon-dents; 36.0% of the respondents mentioned it as themost desirable form of recreation; and more than half(52.4%) mentioned it as the one of the three mostpreferable forms of vacation. The most preferableforms of recreation with more than 10% of the respons-es are guesthouses and recreation facilities at 17.2%,health resorts at 15.4%, and traveling, camping, hunt-ing or fishing at 11.8%. Let us also mention that 4.0%(or 20 people) found it hard to give a concrete answer.It stands to reason that vacation preferences are deter-mined by this or that distinctive feature of the respon-dents. In particular, by considering the respondents byage group, it can be seen that although seaside recre-ation is the most preferable for all age groups, itsweight decreases in the higher age group. Thus 25.7%of the respondents in the 60+ year age group men-tioned seaside recreation, which is the same percent-age as those willing to spend vacations at healthresorts (Chart 3). In addition to these forms of recre-ation, 10.8% of the respondents in the 60+ year agegroup mentioned a fourth form, at a summerhouse or atan individual parcel of land, whereas only 2.7%expressed willingness to travel.

No doubt, many other factors affect the vacation prefer-ences. Thus, when segregating the respondents bysex, the difference between the ones willing to stay atguesthouses and recreation facilities becomes obvious.This form of recreation was mentioned by over 21.5%of women and only 8.9% of men. The preferences ofmen are more diverse than the women's. It is supposedthat a regularity can be derived from the preferences ofincome groups; however, these are not significant. Thelatter attests that the amount of household income isnot crucial for the choice of recreation; however, itdetermines the amount of money spent during thevacation.

If we ignore the respondents who did not specify howmuch money they would be willing to spend on theirvacation,3 then we find that the income group is obvi-ously crucial for the amount to be spent on recreation.More than half of the low-income group (55.3%) isready to spend up to 50,000 AMD (half of this group

Chart 2. The distribution of opinions on the dura-tion of recreation by income groups of the popula-tion.

5th quintile

4th quintile

3th quintile

2th quintile

1th quintile

0 20 40 60 80 100

25.6 43.611.5 11.5

27.0 45.918.9 4.1

12.4 65.29.0 9.0

17.2 58.611.1 9.1

17.7 61.117.9 6.3

Chart 3. Vacation preferences by age groups

Rest houses Seaside Health resorts Traveling

90

80

70

60

50

40

30

20

10

018-24 25.34 35-44 45-59 60+

Age groups

14.1

5.5

40.6

14.8

12.4

12.4

21.4

12.4

47.8 32.1

8.3

21.4

21.8

27.7

17.8

18.8

17.6

25.7

2.7

25.7


62

3 This naturally varies depending on the income group. 22.4% of therespondents from the quintile with the lowest income group found ithard to answer, whereas in other quintiles it averaged 14%.

Chart 4. Readiness to spend money on vacation,by income group, %

under 50 51-100 101-200 201-300 301 and more

100

80

60

40

20

01st 2nd 3rd 4th 5th

Income groups

5.33.9

25.0

10.5

55.3

8.8

14.3

28.6

15.4

33.0

11.1

22.2

25.9

27.2

13.6

25.0

15.3

23.6

26.4

9.7

20.3

21.7

18.8

31.9

7.2

weekend 1-2 week 3 weeks

1 month 1.5 and more months


63

indicated their readiness to spend 10,000 AMD) and42.0% of the respondents from the high-income groupare ready to spend more than 200,000 AMD on theirrecreation.

2. Use, form and place of recreation

From the opinions and preferences concerning recre-ation, let us continue on to the materialization of theseplans in 2006 or the failure thereof. 45.2% of therespondents indicated that they had (and used) vaca-tion in 2006 and 40.2% indicated that they did not havevacation. The remaining 14.6% indicated that they didnot have regular vacation; hence, it was hard for themto speak about that. The fact that one has or has notvacation can not attest to one's employment since only45.0% of the respondents identified themselves withthe employed group. In addition, the respondents asso-ciate vacation with departures and passing leisure timefor which one's employment is not mandatory. Thus,depending on the respondents' affiliation with this orthat economic group, going on vacation was cited by19.3% of the persons working in their households,77.8% of students, 58.7% of the employed, 8.2% ofpensioners, and 22.9% of the unemployed. The latterfigure is especially noteworthy as it exceeds both thepensioners and household workers.

