ArmInfo’s Interview with Armenian Minister of Economy Vahram Avanesyan
by Emmanuil Mkrtchyan
Armenia is intensively moving towards signing of the agreement on accession to the Customs Union. This is how the Government imagines this process, which is to be over by late 2014. However, it is hard to imagine how our country will manage to format hundreds of earlier adopted laws, bylaws, regulating documents and international agreements, as well as to considerably change the vector of international trade relations and the logic of economic development within such a short period of time. In fact, many independent experts believe that Armenia is not so well prepared for that hundred meter race, however, it is certainly able to get through that test if it properly thinks over each of its steps in the very complicated negotiations with the Eurasian Commission. Below is ArmInfo’s interview with Armenian Minister of Economy Vahram Avanesyan, who describes the main difficulties and the key tasks of the country in fulfillment of the road map on accession to the Customs Union.
Mr. Avanesyan, my experience of communication with certain political and economic circles of Belarus and Kazakhstan demonstrates that our future partners in the Customs Union are not so pleased with the real state of affairs in the Customs Union. Russia, which is building the future Eurasian economic community, is harshly defending its own market and insisting on numerous waivers. Belarus and Kazakhstan disagree with so many waivers from the common customs regime. Russia’s market attracts them with its sizes. Armenia, a small country, intends to sit at the negotiating table with its long list including nearly 800 items. I can’t even imagine the response. After all, the Customs Union is a union and there should be as few waivers as possible or there should be no waivers at all. As an importing country, we are interested in a maximally free regime for both import and export items. On the one hand, we want no rise in import duties to protect our producers and the population against the price boost, and on the other hand, we are interested in the lack of export restrictions because our producers face the prospect of immense market. The situation is so tense that one doubts whether we will be strong enough to wangle the needed preferences from the Customs Union members.
We ought to be strong. But for the moment we are at the first stage of negotiations, which are being held within the Eurasian Economic Commission. We have not yet started discussions with the countries. We have submitted our list of waivers to the Eurasian Commission. Later, each group of goods will be negotiated. It is not a matter of commodities as such. The matter concerns the role they are playing for the economy today and what role they will play as raw materials for production or as consumer goods. All this is still being discussed at a technical professional level on the basis of rather serious analytical work. Moreover, today we should take into account the importance of these commodities for our future partners.
Yes, it will be difficult to do this. Of course, all countries are as moody as we are. Don’t these negotiations cover the third countries yet?
They don’t. The matter concerns the Customs Union countries. At the first stage of implementation of the so-called “road map” we are to clearly substantiate the commodity groups that need waivers from the current customs regime in the Customs Union. After the discussions at the Eurasian Commission, we will switch to the second stage – to more detailed discussions with the member-states of the Customs Union.
Let’s speak of the raw materials for our manufacturers. They are mostly imported from the third countries and the rise in tariffs will directly lead to the growth in the prime cost and ultimate price and will also result in reduction of competitiveness.
Certainly, we are seriously working at it. For instance, we receive timber, would laminate, etc. from many countries and manufacture local inexpensive furniture. Wood is also used in construction. We are also working at future-oriented commodities, i.e. primary goods we may need tomorrow to fulfill the key directions of industrial production development. Our reasoning is that the economy will develop and the import of raw materials and components will grow. It this light, it is important to do everything possible for rehabilitation of chemical industry and other fields related to low-tonnage chemistry and pharmacy.
The Government has decided to rehabilitate the lapidary industry and strengthen the jewelry industry. Here we cannot depend on ALROSA’s supplies or on Russian gold only. Moreover, the few lapidary enterprises in the country have recently refused to receive Russian raw materials at all.
We have already launched the talks on lapidary industry. Certainly, we cannot depend on the Russian raw materials only, even on those supplied at low prices. We’ll have to look for compromises here, and I think we’ll find them. We have signed an agreement, under which no export duty will be levied on the Russian border. It is very important. Today our share in the lapidary industry is very little. We have idle production facilities and we are short of professionals. We’ll have to train people again. I think we’ll cope with that task and will breathe new life into the sphere. Anyway, in order to do that, we need to maintain the advantages on gold and diamonds implied by our legislation. Generally speaking, diversified supplies of rough diamonds to Armenians will pose no threat to the Russian manufacturers.
How will we manage to ensure the balance between the commitments to the World Trade Organization and the requirements of accession to the Customs Union?
This is quite a different part of negotiations concerning the World Trade Organization. We should find optimal rate zones between the WTO and the Customs Union with due regard for the fact that the CU tariffs will be declining.
Russia is currently working at issues related to unification of currency and monetary legislation within the Customs Union. I think the decline in tariffs will go on along with formation of a currency union, the so-called ruble zone. According to the Russian mass media, the regulatory framework is already being prepared. Otherwise, I think, the effect from the Customs Union will not be big. It is my personal point of view. Otherwise, Russia will have to put the political cart before the economic horse. It is not pragmatic, because it is almost impossible to create an economic union with literal lack of borders between the partners with so much different weight categories.
