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UNREALISED OPPORTUNITIES
ARMENIA AND GEORGIA
ECONOMIC RELATIONS:
UNREALISED OPPORTUNITIES
Yerevan 2007
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ARMENIA AND GEORGIA ECONOMIC RELATIONS
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UNREALISED OPPORTUNITIES
AKNOWLEDGEMENT
T h i s St u d y h a s b e e n e l a b o r a t e d b y U N D P A r m e n i a t o s u p p o r t t h e
C r o s s - B o r d e r C o o p e r a t i o n P r o j e c t b e t w e e n S h i r a k a n d S a m ts k h e - J a v a k h e t i
Regions implemented jointly with the financial support of UNDP and the
Norwegian Government.
T h e St u d y h a s b e e n i m p l e m e n t e d u n d e r t h e s u p e r v i s i o n a n d c o o r d i n a t i o n o f
M r. A r m e n Ye g h i a z a r y a n a n d M r. Ti g r a n J r b a s h y a n , a n d w i t h a c t i v e
pa r t i c i pa t i o n o f M r. A s h o t I s k a n d a r y a n , M r. S a r g i s G r i g o r y a n , M r. A r ta s h e s
S h a b o y a n , M r. G r i g o r S a r g s y a n , M r. P a v e l H o v h a n n i s y a n , a n d M r. Ti g r a n
G r i g o r y a n . We w o u l d l i k e t o t h a n k o u r G e o r g i a n c o l l e a g u e M r. M e r a b K a k u l i a
f o r h i s c o n t r i b u t i o n i n t h e d e v e l o p m e n t o f t h e St u d y.
T h e St u d y c o v e r s t h e p e r i o d u p t o J u l y 2 0 0 7 .
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TABLE OF CONTENT
List of Abbreviations ...............................................................................................................5
Introduction .............................................................................................................................6
Executive Summary................................................................................................................7
Background ...........................................................................................................................11
Part 1 Analysis of Existing Legal Base.................................................................................16
1. Trade Regulations.............................................................................................................16
Free Trade Agreement between Georgia and Armenia / CIS’s Free Trade Zone................16
World Trade Organisation.....................................................................................................21
Generelized System of Preferencies ....................................................................................21
2. Investment Promotion and Protection ..............................................................................22
Investment laws and institutional framework ........................................................................22
Investment treaties ...............................................................................................................25
Part 2 Trade and Investment Flows between Armenia and Georgia....................................28
Trade in services...................................................................................................................33
Foreign direct investments....................................................................................................37
Part 3 Quantitative Analysis and Econometric Estimations..................................................40
Model setup ..........................................................................................................................40
Data mining...........................................................................................................................43
Estimation and Results .........................................................................................................45
Part 4 Analysis of the current status of economic relations between Armenian and
Georgian bordering regions ..................................................................................................49
Socio-Demographic trends ...................................................................................................49
Population and area of bordering regions ............................................................................49
Poverty..................................................................................................................................51
Labour market.......................................................................................................................52
Economic development status of the regions.......................................................................56
Industry .................................................................................................................................56
Agriculture.............................................................................................................................58
Construction..........................................................................................................................60
Transport and communication ..............................................................................................61
Trade turnover ......................................................................................................................62
Business Demography..........................................................................................................62
Part 5 Assessment of possible impact from the conclusion of Free Trade Agreements
with the EU ...........................................................................................................................65
Current regime and existing trade patterns ..........................................................................65
Application of the Algerian Free Trade Agreement model....................................................66
Accession of Bulgaria and Romania ....................................................................................69
FTA impact on EU-Armenia trade flows ...............................................................................69
Growth of Georgian exports of transport services................................................................71
Alternative option: GSP plus.................................................................................................71
Rules of origin and cumulation .............................................................................................71
Conclusions and Recommendations ....................................................................................73
Annex 1.................................................................................................................................78
Annex 2.................................................................................................................................80
Annex 3.................................................................................................................................81
Annex 4.................................................................................................................................82
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LIST OF ABBREVIATIONS
ACP - African, Caribbean, and Pacific
AEPLAC – Armenian-European Policy and Legal Advice Centre
AMD – Armenian Dram
BITs - bilateral investment treaties
bln. – billion
BOP – Balance of Payments
CIS – Commonwealth of Independent States
CPI – Consumer Price Index
EBRD – European Bank for Reconstruction and Development
EC – The European Commission
ENP – European Neighbourhood Programme
EU – The European Union
FDI – Foreign Direct Investments
FTA – Free Trade Agreement
GATS - General Agreement on Trade in Services
GATT - General Agreement on Tariffs and Trade
GDP – Gross Domestic Product
GEL – Georgian Lari
GNFEA - Goods Nomenclature of Foreign Economic Activity
GNIA – Georgian National Investment Agency
GSP - Generalized System of Preferences
GUUAM - Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova free trade agreement
ICSID - International Centre for the Settlement of Investment Disputes
IFS - International Financial Statistics
Km. – Kilometre
MFN – Most Favoured Nations
MITs - Multilateral Investment Treaties
NGO – Non-Governmental Organisation
NSS RA – National Statistical Service of the Republic of Armenia
OECD – Organisation Economic Cooperation and Development
PRSP – Poverty Reduction Strategy Paper
RF – Russian Federation
SACU - Southern African Customs Union
Sq. Km. – Squire Kilometre
TACIS – Technical Assistance to Commonwealth Independent States
TC - transportation costs
TDCA – Trade Development and Cooperation Agreement
TRACECA - Transport Corridor Europe-Caucasus-Asia
UNCTAD - United Nations Conference on Trade and Development
UNCITRAL - The United Nations Commission on International Trade Law
USA – United States of America
US – United States
USSR – Union of Soviet Socialist Republics
USD – United States Dollar
VAT – Value Added Tax
WITS - World Integrated Trade Solution
WTO – World Trade Organisation
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INTRODUCTION
Due to historical, geographical and national factors, the economies of Armenia and Georgia
have numerous similarities. The relations between these two countries became even deeper when
they formed part of the USSR. After the collapse of the Soviet Union, in the beginning of 1990s,
some of these economic relations were weakened due to the economic crises in Armenia and
Georgia. In the 1990s, the economic blockade of Armenia made Georgia the most important economic partner of Armenia. Since Georgia became the only transit corridor for Armenian exporters,
the economic relations between Georgia and Armenia were intensified.
During the second half of 1990s, a number of agreements were concluded between Armenia
and Georgia in state and intergovernmental levels (e.g. free trade agreement, agreements in the
fields of taxation, customs, and other economic activities).
The economic growth in both countries will obviously create new opportunities for economic
cooperation. In this context, regional cooperation becomes more and more important for growing
economies.
The overall objective of this Study is to foster the economic cooperation between Georgia and
Armenia through improvement of the relations between these two countries in fields of trade, investment, and transportation. Moreover, the specific objective of the Study is to contribute to the
improvement of the socio-economic conditions of the population in Shirak (Armenia) and SamtskheJavakheti (Georgia) regions by activating and fostering cross-border cooperation.
The Study also has the mandate of contributing to the initiation of a regional dialogue between
Armenian and Georgian authorities and the civil society aimed at the intensification of regional relations. It can be foreseen that the conclusions and recommendations set forth in this Study will contribute to this process and will promote also discussions between international organizations active
in the region, intense dialogue between the Armenian and Georgian authorities and decision makers on possible strengthening of economic relations and on regional development issues, as well
as foster business relations between these two countries.
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EXECUTIVE SUMMARY
Development of trade relations with other countries and especially with neighbouring countries
is one of the key elements of economic development of a country, as well as for overall regional
development.
To support this process in Armenia and Georgia, this Study highlights the importance for development of a strategic partnership between these two countries, reviews and analyses current trade
and investment relations, as well as provides possible scenarios for further development of such a
partnership.
This Study consists of five thematic parts and a part dedicated to conclusions and recommendations.
Part I - Analysis of Existing Legal Base - highlights specific issues related to the legal bases of
Armenia-Georgia trade and investment relations. This part provides a comparative analysis of the
Armenian and Georgian legislation regulating bilateral and multilateral trade relations, trade
regimes, and investment issues. It highlights also the existing legislative gaps and describes legal
issues hindering the development of trade and investments flows between two countries.
The Free Trade Agreement concluded between Armenia and Georgia entered into force in
1995. It aims to promote the establishment of stronger trade and commercial ties between participating countries and to promote free trade in goods by eliminating tariffs, customs duties and quantitative restrictions. It is consistent with the WTO rules i.e. with the definition set forth in Article
XXIV:8 (b) of the General Agreement on Tariffs and Trade of 1994 (GATT). The Agreement eliminates all customs duties on goods originating in the territory of the countries that meet the requirements for “originating goods”.
This part elaborates on a bilateral investment agreement, which was signed between Armenia
and Georgia on 4 June 1996 and entered into force on 18 January 1999. This agreement establishes the terms and conditions for private investments by nationals and companies of one country in
the other country. The Agreement envisages international minimum standards of treatment guaranteed to foreign investors such as fair and equitable treatment, full protection and security, MSN
(Most Favoured Nation) treatment, national treatment, etc.
This part examines also the investment acts of Georgia and Armenia, which are quite liberal
compared with the relevant legislations of some other CIS countries. They provide for guarantees
to foreign investors in regard to their rights in a transparent and single document.
Part II - Trade and Investment Flows between Armenia and Georgia - analyses trade flows
between Armenia and Georgia, including trade in goods and services, trade concentration, trade
structure and volumes, as well as other related issues, such as transportation costs, tourism, etc.
Moreover, this part provides also an analysis of investment flows between Armenia and Georgia,
main areas of FDI, its structure and volumes. As regards trade in goods, Armenia plays an active
role in terms of merchandise trade. The main Armenian exports to Georgia include cement and coffee. The Armenian imports from Georgia mainly consist of sugar, fertilizers, citrus fruits, and
processed wood. The concentration index shows that the trade between these two countries is
being diversified year by year. As to the trade in services, it can be stated that given the favourable
geographical location of Georgia, it has significant revenues from its export of services. In particular, Georgia highly benefits from its export to Armenia of transport and tourism services, and has
rather high revenues from transit of gas. On the other hand, the high volume of service imports from
Georgia to Armenia is due to the fact that Armenia is a landlocked country.
The two countries are weakly interlinked with each other in terms of foreign direct investment,
although there is an upward trend in the flows from Armenia to Georgia. This means that Armenia
again plays the role of an active partner. The high growth of investment flows to Georgia during the
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recent years can be explained by the construction of the Baku-Tibilisi-Ceyhan pipeline. The growth
of FDI inflows to the Georgian economy shows that the investment climate has improved during the
preceding years.
Part III - Quantitative Analysis and Economic Estimations - provides an econometric analysis of
existing trade flows between Armenian and Georgia, as well as envisages different scenarios with
different terms and conditions of trade relations. One of the main hypotheses is that although the
growth of imports of goods from Georgia lags behind the growth of exports from Armenia to
Georgia, the difference is covered by growth of imports of services from Georgia. Should the living
standards in Georgia be improved, the volume of imports from Armenia will decrease, since the
Armenian imports to Georgia will be substituted by similar products – with higher quality - imported
from the EU and other countries.
It is estimated that a one-percent increase in unit prices of exportable goods will have a rather
insignificant impact on the exports: it will decrease only by approximately 0.09%. In other words,
price elasticity of Armenian exports to Georgia is very inelastic due to the high level of concentration of Armenian exports to Georgia (Armenia mainly exports to Georgia five types of goods, of
which cement is the major one).
It is projected also that a one-percent change in the consumer prices (inflation) in Georgia will
bring to a 1.42% increase in exports of goods from Armenia. This is explained by the differences in
the monetary policies pursued in Armenia and Georgia.
Moreover, estimation results show that ceteris paribus one-percent increase in Georgian household expenditures in US$ terms will result in a decrease in imported goods from Armenia by 1.1%.
A negative effect of consumption on demand for imports is explained by the fact that the richer the
people, the more they are inclined to substitute their consumption with more expensive goods.
Besides, both Azerbaijan and Turkey have become serious competitors to the Armenian exports. In
addition, during the past 4-5 years, the Armenian economy has been growing at a fast pace, which
has led to the redirection of the demand for the same exportable goods towards domestic consumption. For instance, the boom of construction in Armenia has created an extra demand for cement;
however cement producing factories have reached their full capacity utilisation and are, therefore,
not able to supply the entire domestic market. To this end, it has become necessary to cut down the
volume of cement export to Georgia.
Part IV - Analysis of the Current Status of Economic Relations between Armenian and Georgian
Bordering Regions - describes the socio-economic situation of Armenian and Georgian bordering
regions, including issues related with the population, consumption, labour force, main economic
activities (agriculture, industry, trade, etc.). Moreover, this part provides information on comparative
advantages of the development of economic relations between bordering regions of Armenia and
Georgia.
This part of the Study highlights that comparatively higher wages in Kvemo Kartli region can be
attributed to the existence of a number of industrial giants in the main city (Rustavi) like Azot chemical combine and the metallurgical plant. In addition, there are also two mining companies engaged
in the extraction of copper and gold, as well as a thermal power plant (Mtkvari Energetika). Kvemo
Kartli accounts for more than ¼th of overall industrial output in Georgia.
The analysis shows that the poverty level in Armenia is higher in urban areas than in rural ones,
while in Georgia it is vice versa. Taking into account the structure of the population by urban and
rural settlements, it is obvious that bordering regions of Armenia and Georgia have higher poverty
level in comparison with their countries average indicators.
While the comparison of average wages by regions shows the advantage of Kvemo Kartli
region, the poverty level indicator is the worst in this region if compared with the other observed
regions. This speaks about significant disparities within Kvemo Kartli, especially if we compare the
income levels of urban and rural populations.
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The comparison of per capita industrial output shows the advantage of Kvemo Kartli region
where in 2005 the indicator of per capita industrial output was twice higher than in Lori and about
eight times higher than in Shirak and Tavush regions. This is due to the existence of industrial giants
in Rustavi only.
The observation of agricultural data in the bordering regions and the definition of some comparative advantages of separate regions show that the cooperation between Georgian and Armenian
bordering regions can be as follows: cereals and animal husbandry products from the Georgian side
and potato and vegetables (as well as fruits from Tavush) from the Armenian side.
As a main finding of this part, it can be stated that developing services sector (tourism, trade,
transportation and other) from the Georgian side can be one of the main fields of cooperation with
the Armenian regions. The labour from mainly the urban areas of Shirak and Lori can be quite useful in infrastructural construction activities. In addition to this, the Armenian regions, especially
Shirak, have a potential of developing their manufacturing activities given the large share of urban
population.
The comparison of the data on industrial output, construction and services volume as well as
the data on wages shows that Samtskhe-Javakheti is the less developed region among the five
observed regions. This could be the decisive reason for/ the factor underlying the growth of construction in the last years and the large development projects which shall take place in this region
(for example the funds from the Millennium Challenge Corporation as well as EU Tacis projects
funds).
Part IV - Assessment of Possible Impact from the Conclusion of Free Trade Agreements with
the EU - provides basic information on the EU FTAs, and describes the possible impacts of concluding an FTA with the EU on Armenia-Georgia trade relations, trade flows and structure.
Calculations made within the framework of this Part show that of the conclusion of an EUArmenia FTA will lead to a 0.55% reduction of EU-27’s trade-weighted average tariff rate, while
Armenia’s trade-weighted average tariff rate will drop by 3.11%. Moreover, this will contribute to
1.55% and 4.24% increase of Armenian exports and imports to, and from the EU-27, respectively.
In case Armenia obtains the ‘GSP plus’ regime, the Armenian exports to the EU will increase by
1.6%, and the Georgian exports of transport services to Armenia will increase by 0.06%.
The last part of the Study provides conclusions and recommendation drown on the basis of the
analyses and findings of the above mentioned five parts. The Study includes short- and long term
recommendations, which, by their nature, are possible solutions for intensification of trade relation
between Armenia and Georgia, as well as the trade relations of Armenia and Georgia with other
countries. The core message of these recommendations is the creation of a single economic area
between Armenia and Georgia, which may potentially foster trade relations between the two countries, as well as with third countries, and boost the economic development of the whole region. The
main conclusions can be formulated as follows:
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Economic relations between Armenia and Georgia are concentrated in the fields of trade in
goods and services, investments and transit. The Study shows that within the framework of
these relations, the two countries have rather different roles in terms of the nature thereof:
Armenia is the more active economic partner considering that trade in goods is one of the main
areas of Armenia’s interaction with Georgia, while Georgia can be considered as a passive partner since Georgia is mainly providing transit services to Armenia.
However, diversification of economic relations between Armenia and Georgia is observed.
Although a decline of concentration in trade in goods is noted, both exports remain relatively
concentrated (Armenia - trade in goods; Georgia - trade in goods, services, including transit).
The diversification is more intensive in Armenia than in Georgia, which is shown by the analyses of elasticity and monetary policy of both countries.
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Rather passive economic development in the bordering regions of Armenia and Georgia is
explained by the low development level of bordering regions. The intensification of economic
relations, therefore, is rather low since there is no developed region able to promote cross-border economic development and intensification of trade and investment relations in the bordering parts of the two countries.
The provisions of the bilateral investment agreement (including the double taxation treaty) are
not utilized effectively and there is a need to ratify the other outstanding bilateral investment
treaties and negotiate new ones.
