On January 8, and pursuant to complaints from Armentel's new owner, Vimpelcom (see earlier post), the Public Services Regulation Commission of Armenia approved the request to disconnect some 300 entities "illegally" providing IP-Telephony services effective January 25, 2007.
Since License no. 60 provides that Armentel is legally the sole provider of telecom services, the Commission's decision is an affirmation of the rule of law and respect for property rights. This is not to say that monopoly is something to admire or protect, but Vimpelcom, and previously Hellenic OTE, have paid for these rights. Indeed, the Armenian government granted itself these rights in 1995 and expanded them in 1997 prior to its sale to OTE.
What is remarkable about the recent decision is its swiftness. The Commission approved the acquisition on November 14, 2006, and the purchase of Armentel was completed on November 20, 2006 (see here). And in less then 40 days, a decision was made to shut down all entities encroaching on Armentel's rights. While the timely decision and respect of property rights should be applauded, the previous owner OTE had failed to garner such support from the Commission and the government despite numerous attempts over the past couple of years.
Is the lesson here that Russian ownership is good for Armenia in that it will improve governance and rule of law? Perhaps the question is bigger than that. The French Pernod Ricard, which acquired the Ararat cognac producer (renamed Yerevan Brandy Company) successfully fought to keep other cognac producers from using the Ararat label, in Armenia as well as in Russia, with the government's backing at each step.
Is it Russia or is it country size? It strikes me that country size is perhaps the critical element at play. I wonder if anyone has written on the subject? Do we have any direct evidence on how firms fare under the law depending on their size and FDI origin? Is their any research on how corporate governance varies by nationality as well as size?
[Perhaps the 2005 World Bank and EBRD survey of business environment BEEPS, when it becomes available, can be useful but only in addressing the question on firm size. The 2002 survey can be downloaded from here; I can email you an extract of the raw data limited to Armenia or with fewer variables if you're unable to download the Excel or Stata files]
Saturday, January 27, 2007
Friday, January 26, 2007
Rail Transportation
Rail links continue to be a topic of great interest. Rail transportation shrunk significantly over the past 16 years. On the eve of its independence in 1991, Armenia's railroads handled 12 million tons of freight (see here which also includes similar information on road and air transportation). In 2005, the last year for which data is available, it had dropped to about 2.6 million tons, with more than half of it foreign trade related. Similarly, the number of passengers traveling dropped from 3.5 million to 700,000.
Some of the above steep decline can be explained by the dissolution of the Soviet Union and the traditional markets and trading partners that Armenia had enjoyed. Some can be attributed to the instability in Georgia, particularly in its northern regions. But much should be attributed to the blockade by Turkey.
Indeed, the economic hardship could have been averted by employing rail lines (and roadways) heading west rather than north had it not been for the blockade by Turkey. This is not a trivial matter as the bulk of Armenia's trade is with the west, and not its immediate neighbors to the north and east. In 2005, less than 19 percent of its exports of USD 950 million were destined to Georgia, Russia, Ukraine, and the remaining former Soviet republics to its north and east. Similarly, about 21 percent of its imports of USD 1768 million originated from these countries.
If west is the way to go, then connecting to Kars in Eastern Turkey should be quite cost effective. As the map in my previous post shows, Kars is a stone's throw away from the Armenian border and already has rail links in place connecting the two countries. Open borders and trade are beneficial to Armenia. Undoubtedly, they are also beneficial to Turkey. Obviously economics has little to do with the decision to impose a blockade, which must have cost Armenia billions of dollars in lost economic activity over the past decade.
[March 10: Graph is replaced -- it disappeared again]
Some of the above steep decline can be explained by the dissolution of the Soviet Union and the traditional markets and trading partners that Armenia had enjoyed. Some can be attributed to the instability in Georgia, particularly in its northern regions. But much should be attributed to the blockade by Turkey.
Indeed, the economic hardship could have been averted by employing rail lines (and roadways) heading west rather than north had it not been for the blockade by Turkey. This is not a trivial matter as the bulk of Armenia's trade is with the west, and not its immediate neighbors to the north and east. In 2005, less than 19 percent of its exports of USD 950 million were destined to Georgia, Russia, Ukraine, and the remaining former Soviet republics to its north and east. Similarly, about 21 percent of its imports of USD 1768 million originated from these countries.