If we consider the responses of vacationers on the dura-tion of their vacation, it can be seen that they to someextent differ from the preferences cited by the respon-dents on the necessary duration of vacation. In mostcases, the duration of actual vacations is inferior to thepreferred ones, which we believe is natural (Chart 5).

The gap between the actual and preferred vacationwould have been wider if Chart 5 also had includedthose who did not have any vacation at all. According tothe responses, the average duration of a vacation in2006 was 26 days, which recalculated for all therespondents including the ones who did not have vaca-tions would be about 12 days. Thus according to thesurvey results, an average Yerevan resident above age18 over the first ten months of 2006 (until November)had on average a 12-day vacation.

Let us consider the place where the vacationingrespondents spent their time in the given period (thefirst ten months of 2006). Let us note that out of 226respondents who had vacation, 50 (22.1%) spent it athome. If we consider the reasons cited by the respon-dents for spending their vacation at home, nearly half(45.5%) mentioned scarce financial resources. Theother reasons cited frequently are 22.7% had otherbusiness (work) on hand, 20.5% preferred recreation athome, and 2.3% could not answer.

The other places where vacations are spent can beconsidered in terms of countries (e.g. Armenia andother countries) and other categories (at a relative's orfriend's place, guest house, on a trip, etc.). Althoughmost vacationing respondents, over 93%, mentioned

one vacation location, there are persons who men-tioned two or three such locations. Out of 50 respon-dents who spent their vacation at home, six also spenttheir vacation away from home, including five withinArmenia's boundaries and one abroad. Out of the 226respondents (who cited going on vacation), 44 (19.5%)spent vacations abroad, while 62.8% spent their vaca-tion in Armenia (away from their home).

The decision to spend their vacation at home or away,in Armenia or abroad, mostly depends on the respon-dents' age factor and household income group. Thus,the number of those who spend vacations at homeincreases with age (41.9% of age 60+ and about 10%of those under 34 years old). Interestingly, more thanhalf of the respondents over 35 years of age had novacation (Chart 6).

To sum up the results in terms of all the respondents, itcan be noted that 8.8% of 18+ Yerevan residents in theten months of 2006 went abroad for recreation, while28.4% spent their vacation in Armenia (away from home).Table 1 presents some average descriptive indicators onthe respondent in terms of vacation place (country).

Chart 5. The distribution of the respondents byvacation duration in 2006, as % of vacationers.

75 days and more

40-60 days

25-35 days

16-21 days

10-15 days

5-8 days

1-3 days

0 5 10 15 20 25 30

Va

ca

tio

n d

ura

tio

n

4.9

13.3

27.9

7.1

25.7

18.1

3.1

Chart 6. The respondents' actual vacation andplace thereof, as % of the respondents in the givenage group.

At home In Armenia Abroad Have no rest

60+

45-59

35-44

25-34

18-24

0 20 40 60 80 100

41.9 51.45.4

1.4

1.0

6.0

26.7 51.520.8

15.5 52.426.2

9.7 13.3 40.736.3

10.9 16.4 26.646.1

Ag

e g

rou

ps

The preferences of the respondents who spent theirvacation in Armenia or abroad are nearly the same. Inboth cases most vacationers prefer guesthouses andhealth resorts, while the most significant difference isobserved in the share of vacationers who travel (Table 2).