It is projected that the conclusion of separate FTAs with the EU (i.e. EU-Armenia and EUGeorgia FTAs) will intensify the economic relations between Armenia and the EU as well as
Georgia and the EU, but it will have a very low impact on the development of Armenia-Georgia
economic relations. Conclusion of an FTA between the EU and Armenia-Georgia will promote
joint production of Armenian and Georgian exports to the EU.
Summarizing the above mentioned conclusions, it can be stated that the creation of a single
economic area between the two countries will: 1) reduce the possibility of applying trade restrictions
on Armenia and Georgia by other more developed countries, 2) create wider possibilities for development of trade relations with the EU-27, 3) reduce trade related transaction costs (certification,
accreditation, conformity assessment, etc.), 4)l promote internal investments in the area, 5) attract
foreign investments, and 6) significantly contribute to the overall development of Georgia and
Armenia.
The core recommendations of the Study are mainly related with the conclusion of a new free
trade agreement between Armenia and Georgia, which will provide for the necessary steps and
appropriate actions to be implemented in view of creating a common market without frontiers; in all
these stages of economic integration between the countries different aspects of economic policy
should be harmonised with the EU requirements and approaches.
Moreover, it is recommended for Armenia to sign a Free Trade Agreement with the EU, which
will stipulate provisions that allow using the trade preferences provided by the EU with unlimited use
by Armenia of inputs originating in Georgia (cumulation of origin principle). This provision should be
also included in Georgia-EU FTA. Following the completion of the Caucasian Common Market,
these two agreements should be replaced with a single FTA.
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BACKGROUND
Armenia and Georgia are two of the countries in the South Caucasus region which gained their
independence in the early 1990s after the collapse of the USSR. During the years of independence,
due to geo-political situations and related economic issues in the region, the two countries have
past different development trends.
Georgia is situated to the north of Armenia and borders Russia, Azerbaijan and Turkey.
Georgia also has access to other countries through the sea. Armenia is a landlocked country, bordering Iran, Turkey, and Azerbaijan. Due to the Nagorno-Karabakh conflict and some other issues,
the Armenian border with Azerbaijan and Turkey is blocked.
During these years, while Armenia had disputes with Azerbaijan on Nagorno-Karabakh conflict,
Georgia has had several problems inside the country. The conflict with Abkhazia and Ossetia as
well as a number of political issues led to the outbreak of a civil war in the country, which had a negative influence on the development of the country. The economic situation in Georgia became better after the Rose Revolution of 2003. The new government of Georgia promised to reorient the policy toward privatization, free markets, reduced regulation, and control of corruption. The government reduced the number of taxes from 21 to 7 and introduced a flat income tax of 12%. It significantly reduced the number of licenses a business requires and introduced a one-window system
that allows an entrepreneur to open a business in a relatively short period of time. Strict deadlines
for agency action on permits were introduced, and consent is assumed if the agency fails to act
within the time limit. The government intends to completely eliminate import duties by 2008, which
should reduce costs and stimulate business.
Main socio-economic trends in Armenia and Georgia
The countries have passed different ways of development during the transition period. Both
countries had economic recession processes in early 1990s. The GDP of Armenia in 1993 was only
about 44% of the same indicator for 1989. From 1994, the GDP of Armenia followed an upward
trend. In Georgia, the GDP in 1994 fell to 25% of the same indicator for 1989 and started to increase
from 1995. The development rates of the economies of Armenia and Georgia were also different.
Due to comparatively high growth rates in Armenia, especially starting from 2001 (when a doubledigit growth was recorded), the marker of GDP in 2006 surpassed the level of 1989 by 29%, while
Georgia’s GDP marker in 2006 comprised only 53% of its value in 19891.
GDP structure
The absolute value of Georgia’s GDP for 2006 is estimated to about 7.8 billion USD. The same
indicator for Armenia is less by about 18% and comprises 6.4 billion USD. However, if we compare
the per capita indicators of the GDP we see that Armenia has an advantage (1,983 USD in Armenia
and 1,774 USD in Georgia) by 11.8%.
The structure of GDP by production in Armenia and Georgia is presented in Chart 1. The main
difference which can be viewed in the Chart is that the GDP of Armenia is mostly based on the
industries that produce goods (industry, construction), while the basic branches of Georgian GDP
are services.
1 EBRD Transition Report Update 2007
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Chart 1. The structure of GDP (production side) in Armenia and Georgia, Y2006
Source: NSS RA, Statistics Georgia
The structure of GDP by expenditure side is presented in Table 1. The final consumption expenditures in Georgia as compared to the corresponding GDP are higher by about 11.2 percentage
points, whereas the gross capital formation (or investment) has a larger share in Armenia’s GDP,
which can be one of the reasons of higher growth rates of GDP recorded in recent years and projected for the near future. Net export of goods and services in both countries is negative, but the
difference between exports and imports in Georgia is much larger.
Table 1. The structure of GDP by expenditure side, Armenia and Georgia, Y2006, % to GDP
Source: NSS Armenia and Statistics Georgia
Poverty
One of the most important challenges in both countries is the poverty level of population. Both
countries introduced Poverty Reduction Strategy Papers, indicating the ways of reducing poverty in
the countries. In 2005, the overall poverty incidence in Armenia was estimated to 29.8%, while the
indicator of poverty incidence (by their poverty line) for Georgia was 39.4%. The indicators of poverty gap and severity of poverty also show that the situation in Georgia is a bit worse (Table 2).
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Table 2. Poverty indicators for Armenia and Georgia, 2005
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Source: Social Snapshot, NSS Armenia and PRSP update for Georgia
It should be noted here that the poverty lines are different in different countries and the figures
should not be directly compared. As show harmonized data of poverty for 20032, poverty indicators
were very close to each other: 50% of population in Armenia and 52% in Georgia were below the
level of 2.15 dollars by PPP per day.
Another important area is the growing regional disparities in both countries. While some regions
are growing at high rates, other regions have numerous problems related with increasing poverty
and unemployment issues. In Armenia, disparities are observed between Yerevan and all other
regions. In Georgia, some of the regions benefit from the advantage of having a number of active
large industrial giants, while the regions that are mostly comprised of rural population have problems with unemployment and poverty.
The peculiarities of economic development of these two countries are mostly conditioned by the
geopolitical situation in the region as well as their location. For Armenia, Georgia has become the
only transit corridor for almost all economic relations that need transportation, due to the conflict
between Armenia and Azerbaijan, a closed border between Armenia and Turkey, and also taking
into account that Georgia has a sea port. Therefore, Georgia is located in the centre where two axes
cross. One is the way from Turkey to Azerbaijan, and the second is Armenia-Russia. As it can be
noticed from the structure of GDP, transportation and communication services as well as other related services have a significant role for the GDP of Georgia. At the same time, Armenia has only two
ways for transportation from and to the country. Taking into account the existence of sea ports in
Georgia and the fact that Georgia is the only corridor to reach Russia, which is one of the main trade
partners of Armenia, Georgia has a very important role for Armenia. Another neighbour which has
an open border with Armenia is Iran which has a very protected internal market for imported goods.
It should be noted that there are two main ‘transit corridors’ in the region (including at least one
of the observing countries3): 1) Iran-Armenia-Georgia-Russia; 2) Turkey-Georgia-Azerbaijan. Two
corridors are functioning, but it is obvious that the first corridor is more passive than the second one.
Being in the centre of these corridors, Georgia is more passive in regard to the development of
trade relations with Armenia and, in its turn, Armenia does not consider Georgia as a potential candidate for development of more intensive trade partnership.
Economic policies
The economic policies pursued by Armenia and Georgia differ form each other in the spheres
of public finance and monetary policy. The share of government expenditure is rapidly growing in
Georgia, while the same picture is not observed in Armenia.4 The process of privatization is ongoing in Georgia, whereas in Armenia it is almost completed.
2 Growth, Poverty and Inequality:Eastern Europe and the Former Soviet Union, WB 2005
3 In fact there is also Iran-Azerbaijan-Russia corridor, and currently Azerbaijan and Iran are heavily investing in it.
4 The growth of public expenditure in Georgia is mostly a result of more effective administration and the reduction of non-
observed economy in a country, which took place in recent years. It reflects lower level of tax avoidance in Georgia due
to recent anti-corruption measures that is discussed below. Armenia’s tax rates are not lower than Georgia, so this can
not be put in regular discourse about the size of Government. This means that there is difference in the level of corruption and “government capture”, not in public finance
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The state budget deficit was estimated at 1.5% of GDP in 2006 on a cash basis in Armenia. The
country is increasing the expenditures on social and infrastructure programmes in order to meet the
poverty reduction targets. Despite significant nominal increases in tax revenues over the past two
years, the high incidence of tax evasion and exemptions are reflected in the persistently low ratio
of tax revenue to GDP. For example, the construction sector, the largest in the economy, remains
mostly exempt from taxation. In 2006, the Central Bank of Armenia shifted its main policy objective
from monetary targeting to inflation targeting. Annual average inflation for 2005 was only 0.6%, but
reached to 5.2% in 2006.
As for Georgia, improved tax collection and progress in tackling corruption, as well as growing
privatisation revenues, helped to raise budget revenues during 2006 and allowed the government
to increase their fiscal spending. Consolidated budget revenues increased by 34% during 2006 and
tax receipts rose by more than 43%. High oil prices, extra government spending and strong capital
inflows have meanwhile increased inflationary pressures. By the end of 2006, inflation reached
8.9%. To help lower inflation, the Central Bank allowed the national currency (lari) to appreciate in
nominal terms against the US dollar during 2006, reflecting foreign currency inflows. It also started
to issue certificates of deposits to reduce the money supply from September 2006. While the inflation figures are not much different in the countries, there is the difference in tolerance level of real
appreciation of national currencies for the countries. The fact that Armenia faced much bigger
inflows relative to the size of the economy in comparison of Georgia is also taking place.
External Trade
The share of external trade (goods and services) balance in the corresponding GDP for 2006
was -23.7% for Georgia and -14.4% for Armenia, which means that both countries have negative
balance in external trade. If we compare only the data on external trade in goods, it can be noted
that Armenia is exporting more goods (in value terms) than Georgia. Instead, the Georgian figures
of trade in services had an advantage compared to the Armenian ones.
In 2006, the share of export of goods in GDP for Armenia was 15.7%, while the corresponding
figure for Georgia was 12.7%. Exports in dollar terms in Armenia increased by 3.1% in 2006 and
continue to be dominated by precious stones and base metals (copper, molybdenum). Imports,
however, have increased by almost 22% over the same period, largely fuelled by increasing energy and consumer goods prices. The share of imports of goods in GDP for Armenia was 34.4%.
In 2006 the trade deficit in Georgia widened dramatically by about 80% in dollar terms compared
with 2005. While exports grew by about 20%, imports (mainly of investment goods related to pipeline
construction5) grew by about 43% during this period, and comprise 50.0% as compared to GDP.
Export growth was also negatively affected by a Russian trade embargo on Georgian wine and mineral water, which took effect in March 2006. Wine was Georgia’s second most important export in
2005, accounting for 9.2% of total exports. This decreased to 4.2% at the end of November 2006.
BOP and FDI
The trade deficit in Armenia continues to be offset by substantial flows of remittances. Strong
foreign currency inflows, particularly in the second half of 2006, have led to substantial nominal and
real appreciation of the dram against the US dollar and other major currencies. The capital account
recorded a modest increase in foreign direct investment in 2005, enough to cover the 4.2% current
account deficit.
Compared to Georgia, FDI data have been much lower in Armenia, especially in 2006 (Table
3). The growth of Georgian FDI inflows in 2006 is mainly related to the pipeline construction. As it
can be seen from Table 3, since 2003 FDI in Georgia has kept growing, following the positive
changes that took place in the economy. While in 2002 FDI per capita for Georgia and Armenia was
almost similar, in 2006 FDI per capita for Georgia is more than 4 times higher than the corresponding indicator for Armenia.
5 Transition Report Update 2007, EBRD 2007
UNREALISED OPPORTUNITIES
Table 3. FDI inflows in Armenia and Georgia, 2002-2006
15
External debt
The external debt indicator of Georgia has improved significantly, supported by debt relief
agreements with all bilateral creditors. The ratio of public external debt to GDP fell to 21.3% in 2006
from 27.1% in 2005 (it was 51.5% in 2002). The share of public external debt for Armenia in 2006
was 18.9% as compared to GDP (43.2% in 2002). Gross external debt stood at just over 2 billion
USD at the end of 2006, a modest increase year-on-year, most of which is concessional public debt.
Exchange rates and national currencies
The yearly average value of exchange rate in 2006 for 1USD was 416.04 AMD. The appreciation of the Armenian dram against the US dollar, which started in 2004, has continued. In 2006, the
Armenian dram appreciated by 9.1%, in 2005 – by 14.2%, and in 2004 by 7.8%. In 2006, the average cost of one US dollar was 1.7766 Georgian lari. Starting from 2003, appreciation of the
Georgian lari against the US dollar has also been observed (in 2006, GEL appreciated by 2.0%, in
2005 – 5.4%, in 2005 – 10.7%, and in 2004 by 2.2%).
Table 4. CPI for Armenia and Georgia, 2003-2006
The attitude of national currencies is related also with the price level in the country. Table 4
shows that the CPI in 2005-2006 was lower for Armenia, while the rate of appreciation of the national currency was higher than in Georgia.
16
ARMENIA AND GEORGIA ECONOMIC RELATIONS
PART 1.
ANALYSIS OF EXISTING LEGAL BASE
1. Trade Regulations
Free Trade Agreement between Georgia and Armenia / CIS’s Free Trade Zone
Armenia and Georgia have signed a number of bilateral, regional and international agreements
to eliminate trade barriers, facilitate the cross-border movement of goods and services, and
increase investment opportunities for their businesses. These trade agreements help to level the
international playing field and encourage the governments to adopt open and transparent rulemaking procedures as well as non-discriminatory laws and regulations. They also support the strengthening of business climates through elimination or reduction of tariffs, improvement of intellectual
property regulations, opening of government procurement opportunities, easing the investment
rules, and much more.
For instance, in 1995 these two countries signed a free trade agreement to promote trade and
commercial ties between participating countries, and opened up opportunities for their exporters
and investors to expand their business into key markets. They can speed up trade liberalisation by
delivering gains faster than through multilateral or regional processes. The agreement that is comprehensive in scope and coverage can complement and provide momentum to these countries’
wider multilateral trade objectives by making their best efforts to enforce effectively the agreement’s
provisions.
Therefore, the contracting parties to the Free Trade Agreement (the Agreement) are Georgia
and Armenia. The Agreement applies in respect of the territory to which the customs laws of
Georgia and Armenia are respectively applicable. It was signed 14 August 1995, in Stepanavan,
Armenia, and entered into force on 11 November 1998. The Agreement establishes a free trade
area in conformity with the definition set out in Article XXIV:8 (b) of the General Agreement on Tariffs
and Trade of 1994 (GATT). The free trade area established by this Agreement provides the framework for trade relations between Georgia and Armenia. In addition, the Agreement covers commodity and service.
Moreover, bearing in mind a clear understanding of all benefits of external trade liberalisation,
in the early 90’s Armenia, Georgia and other 10 former Soviet Union republics established the
Commonwealth of Independent States (CIS), the main feature of which became an agreement
establishing a free trade area. The parties to the Agreement on the Creation of a Free Trade Area
(the CIS Agreement) are the CIS countries. The territory of the Agreement covers customs territories of the contracting parties. It was done on 15 April 1994, in Moscow, Russia. It is aimed at implementing provisions of the Agreement on the Creation of Economic Union, dated 24 September
1993, Moscow, Russia, and to form the conditions for a free transference of goods and services. It
is to be emphasised that the contracting parties reserve the right to a self-dependent and independent determination of a regime of foreign economic relations with states which are not signatories to
this agreement.6
Duties and charges
Georgia and Armenia agreed not to impose customs duties, taxes and charges, which have an
equivalent effect on import and/or export of commodity originated from the customs area of one of
the countries and designed for delivery to the customs area of another party. It is to be mentioned
that they also do not impose internal taxes and charges directly or indirectly on goods, covered by
the Agreement, that exceed the rate of relevant taxes or charges imposed on analogous goods of
the domestic production or those produced in third countries. It is not allowed to introduce special
restrictions or demands towards export or import of goods, covered by the Agreement, that in sim6 It is to be noted that at the end of 2002 Georgia ratified also the GUUAM (Georgia, Ukraine, Uzbekistan, Azerbaijan,
and Moldova) free trade agreement. For official documents, visit to www.guuam.org.
UNREALISED OPPORTUNITIES
17
ilar cases are not applied to analogous goods of the domestic production or those produced in third
countries. In addition these countries are not allowed to use different rules towards warehousing,
unloading, storage, shipment of goods, originated from another country, as well as towards repayments and remittances, with the exception of rules that in similar cases are used towards domestic
goods or those originated from third countries.