That question exists, but I cannot say to what extent it is connected with the tariff policy reduction. Another important thing is that there should be no waivers in the Customs Union at all, because, the Union implies a different open ideology. But our countries’ economies cannot be compared by their interests, first of all. There is a big difference between those producing petrochemicals and those who do not. There is also a big difference between those having a large sale market and those with a too small market or between those having 12 thsd USD revenue per capita and those having only 3 thsd USD per capita. But I am convinced that in this very context we are on the winning side.
As regards the WTO, Russia assumed certain commitments when joining the Organization 10 years after we joined the WTO. When the Customs Union was being established, Russia signed an agreement saying that the foreign (general) customs tariffs of the CU countries will be declining in compliance with Russia’s commitments to the WTO. Therefore, we won’t have to be guided by the WTO tariffs but we’ll need to consider the issue in general, i.e. we’ll need to find out how much important certain commodities are for our economy and population.
Does it mean that we will put the tariff policy under manual control and consider each commodity group?
Yes, it does. And we’ll need to do that with due regard for the available structure of economy and industry. For instance, it is no secret that the tariff structure of Europeans and the CU member-states is differentiated not only by the commodities but also seasons. They apply seasonal tariffs. We did not do that because we thought that we need no administrative red tape and that we should not play with the resource prices. This was theoretically considered to reduce the economy efficiency, because in this case resources would make their way to where their tariff burden is smaller rather than where they operate better. This is a constant theoretical dispute in the field of regulation of foreign trade activities and tariff policy, and the dispute has not been over so far.
I think the Ministry of Economy will not be enough here. Serious analytical centers and institutions are needed. In the meantime, we should do something with the total corruption, oligopoly, and monopolies…
Yes, we should inquire into the situation in economy, receive signals from the market, entrepreneurs, and manufacturers. And today we are doing it to give a good account of ourselves. To achieve economic efficiency, many countries study the inner structure of wages, the level of interchangeability of products, etc. We should also learn to do that. It is very important to have clear arguments in the negotiation process.
Let’s return to the weight categories. From the viewpoint of the real sector, our economy is very weak and can fail to withstand the commodity pressing of the partners in the Customs Union. While we are adjusting to their immense sales market, our partners may glut small Armenia with high-quality and inexpensive goods and it will be impossible for Armenia to create its own significant goods. We’ll merely be trampled underfoot.
If this were to happen, it would have already happened. Why? We have an open market with the CIS countries, but the transport costs are big. Therefore, the import from Russia and other CIS countries is not cheap. Against this background, we, a small country, are developing our processing industry (for instance, the food industry) well enough.
However, not only importers but also exporters have transport costs. Exporters have even more transport costs given the Armenian logistics, which is not developed well enough. Nevertheless, we should admit that this field has recently registered some progress.
This is why Armenia should be an open country. Given the narrow domestic sales market, we should focus on export. It is the only opportunity to survive and develop. The Customs Union provides us with an opportunity of a vast export market. Certainly, the European market is larger, but it has higher competition and more technical regulations. In the Customs Union we will receive numerous preferences and if we manage to retain the European preferences at the same time, there will be no better foreign economic regime for us. Therefore, the Government is working at an export-oriented policy and it realizes that it is impossible to do without serious technologies in the current competitive division of labor in the world. And our business community is not so much ready for that yet. The technologies I mean concern not only the quality standards of services and commodities made in Armenia, but also the manufacturing process management, entry into new markets, etc.
We have been trying to adjust our standards, legislation, and regulatory framework to the European standards for almost 10 years. Europeans have spent a lot on this process. What do we see now? It has turned out that no one needs that.
This is a wrong conclusion. On the contrary, the new rules and regulations have been of good service to us. It’s good that the state was pushing the business to high standards by means of these programs. If you are ready to work with Europe, you are undoubtedly ready to work with your CU partners. In general, each country has its own standards and regulations and if you enter a particular country’s market, you should be ready for it, because there are no unified standards. These programs have been of good service to both officials and businessmen. The East and the West focus on two parallel processes – unification process on the one hand, and protection of their own market on the other hand. The entry into other markets demands product certification, and if you have managed to receive the needed certificate under international standards, it does not yet mean that your goods can easily be imported to any country. All countries want to be export-oriented; therefore, our technologies should produce high-quality goods to enter particular markets.
I am a little bit skeptical about the possibility of the technological breakthrough of our industrial production. If big economists of Russia say that it lags behind the West for 20-30 years, in case of Armenia, I am simply sad. As for the basis of the Customs Union, everybody is for its development on the basis of industrial-technical innovation. Although, this way is extremely difficult, but it is our last hope, otherwise we will lag behind forever. China needed more than 25 years and huge resources so that to come closer to this way.