Lastly, let us consider the distribution of the countriesvisited by the respondents. 47.5% of the respondentswho went abroad visited Georgia (Black Sea resorts inKobuleti and Batumi) including 2.5% to Abkhazia.32.5% went to Russia (mainly again to the Black Seabasin, Sochi). If we take into account that 7.5% went toBulgaria, it can be said that nearly 90% of our vacation-ing compatriots spent their vacations on the Black Seacoast.

3. Tourist travel, costs

Before considering the respondents' expenditures ontravel and related costs, let us focus on their travelcompanions. The responses were mainly as follows:20.2% of vacationers traveled alone, 53.5% traveledwith family members, 22.7% with friends or relations,and 3%, however strange it may seem, found it hard toanswer to this question. Interestingly, if we segregatethe responses by age groups, then obviously the oneswho travel with friends will prevail in the lower agegroup; the ones who travel with family prevail in themiddle age group, and most of those who travel aloneprevail in the older age group (Chart 7).

The responses of the vacationers about the problemsencountered during their journey and on site are pre-sented in Table 3. It is notable that except language pro-ficiency and travel complications (which are objective),all the other problems are more often faced by the oneswho spend vacations in Armenia than the ones who goabroad. Interestingly, financial problems and high priceswere more often mentioned by the vacationers whostayed in Armenia than those who went abroad.

Let us consider the vacationers' expenses and thestructure thereof. Since in Armenia and abroad the

vacationers' expenses differ both in terms of absolutevalue and structure, we will consider them separately.Thus in terms of expenditure structure it is obvious thatthe share of those who travel abroad and purchased anall-inclusive tourist package (over 96%) exceeds that ofthe ones who used such services in Armenia (abouthalf). If we compare the average costs of tourist pack-ages abroad and in Armenia, the foreign package isabout twice as expensive (249,000 AMD vs. 124,000

Place of vacationAge,

averageNumber of years ofeducation, average

Average monthly income ofhousehold, AMD

Average size of the household

Table 1. Some average descriptive indicators of the respondent in terms of the chosen vacation place

Average

At home 38.5 13.3 151 292 4.4

In Armenia 30.8 13.5 239 856 4.1

Abroad 26.4 14.4 401 075 4.1

Median

At home 40.5 14 117000 4

In Armenia 26 14 150000 4

Abroad 23 14 190000 4

Mode

At home 46 14 200000 4

In Armenia 20 14 100000 4

Abroad 20 14 190000 4


64

In Armenia Abroad

Table 2. Distribution of the vacation locations, as% of all the respondents, by vacation location

At their friend's or relative's place 29.7% 26.5%

At their own house 11.5% 14.3%

At rest house or health resort 50.7% 38.8%

Traveling 7.4% 18.4%

Other 0.7% 2.0%

Total 100.0% 100.0%

Chart 7. Travel companions by age groups.

Alone with Family with Friends

15-24 25-34 35-44Age groups

+6045-59

80

70

60

50

40

30

20

10

0


65

AMD) which is due to the travel costs incorporated intothe foreign package (plane, bus tickets, etc.).

Let us consider the structure of the average expendi-ture incurred by vacationers in Armenia and abroad bybasic expenditure types (Table 4). The cost of recre-ation abroad is about 2.8 times as expensive as thecost of recreation in Armenia; however, if we considerthe structure of expenses, the difference by the basicitems is not so great. Thus, the average food and drinksexpenditures abroad exceed the same expenditures inArmenia nearly twice. The average payment for thehotel, house or apartment is even lower abroad than inArmenia (by more than 20%). The main cause of differ-ences between general indicators is that abroad othercosts exceed similar costs in Armenia 9.5 times, as wellas the fact that transportation costs abroad exceeddomestic costs 5.4 times.

To sum up let us note that according to the surveyresults, per Yerevan family, 67,300 AMD were spent onaverage on vacation in the first 10 months of 2006.

4. The services of tourist companies

Let us consider in detail the relations between therespondents and tourist companies. Thus, 22.5% of therespondents who spent their vacations in Armenia useda tourist company or intermediary service, while thesame indicator in the case of those who spent vaca-tions abroad amounts to over 65%, and every seventhvacationer used the services of a foreign company.