The countries do not apply customs duties, taxes and levies which have equivalent effect and
quantitative restrictions to importation and/or exportation of goods originating in customs territory of
one of the contracting parties and intended for customs territory of other contracting parties. If necessary, exceptions to this trade regime shall be further formulated. Armenia and Georgia do not
directly or indirectly impose taxes and fiscal levies on goods originating in customs territory of other
contracting parties, in the amount exceeding their level for national goods.7
To simplify the customs clearance of goods imported to Georgia, on 25 July 2006 the
Parliament adopted a new Law on Customs Tariffs. New rates indicated in the law are effective from
September 2006, while most of the general collection rules entered into effect together with the new
Customs Code, in January 2007. Three general rates of tariffs are introduced: zero, 5% and 12%.
Alcohol beverages are taxed in accordance with the brand and the type of the products, in most of
the instances the rates are fixed, while in the other instances 5% and 12% rates apply. The goods
commonly used in constructions and other industry are taxed with the zero tariffs, while the agriculture goods fall under 5% and 12% rates. New customs rates are aimed at lowering the prices for
customers and improving the investment climate in Georgia.
In Armenia, there are only two tariff rates applied on imports of goods - 0 and 10 per cent.
Armenia’s custom tariffs are expressed in ad valorem terms and levied c.i.f. values. More than 60%
of the items in the tariff schedule are subject to 0 per cent duty rate, giving Armenia a weighted average tariff of 4%. The general approach in applying customs tariff is that raw materials, capital goods
and intermediate products are subject to 0 per cent duty rate, and fuel products are subject to 10%
duty rate. A value added tax is imposed on all imports and services. The basic rate of VAT is at 20%.
Individuals importing goods into Armenia pay the VAT if the quantity or cost of goods exceeds the
legal limits of 300 USD or weight of 50 kilograms. The collection of VAT for imported goods is conducted by the customs officials. In Armenia the excise tax is imposed on products consisting of
tobacco and tobacco products, alcoholic beverages (including wines) and crude oil and oil products.
For vehicles arriving in the Republic of Armenia that are registered in the bordering regions
according to the respective Government Decrees (passenger cars with 7 seats registered in
Akhalkalak, Akhaltskha, Ninotsminday, Bolinis, Aspindza, Marneul and Tsalkay regions in Georgia
and trucks carrying 1.5 tons of load transported to Armenia as well as the road tax payers who abide
in the above-mentioned regions in Georgia are fully exempt from paying road tax, and road tax payers who abide in the above-mentioned regions of Georgia for trucks with 1.5-3 tons of carrying
capacity arriving in the territory of Armenia pay 50% of road tax only.8
Transit issues
According to national laws, the countries are required to ensure free transit, through their territory, of commodities that originated from the customs area of another party or of third countries and
designated for the customs area of another party or of the third country.
The CIS Agreement declares that the observance of the principle of free transit is the most
important condition for achieving the objectives of the Agreement and an essential element of the
process of attaching them to the system of international division of labour and cooperation. Thus
transit transportation is not subject to groundless delays or restrictions. It is to be noted that conditions for transit including tariffs on transportation by any kind of transport and rendering services
should not be worse than the conditions provided by the contracting parties for their own consignors
and consignees and for their goods, as well as for carriers and vehicles for this contracting party, or
7 Article 8(2) of the CIS Agreement that the Contracting Parties will present full information on all current taxes and other
fiscal levies.
8 The Customs Committee Decision of 22 February 1998; No. 7-MVB:
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ARMENIA AND GEORGIA ECONOMIC RELATIONS
provided to consignors, consignees, their goods, carriers and vehicles of any other foreign state,
unless otherwise provided by bilateral agreements.
The Governmental Decree of Georgia No. 27 of 8 February 2006 has fully entered into force. It
applies to all forms of transportation (except for passenger cars), whether loaded or empty, that
cross the Georgian border and are subject to customs control. These transportation means have to
comply with the weight and size requirements as provided by the Georgian legislation. The total
weight of the vehicle shall not exceed 44 tons, whereas the weight load for single axle shall not
exceed 10 tons; additionally the weight of the cargo that it carries has to comply with the manufacturer’s requirements. This rule will seriously affect the vehicles carrying goods from abroad into
Georgia, as most of them do not satisfy these requirements and will be sanctioned accordingly.
Georgia agreed in negotiations with Azerbaijan, which is not a WTO member, to provide a
favourable transit tariff of 50% on the railway freight transportation based on the Agreement on Coordination of Railway Transportation.9 As regards Armenia, Georgia provides only 24% discount for
fuel and petroleum oil products and 17% for the rest of cargoes. These transit tariff discounts are
stated in Article 5 (2) of the Tariff Policy of Georgian Railway, adopted by the decision No. 1 of the
Ministry of Transport and Communication on 3 January 2002. In this context, Georgia violates the
MFN and national treatment principles of the WTO trading system by (a) discriminatory railway tariff discounts, (b) internal taxes and charges imposed on foreign vehicles, (c) compulsory motor
insurance,10 which are also applied to transit, as well as the rules of freedom of transit provided in
GATT.
Trade Provisions
Import Restrictions
Armenia and Georgia may apply only the general restrictions on import of goods. The import of
weapon, military equipment and technique and also import of toxic and radioactive industrial wastes
with the purpose of their utilization, safe disposal, interment and any other purposes is prohibited.
Quantitative restrictions
Georgia and Armenia restrain from implementing discriminative measures in reciprocal trade,
as well as from application of quantitative restrictions towards import of goods or their equivalent
measures within the framework of the Agreement. They may unilaterally ascertain quantitative or
other special restrictions within reason and with a strictly defined period. These restrictions must be
of exclusive character and may be applied only in cases envisaged by agreements in the framework of GATT. In addition, it is required that any party which applies quantitative restrictions in
accordance with the Agreement, must provide the other party with full information about the basic
reasons for establishment, forms and possible terms of application of mentioned restrictions; hence
the consultations are appointed.
Armenia and Georgia do not apply quantitative restrictions (quotas or tariff rate quotas) on
imports, and do not maintain a system of minimum import prices. In general, there are no import
licensing requirements neither in Georgia, nor in Armenia, and companies are able to import freely.
The only exceptions are: pharmaceutical products and medicines, phytoprotection chemicals which
are regulated in the interest of public health and safety, and weapons and nuclear materials relating to security.
Export restrictions
The export of military weapons and ammunition, works of art of museum value and antiquary
is prohibited.
9 The Agreement on Co-ordination of Railway Transportation was signed in Serakhs on 13 May 1996 between
Uzbekistan, Georgia, Azerbaijan and Turkmenistan. The Republic of Armenia ratified the Agreement on 01 December
1998.
10 Foreign vehicles are required to purchase special Georgian motor insurance, even if they already have international-
ly valid insurance certificate (the Law on Mandatory Insurance of Civil Liability for Owners of Motor Vehicles). This typically amounts to about 25 USD per trip).
UNREALISED OPPORTUNITIES
19
Quantitative restrictions
Armenia and Georgia do not introduce special restrictions or demands towards export of goods
covered by the Agreement, that in similar cases are not used towards analogous goods of the local
production or those produced in third countries.
There are no export restrictions and export taxes in Armenia and Georgia, and there is no system of minimum export prices. As on the import side most exports are free of any prohibitions or
quotas. In both countries export restrictions are imposed for health, security, and environmental reasons. The items affected are weapons, nuclear materials, pharmaceuticals, rare animals and plants,
rare objects or artefacts considered part of the national patrimony. Exports of textiles and clothing
to the European Union are subject to licensing under bilateral agreements with the European Union.
Safeguards
Being members of the WTO, Georgia and Armenia may take a “safeguard” action (i.e., restrict
imports of a product temporarily) to protect a specific domestic industry from an increase in imports
of any product which is causing, or which is threatening to cause, serious injury to the industry.
Armenia and Georgia do not apply safeguard mechanisms which differ from those applied on MFN
bases. Quantitative restrictions may be ascertained unilaterally and with strictly defined periods.
These restrictions must be of exclusive character and may be applied only in cases envisaged by
the WTO agreements. The state, which applies quantitative restrictions, must provide the other
party with full information on the reason for establishment, forms and possible dates of the application of the said restrictions.
Commodity nomenclature
During implementation of tariff and non-tariff regulation of bilateral economic relations for
exchange of statistics and implementation of customs procedures, Armenia and Georgia apply common nine-digital commodity nomenclature of foreign economic activity based on the harmonized
system of description and coding of goods and on the combined tariff and statistic nomenclature of
the European Union.
When implementing measures of tariff and non-tariff regulation, maintaining statistical accounting and exchanging statistical information, as well as for customs control and clearance purposes,
the parties apply the Goods Nomenclatures of Foreign Economic Activity based on the Harmonized
Commodity Description and Coding System. For their own needs, the parties shall, if necessary,
carry out further development of national goods nomenclatures.11
Anti-Dumping and Countervailing Measures
Armenia and Georgia consider that unfair business practice is incompatible with the Agreement’s
objectives and their legal framework, and they do not to allow for the following methods:
• agreements between companies and their associations that aim to prevent or restrict competition or violate its conditions at the territories of the parties;
• activities through which one or several companies, using their dominant condition, restrict competition on the whole or on the substantial part of the parties’ territories.
Re-export
Armenia and Georgia do not permit a non-sanctioned re-export of goods, in regard to the export
of which another party producing these goods applies governmental regulation measures. It is
agreed that both Armenia and Georgia determine the lists of goods according to which a non-sanctioned re-export is prohibited. The countries have also exchanged the lists of goods to which governmental regulation measures are applied. It is to be noted that re-export of such goods to third
countries may be implemented only through a letter of consent and in terms defined by the authorised bodies of the country of origin.
11 Article 7(2) provides that the Russian Federation shall carry out the maintenance of a standard copy of the Harmonized
Commodity Description and Coding System through the existing representative offices in relevant international organizations, until other contracting parties declare their independent maintenance of the standard copy.
20
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Armenia and Georgia should not permit a non-sanctioned re-exportation of goods for export of
which other contracting parties, on the territory of which these goods originate, apply measures of
tariff and/or non-tariff regulation. Issues associated with re-exportation of goods must be regulated
in compliance with the Agreement on Re-exportation of Goods and Procedure of Granting a Permit
for Re-exportation (Annex II of the CIS Agreement).
Technical Barriers to Trade
Currently the governments of Armenia and Georgia are taking measures necessary to ensure
that regulations, standards, testing and certification procedures meet the requirements of the
Agreement on Technical Barriers to Trade (TBT Agreement).12 Member countries of the World Trade
Organization – e.g. Armenia and Georgia - are required to report to the WTO all proposed technical regulations that set out specific characteristics of products that could affect trade with other
member countries.
In Armenia, the National Institute of Standards is the national body responsible for standards.
The National Institute of Standards maintains the national fund of standards of the Republic of
Armenia which contains International (ISO), Interstate (GOST), Regional (EN), Armenian (AST) and
other state standards. The National Institute for Metrology is called to implement all metrological
activities, maintain measuring standards (etalons), as well as perform certification (type approval)
of measuring instruments both in the customs and inside Armenia, calibration, verification performing bodies, testing laboratories accreditation activities, and state metrological control. There is also
an accreditation agency which operates within the Ministry of Trade and Economic Development
(the Ministry), as a separate department. It is empowered to perform accreditation activities: to
organise expert groups, assess technical competence of applicants by documentation presented,
perform on spot checks, present results of assessment to the Accreditation Board for their final decision. The Accreditation Board consists of fifteen members, representing both state governance bodies and stakeholders from NGOs (consumer protection, producers, trade organisations or associations), scientific organisations, and it is headed by the Minister of Trade and Economic
Development. The Board is authorised to grant or decline accreditation, widen or narrow the scope
of accreditation, cancel accreditation (if non-compliance or infringement is detected). The Board is
also responsible for granting authorisation for certification or testing in particular conformity assessment fields, accredited bodies or laboratories for which are not available. This authorisation is valid
for one year.
The State Quality Inspection of Armenia operates within the structure of the Ministry as a separate division and is headed by the Minister. It is entitled to perform control over the compliance of
products, processes/works, and services with mandatory requirements set by normative documents, as well as observance of mandatory conformity assessment rules. It aims to prevent
infringements of mandatory requirements by economic entities. It also inspects conformity assessment bodies for the compliance with normative documents and performs state metrological control.
The Inspection administers a central (Yerevan) and ten territorial offices in regions.
As regards Georgia, the technical regulation system was reformed to give way to a voluntary
standards system and to reduce state regulation in this sphere. The new laws introduced technical
regulations harmonised with international and European standards that significantly simplify export
and import procedures for businesses. Sakstandarti (Georgian National Agency of Standards,
Technical Regulations and Metrology) comprises different divisions: National Organ of
Standardization, Office of Accreditation, Institute of Metrology and Standardization, and Office of
Control and Supervision.
Institutional Cooperation
Armenia and Georgia must regularly exchange information as regards the laws and other legislative acts relating to the economic activity in trade and transport spheres, investments, taxation,
12 i.e. the transition into to a system of ‘voluntary’ standards and certification whereby the importer can choose to conform his products to e.g. Georgian standards or the standards of any EU or CIS. If foreign standards are chosen, they
must be registered by the importer in a national responsible agency.
UNREALISED OPPORTUNITIES
21
banking and insurance activity and other financial services including customs issues and statistics.
It is required that they immediately inform each other about legislative amendments that may affect
the implementation of the Agreement.
They should notify each other of the operating tariffs and all their exceptions. These countries
should take measures for a maximum simplification and unification of customs formalities, in particular, by introducing single forms of customs and goods accompanying documentation, being guided by current international agreements and arrangements.
To implement the agreed policy on export control towards third countries, Armenia and Georgia
must hold regular consultations and take mutually agreed measures for establishing an effective
export control system.
In order to implement the objectives of the Agreement and to elaborate recommendations for
improvement of trade and economic cooperation between the two countries, the parties have
agreed to establish a joint Georgian-Armenian Commission.
In addition, it should be mentioned that both Armenia and Georgia pay a special attention to the
TRACECA (Transport Corridor Europe-Caucasus-Asia) project. The latter has resulted in a closer
cooperation and dialogue among member countries and their governments, aimed at facilitating
trade, simplifying border-crossing procedures, and reducing transit fees.
Finally, there is an Armenian-Georgian Association for Business Cooperation which is an intergovernmental body that aims to strengthen cooperation and develop the bilateral relations between
two countries. The Association is actively involved, for instance, in trade facilitation matters including procedures and controls governing the movement of goods across national borders which is
currently in the process of improvement so as to reduce associated cost burdens and maximise efficiency while safeguarding legitimate regulatory objectives.
World Trade Organisation
On 6 October 1999, Georgia’s WTO accession negotiations were successfully concluded after
the WTO General Council adopted Georgia’s Working Party report and the so-called Protocol of
Accession that was signed by the State Minister of Georgia. On 20 April 2000, the Parliament of
Georgia ratified the agreement on Georgia’s accession to the WTO, and on 14 June 2000 Georgia
became the 137th full member of the WTO. The WTO Working Party adopted the final report of
Armenia’s accession in November 2002, and the General Council adopted the report in December,
2002. The membership of Armenia to the WTO took place on 5 February 2003.
A key rule of the multilateral trade system is that reductions in trade barriers should be applied,
on a most-favoured nation basis, to all WTO members. This means that none of the WTO members
(e.g. Armenia and Georgia) should be discriminated against by another member’s trade regime.
However, regional trade agreements - e.g. the Free Trade Agreement between Armenia and
Georgia - are an important exception to this rule. Under this Agreement, reductions in trade barriers apply only to the parties to the agreement. This exception is allowed under Article XXIV of the
General Agreement on Tariffs and Trade for trade in goods, in Article V of the General Agreement
on Trade in Services (GATS) for Trade in Services, and in the Enabling Clause (i.e. the 1979
Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of
Developing Countries).
Generalized System of Preferences
In addition to enjoying MFN tariffs with other WTO members, Georgia also benefits from a
Generalized System of Preferences (GSP) when trading with the USA, Canada, Switzerland, and
Japan. Accordingly, lower tariffs are applied on goods exported from Georgia to these countries. In
July 2005, Georgia became one of the only two beneficiaries (besides Moldova) of the new EU GSP
Plus scheme in the entire CIS and one of the 15 beneficiaries in the world. This is an important factor in terms of facilitating export from Georgia. Under the old scheme, Georgia was allowed to
import only 3300 products to the EU market without any customs duties, and 6900 products under
22
ARMENIA AND GEORGIA ECONOMIC RELATIONS
certain preferences. After being granted the GSP Plus beneficiary status, Georgia is allowed to
import 7200 products to the EU market under the duty free regime. From 1 January 2006, Georgia
enjoys the ‘GSP Plus’ beneficiary status with Turkey as well.
As to Armenia, it is a beneficiary of GSP schemes provided by the EU, the USA, Canada,
Switzerland, Japan, Poland, and Estonia.13 The GSP provides import duty reductions on a list of
products that meet the requirements stipulated by the country administering the GSP, which
includes the rules of origin. To meet the rules of origin requirements under the GSP, the Armenian
Chamber of Commerce and Industry, in accordance with the laws of Armenia, is empowered to
issue a certificate of origin Form A, accepted in the countries administering the GSP. Currently the
Armenian Government is applying for the ‘GSP Plus’ scheme: for especially vulnerable countries
with special development needs. It will cover around 7,200 products that are allowed to enter the
EU under the duty free regime. Here Armenia must meet a number of criteria including ratification
and effective application of 27 key international conventions on sustainable development and good
governance.