If west is the way to go, then connecting to Kars in Eastern Turkey should be quite cost effective. As the map in my previous post shows, Kars is a stone's throw away from the Armenian border and already has rail links in place connecting the two countries. Open borders and trade are beneficial to Armenia. Undoubtedly, they are also beneficial to Turkey. Obviously economics has little to do with the decision to impose a blockade, which must have cost Armenia billions of dollars in lost economic activity over the past decade.
[March 10: Graph is replaced -- it disappeared again]
Wednesday, January 24, 2007
Fallout from the Slaying of Hrant Dink
The slaying of Hrant Dink is yet another sad chapter in the history of the ruling regimes in Turkey and the pain they keep inflicting upon Armenians. The continuing destruction of ancient Armenian churches and historical monuments, the confiscation of church properties (Christian foundations), the conversion of ancient Armenian churches to mosques, the prohibitions on the teaching of the Armenian language and training of clergy, the absence from educational textbooks any reference to the 3000 year old Armenian roots of more than half of the country, and instilling an environment of intolerance towards Armenians, have taken their toll.
Not only successive governments have inflicted pain upon Armenians within Turkey's own borders, but they have imposed a crippling blockade on the newly independent and tiny landlocked Armenia. This blockade has caused tremendous suffering and contributed to widespread poverty and unemployment.
In one of his last writings, Hrant asked that the Diaspora turn its energies to the newly independent state of Armenia. The government of Turkey has a tremendous role to play here. This blockade, the ultimate symbol of intolerance towards Armenians, should be lifted immediately and unconditionally.
However, lifting the blockade is not only a political decision. Without dealing with the environment of intolerance towards Armenians, open borders don't mean anything. Would any shopkeeper in Turkey dare to promote or showcase a product with the label Made in Armenia today? Would Armenians feel safe and free to move around?
Recent news from Turkey, and in particular the reaction from the media, are very encouraging. Indeed, I could not believe the 21 January, 2007, statement in the daily Sabah (Morning in Turkish) by an advisor to the prime minister of Turkey, that Hrant Dink "was not entrusted to us as an Armenian; rather he was the real host of this country." This is the closest to an official acknowledgement that Armenians are natives and the original inhabitants of much of the land that is called Turkey today.
The words that I read from the press in Turkey are very encouraging. But actions speak louder. For starters, when will the government of Turkey lift its blockade of Armenia? When will it stop adding fuel and start putting out the flames of intolerance towards Armenians? How many more Hrants have to be sacrificed before the decent citizens of Turkey make their government do the right thing?
[March 13, Map restored, pictures removed. Hope it'll not disappear again.]
Not only successive governments have inflicted pain upon Armenians within Turkey's own borders, but they have imposed a crippling blockade on the newly independent and tiny landlocked Armenia. This blockade has caused tremendous suffering and contributed to widespread poverty and unemployment.
In one of his last writings, Hrant asked that the Diaspora turn its energies to the newly independent state of Armenia. The government of Turkey has a tremendous role to play here. This blockade, the ultimate symbol of intolerance towards Armenians, should be lifted immediately and unconditionally.
However, lifting the blockade is not only a political decision. Without dealing with the environment of intolerance towards Armenians, open borders don't mean anything. Would any shopkeeper in Turkey dare to promote or showcase a product with the label Made in Armenia today? Would Armenians feel safe and free to move around?
Recent news from Turkey, and in particular the reaction from the media, are very encouraging. Indeed, I could not believe the 21 January, 2007, statement in the daily Sabah (Morning in Turkish) by an advisor to the prime minister of Turkey, that Hrant Dink "was not entrusted to us as an Armenian; rather he was the real host of this country." This is the closest to an official acknowledgement that Armenians are natives and the original inhabitants of much of the land that is called Turkey today.
The words that I read from the press in Turkey are very encouraging. But actions speak louder. For starters, when will the government of Turkey lift its blockade of Armenia? When will it stop adding fuel and start putting out the flames of intolerance towards Armenians? How many more Hrants have to be sacrificed before the decent citizens of Turkey make their government do the right thing?
[March 13, Map restored, pictures removed. Hope it'll not disappear again.]
Monday, January 08, 2007
Tax Holidays
2007 is the last year when new investments by foreign firms qualify for tax holidays in Armenia. Firms investing a minimum of 500 million Drams (1 USD=365 Drams) benefit from 100 percent forgiveness from the profit tax in 2008 and 2009.