When considering the nature of services provided bytravel agencies, we can see that the ones who spent

their vacations in Armenia usually purchased an inte-grated package or a referral (80.6% of all those whouse the services of travel agencies) and 12.9% usedonly the transportation and hotel services (food exclud-ed). As for those who spent vacations abroad, 57.1% ofthe ones who used tourist companies purchased inte-grated packages (referrals) and 35.7% used only trans-portation services (purchased tickets). If we take intoaccount that most of those who traveled abroad went toGeorgia, it can be stated that it was rather common touse travel agencies for the transportation to Kobuleti (orBatumi).

Those who used the services of travel agencies aremainly satisfied with the quality of provided services.50.1% were completely satisfied with the services pro-vided, 44.6% were mainly satisfied, and 4.6% of therespondents were dissatisfied with the services of trav-el agencies. Notably, if we consider the opinions of therespondents in terms of the recreation venue, the dis-satisfied are among those who spent their vacation inArmenia. If we take into account that 60.7% of thosewho went abroad were entirely satisfied with the serv-ice quality, and 35.5% of those who stayed in Armeniawere entirely satisfied, then we can conclude that theservice provision quality by the domestic companiesleaves much to be desired compared with the servicesprovided abroad.

Interesting results were obtained when analyzing thedecisive factors for the choice of travel agency. In gen-eral, for those who use the services of travel agenciesthe opinions of friends and acquaintances about thegiven tourist company are most important (this was

In Armenia Abroad Total

Table 3. The problems most frequently encountered during vacation, % of total vacationer respondents.

no problem 60.4% 61.7% 60.9%

financial problems, expensiveness 15.3% 10.0% 13.9%

unrealized expectations 5.6% 1.7% 4.5%

traveling problems 5.6% 10.0% 6.9%

language issues 0.7% 3.3% 1.5%

food issues 4.9% 1.7% 3.5%

other 1.4% 1.7% 1.5%

hard to say 6.3% 10.0% 7.4%

Total 100.0% 100.0% 100.0%

Category of expenditureIn Armenia Abroad

AMD % in expenses AMD % in expenses

Table 4. Average expenditures during the vacation, by basic groups

Hotel, house rental fee 70 646 32.4% 55 500 9.2%

Food and drinks 58 727 27.0% 115 039 19.0%

Transportation 19 842 9.1% 107 738 17.8%

Recreation, cultural, sport and other relevant activity expenses 27 423 12.6% 85 750 14.2%

Purchases, gifts 24 358 11.2% 79 748 13.2%

Other expenses 16 909 7.8% 161 500 26.7%

Total 217 906 100.0% 605 275 100.0%

indicated by nearly half (44.6%) of the respondents).The next decisive factors are as follows: the name ofthe given company or whether it is famous (21.5%), thecompany's advertising (15.4%), and quoted prices(12.3%). If we consider the respondents by variousgroups, then although the above four factors are pres-ent in all four groups, they vary in importance. Forexample, for the students on vacation their friends' ref-erences are more important (59.1%) and advertising isleast important (just 9.1%). The variations are moreobvious when the respondents are segregated by sex(Chart 8).

If for women the references of friends in the choice oftravel agencies are most important (51.2%); for men itis less crucial (31.8%). About 31.8% of men attach lessimportance to the name of the company or its beingfamous. Notably, the quoted price is more important forwomen (16.3%) than for men (4.5%).

Information and awareness play an important role inthe choice of travel agency. The dominating majority ofthe respondents (80.8%) indicated that they obtainedthe basic information about travel agencies and recre-ation venues from the television and 9.2% get informa-tion from friends, acquaintances and relations. Theother sources of information are incomparably lessimportant: magazines and newspapers at 4.2% andthe Internet at 2.0%. The role of the Internet as asource of information is especially low compared withthe percentage of people who obtain informationthrough the Internet in other countries.