2. Investment Promotion and Protection
Investment laws and institutional framework
The primary statute dealing with foreign investment in Armenia is the Foreign Investment Act of
1994 (the Armenian Act). In Georgia, the cornerstone of the modern legal framework for foreign
investment is the Investment Activity and Guarantees Act of 1996 (the Georgian Act), the State
Promotion of Investments Act of 2006, and the Georgian National Investment Agency Act of 2002.
In addition, there are various laws (including the secondary legislation) on privatisation, land acquisition, concessions and permits and licensing that are relevant for investors.
Both the Georgian Act and the Armenian Act determine in general terms the rights of foreign
investors, guarantee these rights and establish the forms and methods of state regulation in the
area of investment activities. These Acts have established national treatment (foreign investors cannot be treated worse than domestic companies), the right to repatriate profits, 10-year guarantees
against adverse legislative changes (5-year in Armenia), and recourse to international dispute settlements.14 Investors rights are further specified in both Armenia’s and Georgia’s bilateral investment
treaties (BITs).15 In addition, both investment laws do not identify any sector of the economy as
being closed for foreign investment. They provide, in general terms, that it is prohibited to invest in
an object whose creation and use does not meet the requirements of security, health or environment and other requirements specified by the legislation.16
Substantive Law
In Georgia, an investment is any kind of property or intellectual value or right to be contributed
and used in the entrepreneurial activity carried out in Georgia for earning of possible income. Such
‘assets’ include:
a. monetary assets, a share, stocks and other securities;
b. movable and immovable property - land, buildings, structures, equipment and other material
valuables;
c. lease rights to land and the use of natural resources (including concession), patents, licenses,
13 For detailed discussion on EC GSP scheme, see AEPLAC report on Increasing the Efficiency of the EC GSP Utilisation
in Armenia, 2004.
14 For more discussion on this topic, see “Investment Disputes”, infra.
15 For more discussion on this topic, see “Bilateral Investment Treaty”, infra.
16 This may includes production of nuclear, bacteriological or other weapons of mass destruction; production and dissem-
ination of illicit drugs as well as other activities prohibited by international treaties and domestic legislations (e.g. Article 9
of the Georgian Act).
UNREALISED OPPORTUNITIES
23
know-how, experience and other intellectual valuables;
d. other property or intellectual valuables or rights not prohibited by the laws of Georgia.
In Armenia a foreign investment means any type of property, including financial resources and
intellectual values, which are being directly invested by a foreign investor in commercial and other
activities conducted in Armenia to gain profit (revenue) or to achieve any other beneficial outcome.
Pursuant to the Armenian legal framework, foreign investors receive national treatment (i.e.
they are treated no less favourably than domestic investors). There is one exception to this preferential rule concerning the ownership of land. However, foreign companies established in Armenia
as legal persons have the same status as domestic entities and may own land. In addition, foreigners may obtain a permission to use land under long-term lease contracts.
The Armenian Act contains a so-called ‘stabilisation clause’. Accordingly, in the event of amendments to the foreign investment laws of Armenia, the legislation that was effective at the moment of
implementation of the investment shall apply, upon the request of a foreign investor, during a fiveyear period from the moment of investing. Article 15 of the Georgian Act determines a ten-year period: in such a case an investor shall conduct his activities in accordance with the legislation which
was in force before the new legislative act has been effected.17
The guarantees against nationalisation and expropriation are provided. In Armenia foreign
investment shall not be subject to nationalisation. Expropriation may only be allowed as an extreme
mean in case of an emergency declared in accordance with laws of Armenia, and only upon the
decision of a court and with full compensation. Investors must also be compensated for any damage or loss of profit resulting from illegal actions by state officials. Compensation shall be paid at
current market prices or prices determined by independent auditors either in the currency invested,
or in any other currency mutually agreed upon by the parties. In Georgia the investments may only
be subject to ‘requisition’: a) in cases specified by laws; b) by a court’s judgment, or c) in the case
of urgent necessity established by the legislation. The compensation should correspond to the actual value of the seized investment directly at the time when such requisition took place. In addition,
the compensation must be paid without any delay and it shall also comprise damages suffered by
the investor from the moment of requisition till the payment of the sum of compensation.
In Armenia foreign investors are entitled to compensation, through a court’s judgment, for the
material and moral damages - including lost profits - caused as a result of illegal actions by state
officials. It is to be noted that compensation must be paid promptly at current market prices or prices
determined by independent auditors. This compensation is paid either in the currency invested, or
in any other currency mutually agreed upon by the parties. For the period from the moment of origination of the right to compensation through the moment of its execution, an interest in the due
amount of compensation shall be calculated at current rates for deposit accounts established on the
loan market of Armenia.
In Armenia foreign investor’s profit (revenues) should, after paying the taxes and other fees
required by the legislation, remain under the investor’s disposal. Moreover, foreign investors and
foreign employees are entitled to freely transfer their property, profits and other means abroad.
Foreign exchange is widely available, and the local currency - the Armenian dram - is freely convertible. The same is the regulatory framework in Georgia.
In Armenia the import of goods for paying in the statutory capital of enterprises with foreign
investments is exempted from custom duties. If such goods are sold within a period of three years
after availing oneself of this privilege, the customs duty, including the collection of calculated penalties for a delay in payment, is due in accordance with the rules and procedures set by the customs
legislation. It is to be noted that there are no corresponding provisions in the Georgian Act.
In Armenia enterprises with foreign investments are entitled to export their products, works and
services and import products, works and services for their own needs without any license, with the
exception of the cases defined by the Armenian legislation and by international treaties. Although
worded differently, the Georgian Act has a similar provision.
17 The same article provides that Articles 7 (“Investment Inviolability”), 8 (“Compensation for Investment Requisition”) and
16 (“Procedure for Dispute Resolution”) shall not be subject to the legislative amendment.
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ARMENIA AND GEORGIA ECONOMIC RELATIONS
Privileges established by the Armenian Act apply to those enterprises with foreign investment
where such investment is no less than 30 per cent at the moment of incorporation. There are no
corresponding provisions in the Georgian Act.
In Armenia, any foreign investor shall be entitled to exploit renewable and non-renewable natural resources on the basis of concession contracts concluded by the foreign investor and the
Government, as provided by the Concession Act of 2002. Concession contracts may contain exceptions from the legislation in force in the Republic of Armenia. In such cases, they shall be subject to
approval by the Parliament.
Institutional and Policy Arrangements
The Business Support Council of Armenia was established and its members were appointed by
the Presidential Decree No. 768 on “Establishing a Business Support Council” adopted on 31
December 2000. The Charter of the Business Support Council became effective by the Prime
Minister’s Decree No. 131 of 22 February 2001. The main objective of the Council activities is to
ensure a favourable environment for investments and business in Armenia. The Prime Minister is
the Chairman of the Council; the Vice Chairman is the Chief Adviser on Economic Issues to the
President. The Minister of Trade and Economy Development, the Minister of Finance and Economy,
and the Mayor of the city of Yerevan are also included in the Council. Forty-four businessmen representing the business community are members to the Council, on rotation order, and eight representatives out of 44 are elected by rotation order once half year, the staff of which is formed in
accordance with the Prime Minister’s decree. Since the establishment of the Council, six rotations
have taken place. In addition in 2005, the Government adopted the Investment Policy Concept
which expressed general approaches and strategy of investment policy and presented a combination of issues, principles and goals. The main goal of the investment policy of Armenia is:
“Ensuring sustainable economic growth, increasing prosperity of the population and protection
of environment via increasing of economic activity, formulation of favourable investment climate,
and growth of investment volume.”
The Georgian National Investment Agency was established in 2002 when the Georgian
Parliament adopted the National Investment Agency Act of 2002. As the only Georgian governmental agency responsible for investment promotion, GNIA is designed to act as a “one-stop-shop” for
comprehensive information about investment opportunities in Georgia. The mission of GNIA is to
promote and facilitate foreign direct investment in Georgia. The said Act outlines the role of the
Agency and some programmes for the support to foreign and domestic enterprises. It needs to be
noted that the programmes have long expired and functions assigned to GNIA in the law do not fully
correspond with its current status and capacities. For example, the mandatory registration of investments above 100.000 USD with GNIA and annual follow-up reporting of investment plans have
never been implemented. In 2002-2003, the ‘Fund of the President’ was used to stimulate investments, mainly by domestic companies, through provision of subsidies and support to bank guarantees. The State Promotion of Investments Act seeks to refine the procedures of investment promotion. The Agency is to represent investors vis-à-vis administrative authorities during the licensing
process. For this, the Agency charges fees that are to be determined by the Ministry of Economic
Development. No fees apply for the category ‘investments of special importance’, investments over
8 million GEL or over 2 million GEL, in case the investment is undertaken in highlands of Georgia.
The Law further outlines the procedures of issuance of preliminary licenses and/or permits, clearly
stating GNIA authority and the obligations of municipalities and state authorities to inform investors
about the procedure in a timely manner.
UNREALISED OPPORTUNITIES
Investment treaties
25
Bilateral Investment Treaty
Over the last 50 years, the international community has taken decisive actions to promote the
flow of capital into developing countries by creating rights of fair treatment and effective remedies
for investors. The first key development was the substantial growth in the number of Bilateral
Investment Treaties entered into by developed and developing countries. These treaties are agreements between two countries for the reciprocal encouragement, promotion and protection of investments in each other’s territories by companies based in either country.
There are now about 2000 BITs in force worldwide.18 Over 140 states are party to at least one
such treaty, two-thirds of which were concluded in the 1990s. These treaties provide rights of fair
treatment which investors can enforce directly against the Host State. They also commonly contain
the Host State’s advance consent to the International Centre for the Settlement of Investment
Disputes (ICSID) arbitration (as a division of the World Bank) in the event of investment disputes
arising. The Host State is prepared to offer such rights to investors as a way of attracting investments.
In addition, a number of Multilateral Investment Treaties (MITs) have been created which provide rights that are largely similar to those found in BITs. The 1992 North American Free Trade
Agreement (between Mexico, Canada and the USA) and the 1994 Energy Charter Treaty (in force
between EC states as well as 49 others) are the best examples.
The Agreement on Promotion and Mutual Protection of Investments was signed by the governments
of Armenia and Georgia on 4 June 1996 and entered into force on 18 January 1999.19 As of today,
this Treaty constitutes the most important legal instrument for the mutual protection of foreign
investments in both states. It has been concluded between two States in order to provide protection
to nationals of each state. ‘Nationals’ include both natural persons and companies i.e. investors covered by protection of investment treaties can thus be divided into natural persons and legal entities.
The term ‘investor’ refers with regard to either Contracting Party to natural persons who,
according to the law of the given Contracting Party, are considered to be its nationals. The Treaty
extends the benefit of its protection to legal entities such as companies. It also requires that the entity be incorporated or constituted under the laws of the contracting parties.
The term ‘investment’ means every kind of asset and in particular, though not exclusively,
includes:
a. movable and immovable property and any other related property rights such as mortgages;
b. shares in, and stock, bonds and debentures of, and any other form of participation in, a company or business enterprise;
c. claims to money, and claims to performance under contract having a financial value;
d. intellectual property rights, technical processes, know-how and any other benefit or advantage
attached to a business;
e. rights, conferred by law or under contract, to undertake any commercial activity, including the
search for, or the cultivation, extraction or exploitation of natural resources.
If jurisdictional hurdles are overcome, the question arises whether the host state has breached
its substantive obligations. The Treaty determines the rights and protection available to investors in
a particular host state. It provides broader protections for the investor than those available under
customary international law such as:
18 See e.g. www.unctadxi.org. The BITs search engine has been designed by the United Nations Conference on Trade
and Development (UNCTAD), to provide a user-friendly way to retrieve either all available BITs signed by one country or
a specific BIT between two countries. This table is illustrative only and should not be relied upon as a substitute for specific legal advice. It is important to check the status and applicability of a treaty in each case, and to note that many
treaties are applicable to investments which came into existence before the treaty itself entered into force.
19 The Parliament of Armenia ratified the Treaty on 18 February 1997 (N-161-1). Both Russian and Armenian versions of
the Treaty are available on the official web site of the Ministry of Foreign Affairs of Armenia.
26
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Full protection and security for the investment
Investments are accorded ‘full protection and security’ by the host state. The practical effect of
this provision is that the host state will be liable to compensate the investor, should state authorities
(such as the police) cause damage by, for example, taking unreasonable action or omitting to take
reasonable protective action.20 The obligation of the host state to provide full protection and security to investors is independent and not relative to the level of protection provided by the state to its
own nationals or to nationals of other states. Therefore, the fact that the state did not protect the
property of its own nationals is no defence to a claim by an investor of breach of this obligation.21
National and ‘most favoured nation’ treatment
Another common protection provided by the Treaty is that the investment must be treated no
less favourably than that of nationals and companies of the host state (national treatment) or of any
other state (most favoured nation treatment, usually abbreviated to “MFN” treatment). Thus, this
protection attempts to ensure “relative” standards of treatment, that is, standards which define the
treatment required for covered investment relative to the treatment given to other investments.22
Compensation for losses due to war or riot discriminatory measures impairing the investment
If an investor suffers losses owing to war or other armed conflict, revolution, a state of national
emergency, revolt, insurrection, and riot or by military requisition, the investor’s compensation
should be no less favourable than the host state accords to its own nationals or companies of any
third state.
In addition, an obligation upon the host state not to impair the management or operation of the
investment by arbitrary and discriminatory measures is imposed.
Protection against expropriation or nationalisation
The obligation to compensate for expropriation is among the most crucial protections provided
by Treaty. This includes the physical or legal taking of property as well as measures which, while
they may not deprive an investor of the legal right to his property, substantially diminish its value or
another benefit he derives from it (a good example being revocation of a licence required to operate a business). Expropriation will generally be prohibited unless it is:
• for a public purpose;
• non-discriminatory; and
• subject to prompt, adequate and effective compensation.23
The compensation should be equivalent to the fair market value of the expropriated investment
immediately before the expropriatory action was taken or became known, whichever is earlier; be
paid without delay; be fully realizable; and be freely transferable at the prevailing market rate of
exchange on the date of expropriation.
Rights to repatriate investment and returns
The Treaty contains a provision guaranteeing the right of investors to transfer the investment
and the returns on the investment into freely convertible currency after taxes and other mandatory
payments.
20 Asian Agricultural Products Ltd (AAPL) v Republic of Sri Lanka, ICSID Case No.ARB/87/3, Final Award, June 27, 1990,
(191) 6 ICSID Review—Foreign Investment Law Journal 526; American Manufacturing Trading Inc v Republic of Zaire,
ICSID Case No.ARB/93/1, Award, February 21, 1997, 5 ICSID Reports 10.
21 American Manufacturing Trading Inc v Republic of Zaire, ICSID Case No.ARB/93/1, Award, February 21, 1997, 5
ICSID Reports 10 and 30.
22 See OECD, Most-Favoured-Nation Treatment in International Investment Law; September 2004. Emilio Agustín
Maffezini v Kingdom of Spain, ICSID Case No.ARB/97/7, Award on Jurisdiction, January 25, 2000, (2001) 16 ICSID
Review—Foreign Investment Law Journal 212.
23 See e.g. Metalclad Corporation v. United Mexican States (Award of 30 August 2000, ICSID Case no. ARB (AF)/97/1).
UNREALISED OPPORTUNITIES
27
Dispute Settlements
Disputes concerning the investment between the investor and host state will be referred to independent binding arbitration (often ICSID or UNCITRAL arbitration). The right to go to arbitration may
only arise after attempts have been made to reach an amicable resolution (within 6 months).
•
•
•
•
•
•
Summarising the above mentioned analysis of the legislation base, it can be stated that:
The Armenia-Georgia Free Trade Agreement, which entered into force in 1995, aims to promote
stronger trade and commercial ties between participating countries and to accelerate the free
trade in goods by eliminating tariffs, duty and quantitative restrictions. It is consistent with the
WTO rules i.e. with the definition set out in Article XXIV:8 (b) of the General Agreement on
Tariffs and Trade of 1994 (GATT). The provisions in the free trade agreements are wide-ranging; they have included many of the following topics: trade in goods, customs procedures, rules
of origin, transit, etc.
The Agreement eliminates all customs duties on goods originating in the territory of the countries that meet the requirements for ‘originating goods’. Neither country shall adopt or maintain
any non-tariff measures on the importation of any good of the other country or on the exportation of any good destined for the territory of the other country except in accordance with its WTO
rights and obligations or in accordance with other provisions of the Agreement. The Agreement
requires ensuring free transit through the countries’ territory.
Thus the Agreement must be mutually reinforced by the participating parties so as to provide
greater opportunities in the goods and services sectors to a wide range of Armenian and
Georgian exporters, and to further strengthen trade and investment links between the countries.
This part of the study also discusses relevant provisions of the Creation of a Free Trade Area
which have became operational in 1994 and aim to form conditions for a free movement of
goods and services. It provides cooperation in solving specific tasks targeting gradual elimination of customs duties, taxes and levies which have equivalent effect and quantitative restrictions in mutual trade; abolition of other barriers to a free transfer of goods and services; creation and development of an effective system of mutual settlements and payments on trade and
other transactions.
A bilateral investment treaty between Armenia and Georgia - signed on 4 June 1996 and
entered into force on 18 January 1999 - is an agreement establishing the terms and conditions
for private investment by nationals and companies of one country in the country of the other.
