Baku, February 19, 1905

Entrepreneurs are often valued for their creativity and contribution to economic growth and prosperity. But at times, and in some countries, minority entrepreneurs pay a very high price for their success. Examples of this include the attacks on Chinese owned shops and businesses in Indonesia , the fire bombings of fishing boats and homes of Vietnamese refugees in Texas, and the treatment of Jews throughout the middle ages.

The contribution of Armenians to the economic development of Baku well over a century ago is another build-and-destroy chapter in history, albeit perhaps an extreme example, where economic success is met with a massive violent reaction. As told by Luigi Villari, an Italian historian and diplomat, who travelled throughout the Caucasus region in 1905 (Fire and Sword in the Caucasus, London, T. F. Unwin, 1906), "... To the Armenians above all is the development of Baku due, for they were the first to work the oil-fields on a large scale and on modern lines; they perform a large part of the skilled labour, and among them most of the managers, engineers, as well as many capitalists, are to be found." (page 187).

The Armenians began to arrive in Baku in the late 18th century as their ancestral lands were being divided between the Persian and Ottoman Empires. Their numbers increased with the rush to develop the oil industry after the control of Baku changed hands from Persia to Tsarist Russia. The first refinery was founded by Melikoff (Melikian) in 1863. Notable Armenian firms included Mantasheff, the Caspian Co., the Moscow and Caucasian Co., and Aramazd who competed head on with the Nobel Brothers and the Rothschild's, as well as Russian, British, and Dutch firms. (page 185-6)

By 1905 Armenians accounted for about a third of the the oil industry. They also accounted for 25,000 of the population; there were 74,000 Russians, 56,000 Tartars (this is what today's Azerbaijanis were called then), 18,000 Persians, plus about 20,000 other nationalities. (page 186) Many of the buildings they commissioned are present in today's Baku, with the church on the fashionable Fountain Square being the most visible.

February 19, 1905, was the date that much of the tremendous wealth and infrastructure that the Armenian community had contributed to Baku came under severe attack by the Tartars (Azerbaijanis). The oil facilities were set ablaze along with homes in the Armenian quarter, as well as a number of the wealthiest Armenians were killed (e.g., Adamoff, Lalaieff -- page 195).

With impunity, the Tartars committed other pogroms in Nakhichevan, Shusha (Shushi), Elizavetpol (Ganja), among others. How were the Tartars able to commit these pogroms and not risk the intervention of the Russian military or incur the wrath of the Cossacks?

Tsarist Russia's policy towards Armenians may explain quite a bit. In the 1880's the Russians suppressed all 500 Armenian schools in the Caucasus. (page 152-3). In an another example, in 1894, Russia protected Turkey from western interference during the Hamidian massacres where over 100,000 Armenians were killed. It feared an autonomous Armenia in Turkey would lead to similar outcome in Russian or Eastern Armenia (page 154). Indeed, and according to Villari (page 154) Prince Lobanoff is reported to have said, "Nous voulons l’Arménie sans les Arméniens," i.e. Russia desires Armenia without the Armenians.

The Russian government weeded out Armenians from public service (page 155). In addition, in 1903, all Armenian church property was confiscated, including Etchmiadzin the seat of the Holy See -- the Armenian Pope (page 156). Prince Golytzin is reported to have said "In a short time there will be no Armenians left in the Caucasus, save a few specimens for the museum." (page (157) It should come as no surprise that the Governor of Baku, Georgian Prince Nakashidze, was seen "openly encouraging the Tartars" (page 195). Indeed, Russia favored the Tartars (Azerbaijanis) who represented the only element that could be relied upon in the Caucasus (pages 170 and 158).

In Villari's words “... In the Caucasus it is popularly said that it takes ten Jews to cheat an Armenian, just as in England it is said that it takes many Jews to cheat a Scotsman.” (page 163) Other authors have used the less loaded term "outwit." I suspect these racial overtones have set deep roots in the Caucasus and the region!

Villari's book is an excellent source on the economic contribution of Armenians to Baku and Tiflis (Tbilisi). It contains beautiful pictures of Georgia, the destruction in Baku, and very sad and disturbing pictures taken in Nakhichevan.


Armenian church in Baku -- picture (L) taken in 1988. More recent picture (R) showing crosses above front door and on top of steeple missing.

Why So Little Economics Research?

Browsing through Econlit in EBSCO Host databases, I could not find a single article written by an author affiliated with an Armenian Institution and published in the top 159 economics journals ranked in a study funded by the European Economic Association.

How do we explain this (other than the pains of transition)? How much of this can be explained by the lack of training, adequate tools (software and hardware), and access to data and research materials? Are there any institutional impediments to doing research? And most importantly, how do we reverse it. It will be good to hear from those of you in the field and face similar experiences.

This is not a trivial matter. Publications are critical in ranking institutions, and by proxy the quality of education. These send critical signals to potential employers and grants makers. In addition, research and publications play an important role in improving the quality of debate and discourse on public policy matters. These potentially have a civilizing effect that is sorely missed in the society.

Of course there are signs of life. For example, I was able to identify 9 papers published in recent years in journals that are unranked or weakly related to economics.