I think that the CU may give us markets as well as joint projects in the innovation spheres. In case of good management, the countries of the CU may reach much for a short period of time. All of us have a great scientific and staff potential. We simply need drawing out of priorities and certain stable general policy for development of the innovation sector. Integration will open very much interesting prospects for the branches that need markets. Big business, the monopolist state structures and the government should be the customers of the IT production. We should support these processes at the state level. At the same rime, it is wrong to take all this only within the frames of the CU borders. Members of the CU are not going to build a fence around themselves. On the contrary, they want to join efforts, markets, innovations and technologies with a purpose of developing towards the world. As for Armenia, it should concentrate at the markets close to us, and later gather potential, enter the European market, Asia and wherever else.
As a minister and analyst, do you imagine the structure of our economy in 10 years?
I think it will be more diversified than today. I think that the mining industry will be 3.5-4% of GDP and not more. The processing industry, including metalworking and agriculture products processing will be about 12.5%-13.5%. The pharmacological industry is still low technological in our country, but has been developing not so badly. I think that in 10 years the share of the industrial sector of the country will be about 21-22% of GDP. Energy will remain at the 3-4% level, the IT sector - at 4% level. Production of jewelry and diamonds will grow much. I think that a very serious niche for the textile industry will be opened in the country, as there are certain signs of that. The niche will open as China, the world textile monopolist, has been gradually developing technologies and opening new ways for other countries to restore their own light industry sectors. I think that in the current geo-political conditions heavy engineering and machine tool building will hardly be able to develop in our country. But we shall be able to concentrate at two-three groups of light goods by producing some IT production means for our production. Do you remember that 10 years ago, when lapidary industry was well developing in the country, we started producing modern lapidary machines? There was higher demand for them. Nevertheless, I think that the share of engineering will not exceed 1.5-2%.
You know, I used to study the viewpoints of the consulting companies about the pilot projects of the export-oriented companies. And sometimes it seemed to me that these projects were made as an order. For instance, the government wants pharmacy to make an unprecedented leap or to surpass Georgia in wine production. So let’s draw figures and top. They decided to open an office for the Armenian cheese export, but failed. If you do not have professionals, if nobody can fulfill the decisions and conceptions of the government, maybe, you should invite specialists from abroad, offer them a specific job and demand true results.
I don’t want to comment on all your assessments, as like an economic journalist, you have such a right. However, I do not agree with you. As for the priority directions of industry drawn out under the order of the government, I think that the priority directions were chosen correctly. They are based on a rather professional analysis but not on the wish list of the government. Moreover, drawing out of the strategy and programme of events in different sectors did not and could not suppose drawing out of the ready-made business-projects. Their goal is to guide the industrial policy when adopting decisions for the sake of the given sector. As for the specific investment projects, they should be chiefly ordered, drawn out and fulfilled by the private sector. In this context, the more predictable is the government, the easier for the private sector to determine its development strategy.
But where are you going to take money from for all this? The volume of foreign investments dropped by 40%, local investments do not grow. Do you hope for the pension reform? The entire macroeconomic stability reposes on the $2 billion transfers from the Diaspora per year, which our economy cannot even absorb. It turns out that this money, which was not earned in the country, preserving an illusion of the macroeconomic stability, is chiefly spent to finance import, leaving less taxes and big profit to our big importer-monopolists.
On the one hand, I would not place stake only on foreign investments jumping for the last years. For instance, in 2008 only two sectors – telecommunication and energy provided 80% of foreign investments. One should remember that foreign investments to such countries as Armenia are of a short-term nature and very much mobile. It means that they are not stable. I think that the level of foreign investments within 20-25% out of the total investments would not be a bad result for us. As for the local investments, one of the priority tasks for the mid-term outlook is to create in the country the opportunities for accumulation of stable money and to put our stake on these resources.
Does it mean that it is more important for us to make local investments in the total capital?
The level of foreign investments is a unique barrier of the quality of business climate in the country. This is very much important, although it partly reflects the situation in the world economy. As for the volumes of local investments in the total capital, this is what we should link our hopes with, first of all. This indicator is stable in the country. It is bad that this indicator does not grow but good that it does not fall. This process should be supported and given impulses. Actually, 25% - 27% level of foreign investments is not a bad indicator for Armenia. The 7-8% industrial growth is not bad either. You see, not everything is spent to cover import. Now we understand that it is impossible to gain serious results only by means of standard reforms. We need other measures. Moreover, we need industrial zones according to the territorial principle, new tools for financing of projects and very much risky venture capital. We need grants, help for certification, for entering new markets, for transportation. To be short, we need to use all the tools, which are called the industrial policy.
You are an optimist, and I am jealous of your optimism.
Otherwise, I would not occupy the position of the minister.
Thank you for the interview.