The Treaty provides international minimum standards of treatment guaranteed to foreign
investors such as fair and equitable treatment, full protection and security, most-favoured-nation
treatment, national treatment. In addition, the Treaty stipulates that investments shall not be
expropriated or nationalized either directly or indirectly through measures tantamount to expropriation or nationalization (“expropriation”) except for a public purpose in a non-discriminatory
manner upon payment of prompt, adequate and effective compensation.
Finally, the investment acts of Georgia and Armenia are also examined and have proved to be
quite liberal laws compared with the legislations of several other CIS countries. They assure
existing guarantees to foreign investors of their rights in a single transparent and stable document.
28
ARMENIA AND GEORGIA ECONOMIC RELATIONS
PART 2.
TRADE AND INVESTMENT FLOWS BETWEEN ARMENIA
AND GEORGIA
Changes in the volumes of trade flows within the regional neighbourhood are the first indicators
of the active or passive character of the country’s relationship with the countries in the region. From
this point of view, it is important to know which goods prevail in the trade flows of Armenia with its
neighbours, and in the production of which goods the neighbouring states have comparative advantages. Besides, the character of changes in the volumes of trade turnover during the last four or five
years is of a special interest. Finally, it is important to know whether the trade flows have a concentrated or diversified character.
This report provides a comprehensive overview of the Armenia-Georgia merchandise trading
relationship for the period covering 1998-2006, with a specific emphasis on Armenian exports to
Georgia. This part of the report examines also the nature of Armenia-Georgia merchandise trade,
identifies the sectors in which Armenia has a comparative advantage and prospects for increasing
Armenia’s exports to Georgia.
Growth of Armenian Exports to, and Imports from Georgia
The indicators of Armenia show that there has been a significant improvement in the external
trade over the past nine years (average annual growth in exports over the period amounted 21.91%
as compared to 12.6% average growth in imports), which leads to a substantial trade deficit decline
from 30% to GDP in 1998 to 18.6% in 2006.
Table 5 Armenia, Trade with the World and Georgia (USD, million)
* Since 2003, the statistics on external trade is presented by country of origin.
The volume of Armenia’s trade increased by 15.2% in 2006 as compared to 2005 and
reached 3,198.36 billion USD, of which exports increased by 3.1% to 1,003.96 billion USD and
imports by 21.8% to 2,194.4 billion USD.
UNREALISED OPPORTUNITIES
Table 6 Armenia, main trade partners, 1998-2006
29
During 1998-2006, the trade between Georgia and Armenia has increased steadily, and
Georgia has became the fifth largest trade partner of Armenia (export, excluding Switzerlandexport to this country mainly consists of polished diamonds and that is only processing of imported diamonds for re-export).
Chart 2 Exports to Main Trade Partners
The Armenian export structure, including exports to Georgia - although there is a clear diversification tendency within the product group involved - remains highly concentrated, with diamond
processing, jewellery and copper and molybdenum ore and concentrates, still accounting for more
than half of the total export to the World and with ores and mineral products (mainly cement)
accounting for more than 40 percent of total exports to Georgia. The commodity composition of
Armenia’s export to Georgia has remained fairly constant over the observed period, with the top
seven group of products accounting for more than 80 percent of the Armenian exports, however the
number of products (at the 8-digit GNFEA level) has significantly increased from 85 in 1998 to 299
in 2006.
30
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Table 7 Commodity Share in Export to Georgia and World
Cement remains one of the main products exported to Georgia from Armenia. About 15.6 million USD of cement exports24 were indicated in 2006, showing an increase of 42.6% compared to
2005, and more than 50 times increase compared to 2002. It is also important to mention that there
are two types of cement production in Armenia - production of moist and dry cement - both of which
are competitive on the Georgian market. Nevertheless, as the share of costs of gas in the total costs
of moist cement production account for about 70-75%, the review of gas prices by Russia since
2009 may highly impact the volume of moist cement exports to Georgia, although the dry cement
may still remain competitive. The next product group, by share of total Armenian exports to Georgia,
is vegetable products. As it can be seen from Table 8, the share of these products in the total
Armenian exports to Georgia in 2006 accounted for 14.8 %. The most part of this product group
includes coffee,25 exports of which in 2006 constituted about 7.9 million USD, compared to 5.6 million USD in 2005 (41.9% growth) and to 0.4 million USD in 2002 (more than 19 times growth). Thus,
exports of coffee to Georgia have shown a steady high growth rate during the preceding five years.
Another important item of Armenian exports to Georgia is ‘prepared or preserved meat’ falling under
the section for foodstuffs (see also Table 8). The volume of these products26 constituted 1.1 million
USD in 2006, whilst in 2005 it accounted for only about 0.1 million USD. Thus, the growth rate of
exports increased by almost eleven times since 2005, though the exports of these products during
the preceding years were rather insignificant. It is also worth noting that in 2006 large volumes of
exports of plastic bottles were observed. The exports of this product type accounted for 1.1 million
USD for the mentioned period, whilst there were almost no exports of this product during the previous years.
24 Products falling within CN codes 2523 10 00, 2523 29 00 and 2523 90 90.
25 Products falling within CN codes 0901 11 00, 0901 21 00 and 0901 22 00.
UNREALISED OPPORTUNITIES
Table 8 Commodity Share in Import from Georgia and World
31
The main product groups imported from Georgia to Armenia are prepared foodstuffs, chemical
products, wood and vegetable products, the share of which in total imports from Georgia accounts
for 40.0%, 30.3%, and14.8% respectively (see Table 8). The main product falling under Section
“Prepared foodstuffs” and exported to Armenia is sugar,27 the exports volume of which in 2006 constituted more than 11.8 million USD, showing a growth of 2.5 times against the 2005 marker. During
the preceding years, the exports of this product to Armenia was quite insignificant. Another important item of Georgian export to Armenia are the chemical products, and in particular fertilizers.28 The
exports of the Georgian fertilizers, as in the case of sugar, experienced a high boost in 2006, reaching the figure of 9.5 million USD, whilst in 2005 the volume of exports of this product accounted for
5.2 million USD. Thus, a growth of 1.8 times was observed. However, unlike sugar, large volumes
of this product were exported to Armenia also during the preceding years: there has been a steady
increase year-on-year. The third category by its share in the total Georgian exports to Armenia is
wood, and especially that falling under subchapter 4407 of the Harmonised System.29 The Georgian
exports of this product constituted 5 million USD in 2006, with an increase of 1.8 times compared
to 2005, and 2 times compared to 2002.
The export concentration index shows the degree of diversity of export assortment and the
equality of the distribution of exported goods’ weights in the general export structure. If one or a
group of exported goods obviously overweighs the others, then the index value is equal to 1, and
in the case of weight equality, the index value is zero30.
26 Products falling within CN code 1602 50 80.
27 Products falling within CN code 1701 99 10.
28 Products falling within CN codes 3102 21 00 and 3102 30 90.
29 Wood sawn or chipped lengthwise, sliced or peeled, whether or not planed, sanded or end-jointed, of a thickness
exceeding 6 mm.
30 Obviously, on the level of an exports’ eighth -digit coding used in our calculations, calculated concentration index provide a complete idea about the exports concentration.
32
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Table 9 Concentration indices of the trade between Armenia and Georgia
1NSS and own estimations. Estimated at the 4-digit level GN FEA (The trade concentration index is calculated in
accordance with Gini-Hirrschman coefficient)
As it can be seen from the table, the concentration indices for exports to Georgia are decreasing year by year, which means that products exported to Georgia from Armenia are constantly being
diversified. Despite the fact that compared with 1998, in 2006 a quantitative growth of goods exported from Armenia to Georgia was observed (from 85 to 299), due to the weights of processed industrial goods (cement, plastic products) and some processed foods the increase of diversity of exports
does not seriously ‘soften’ the concentrated character of exports. In case of imports from Georgia,
the concentration index is still relatively high,31 but volatile. In 2003 there has been a significant
decrease in the number of products imported from Georgia, which can be explained by the shift to
statistics based on the origin principle.
It is also important to analyse the exported products that Armenia and Georgia have a high level
of specialization. Armenia has presented seven main types of products (at the 4 digit level) where the
level of specialization was very high. These groups of goods included cement, eggs, coffee, prepared
meat, electrical energy - here the export specialization index had absolute advantages (see Table 10).
Table 10: Armenia’s export specialization index* (2003-2006)
31 The world concentration index compared with 1998 has changed insignificantly and has the value of 0.2.
UNREALISED OPPORTUNITIES
33
*The export specialization (ES) index is a slightly modified RCA index, in which the denominator is usually measured by
specific markets or partners. It provides product information on revealed specialization in the export sector of a country and
is calculated as the ratio of the share of a product in a country’s total exports to the share of this product in imports to specific markets or partners rather than its share in world exports:
ES = (xij/Xit) / (mkj/Mkt)
Where xij and Xit are export values of country i in product j, respectively, and where mkj and Mkt are the import values of
product j in market k and total imports in market k. The ES is similar to the RCA in that the value of the index less than unity
indicates a comparative disadvantage and a value above unity represents specialization in this market.
To make the indicator symmetrical - to present it in [-1;+1] surrounding, the received ES is transformed in the following way:
symmetrical ESi = (ESi-1)/(ESi+1): The indicator shows in which exported good the country has a comparative advantage:
The values tending to -1 show the absence of relative advantage in the given good, and the values tending to 1 show the
presence of such an advantage
**Absolute advantages, ***No exports
Georgia has high level of specialization in nuts, citrus fruits, sugar, cyanides and fertilizers
where the high level of specialization is obvious (see Table 11).
Table 11: Georgia’s export specialization index (2003-2006)
The concentration character of Armenian exports is explained by high transportation costs
and unsatisfactory level or absence of local materials. As a result, Armenia has to be specialized
in spheres where the value added to imported materials is relatively high with low transportation
costs.
Trade in Services
Another important component of Armenia-Georgia economic relations is trade in services
between these two countries. Being a landlocked country, Armenia has to use the more favourable
geographical location of Georgia to access to the markets of its main trading partners, such as the
EU and the CIS, which is a large source of exports of Georgian transport services to Armenia.
Another source of benefits for Georgia from trade in services is the transit of gas from the Russian
Federation to Armenia, the importance of which cannot be underestimated. Besides, according to
various statements of Georgian state officials, the number of Armenian tourists in Georgia has significantly increased, which is also an important element of service exports.
34
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Thus, to have a whole picture of economic relations between Armenia and Georgia, it is also
important to analyse the structure of Georgian benefits from exports of services to Armenia. The
assessment of the mentioned benefits resulted from exports of Georgian transport services, tourism
and transit of gas is provided below.
Transport
Both Armenia and Georgia are considered open economies in regard of external trade, but at
the same time, the transportation costs are extremely high. As it is shown in Table 12, the transportation costs in Armenia are more than twice higher than the world average, which is explained
by the fact that Armenia is a landlocked country. The high ratio of transportation services to external trade turnover in Georgia is mainly due to the fact that Georgia is a transit country for Armenia
and Azerbaijan, and transportation services currently are the largest item of Georgian exports.
Thus, the high turnover of transport services indicates the high level of transportation costs for
Armenia, whilst on the other hand it is a source of revenues for Georgia.
Table 12 Comparative analysis of transportation costs as of 2005, in % to GDP32
Although showing a downward trend, the transportation costs of Armenian and Georgian
exports and imports may be considered as one of the highest worldwide, with the possible exception of African landlocked countries.
Since the relevant statistical data on bilateral trade in transport services is not available, the
total exports of Georgian transport service to Armenia is calculated on the basis of the data obtained
from an Armenian freight company, “Apaven”. The company provided the following figures in regard
to the transportation costs of Armenian exporters and importers spent on the Georgian side (see
Table 13):
32 Source: WTO trade statistics
UNREALISED OPPORTUNITIES
Table 13 Transportation of 1X20’ Maersk sea/land container Poti-Yerevan-Poti by
rail and by truck (USD)
35
To calculate the average transportation cost per ton, the share of cargo transportation by road
and rail is required. For 2003, the total exported and imported goods by rail constituted 243,800 and
990,300 tons respectively (1,234,100 tons in total), whilst the same figures for road cargo transportation amounted to 103,700 and 434,100 tons respectively (537,800 tons in total).33 These figures show that about 74% of the Armenian trade is carried out by rail. Thus, the average cost per
ton is equal to 32.13 USD.34
Taking this figure as transportation cost per ton for all Armenian products traded through the territory of Georgia, the total transportation cost is calculated. In 2006 Armenia’s total trade by weight
carried out through the territory of Georgia amounted to about 3.1 million tons. Multiplying this figure by the average cost per ton, we can have an estimate of Georgian transport services exports
to Armenia, which constitutes about 100.23 million USD.
In respect to the Armenian transport services exports to Georgia, it is important to mention that
Armenian transport companies are not competitive in comparison with those of Georgia, therefore
the volume of transport services exported to Georgia cannot be significant.
There is also an important fact which is worth to be mentioned: Armenia should negotiate for a
50% railway tariff discount with Georgia, as the one provided to Azerbaijan. Georgian railway tariffs
discount provided to Armenia is 21% in average, of which 24% - for oil commodities, 17% - for other
products, i.e. transit costs by the Georgian railways per 1 ton is 12.17 USD in average. If Georgia
provides a higher tariff discount as it is the case with Azerbaijan, transport of a container from Poti
to Sadakhlo would cost 177.2 USD (7.7 USD per ton).
Transit of gas
As it is known, Armenia’s import of natural gas comes from the Russian Federation through the
territory of Georgia, which requires a transit fee of 10% of the natural gas transported by the RussiaArmenia gas pipeline. The price of the gas for Armenia is set at the level of 110 USD for thousand
cubic meters, whilst at the same time the price for Georgia constitutes 230 USD for thousand cubic
meters. According to the Armenian gas importing company “Armrusgasprom”, the following data on
the volumes of imported gas was obtained (see Table 14):
33 Source: National Statistical Office of the Republic of Armenia, Transport and Communications of the Republic of
Armenia, 1999-2003
34 Average cost per ton = ((522 X 0.74) + (1357 X 0.26))/23 = 32.13 $. Calculation is done at a rate 23-24ton per 20 ft.
Container (cargo plus container), which is typical weight for container in Armenia and Georgia
36
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Table 14 Volumes of natural gas imported into Armenia from RF (million cubic meters)
* 10% of total gas imported to Armenia from Russia
Converting these figures to US dollars at a price of 230 USD for thousand cubic meters, we will
have the benefits of Georgia from the transit of gas (See Table 15).
Table 15 Volume of Georgian fees from the transit of gas from Russia to Armenia
(USD, million)
Thus, in 2006 the Georgian benefits from the transit of gas through its territory accounted for
about 41 million USD35.
Tourism services
Another important component describing the trade in commercial services between Armenia
and Georgia is that of tourism services provided by these two countries to each other. A recently
conducted study36 based on the survey organized by the Statistics Department under the Ministry
of Economic Development of Georgia states that the volume of tourism services exported from
Georgia to Armenia for the period of July-October 2006 constituted about 10.27 million USD. On the
other side, Georgian imports of tourism services from Armenia for the same period amounted to
about 4.62 million USD. Thus, during the period of July-October 2006 Georgian net export of
tourism services to Armenia was about 5.65 million USD.
Thus, the total benefits of Georgia from exports of transport and tourism services, as well as
from transit of gas, are as follows:
• Exports of transport services to Armenia – 100.23 million USD;
• Transit of gas – 40.89 million USD;
• Net exports of tourism services – 5.65 million USD;
•
In total – 146.77 million USD. 37
Summarizing the analyses of the trade in services between the observed two countries, it
should be mentioned that Georgia highly benefits from its favourable geographical location as well
as from the fact that Armenia is a landlocked country. High transportation costs for Armenian
exporters and importers are significant source of revenues for the Georgian economy. Besides, high
prices of domestic tourism services and low prices of passenger transportation to Georgia is an
incentive for Armenia to use Georgian tourism services.
35 ‘’Georgia is entitled to 10 per cent of the gas transiting the country as an in-kind fee, but this is reduced by the technical losses incurred in transportation, which amount to about 6 per cent of the quantity transported’’. ‘’In the Pipeline:
Georgia’s Oil and Gas Transit Revenues’’. Andreas Billmeier, Jonathan Dunn, and Bert van Selm, IMF, 2004
36 Vakhtang Pkhakadze, Revaz Tsakadze, Department of Statistics under the Ministry of Economic Development of
Georgia, with financial support of TACIS programme, “Report of the Survey on Shuttle Trade and International Tourist
Services”, Tbilisi, 2006
37 Calculation of the volumes of some other services such as telecommunications, is not possible due to lack of relevant data, caused by not provision of data by Armentel.
UNREALISED OPPORTUNITIES
37
Foreign Direct Investments
Besides trade in goods and services, it is important to analyse also the investment flows. It is a
noteworthy fact that the Georgian direct investment stock in Armenia is too small and amounts to
only 21,200 USD, whilst the total Armenian FDI stock for the period of 1988-2006 constitutes about
1.7 billion USD.38 It is for this reason that the emphasis is made on the flows of Armenian direct
investments into the Georgian economy.