5. Appraisal of recreation capacities inArmenia

Let us consider the respondents' opinions andappraisals on tourism capacities of Armenia (Table 5).Grading the appraisals in three degrees (high, medium,low) we see that according to the respondents, the sit-uation is most satisfactory in Armenia's hotels andrestaurants (61.4% high, 3.2% low). Natural conditionsare also positively appraised by the respondents(53.0% high, 9.6% low). In contrast with this, the per-centage of high graders for service quality is compara-tively low at 30.0%; whereas, 20% appraised the qual-ity as low. The remaining two factors, the infrastructureand price, were mainly appraised as low than high.Moreover, 74.1% believe the price is high for tourism inArmenia; whereas, only 1.2% believe the price is low.

If we compare the appraisals given by the vacationersin Armenia and abroad (Chart 9) one can see the fol-lowing distinctive features. Nature resources and hotelsare mostly highly appraised by the ones who spent theirvacation in Armenia; whereas, infrastructure or servicequality are highly appraised by those who spent vaca-


66

Chart 8. Distribution of the factors decisive for thechoice of travel agency, by sex, % of all the respon-dents of the given sex

men women

company name

recommendation offriends

advertisement

price

specific offer

hard to say

0 10 20 30 40 50 60

16.3

31.8

51.231.8

14.0

18.2

16.3

4.5

0.09.1

2.3

4.5

very high high medium low very low

Table 5. Distribution of appraisals for the conditions for tourism development conditions in Armenia, % of allthe respondents

Natural conditions 16.2% 36.8% 37.4% 5.6% 4.0%

Hotels, restaurants 12.8% 48.6% 35.4% 2.2% 1.0%

Infrastructure (roads, rest rooms, boutiques, other) 2.2% 18.6% 49.8% 17.2% 12.2%

Quality of service 6.8% 23.2% 48.0% 12.8% 9.2%

Price 37.6% 36.6% 24.6% 1.2% 0.0%

Chart 9. Variation in the appraisal of certain factorsimpacting recreation arrangements in Armenia by theresponses of the ones who spent the vacation inArmenia and abroad, % of the total number of respon-dents in this group

In Armenia Abroad

high

natural conditions

hotels,restaurants

infrastructure the quality ofservices

price

low high low high low high low high low

80

70

60

50

40

30

20

10

0


67

tions abroad. The latter can be accounted for as follows:infrastructure or service quality appraisals deteriorateafter exposure to them, which means that the notionthereof was better that the reality. The distribution ofopinions about the recreation prices in Armenia is alsoof interest as most of the respondents who took a vaca-tion abroad believe that the prices in Armenia are high.

6. Recreation on weekends

In addition to the time allocated to tourism and recreationover the year, it is also possible to use the weekends forrecreation purposes. More than half (55.4%) of therespondents used such opportunities to go out of town.The percentage of such vacationers varies significantlydepending on the group of respondents. Thus, amongstudents this amounts to 70%, among men 60%, and40% of women, etc. There is a clear dependencebetween the increase in age and the decrease in goingout of town, as well as between the increase in householdincome and the decrease in the percentage of travelers.

The two most frequently cited recreation venues are asfollows: Lake Sevan (32% of respondents and 57.3% ofthose who go out of town) and camping in the country(18.8% and 33.7%, respectively). As the respondents'age increases, the percentage of those who go to LakeSevan decreases (70% of 18-24 year olds go out oftown to Lake Sevan, only 37.5% go there from the 60+age group). The 60+ age group acquired a new recre-ation venue, the summerhouse.

When considering the respondents by householdincome groups, there are no visible differences for thechoice of recreation venue or form. The differencesemerge only when considering the amounts spent onrecreation. Thus, 35.0% of the lowest-income 1st quin-tile group spent on average less than 10,000 AMD to goout of town and a maximum of 50000-100,000 AMD,and in the 5th (highest-income) quintile only 1.7% spentunder 10,000 AMD (Chart 10).