Four were written by authors affiliated with the central bank (3) and UNDP (1) and published in a special issue:

1. Impact of Regulated Price Adjustments on Price Variability in a Very Low Inflation Transition Economy: Case of Armenia, European Journal of Comparative Economics, Spring 2005, v. 2, iss. 1, pp. 17-39.
2. The Measurement of Co-circulation of Currencies and Dollarization in the Republic of Armenia, European Journal of Comparative Economics, Spring 2005, v. 2, iss. 1, pp. 41-65.
3. The Evolution of Competition in Banking in a Transition Economy: An Application of the Panzar-Rosse Model to Armenia, European Journal of Comparative Economics, Spring 2005, v. 2, iss. 1, pp. 67-82.
4. Core Inflation in a Small Transition Country: Choice of Optimal Measures, European Journal of Comparative Economics, Spring 2005, v. 2, iss. 1, pp. 83-110

Three were written by authors affiliated with the American University (2 non-Armenian):

1. Completing Post-earthquake Replacement Housing in Rural Armenia: Did It Induce Further Investment? Housing Studies, January 2006, v. 21, iss. 1, pp. 97-112.
2. Voucher-Financed Privatization: Lessons from the Armenian Experience, Global Business and Economics Review, December 2004, v. 6, iss. 2, pp. 280-302.
3. Viticulture, Wine Production, and Agriculture in Armenia: Economic Sectors in Transition, Journal of Applied Business Research, Fall 2002, v. 18, iss. 4, pp. 13-23.

And one was written by authors from the State Engineering University:

1. A Dynamical Model of Water Recycling in a Mine-Processing Enterprise, Central European Journal of Operations Research, February 2006, v. 14, iss. 1, pp. 45-57.

When I further searched by "Geographic Descriptors" rather than "Author Affiliation," I located two more papers written by authors affiliated with the Russian-Armenian (Slavonic) University:

1. Tax Reforms as Capital Market Development Factor, Transition Studies Review, 2006, v. 13, iss. 1, pp. 131-41.
2. Rating System as a Banking Performance Regulator in the Conditions of Transition Economy, Transition Studies Review, 2005, v. 12, iss. 2, pp. 222-30.

Some progress, but much more is needed. Once again, it will be good to hear the views of others on this important subject.

Preferences for a family size

During the Soviet era, a typical Armenian family had two-three children. One-child families were rare. The current fertility rates (the average number of children born to a woman over her lifetime) are down to 1.3 in 2005 (down from 2.8 in late 1980s). What are the reasons for such abruptly declining fertility rates?

Changes in preferences for a family size might have been motivated by several reasons. First of all, the socio-economic conditions in the country induced families to cut back on the size. Second, the Armenian women, especially in urban areas, became more independent and career-oriented, thus private incentives have undergone major changes. Third, the government does not exhibit pro-natalist sentiments. The child allowance program in Armenia is minuscule: only 0.35 percent of the state budget was spent on child allowance program in 2005. The program itself envisions a lump-sum allowance of 35,000 AMD at childbirth (raised from 5,900 AMD in 2003) and a monthly allowance of 3,000 AMD for children of age two and younger (if the mother is employed, the family gets only 50% of the monthly allowance).

From the 2003 Household Survey, one can identify 86 households (out of 1396 surveyed households having a female married member between ages 18 and 35) who welcomed a newborn to their household in 2003. Unfortunately, none of the households reported to receive a lump-sum child allowance. Could it be that the survey questions were poorly designed and didn’t make it clear that child allowance is one of the income categories the household receives? Or in fact the households didn’t claim their right to receive the allowance in time, therefore losing the privilege? One way or another, after examining total household income per month it becomes clear that the child allowance of even as little as 35,000 AMD could have made a big difference in the lives of many households. The household income varies from 5,000 AMD to 965,000 AMD per month with a mean of 90,315 AMD and a standard deviation of 124,541 AMD. As seen from the graph below, the distribution of household income per month is highly right-skewed (the histogram excludes two outliers with 591,000 and 965,000 AMD monthly income, respectively).

One thing I wish for is better designed surveys that will make it easy to evaluate the link between the social policies and fertility rates in the country.

Banks and Armenia's Economy

Over the past couple of years, the banking sector in Armenia witnessed a rapid transformation and a string of mergers and acquisitions that may lay the ground for further expansion in Armenia's economy. With western ownership of HSBC, Cascade, Converse, and ACBA Credit Agricole Bank, and Russian (Vneshtorgbank) ownership of VTB-Armenia Bank, the landscape has been radically altered.

The maturity and depth of the financial sector is often what separate the wealthy developed economies from the poor developing countries. It is these institutions that regulate the saving/investment process and the relations between lenders (or savers) and borrowers. This financial intermediation is critical to the development of an economy; it is difficult to imagine what form savings may take place and how this can be tapped by businesses to finance their capital expenditures. It is also difficult to imagine how trade, international as well as domestic, is facilitated in the presence of a weak financial system.