The share of Armenian FDI stock for 2000-2006 in the Georgian economy is also rather insignificant (see Table 16 and Chart 3). However, in comparison with the Georgian direct investments into the
Armenian economy, the figure is much larger and an upward trend may be observed (see Table 17).
Table 16 FDI stocks in Georgia by main investing countries, 2000-2006 (1000 USD)39
Chart 3 Share of FDI stocks in Georgia by main investing countries, 2000-2006 (%)
38 Source: National Statistical Service of the Republic of Armenia, “Socio-economic situation of the Republic of Armenia
for the period of January-February 2007”
39 Source: Department of Statistics under the Ministry of Economic Development of Georgia
38
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Table 17 Growth of FDI flows compared to previous year (%)
The volatility of FDI inflows growth rates across all the countries is obvious: this is natural for
small countries since a small project undertaken by a foreign investor may lead to a significant
increase of growth rate as compared to the previous year. Besides, it is important to note that most
of the investment since 2003 can be attributed to the exceptional influence of the construction of
the BTC pipeline and, more recently, the construction of the gas pipeline. The international consortia involved estimated that their contribution to these inflows accounted for 75% in 2005, and in
2007 it will account for about 50%.40 At the same time, there is a clear upward trend in the FDI volume invested in the manufacturing sector, which constituted about 110 million USD in 2005.
Another interesting fact is that a high growth of FDI inflows to the Georgian economy was indicated in 2003, which can be also explained by the political changes that took place in Georgia. The
number of countries investing in Georgia also increased significantly (see Table 18). Armenian and
Azerbaijani FDI outflows to Georgia commenced in 2003.
Table 18 Number of countries investing into Georgian economy by years
Thus, it can be concluded that the two countries are weakly interlinked with each other in
terms of FDI, although Armenia is becoming more active in this sense, whereas Georgia is playing the role of a passive partner. The revolution in Georgia set favourable conditions for FDI
inflows, including for those coming from Armenia.
•
Summarizing the analyses provided above, it is worth to highlight the following points:
Trade in goods: Armenia plays an active role in regard to merchandise trade. The main
Armenian exports to Georgia include cement and coffee. The Armenian imports from Georgia
mainly consist of sugar, fertilizers, citrus fruits and processed wood. The concentration index
shows that trade between these two countries is being diversified year by year.
40 GEPLAC, “Foreign Direct Investment to Georgia: Can Active Investment Promotion Policies Make a Difference?”,
January 2007
UNREALISED OPPORTUNITIES
•
•
39
Trade in services: Due to its favourable geographical location, Georgia has significant revenues from its export of services. In particular, Georgia highly benefits from export of transport
and tourism services to Armenia, and has revenues from transit of gas. On the other hand, the
large volume of service imports from Georgia to Armenia is due to the fact that the latter is a
landlocked country.
FDI: The two countries are weakly interlinked with each other in terms of foreign direct investment, although flows from Armenia to Georgia are increasing. This means that Armenia again
plays a role of an active partner. The high growth rate of investment inflows to Georgia during
the recent years can be explained by the construction of the BTC pipeline. The growth of FDI
inflows into the Georgian economy shows that the investment climate has improved during the
preceding years.
40
ARMENIA AND GEORGIA ECONOMIC RELATIONS
PART 3.
QUANTITATIVE ANALYSIS AND ECONOMETRIC
ESTIMATIONS
Model Setup
One of the major indicators that characterize economic relations between two countries is the
trade. As mentioned above, both Armenia and Georgia have undergone major structural changes
in their economic systems since the collapse of the Soviet Union. Despite severe inflation and
unemployment that was prevailing in both countries for the most of the 1990s, both countries managed to overcome the existing difficulties and have now become trading partners. The graph below
shows the evolution of trade between Armenia and Georgia. As it can be seen from the graph, the
increase in total trade volume, which is calculated as a sum of imports and exports, is mainly due
to a significant increase in exports from Armenia to Georgia, meanwhile the imports from Georgia
have been increasing in a more moderate pace.
Graph 1
However, it is to be mentioned that since 2003 imports of goods started to be declared based
on their origin rather than by country of imports, i.e. if a gadget was made in Germany but imported from Georgia, then it used to be declared as imports from Germany. Despite this structural
change in trade declaration, the pattern described above still can be seen on the graph covering
the past four years.
Graph 1 is based on figures that include only tradable goods and do not include services which
constitute the second major component of trade. In this study, these two components of trade –
goods and services – were broken down into two parts and analyzed separately. One of the main
hypotheses is that although the growth of imports of goods from Georgia has lagged behind the
growth of exports from Armenia to Georgia, the difference has been made up by growth of imports
of services from Georgia. Particularly, there are two major sources of exports of services from
Georgia to Armenia. These are charges for transportation and tourism. Transportation charges in
their turn are divided into tariffs for communication, such as charges incurring from using the land
for putting up the fiber-optic lines connecting Armenia with the main computer centers, tariffs from
UNREALISED OPPORTUNITIES
41
transporting gas from Russia to Armenia, and tariffs for transiting trucks from European countries
and Russia to Armenia. In this part of the research, the emphasis is put on an empirical analysis of
trade in goods, meanwhile the analysis of services is presented in Part 2 and Part 3 of the Study.
In order to be able to factor out variables that can potentially have an impact on trade relations,
it was decided to suggest and estimate exports and imports demand functions for Armenia.
For any type of good tradable between the two countries – Armenia (A) and Georgia (G) – it is
possible to use the following functional forms:
where EX and IM are exports and imports of good i from and to Armenia in USD in real terms; Pi is
the price for good i - the unit price including transportation costs; P is the price index; and C is consumption in USD terms. Superscript A and G denote the country. ? is the nominal exchange rate
versus USD. The exports and imports are given in real terms.
To obtain a better understanding of how exports and imports demand functions have been estimated, please refer to Box 1.
Thus, if we take the log of the equations (1)-(2) we will get the following relationships:
These theoretical equations assume that there should be equal (in absolute terms) impact of
unit price of goods and price inflation in trading partner country on exports or imports. However,
there may be many reasons as to why this should not be considered a dogmatic statement, and
therefore coefficients in front of these variables in the equations may differ from each other even in
absolute terms. The simplest explanation is that for each type of good there should be its own fixed
effect of the unit price of good i on exports or imports. Therefore, the entire sample of all goods may
not necessarily produce equal coefficients (in absolute terms) on the first two right hand-side variables in equations (3)-(4).
Due attention should be paid also to the coefficient in front of the consumption variable. The
theoretical equation suggests that there should be one-to-one relationship between consumption
and exports, however the elasticity coefficient may vary from unity because of (a) fixed effects of
each type of goods, and (b) year that the analysis covers.
Therefore, we will not constrain any of the coefficients when estimating the equations. Thus, he
adjusted relationships take the following forms:
42
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Where, in addition to all notations, t denotes the time, and uit and eit are the idiosyncratic errors
that can be added to the right hand-side of the equation in order to keep the coefficient constant
across the type of goods and time. This proposed framework can be used for estimating equations
(5)-(6) for pooled dataset.
UNREALISED OPPORTUNITIES
43
Nevertheless, there are several issues that should be considered, and some of them should be
mentioned in the model setup. First, the relationships described above do not take into account the
demand from the rest of the world, and consider only the mutual demand on goods solely between
Georgia and Armenia. However, if the variables can be controlled so that errors are not correlated
with any of the right hand-side variables, then it will be possible to get a pure effect of each of the
three factors that are included in the relationship. To this end, it will be necessary to use special estimation techniques such as two-stage least squares estimation method. Second, the equations
should be estimated in first-difference forms in order get rid of the effect of possible trend in the data
across the time. This is something that is more known as unit root. If the data is not stationary, consistent estimations for coefficients cannot be achieved.
It is anticipated to get the following signs for each of the coefficients for the estimated equations. The unit price of goods should have a negative sign on exports or imports, meaning that higher unit price in Armenia should have a negative impact on exports of goods from Armenia to
Georgia; meanwhile higher prices of import goods from Georgia will have a negative effect on the
volume of imports to Armenia. At the same time, higher consumer prices in Georgia will create a
demand for goods produced in Armenia, whereas higher consumer prices in Armenia will have a
positive impact on the demand for goods imported from Georgia. The impact of consumption rate
in the trading partner on the exports of goods can be ambiguous. The theory suggests that ceteris
paribus higher consumption in trading partner country should proportionally increase the demand
for exports. This is true provided that there are only two trading partners. However, in case there is
a third trading player in form of the ‘rest of the world’, then there can be a negative effect on that
very variable. The factor behind it is that with increasing consumption, say in Georgia, Georgians
will import less Armenian goods, substituting them by imports from other trading partners, such as
EU countries. The same is true for Armenia as well. The higher is the net wealth of Armenian consumers, i.e. higher consumption in Armenia, the more goods will the Armenian consumers substitute by importing from other trading partners.
Data Mining
As mentioned above, the change in trade declaration based on the origin rather than on country of imports took place in the beginning of 2003. Therefore, to ensure the consistency of our data,
this analysis includes data covering the period of 2003-2006. However, not all types of goods have
been traded during the course of each of these four years. Therefore, in order to come up with a
balanced panel of data, all goods that have not been traded during at least one of the years of the
observed period were excluded. The raw dataset was obtained from the National Statistical Service.
The depth of the data included types of goods aggregated up to the 8th digit. Since this kind of data
was too detailed and did not allow for enough observations when filtered to obtain a balanced panel
of data, the data was aggregated up the 4th digit. After filtering the data, 45 types of goods were
left at the 4th digit of aggregation for exports data, and 25 types of goods for imports data. The list
of the types of goods for both exports and imports is given in Table A1 and Table A2 of Annex 1.
Table A3 provides the goods that were in the list of both exports and imports during 2003-2006.
44
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Table 19. Entire and filtered Armenian exports and imports to and from Georgia
Table 19 provides the share of filtered data in the total value of exports and imports. The purpose of this calculation is to ensure that filtering out types of goods that did not encounter in at least
one of the observed years did not cut off the bulk of the total exports or imports during the given
year. Moreover, it can be concluded that on average 63% of exports during 2003-2006 was made
of the same 45 types of goods aggregated to the 4th digit; meanwhile around 67% of imports were
created by 25 types of goods.
Table A3 of Annex 1 shows that there were only 3 types of goods that were traded in both directions. This suggests that during the preceding four years the two countries have been complementing each other rather than competing with each other.
The conclusions drawn on the basis of the tables lead to the hypothesis that trade between two
countries lies in different layers of demand. Georgia has a larger demand on tradable goods from
Armenia rather than the letter has on imports from Georgia. At the same time, the lower demand by
Armenians for imports from Georgia is substituted by imports of services from Georgia. For more
detailed information on services, please refer to Part 2 of the Study.
For each observation, i.e. type of good, it has been possible to obtain the total weight or the
number of units for each type of good, as well as its total value in US dollars. From here, the unit
price for each type of good was obtained and its change over the previous period as a change in
the unit price of good, or in other words deflator, was considered. By construction unit price of goods
also include transportation costs (TC) associated with transit of goods for exports or imports. In
order to be able to segregate TC from the entire value of goods, a survey was conducted with a
local freight company, “Apaven”. In fact, although the entire turnover of the trade has increased over
the years, it did not put any specific downward pressure on the transportation cost which stayed
constant over time.
Consumer prices, consumption and nominal exchange rate series were obtained from the
International Financial Statistics (IFS) compiled by the International Monetary Fund. Series that represent consumer prices are 91164...ZF... for Armenia, and 91564...ZF... for Georgia. Both are given
as an index which equals 100 for Y2000. Consumption series are represented by household consumption expenditures, including NPISHS, and given in 91196F..ZF... for Armenia and 91596F..ZF...
for Georgia, as classified by IFS. Figures given in local currency were converted to US dollars,
using the nominal exchange rate taken as average for each year, rather than the end-of-period41.
The series corresponding in IFS are 911..AF.ZF... for Armenia and 915..AF.ZF... for Georgia.
41 More information on data dissemination and methods of data compilation can be found at http://www.imf.org.
UNREALISED OPPORTUNITIES
Estimation and Results
45
Equations (5)-(6) were estimated using regression methods for panel of data for 2003-2006.
Since the variables associated with the rest of the world were omitted, the right hand-side variables
might be correlated with errors which can bring some endogeneity in the system. The control for this
estimation was done using two-stage least squares method, where as instruments were taken all
exogenous variables as well as lagged series for unit prices. The equations were also controlled for
fixed effects for cross-section data. Breusch and Pagan Lagrangian multiplier test was performed to
make sure that there is in fact a statistical difference in using fixed rather than random effects in the
system. The results of the test are given in Annex 1 in Table A4. Nothing was controlled for time
dimension since, as was mentioned in the model setup, the main variation brought into the system
is mainly due to various types of goods. Also because of the latter, cross-section coefficients covariance matrix was estimated using White’s cross-section estimates to take into account the heteroskedasticity in the data. Equations were estimated in log-differences, which approximately equal
to percentage change. This however forces to drop off one year of observations - Y2003 - which consisted of 45 data observations for exports, and 25 for imports. However, it was still possible to ensure
consistency in the estimation since even after dropping an entire year of observations, there were 3
x 45 = 135 observations for exports, and 3 x 25 = 75 observations for imports. Outputs of estimation
for both exports and imports demand functions are given in tables below.
Table 20. Estimation results for exports demand function
Table 21. Estimation results for imports demand function
46
ARMENIA AND GEORGIA ECONOMIC RELATIONS
The tables above show that the estimated coefficients in the demand functions are of the initially anticipated sign, as suggested by the theory. Coefficients are also statistically significant. The
coefficient on consumption has a negative sign. As already mentioned, this can be explained by the
fact that the export function is higher than the consumption rate in Georgia, more Georgians substitute Armenian goods with those from the rest of the world. Particularly, with higher living standards, Georgians would rather import goods from EU countries as goods of supposedly higher
quality. Unfortunately, it was not possible to construct a model taking into account the demand of
imports and exports using not only two countries, but incorporating the rest of the world as well,
since it was beyond the scope of this research. For this purpose, it was necessary to build a computable general equilibrium (CGE) model and calibrate it42.
Results of the regression analysis for exports demand function are as follows. One percent
increase in unit prices of exportable goods has a very minor impact on the exports: it will decrease
only by approximately 0.09%. In other words, the price elasticity of Armenian exports to Georgia is
very inelastic. The explanation behind this is that the export to Georgia is very concentrated43. The
huge bulk of exports consist of only 5 types of goods, of which cement is the largest. The Ararat
cement factory, which is the only cement factory in the region that uses dry technology, produces
comparably cheap cement. Even with transportation costs from Armenia to Georgia, the import of
cement is still cheaper than its production in Georgia via the wet technology. Booming construction
in the region has increased the demand for cement, which Armenian producers were more than
ready to provide with inflating prices from year to year.
However, it can be assumed that price elasticity of exports will grow as Georgia starts diversifying its imports, finding other sources of substitutes. Particularly, investment projects in the area of
diversification of energy resources are observed. Besides importing electricity from Armenia,
Georgia has set up lines of electricity imports also from Azerbaijan and Turkey.
With regard to consumer prices, a one percent change in consumer prices - an indicator more
known as inflation - in Georgia brings to 1.42% increase in exports of goods from Armenia. This is
explained by the differences of the monetary policies pursued in Armenia and Georgia. Starting from
early 2004, the US dollar exchange rate depreciation pressures placed all central banks in front of
a dilemma of either artificially depreciating their national currencies by sterilizing capital inflows and
thus creating monetary inflation, or concentrating on inflation control, letting the local currency
appreciate and thus ‘hurt’ the exports. Georgia, being a country with comparable low exports of
goods as a share in GDP, could not afford itself to have appreciation of real effective exchange rate.
Exports of services in Georgia, half of which contributes to ‘passive’ type of exports of services such
as transit, is almost equal to the exports of goods. The table below shows the structure of Armenian
and Georgian exports by year, from 2003 to 2006:
Table 22 Structure of Armenian and Georgian exports by year, from 2003 to 2006
(million USD)
* Source: National Statistical Service of the Republic of Armenia
** Source: World Trade Organisation official web page
42 See for example AEPLAC 2004
43 For more details see Part 2
47
UNREALISED OPPORTUNITIES
As it can be seen from the table, Armenian exports of goods as share in the GDP is higher than
in Georgia. This partially explains why the Central Bank of Armenia was not conducting an
exchange rate monetary policy but rather aiming at price stabilization and productivity. Table 23
shows the inflation and exchange rate dynamic of both countries. Inflation rate in Georgia during
the recent years has stayed well above Armenia’s inflation, which made the Armenian goods cheaper as compared to the Georgian ones. This explains the positive sign of the impact of Georgian consumer price change on exports from Armenia to Georgia.
Table 23. Exchange rate and inflation dynamics in Armenia and Georgia
* Negative sign means appreciation of the local currency versus USD.
It would be more than naive to bring inflation figures of trading countries without looking at the
bilateral nominal exchange rate. The graph below shows the dynamics of exchange rate AMD/USD,
GEL/USD and AMD/GEL. To make the visual concept easier, all three graphs were normalized with
the end of December 2002, set at 100. As seen from the graph, the Armenian dram has appreciated against the Georgian lari by 20% during the last four years. At the same time, the inflation difference between two countries amounted to almost 13%. In other words, during 2003-2006 in real
terms the Armenian dram has appreciated against the Georgian lari, which made imports from
Georgia more attractive and exports from Armenia less attractive.
