Armenia's industrial sector slows down ahead of EEU entry

By bne IntelliNews November 13, 2014

bne -

The growth rate of Armenian industrial output has slowed down steeply this year as lower commodity prices took a toll on the mining sector and the government-sponsored development of other export-oriented industrial sectors struggled to gain momentum a few months ahead of the launch of the Eurasian Economic Union.  
Industrial production grew at 1.7% year-on-year from January to September, according to figures from the national statistical service.  That marked a sharp slowdown from the solid growth rates the sector achieved in 2013 and 2012, when it increased at respectively 6.8% and 8.8% on the back of soaring mining exports. Falling copper prices (-10% in the year-to-date) and weak demand for ferromolybdenum (FeMo) -  the country's two largest mining products - hampered the country's mining sector in 2014, whose added value shrank 8.8% year-on-year in the first nine months of year. Manufacturing industry, which makes up 65% of the country's overall industrial output, grew by 5.6% in the period, whereas the output of  the power sector decreased by 3.3%. 
Overall, Armenia's economy expanded by 4.3% in the first nine months of the year, the national statistical service said, leading the government to revise downwards economic growth estimates for full-year 2014. "Transfers have dropped, so did investments," local news agency Arka quoted the country's deputy minister of finance Pavel Safaryan as saying on November 10. "The trend is negative. Sanctions [on Russia] affect our exports as well. There are some estimates, but they are not final. Instead of 5.2% planned, we will post 3% GDP growth only [compared to 3.5% in 2013]. Total negative impact is 2%," he said.
Despite the economic rebound the country has experienced over the last three years, Armenia has struggled to fully recover from the crisis that hit the country in 2009, when GDP plummeted 14.1%.  Total foreign investments did not go beyond $370mn in 2013, just a fraction of the $944mn achieved back in 2008, according to figures from the United Nations Conference on Trade and Development's (UNCTAD) 2014 World investment report.
The lack of solid foreign investment inflows has  hampered the development of Armenia's industry, in particular those export-oriented, high added value sectors the government is trying to support, says  Aghavni Hakobyan, associate professor of the Armenian State University of Economics.
In the aftermath of the 2009 crisis the government set up an industrial policy aimed at supporting 11 major export-oriented sectors to better diversify the economy and balance the country's import/export ratio. The government hoped to grow the ratio of goods exports  to GDP to 16% in 2015 and 19% in 2020 from 11% in 2010, while total export volumes, excluding mining products and diamonds, should increase to between $700mn and $900mn in 2016 and $1,300mn to $1,500mn in 2020 from $385 in 2010. The 11 selected sectors were processing engineering, bio-technologies, pharma, diamond processing and jewellery, clock-ware industries, textiles, wine-making, brandy-making, mineral water and juice bottling, and canneries. 
"Our objective is to create a 'post-industrial society'," the then Prime Minister Tigran Sargsyan said in 2012, emphasising the role the private sector was expected to play in the development of the new industrial strategy. 
Two years on, the strategy has produced mixed results. The mining sector was the major driver of industrial and exports growth in 2012 and 2013. Other targeted export-oriented sectors struggled to catch up though, and the overall deficit in goods trades increased  to $2.34bn in 2013 from $2.21bn in 2012 and $2.08bn in 2011, according to figures from the central bank. The deficit slightly increased (+2.6%) in the first half of 2014 too. 
As Armenia is about to join the upcoming Eurasian Economic Union, which will create a common market between Belarus, Russia, Kazakhstan and Armenia from January 1 2015, doubts remain over the opportunities that lie ahead for local exporters. 
"The structure of imports and exports of the Republic of Armenia testifies to the limited possibilities of expansion of foreign trade with the member countries of the Eurasian Union," Hakobyan told bne
The share of Armenia's exports to European countries was 39.2% and 33.4% in 2012 and 2013, respectively, while the share of exports to CIS countries was 23.7% and 20.4%. 
"This data indicates more than a low level of foreign trade relations between member states. The presented statistics incite doubts about the viability and benefits of the Republic of Armenia joining in this integration structure, especially given today's realities and the specificities remaking the world order," Hakobyan said, referring to the sanctions imposed on Russia and the broader clash between Western countries and Russia, the main promoter of the union. 
The government's industrial policy has also drawn criticism from leftwing parties. Only three major industrial firms  - Zangezur Copper and Molybdenum Combine, Grand Tobacco, and Yerevan Brandy - feature among the country's largest taxpayers and the share of industry in Armenia's GDP is expected to remain stable at 17% in 2015 compared to 68% in the 1980s during Soviet times, local press quotes leftwing politician and head of the Domestic Producers union Vazgen Safaryan as saying. 
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