Chart 10. Expenditure on weekend recreation byhousehold income quintile groups

under 10 ths AMD 10-50 ths AMD 50-100 ths AMD

101-200 ths AMD 201 ths and more

100

80

60

40

20

01st 2nd 3rd 4th 5th

Age groups

0.0

45.0

20.0

35.0

10.9

2.2

47.8

26.1

13.0

15.8

7.0

33.3

28.1

15.8

27.1

8.5

27.1

25.4

11.9

38.3

6.7

16.7

36.7

1.7

According to the majority of respondents (53.4%) the best duration of vacation is one month. 12.6%consider two weeks and 12.4% consider three weeks sufficient for a vacation. The other answers havefewer supporters: 5.6% for 1.5-2 months, 4.8% for 1 week, and 2.2% for more than 2 months.Interestingly, according to 3.6% of the respondents the rest on each weekend is sufficient for full-fledged recreation.

Among the forms of recreation, the seaside is the first preference (36.0%). Other forms with more than10% of the responses are guesthouses at 17.2%, health resorts at 15.4%, and traveling, camping orhunting at 11.8%.

45.2% indicated that in 2006 they had and used their vacations. 40.2% indicated that they did not havevacation. The remainder, 14.6%, indicated that they do not have regular work; hence, it is hard forthem to speak about vacations.

The average duration of the respondents' vacations in 2006 was 26 days which, if recalculated for allrespondents (including the ones who did not have vacation) will amount to 12 days. Thus, accordingto the survey results, an average resident of Yerevan over 18 years of age in the first 10 months of2006 had 12 days of vacation.

22.1% of the respondents spent their vacations at home. 45.5% of those who spent their vacations athome cited the scarcity of financial resources. Other cited reasons are 22.7% had other work (busi-ness), 20.5% preferred to rest at home, and 2.3% found it hard to answer.

Out of the 226 respondents who had vacations, 44 (19.5%) went abroad and 62.8% vacationed inArmenia (not at home).

CONCLUSIONS


68

47.5% of those who vacationed abroad went to Georgia (Black Sea resorts in Kobuleti and Batumi),of which 2.5% to Abkhazia and 32.5% to Russia (mainly Sochi). If we take into account that 7.5% wentto Bulgaria, then we can say that nearly 90% of our citizens who went abroad on vacation preferredthe Black sea coast.

The total average expenditure on recreation abroad exceeds about 2.8 times the expenditure on recre-ation in Armenia, however, the differences in the main items of expenditure are not so significant.Average expenses on food and drinks abroad exceed nearly twice the same expenses in Armenia,while the payment for hotel, house or apartment abroad is even lower than in Armenia (by more than20%). The main cause of the differences in expenses abroad is that other costs exceed 9.5 times thesame costs in Armenia. Also, transportation costs abroad exceed the ones in Armenia about 5.4times.

Per Yerevan family, 67,300 AMD was spent on average on vacation in the first 10 months of 2006.

22.5% of the respondents who spent their vacations in Armenia used a tourist company or intermedi-ary service, while the same indicator for those who spent vacations abroad is over 65%.

The ones who used the services of travel agencies are mainly satisfied with the quality of providedservices. 4.6% of the respondents were dissatisfied with the services of travel agencies. The dissat-isfied ones were those who stayed in Armenia. 60.7% of those who went abroad were entirely satis-fied with the service quality, and 35.5% of those who stayed in Armenia were entirely satisfied.

In general, for those who use the services of travel agencies the opinions of friends and acquaintanc-es about the given tourist company are most important (this was indicated by nearly half or 44.6% ofthe respondents). The next decisive factors are as follows: the name of the given company or whetherit is famous (21.5%), the company's advertising (15.4%), and quoted prices (12.3%).