Consider some of the many business services that banks may provide:

A. Credit Facilities for Capital Finance,
B. Bank Guarantees such as (1) Advance Payment Guarantees, (2) Tender Bonds, (3) Performance Bonds and others, and (4) Stand-by Letters of Credit,
C. Trade Services in the case of imports such as (1) Bills for Collection and (2) Post-Import Finance, or in case of exports such as (1) Documentary Credits, (2) Bills for Collection, and (3) Pre and Post Shipment Finance.

It is hard to imagine how trade and investments can take place in the absence of such services. However, it is equally difficult to imagine how the financial sector can grow and prosper in the absence of good governance, regulatory institutions, and most importantly trust. If we were to examine total bank deposits, Armenia would have the profile of a poor developing country when expressed relative to GDP. These deposits are about 10 percent of GDP; much smaller when we examine time deposits and other measures of intermediation relative to GDP. But this is much better than the 3 percent observed a decade ago, despite the rapid growth of its economy.


Indeed, the financial sector, and for a number of years, may have had a depressing effect on economic activity. Poor governance and weak institutions may have caused significant damage to the economy. Consider the following excerpt from the financial statement of Hellenic OTE, until recently the parent company of Armentel:

During 2001, an Armenian bank, Haycap Bank, with which ArmenTel had deposited US$4.8 millions, was placed under a conservatorship program. It is uncertain whether ArmenTel’s funds will be recovered. This amount has been fully provided for in our consolidated financial statements. Nevertheless, in order to recover its funds, ArmenTel has initiated a series of actions, including discussions with Haycap Bank’s creditors and legal measures intended to help secure ArmenTel’s position within the framework of Haycap Bank’s conservatorship program proceedings. In 2002, Haycap Bank initiated legal proceedings before Armenian courts against Armentel requesting compensation for losses and damages allegedly incurred as a result of the actions of Armentel. On February 18, 2005, the Armenian Economic Court ruled that Armentel should provide to Haycap compensation in the amount of US$ 5.2 million. On May 31, 2005, ArmenTel appealed against this decision before the Armenian Supreme Court.
Source: US Securities and Exchange Commission Form 20-F, pages 87-88

Not only Armentel may have lost $4.8 million in deposits, but it may have risked losing another $5.2 million in its zeal to recover its losses. Notwithstanding the black eye that Armenia gets for this, poor corporate governance impedes economic activity, and a weak judiciary is not very helpful. So it is gratifying to witness the recent arrival of "giants" at the scene who may contribute to the prosperity of Armenia, and challenge the system if need be. Their presence is bound to improve corporate governance, and deepen financial intermediation.

Armenia's banks today, in particular the foreign owned, are likely to be well governed and "strong." Equally important, they have introduced considerable innovations such as in business services, e-banking, credits cards, money transfers, among many others.

A recent paper provides a nice primer on the many obstacles that Armenia's financial system faces. It will be good to see empirical research in this area.

The Largest Taxpayers

For the past couple of years the State Tax Services agency has published a listing of the largest taxpayers in Armenia, along with the amount of taxes they had paid. In the most recent release on taxes paid in 2006 (in Armenian), the agency reports the total amount paid by the largest 1000 taxpayers and breaks it down by type. The latter include custom duties, direct taxes (profit and personal income), and VAT among others.

The agency should be applauded for making the tax system more transparent, as well as making such data available to analysts and researchers. Further expansion of the reported information may enhance its usefulness. Two suggestions:

1. Is the reported information on a gross or net basis. In other words, is the reported information net of any refunds? It would be good to clarify this. As an example, the German owned Zangezur Copper Molybdenum Combine firm is listed as the largest taxpayer with total payments of about 33 billion Drams (USD 79 million), including VAT payments of 12 billion Dram (VAT tax rate is 20 percent). But because the bulk of the copper and molybdenum output is most likely exported, and as such is exempt from the VAT, (unless I am mistaken) much of the reported VAT tax should be refunded resulting in a near zero liability. Thus, it appears that it is the gross value that is reported. I think the net liability is critical.

2. The reported direct taxes (column 8 of the list), though not clear, seem to reflect business and personal taxes. More specifically, it appears to combine taxes on business profits (including repatriated income of foreign firms) and those on employee wages withheld by the firm. If true, it is not an easy task to untangle these two pieces with publicly available data. For the income tax, one needs information on total wages and its size distribution before the tax rate schedule is applied. Also, the presence of tax holidays for foreign investors complicates matters and makes it difficult to gauge how much of the reported direct taxes are on profits.

Again, the reporting of the tax information represents a major milestone. But it would be good if the reported information were further expanded. The media and analysts also have a responsibility for accurate and objective analysis of the reported information. Many are correct in highlighting the low taxes paid by some local businesses. Others, and despite of the best of intentions, have drawn some outlandish inferences from the tax figures reported over time; it is difficult to draw inferences on the underlying profitability of each firm in the published list.

It would be good to see more research done on the various aspects of the tax system in Armenia. Do we know of any ongoing research?

[Feb 11 -- you may download an xls file of the taxpayer data from here; you need Armenian fonts and can be slow to download. This data as well as data for prior periods is available in pdf format from here.]