Profits in Armenia are taxed at a flat tax rate of 20 percent, except for firms engaged in agriculture which are exempt. Generous depreciation allowances further reduce the effective tax rate that businesses face. Hotels, for instance, are depreciated over 10 years; 20 years for other buildings. Computers are expensed, and so are investments in structures in the earthquake zone, as well as all investments in Gyumri, Armenia's second largest city and also in the earthquake zone (see here and here for depreciation rates). These allowances have the effect of reducing the effective tax rate on normal profits to zero in Gyumri, and generally to much less than 20 percent for the rest of the country.
Source: Taxes, Investment Incentives, and the Cost of Capital in Armenia
Tax rates, both statutory and effective, are quite low. Even if these low rates are not sufficient incentives, the current tax holiday strikes me as too expensive a tool for a small and impoverished country like Armenia. Consider the case of Armentel, the second largest taxpayer in Armenia (I am not picking on this firm -- it just turns out that it is the most transparent firm operating in Armenia with readily available financial statistics). In 2005, this firm earned pre-tax profits of Euro 49.9 million off gross revenues of Euro 119.1 million. It booked an income tax of Euro 4.9 million, or 10 (and not 20) percent of its taxable profits (see here). Surely this highly profitable firm is able to pay more.
Not only one would object to this tax break on grounds of equity and fiscal soundness, but also object to it on the grounds that it is not directly related to the marginal investment put in place. Consider the case of a firm with pre-tax profits of Euro 10 million. By investing slightly over one Euro million, this firm is able to slash its tax bill by 2 Euro million. The government has cut back in the past on this form of subsidy. Firms with investments put in place in 2002, for instance, were accorded 100 percent exemption in 2003-2004, and 50 percent for tax on 2005 and 2006 profits (see here).
The existing accelerated depreciation provisions act as investment tax credits (they are equivalent), and already provide for targeted investment incentives. Would Armenia be better off with the tax holidays extended?
Are there any statistics on the amount of revenue loss to the government? This has to be in the tens of USD millions. Also, do we know who benefits from this tax break? Is anyone writing on the subject?
Profits in Armenia are taxed at a flat tax rate of 20 percent, except for firms engaged in agriculture which are exempt. Generous depreciation allowances further reduce the effective tax rate that businesses face. Hotels, for instance, are depreciated over 10 years; 20 years for other buildings. Computers are expensed, and so are investments in structures in the earthquake zone, as well as all investments in Gyumri, Armenia's second largest city and also in the earthquake zone (see here and here for depreciation rates). These allowances have the effect of reducing the effective tax rate on normal profits to zero in Gyumri, and generally to much less than 20 percent for the rest of the country.
Source: Taxes, Investment Incentives, and the Cost of Capital in Armenia
Tax rates, both statutory and effective, are quite low. Even if these low rates are not sufficient incentives, the current tax holiday strikes me as too expensive a tool for a small and impoverished country like Armenia. Consider the case of Armentel, the second largest taxpayer in Armenia (I am not picking on this firm -- it just turns out that it is the most transparent firm operating in Armenia with readily available financial statistics). In 2005, this firm earned pre-tax profits of Euro 49.9 million off gross revenues of Euro 119.1 million. It booked an income tax of Euro 4.9 million, or 10 (and not 20) percent of its taxable profits (see here). Surely this highly profitable firm is able to pay more.
Not only one would object to this tax break on grounds of equity and fiscal soundness, but also object to it on the grounds that it is not directly related to the marginal investment put in place. Consider the case of a firm with pre-tax profits of Euro 10 million. By investing slightly over one Euro million, this firm is able to slash its tax bill by 2 Euro million. The government has cut back in the past on this form of subsidy. Firms with investments put in place in 2002, for instance, were accorded 100 percent exemption in 2003-2004, and 50 percent for tax on 2005 and 2006 profits (see here).
The existing accelerated depreciation provisions act as investment tax credits (they are equivalent), and already provide for targeted investment incentives. Would Armenia be better off with the tax holidays extended?
Are there any statistics on the amount of revenue loss to the government? This has to be in the tens of USD millions. Also, do we know who benefits from this tax break? Is anyone writing on the subject?
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