In the context of tourism development prospects in Armenia, the situation is most satisfactory inArmenia's hotels and restaurants (61.4% high, 3.2% low). Natural conditions are also positivelyappraised by the respondents (53.0% high, 9.6% low). In contrast with this, the percentage of highgraders for service quality is comparatively low at 30.0%, whereas 20% appraised the quality as low.The remaining two factors, the infrastructure and price, were mainly appraised as low than high.Moreover, 74.1% believe the price is high for tourism in Armenia, whereas only 1.2% believe the priceis low.

More than half (55.4%) of the respondents used the weekend to go out of town. If the difference interms of recreation venue is insignificant for different groups of respondents, then in terms ofexpenses, the household income quintile groups differ greatly.

List of Important Events

69

August

CHRONOLOGY OF IMPORTANT EVENTS

Gabriel Geara, the Ambassador of Lebanon toArmenia, on behalf of his country thanked thegovernment and the people of Armenia for theassistance provided during the recent conflict.

The four-day Second All-Armenian EducationalConference dedicated to the elaboration of thestandards in the all-Armenian education systemstarted in Tsakhkadzor.

John Evans, the US Ambassador Extraordinaryand Plenipotentiary, completed his mission inArmenia.

The Embassy of the Russian Federation inArmenia expressed its gratitude for the condo-lences expressed by the Armenian people on theoccasion of the crash of the Pulkovo Airlinesplane.

The respected Armenian poet Silva Kaputikianpassed away at the age of 87.

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September

The Nagorno Karabakh Republic celebrated the15th anniversary of its independence.

The President of Belarus received the creden-tials of the Ambassador of the Republic ofArmenia to Belarus, Oleg Yesayan.

The Ambassador of the Republic of Armenia toArgentina, Uruguay and Chile, VladimirKarmirshalian, (based in Buenos Aires) present-ed his credentials to the President of Chile,Michelle Bachelet.

The parliament of the Argentine provinceCordoba adopted a declaration marking April 24as the commemoration day of the ArmenianGenocide victims.

The Days of Yerevan in Moscow commencedwithin the framework of the Year of Armenia inRussia.

AEPLAC held the presentation of the 7th bookpublished in the European Integration LibrarySeries, Securitization of Assets in Europe, at theTekeyan Center in Yerevan.

The US Senate restricted the approval of thecandidacy of the new US Ambassador toArmenia for an indefinite period.

Armenia has become the second country in thepost-Soviet area to test and introduce ATMscapable of receiving cash.

A military parade took place in Yerevan on theoccasion of the 15th anniversary of Armenia'sindependence

The 3rd All-Armenian Armenia-Diaspora Forumended.

The 2nd All-Armenian Economic Forum started.

Serge Smesov was appointed the newAmbassador of France to Armenia.

The oldest citizen of Armenia, Gula Navoyan, is124 years old.

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October

The opening ceremony of the Days of France inArmenia took place in Yerevan.

The newly appointed Ambassador of Switzerlandto Armenia, Lorenzo Amberg, (based in Tbilisi)presented his credentials to President RobertKocharian.

The newly appointed Armenian Ambassador tothe United Arab Emirates, Vahagn Melikian, pre-sented his credentials to the President of theUnited Arab Emirates, Sheikh Khalifa Bin ZayedAl-Nuhayan.

The Ambassador Extraordinary andPlenipotentiary of Romania to Armenia, NikolaeIordake, completed his mission in Armenia.

The French Parliament adopted the draft law crim-inalizing the denial of the Armenian Genocide inthe Ottoman Empire in the early 20th century.

AEPLAC held the presentation of the 8th bookpublished in the European Integration LibrarySeries, European Union in Detail, in Yerevan.

The Parliament of Milan, Italy, adopted the reso-lution recognizing the Armenian Genocide in theOttoman Empire in 1915.

The newly appointed Ambassador of Sweden tothe Republic of Armenia, Hans Gunar Aden, pre-sented his credentials to President RobertKocharian.

The Armenian Ambassador to Norway, AraAivazian, presented his credentials to KingHarald V of Norway.

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