Saturday, January 27, 2007

Investor Nationality and Rule of Law

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]


Observer said...

Very interesting observations... I'd be really interested to know how is the "rulo of law" going for the dimond and it businesses - our priority areas...

Frieda said...

Enjoy your writings.

Anonymous said...

I think it has nothing to do with rule of law, but Armenia's continued reliance on Russia and incapability to "refuse" the "big" "brother", which is very dangerous for the future of Armenia. It is understood that we have to please Russia as it ”guards” us against the Turkish threats, but one must think about the national security which is best guarded if diversified such that foreigners do not have ultimate control over nations strategic resources. In terms of French acquiring the brandy factory, for them it is a pure business, while Russia does not care about Armenian factories as their capacity is insignificant for their economy. It is purely mean of political pressure.

Keep posting nice topics. I enjoy them. Vahe