Graph 2
The next variable is consumption. Estimation results show that ceteris paribus one percent
increase in Georgian household expenditures in USD terms will result in a decrease in imported
goods from Armenia by 1.1%. As explained above in the theoretical model setup, a negative effect
of consumption on demand for imports is explained by the fact that the richer the people, the more
they are inclined to substitute their consumption with more expensive goods. Besides, both
48
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Azerbaijan and Turkey have become real competitors to the Armenian exports. Particularly, several agricultural products have been substituted by imports from neighbouring countries rather from
Armenia, either because of quality or cheapness. This, of course, can be one of the explanations.
Another explanation is that during the preceding 3-4 years Georgia has undergone major geopolitical changes, which in one way or another have had an influence on the trade relationship between
the two countries. However, the most important explanation is that during past 4-5 years the
Armenian economy has been growing at a fast pace, which made the demand of the same
exportable goods to be redirected towards domestic consumption. If we consider, say, the cement
production, the boom of construction in Armenia has created an extra demand for cement, whereas the cement producing factories, because of reaching their full capacity utilization, were not able
to supply the entire domestic market without cutting down the volume of cement export to Georgia.
The estimates of the imports demand function are given in Table 21. The sign of the estimates
of the coefficients basically corresponds to the initial assumptions. However, the estimation results
did not appear very robust as we considered some series in cross-section and time dimensions.
The estimation also did not produce any meaning magnitude of coefficients.
As an explanation to this it can be stated that, firstly, the non-robustness of estimation can be
described by the fact that the imports of goods from Georgia is very concentrated. As calculated and
presented in Part 2, the imports concentration index during the recent years has stayed on comparatively high levels. This created an effect of dominant observations during the estimation, which
resulted in a non-stable estimation output. Besides, a number of goods in the imports decreased during the time, which also had a similar effect. Secondly, as described above, a large part of Georgian
exports consists of services, and there are a few types of goods that Georgia exports consistently.
This has also created problems in the estimation of the imports demand function from Georgia. For
more information on imports structure from Georgia to Armenia, please refer to Part 2.
•
•
•
•
Summarising the above mentioned results of the analysis, the findings can be formulated as follows:
Increased living standards in Georgia will lead to decreased imports from Armenia, as a result
of substituting the Armenian imports to Georgia by similar products - with supposedly higher
quality - imported from the EU and other countries.
One percent increase in unit prices of exportable goods has a very minor impact on the exports:
it will decrease only by approximately 0.09%. In other words, the price elasticity of Armenian
exports to Georgia is very inelastic because of the high level of concentration of Armenian
exports to Georgia (the main part of Armenian exports to Georgia consists of only 5 types of
goods, of which cement is the largest). Nevertheless, it can be assumed that the price elasticity of exports will grow as Georgia starts diversifying its imports, finding other sources of substitutes.
A one percent change in consumer prices (inflation) in Georgia brings to 1.42% increase in
exports of goods from Armenia. This is explained by the differences in the monetary policies
pursued in Armenia and Georgia.
Moreover, estimation results show that ceteris paribus one percent increase in Georgian household expenditures in USD terms will result in a decrease in imported goods from Armenia by
1.1%. A negative effect of consumption on demand for imports is explained by the fact that the
richer the people, the more they are inclined to substitute their consumption with more expensive goods. Besides, both Azerbaijan and Turkey have become real competitors to Armenian
exports. In particular, several agricultural products have been substituted by imports from neighbouring countries rather than from Armenia, either because of quality or cheapness. Moreover,
during the past 4-5 years the Armenian economy has been growing at a fast pace, which made
the demand of the same exportable goods to be redirected towards domestic consumption. If
we consider, say, the cement production, the boom of construction in Armenia has created an
extra demand for cement, whereas the cement producing factories, because of reaching their
full capacity utilization, were not able to supply the entire domestic market without cutting down
the volume of cement export to Georgia.
UNREALISED OPPORTUNITIES
PART 4.
ANALYSIS OF THE CURRENT STATUS OF
ECONOMIC RELATIONS BETWEEN ARMENIAN AND
GEORGIAN BORDERING REGIONS
49
The activation of economic cooperation between Armenia and Georgia is very important not
only in a state level, but even more important for the development of regions in both countries.
There are large regional disparities in both countries in terms of income of population, business
developments and other socio-economic issues. The economic cooperation between the regions
near the Armenian-Georgian border will provide extensive opportunities for the development of
these regions.
The border between Armenia and Georgia lies between two regions from Georgia (SamtskheJavakheti, Kvemo Kartli) and three regions from Armenia (Shirak, Lori, Tavush). The length of the
border is about 164 km.
There are three frontier points which connect Armenia with Georgia: Bavra (Akherpo) point
(Shirak to Samtskhe-Javakheti), Gogavan (Guguti) point (Lori to Kvemo Kartli) and Bagratashen
(Sadakhlo) point (Tavush to Kvemo Kartli). The last one is the main border point which serves as a
transit way between countries. The Gogavan point is used quite rarely and mostly for regional
issues.
To study the opportunities of economic cooperation between these bordering regions, it is necessary to obtain an understanding of the trends of socio-economic development of these five
regions.
Socio-Demographic Trends
Population and Area of Bordering Regions
It would be expedient to start the comparison of the bordering regions of Armenia and Georgia
with the main physical indicators: area and population. Each of the two Georgian bordering regions
is twice larger in terms of their area than each of the Armenian regions. The area of Kvemo Kartli
region in Georgia is 6,528 km2, and the area of Samtskhe-Javakheti – 6,412 km2, while the largest
bordering region from Armenia (Lori) has an area of only 3,789 km2. However, since there are three
regions from Armenia that have a border with Georgia (two bordering regions), the difference in
overall bordering area is a bit less. The overall area of the Armenian regions that have border with
Georgia comprises 9,174 km2 (which is 30.8% of Armenia’s overall territory), while the correspon-
ding area in Georgia is 12,941 km2 (or about 18.6% of Georgia’s overall territory44). The area of bordering regions from the Georgian side is larger by 41.1%.
The population indicators of the observed regions have lower disparities than the indicators of
area. Moreover, the overall figures for bordering regions from Armenia and Georgia are close to
each other. The overall population from the Armenian side is 698.2 thousand (as of 01.01.200745),
while the corresponding figure for Georgia is 716.1 thousand (as of 01.01.2006)46. The share of the
population living in the regions bordering with Georgia in the whole population of Armenia is about
21.7%, whereas the same figure for Georgian regions is about 16.3%47.
44 Or 22.6% of the territory of Georgia, without Abkhazia and South-Ossetia regions which are currently out of the control of the central government.
45 Or 699.2 thousand as of 01.01.2006.
46 Here and further in the text some data on Georgia refer to previous years because of unavailability of data.
47 The population of Georgia is estimated without the Abkhazia and South-Ossetia regions which are currently out of
the control of the central government.
50
ARMENIA AND GEORGIA ECONOMIC RELATIONS
The highest density of the population was registered in Shirak region (105 people per 1 km2)
and the lowest in Samtskhe-Javakheti – only about 33 people per 1 km2 (Table 24).
Table 24. Main indicators of the bordering regions.
Source: NSS Republic of Armenian, Statistics Georgia
Taking a look at the changes in the number of people living in the observed regions during the
last five years, it becomes obvious that the number of people in Georgian regions is growing, while
the population in the Armenian regions is decreasing (Chart 4). Moreover, the average annual
growth rate of the number of people in these two regions of Georgia is higher than the average figure for the country (mainly due to higher rates in Kvemo Kartli region). At the same time, the change
in the population of the Armenian bordering regions is lower than the average figure for the country, which speaks about the different trends of regional development in two countries.
Chart 4. Average annual population changes, 2002-2006, %
Source: Statistical Yearbooks of Armenia and Georgia
For the description of population it is important to understand the structure of each region by
the type of settlement (Chart 5). Two bordering regions from Georgia have population mainly from
rural settlements, which is decisive for the development of the region mainly by the agricultural production direction. At the same time, two out of three Armenian bordering regions have a large share
of urban population, which means that these regions should have a large share of industry in the
economic structure of the regions.
UNREALISED OPPORTUNITIES
51
Chart 5. The structure of population in the regions by the type of settlement (urban, rural)
Sources: NSS Armenia and Statistics Georgia
Another factor - which we think can have an influence on the further cooperation between the
regions of Armenia and Georgia - is the structure of population in the regions of Georgia by ethnicity.
While Armenia has a homogenous structure of population by ethnicity (about 98% of the population of
Armenia are Armenians), the structure of population in Georgia is very different by regions. If the share
of Georgians in the whole country is about 84%, the share of Georgians in these two bordering regions
is about 43-45%. The majority of the population of Samtshe-Javakheti region are Armenians (about
55%), while in Kvemo Kartli region about 45% of the population are Azerbaijani and 6% are Armenians.
Poverty
Taking into account the household survey results conducted in two countries, a comparison of
the figures of poverty in two countries has been made. As it can be seen from Table 25, the indicators of poverty incidence in 2004 were almost the same in a country level; however if it decreased
in Armenia in 2005, in Georgia the indicator of poverty incidence increased in 2005. Thus, in 2005
the poverty level in Armenia was by about 10 percentage points lower than in Georgia. Another
interesting difference for the poverty indicators of the counties is the levels of poverty in urban and
rural areas. In Armenia the poverty indicator in urban areas is higher than in rural ones, while in
Georgia it is vice versa: the poverty level is higher in rural areas than in urban ones.
Table 25. Poverty indicators in Armenia and Georgia, 2004 and 200548
Source: Social Snapshot, NSS Armenia and PRSP update for Georgia
48 As it was mentioned earlier the poverty lines are different in different countries and the figures should not be directly
compared.
52
ARMENIA AND GEORGIA ECONOMIC RELATIONS
When referring to the regional composition of poverty indicators, it should be stated that poverty incidence level is the highest in Shirak region of Armenia (Table 26). The indicator for 2005 in
Shirak was 42.5%, which was by 12.7 percentage points higher than the country average level of
poverty incidence. The other two bordering regions of Armenia – Lori and Tavush - have comparably lower indicators of poverty incidence, constituting 28.8% and 25.8% respectively.
Table 26. Poverty indicators by regions of Armenia, 2004 and 2005
Source: Social Snapshot, NSS Armenia
Similar information regarding the Georgian bordering regions was not available. However, different documents49 mention that the poverty level in Samtshke-Javakheti is 66% and the officially
declared minimum living standards – 51.1 %, while in Kvemo Kartli region it is much higher -78%.
These figures have been calculated by the old methodology according to which Georgia’s average
poverty was about 51% (while according to the new methodology it is 35.7%), therefore they are
not comparable with the relevant Armenian figures. Nevertheless, if these indicators are compared
within Georgia, it can be stated that in both bordering regions the poverty level is much higher than
in a country as average.
It is also interesting that if the comparison of average wages50 and poverty level in Armenian
regions is more or less close to each other, in the Georgian region this trend is not observed.
Samtskhe-Javakheti region has lower level of average wages but its poverty level is also lower than
in Kvemo Kartli region. Thus, the high level of poverty with the comparably high level of average
wages in Kvemo Kartli speaks about large disparities within the region among populations’ income
levels. This can be explained with the existence of some industrial giants in the main city – Rustavi,
while the rest of the region is not developed more than Samtskhe Javakheti region and, moreover,
than the Armenian bordering regions.
Labour Market
Comparison of labour market indicators between the bordering regions from Armenia and
Georgia shows that the Georgian regions have some advantages. These advantages are viewed in
two different types of comparison. First, if we compare the figures of bordering regions with each
other and, second, if we compare bordering regions with the average indicators of their countries.
The registered unemployment rates for Georgian regions are much lower than for Armenian
ones. If in Samtshkhe-Javakheti region the unemployment rate was 9.2% in 2005, then for Shirak
and Lori regions it was about 18%. The main reason for such an essential difference is obviously
the structure of population by the type of settlement. Employment of urban population is more sensitive to economic processes in the country than the employment of rural population. Most of the
49 Georgia PRSP update, 2005
50 Labour market trends by regions are discussed below.
UNREALISED OPPORTUNITIES
53
economically active rural population are employed at their own lands. The unemployment rate of
Tavush region, which is more or less comparable with Georgian regions by its share of rural population, speaks about the influence of this factor.
The factor of rural population works also in case of comparing the employment rates of the
regions with the average figures of their country. In observed Georgian regions the rates of unemployment are lower than the country average, while the same figures for the Armenian bordering
regions (except Tavush) are much higher than the country average indicator.
Table 27. Main indicators of Labour market by bordering regions, 2005
Source: NSS Armenia and Statistics Georgia
To understand the figures of Table 27 (also the size of influence by urban-rural population factor), it is worth to look at the structure of employment by types of economic activity.
In all five regions the biggest share of employment refers to agricultural activities. But if its share
in Shirak and Lori regions is a bit more than the half of all employment in the region, then SamtskheJavakheti region almost 80% are employed in agriculture. The employment structures of Tavush
and Kvemo Kartli regions are mostly similar. The only substantial differences between these regions
are in the trade and social sectors. Kvemo Kartli region has the biggest share of employed in the
trade sector in comparison to all observed regions. This can be attributed to the favourable location
of the region. It has borders not only with Armenia but also with Azerbaijan. Taking into account the
relations between Azerbaijan and Armenia, this region has become the trade centre between the
three countries.
Other differences between the shares of employment by types of activity in observed regions
are conditioned by the peculiarities of their countries. Thus, it can be noticed from Table 28 that the
share of employment in social (education, health, etc.) as well as construction sectors is higher in
the Armenian regions. The share of employment in social sectors in Armenia (whole country) beats
the Georgian indicator by 2.4 percentage points.
54
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Table 28. The structure of employment by types of activity in bordering regions, 2005
Source: NSS Armenia and Statistics Georgia
In a country level, the largest differences are viewed in the shares of employment in industry
and agriculture sectors (Chart 6).
Chart 6. Shares of employment by main types of economic activities in
Armenia and Georgia, 2005
Source: NSS Armenia and Statistics Georgia
The comparison of the level of monthly average wages in the two countries shows that the figures and trends for Armenia and Georgia are very close to each other. If in 2002 the average monthly wage of hired employees in Georgia was equal to 45.7 USD and in Armenia – 44.1 USD, then in
2005 these indicators are even closer – 112.7 USD for Georgia and 113.7 USD for Armenia.
However, a closer look at the level of wages by types of economic activities reveals some differences between the countries’ indicators (Chart 7).
UNREALISED OPPORTUNITIES
55
Chart 7. The level of wages in Armenia and Georgia by types of economic activity (NACE)*
to corresponding country average wage level (average wages for the countries=100) (2004)
* A - Agriculture, hunting and forestry, B -Fishing, C - Mining and quarrying, D - Manufacturing, E - Electricity, gas
and water supply, F - Construction, G -Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and
household goods, H - Hotels and restaurants, I - Transport and communication, J - Financial intermediation, K - Real
estate, renting and business activities, L - Public administration, M - Education, N - Health and social work, O - Other community, social and personal service activities.
Source: NSS Armenia and Statistics Georgia
The largest advantage of Georgian wages are observed: (a) in the banking sector (financial
intermediation) wages, where wages in Georgia are higher by 25% than the wages in the same sector in Armenia and by 4.7 times higher than average wage level in Georgia, (b) construction, (c)
transport and communication, (d) other services. The wages in Armenia are higher in: (a) mining
and quarrying (by about 90% higher than in Georgia), (b) hotels and restaurants (by about 2.5 times
higher than in Georgia), (c) public administration, (d) agriculture, (e) energy sector.
The disparity level between wages of different types of activities is higher in Georgia (index of
standard deviation of wages by activities in Georgia is 108, in Armenia - 80).
The disparity of average wages in Georgian bordering regions is also higher than in Armenia.
The level of monthly wages in Kvemo Kartli (74.5 USD) is by 38% higher than in neighbouring
Samtshe-Javakheti region, where average monthly wages comprised about 54 USD in 2004. The
figures of Armenian regions for 2004 lie between the figures of Georgian regions. Average monthly wage in Shirak was 62.4 USD (2005 - 90.1), in Lori – 66.9 USD (2005 - 93.6) and in Tavush –
59.0 USD (2005 - 83.8).
The average levels of wages in all five bordering regions are lower than the average levels of
their corresponding countries (Chart 8).
56
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Chart 8. The comparison of average monthly wage levels of bordering regions with their
country average (countries average=100) 2004
Source: NSS Armenia and Statistics Georgia
Economic Development Status of the Regions
Industry
Industrial production plays one of the main roles in the economy of both countries. The share
of industrial production51 value added in GDP for 2006 in Armenia was 17.4%, while in Georgia 12.4%. At the same time the absolute values (in terms of current USD) of volumes of industrial output were very close to each other. In 2001, the volume of industrial output in Armenia comprised
557.3 million USD and in Georgia – 557.2 million USD, whereas in 2006 it amounted to 1,546.7 million USD in Armenia, and 1,540.1 million USD in Georgia.
If the industrial output figures are very close to each other in a country level, in a regional level
there are differences, particularly if we take into account the bordering regions. The overall share of
three bordering regions from Armenia in the country’s total industrial output was 9.9%, which is the
highest indicator in comparison with the corresponding figures of the preceding six years. The
growth is due to the growth in industrial production in Lori region.
Industrial output levels are very different in the two bordering regions from the Georgian side.
If in 2006 the share of Samtskhe-Javakheti in the total industrial output of Georgia was only 2.5%,
the same indicator of Kvemo Kartli region was about 26.4%. Kvemo Kartli region has the second
largest share in the industrial production of Georgia among all regions, after Tbilisi. The dynamics
of the shares of the bordering regions in the industrial production of their countries is presented in
Chart 9. As it can be seen from the chart, during 2001-2006 two out of five observed regions have
registered growth in the shares of industrial output (Lori and Kvemo Kartli).
51 C, D, E – sectors in the classification of economic activities (NACE)
UNREALISED OPPORTUNITIES
Chart 9. Dynamics of shares of industrial output in the total industrial output
of their countries by observed regions, 2001-2006
57
Source: NSS Armenia and Statistics Georgia
Taking into account that the volumes of industrial output in Armenia and Georgia were very
close to each other, Chart 9 describes also the comparison of the output levels between the regions.
Thus, the industrial output of Kvemo Kartli was about 3.7 times higher than the same indicator for
Lori and more than 10 times higher than the indicators of the remaining regions.
This picture will change in case of comparing the per capita output levels (Chart 10). In 2006,
the per capita industrial output volume for Kvemo Kartli region was 800 USD - about twice higher
than the indicator of Lori region (393 USD).
Chart 10. Per capita industrial output by regions, USD
Source: NSS Armenia and Statistics Georgia
The development of the industry in Kvemo Kartli region can be attributed to the fact that several large industrial enterprises operate in the region. Rustavi is the main city of the region, where the
Azot chemical combine and the metallurgical plant are located. The thermal power plant Mtkvari
Energetika and the mining companies Kvartsiti and Madneuli engaged in the extraction of copper
58
ARMENIA AND GEORGIA ECONOMIC RELATIONS
and gold are among other large enterprises operating in the region. Samtske-Javakheti has lower
level of industrial production development. A large part of the enterprises functioning in the region
include mineral water bottling factories (Borjomi), bakeries, cheese and sausage producing plants
and timber processing enterprises.
The Table in Annex 2 provides detailed figures of Armenian regions as to their industrial production per capita. As it can be seen from the Table, the Lori region has an advantage over the average level of Armenia in the production of basic metals. The other two regions have comparably
lower indicators in all types of activities. The lack of data on industrial subsectors in the bordering
regions from Georgia makes it impossible to draw a comparison and define the sub-sectors for
cooperation between bordering regions of Armenia and Georgia.
Agriculture
In 2006, the shares of agricultural output in GDP were 18.2% for Armenia and 11.3% for
Georgia. In 2005, the volume of agricultural output in US dollars for Armenia was 1,077 million USD,
and for Georgia - 1,427 million USD. The same figures presented by per capita interpretation are
very close to each other – 335 USD in Armenia and 327 USD in Georgia. The composition of agricultural output by two main branches of agriculture is different in these countries. Plant growing output accounted for 58.4% of the total agricultural output in Armenia, while in Georgia it was 52.7%.
Taking a closer look at the figures of plant growing and animal husbandry outputs by per capita
interpretation, it can be seen that the indicator of plant growing output per capita is higher in
Armenia, while the same indicator for animal husbandry is higher in Georgia (Table 29). Plant growing output per sown area is also higher in Armenia (in 2005, Armenia’s figure was 1,905 USD per
hectare against Georgia’s 1,392 USD per hectare).
Table 29. Agricultural output per capita in Armenia and Georgia, 2001-2005, USD
Source: Calculations are based on the figures of NSS Armenia and Statistics Georgia
Although the agricultural output data in a country level are more or less close to each other, the
regional comparison provides a different pattern (Table 30). The per capita harvest of potato and
vegetables in Kvemo Kartli region of Georgia is the highest between the indicators of all five
observed regions; moreover it was 2.5-3 times higher than the Georgia’s average level. The highest indicator of the per capita harvest of cereals belongs to Samtskhe-Javakheti region. Fruit and
grapes are the advantage of Armenia’s Tavush region. Although Shirak and Lori regions did not
have an advantage over the other regions by their per capita production indicators, however Shirak
region’s productivity per hectare of sown area of potato and vegetable is the highest.
UNREALISED OPPORTUNITIES
Table 30. Plant growing indicators by regions, 2005
59
Source: Calculations are based on the figures of NSS Armenia and Statistics Georgia
The comparative indicators of animal husbandry by regions are as follows (Table 31):
Samtskhe-Javakheti region has the highest figures of livestock number per capita in comparison
with the other four regions, by three out of four observed categories – cattle, cows, sheep, and
goats. The highest number of pigs per capita is registered in Tavush region of Armenia. In a comparison of production of animal husbandry, Kvemo Kartli has the highest indicators in egg and wool
production. Samtshke-Javakheti is the leader in per capita milk production.
Table 31. Animal husbandry indicators by regions, 2005-2006
Source: Calculations are based on the figures of NSS Armenia and Statistics Georgia
The observation of agricultural data in the bordering regions and the definition of some comparative advantages of separate regions show that the cooperation between Georgian and Armenian
bordering regions can be as follows: cereals and animal husbandry products from the Georgian side
and potato and vegetables (as well as fruits from Tavush) from the Armenian side.
60
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Construction
Construction has become the leading industry in the Armenia for the last few years. It has been
the driving industry in GDP growth for Armenia during the last five years. Its share in total GDP for
2006 comprised 26.7%, while in 2001 it was only 9.7%. However, the construction activities are not
equally distributed between the regions of the country. About 82% of construction activities in the
country fall to the share of Yerevan.
The share of construction in Georgian GDP has also been growing during the recent years, but
it is much less than in Armenia. In 2005 the share of construction in GDP was 8.7%, while in 2001
it was 3.9%. It is interesting that the distribution and trends of construction activities in Georgia are
similar to the Armenian trends. In 2006, about 72% of construction was concentrated in Tbilisi.
Taking into account the above mentioned trends, it is worth to discuss the construction production in the bordering regions. The shares of construction in all five bordering regions in the total construction of their countries are very low. In 2006, Lori region’s share was 3.1%, Shirak’s share was
1.3%, and Tavush’s share in the total construction was only 1%. At the same time, the share of
Samtskhe-Javakheti in Georgia’s construction was 2% and the share of Kvemo Kartli – 3.4%. The
trend of the shares in construction shows that during last five years the shares of Armenian regions
in the country’s total construction have dropped, while the shares of Georgian bordering regions in
the total construction of Georgia are slowly growing. Chart 11 shows the volume of construction in
the observed regions. The largest volume in 2006 was registered in Lori – 46.5 million USD, while
Samtshke-Javakheti is still the last with volume of construction of 11.7 million USD.
Chart 11. Volumes of construction in the bordering regions of Armenia and Georgia,
2001-2006, million USD
Source: NSS Armenia and Statistics Georgia
Table 32 shows the per capita indicators of construction by the observed regions. It is obvious
that the figures in Armenia are much higher than the same figures in Georgia which is due to the
higher share of construction in Armenia’s GDP in comparison to the Georgian one. The growth in
construction of Samtskhe-Javakheti is also worth to mention: it implies that the region (which is
probably the less developed between the five observed countries)52 is attracting more investments,
which is a matter of several programmes and investments aimed at reduction of poverty in the
region (it is assumed that it is related also to the growth of construction in Armenia (as the majori52 The industrial production, construction and services volume data comparison as well as the comparison of data on
wages show that Samtskhe-Javakheti is the less developed region between the five observed regions.
UNREALISED OPPORTUNITIES
61
ty of the population of Samtskhe-Javakheti are Armenians, it could have served as an opportunity
for this region to gain from the development of Armenia)).
Table 32. Average per capita volumes of construction for YY2001-2006, USD
Source: Calculations are based on the figures of NSS Armenia and Statistics Georgia
Transport and Communication
The comparison of transport and communication sectors turnovers between countries shows
the advantage of Georgia upon Armenia. The sector’s turnover per capita in 2005 was about twice
higher in Georgia than in Armenia. This can be explained by the location of the country and the
geopolitical situation in the South-Caucasus region (also the advantage of having a sea). Georgia
is the main transportation route for Armenian exporters and importers. It has also a large role in
Azerbaijan and Turkey relations.
However, the figures of the bordering regions show that the per capita indicators of transport
and communication sector outputs of Georgian bordering regions are not higher than those of
Armenia. Moreover, the Samtskhe-Javakheti region has a very low figure in comparison to the other
four regions. The other Georgian region – Kvemo Kartli - has good communication links - the main
motor road and railway line connect Tbilisi with Armenia and Azerbaijan.
Table 33. Transport and Communication sectors’ turnover per capita by regions, USD
Source: Calculations are based on the figures of NSS Armenia and Statistics Georgia
62
Trade turnover
ARMENIA AND GEORGIA ECONOMIC RELATIONS
The comparison of trade turnover per capita indicators in a country level shows the higher
growth rate of Georgia, although the Y2005 figures are close to each other (Armenian figure is even
slightly higher). In a regional level, Kvemo Kartli region has the highest indicator of per capita trade
turnover, which can be explained by the location of this region. Being located between Armenia,
Azerbaijan, and Georgia brings a significant advantage for trade, also taking into account the
absence of direct trade relations between Armenia and Azerbaijan. Again – similar to the case of
transport and communication - Samtskhe-Javakheti region has the lowest indicator in comparison
to the other four regions.
Table 34. Trade Turnover per capita by regions, USD
Source: Calculations are based on the figures of NSS Armenia and Statistics Georgia
Business Demography
The level of business activity can be measured also by the number of registered business entities in the country or in a region. Thus, the comparative figures of registered entities per capita in
Georgia and Armenia show the more favourable position of Georgia in 2006. It can be noticed from
Table 35 that the advantageous position of Georgia can be attributed to higher growth rate of registering business entities during the preceding five years. In Georgia there was an 86% growth of
the number of entities per capita during last five years, while the same figure for Armenia was only
12%. If the number of entities per 1,000 people in 2002 was higher in Armenia by 46%, then already
in 2006 the figure of Georgia topped that of Armenia by 14%.
The growth of the number of entities per capita is also higher in Georgian bordering regions in
comparison to the Armenian ones. Due to this trend, the number of registered entities for Kvemo
Kartli reached the level of 31 entities per 1,000 population, which is about the same level as in
Armenia’s Tavush and Lori regions. The number of entities per 1,000 people is lower in Shirak and
even less in Samtshkhe-Javakheti – only about 19 entities per 1,000 people.
UNREALISED OPPORTUNITIES
Table 35. Number of registered entities per 1000 people
63
Source: Calculations are based on the figures of NSS Armenia and Statistics Georgia
-
-
-
Summarising the above analysis, it can be stated that:
The border between Armenia and Georgia lies between two regions from Georgia (SamtskheJavakheti, Kvemo Kartli) and three regions from Armenia (Shirak, Lori, Tavush). The length of
the border is about 164 km.
The overall area of the Armenian regions that have border with Georgia comprises 9,174 km2
(which is 30.8% of Armenia’s overall territory), while the corresponding area from Georgia is
12,941 km2 (or about 18.6% of Georgia’s overall territory53), which is larger by 41.1%.
The overall figures for population living in the bordering regions of Armenia and Georgia are
close to each other. The overall population from the Armenian side is 698.2 thousand (as of
01.01.2007), while the corresponding figure for Georgia is 716.1 thousand (as of 01.01.2006).
During the recent five years the population in the bordering regions from Georgia has been
growing, while the number of population in the Armenian side has been declining.
Unfortunately the poverty estimates for Georgian regions are not available (the figures are
available only for Georgia as a whole or by rural and urban population), which makes it very difficult to compare the poverty estimates between the separate regions.
The structure of population by urban and rural settlements shows that the Georgian regions are
mostly comprised of rural population (75-80%), while in two out of three bordering regions of
Armenia the urban population has a larger share than rural one (about 60%). This can be a
decisive factor in the future economic cooperation between the regions: industrial products from
the Armenian side instead of agricultural products from the Georgian side.
Mostly as a result of having more rural than urban population, the labour market figures in the
Georgian regions have better trends than in Armenian ones. The participation rate is higher and
the unemployment rate is lower.
The average monthly wages in Armenian regions are close to each other, while the wages in
Kvemo Kartli region are by 40% higher than in the neighbouring Samtskhe-Javakheti region.
The figures of wages for the Armenian regions lie between these indicators.
53 Or 22.6% of the territory of Georgia, without Abkhazia and South-Ossetia regions which are currently out of the control of the central government.
64
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-
-
-
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ARMENIA AND GEORGIA ECONOMIC RELATIONS
Comparatively higher wages in Kvemo Kartli region can be explained by the existence of a
number of industrial giants in the main city (Rustavi) such as the Azot chemical combine and
the metallurgical plant. In addition, there are two mining companies engaged in the extraction
of copper and gold, and a thermal power plant - Mtkvari Energetika. Kvemo Kartli accounts for
more than ¼th of the overall industrial production in Georgia.
The poverty level in Armenia is higher in urban areas in comparison with the rural ones, while
in Georgia it is vice versa. Taking into account the structure of population by urban and rural
settlements, it is obvious that bordering regions from Armenia and Georgia have higher poverty level in comparison with their countries average indicators.
While the comparison of average wages by regions shows the advantage of Kvemo Kartli
region, the poverty level indicator is the worst in this region as compared to the other observed
regions. This speaks about large disparities within Kvemo Kartli, especially in the income levels of urban and rural populations.
The comparison of industrial production per capita shows the advantage of Kvemo Kartli region
where in 2005 the value of industrial production per capita was twice higher than in Lori and
was about eight times higher than in Shirak and Tavush regions. This is due to the existence of
acting industrial giants in Rustavi.
The observation of agricultural data in the bordering regions and the definition of some comparative advantages of separate regions show that the cooperation between Georgian and
Armenian bordering regions can be as follows: cereals and animal husbandry products from the
Georgian side and potato and vegetables (as well as fruits from Tavush) from the Armenian
side.
The volumes of construction are comparably higher in the Armenian bordering regions (especially in Lori region). During the preceding two years, the volume of construction in SamtskheJavaketi region of Georgia is growing faster than in the neighbouring Kvemo Kartli region.
Although the per capita indicators in services are more or less comparable in Armenian and
Georgian bordering regions, the Georgians regions (especially Kvemo Kartli) have a comparable advantage in developing this field due to their geographic location and circumstances.
Developing services (tourism, trade, transportation, etc.) from the Georgian side can be one of
the main fields of cooperation with the Armenian regions. The labour from mostly urban areas
from Shirak and Lori can be useful during infrastructural constructions in this field. In addition
to this, the Armenian regions, especially Shirak, have a potential of developing manufacturing
activities due to their large share of urban population.
The comparison of data on industrial production, construction and services volume as well as
the data on wages show that Samtskhe-Javakheti is the less developed region among the five
observed regions. This could be the factor underlying the growth of construction in the last
years and the large development projects which shall take place in this region (for example the
funds from the Millennium Challenge Corporation as well as EU Tacis projects funds).
UNREALISED OPPORTUNITIES
PART 5.
ASSESSMENT OF POSSIBLE IMPACT FROM THE
CONCLUSION OF FREE TRADE AGREEMENTS
WITH THE EU
65
Evaluating the impact of the European Neighbourhood Policy Action Plans’ implementation on
the Armenian-Georgian relations, some assumptions have been made. First, the strongest impact
on deepening of economic relations between two countries in the short run will have the Free Trade
Agreement concluded between Armenia and the EU, as envisaged by the ENP Action Plan. Since
the major part of the Armenian trade is carried out through the territory of Georgia, this will stimulate the growth of export of Georgian transport services to Armenia. It is also assumed that the EUGeorgia Free Trade Agreement will not have a strong impact on Armenia-Georgia relations.
Although the conclusion of Free Trade Agreements is only one of the activities envisaged by
the Action Plans of Armenia and Georgia, their effect is most easily computable. In this sense, it is
worth noting that the other elements of the ENP Action Plans, targeted at the alignment of the standards with the EU ones and thus improvement of the public administration of these countries, will
in the long run highly contribute to the improvement of Armenia-Georgia relations.
To this end, the following methodology has been applied:
EU and Armenian customs revenues under the current regime are calculated according to the
HS 8-digit code;
The reduction of the customs revenues are provided based on the Algerian FTA model;
Since it also leads to a reduction of prices, the growth of Armenian exports to and imports from
the EU are also calculated, based on import demand elasticity of the EU and Armenia, respectively. The import demand elasticity is provided by the World Integrated Trade Solution (WITS), software developed by the World Bank Group;
The product groups which are transported through the territory of Georgia are identified, and
the costs of the transport services are calculated;
The growth of exports of Georgian transport services resulted from the conclusion of an EUArmenia FTA are calculated.
Current Regime and Existing Trade Patterns54
The EU is Armenia’s main trading partner. In 2005, the share of Armenian exports and imports
constituted 46.5% (365.3 million EUR) and 28.1% (408.4 million EUR) of the total Armenian export
and import respectively, whilst in 2004 it amounted to 35.3% (205.7 million EUR) for exports and
25.4% (276.8 million EUR) for imports. In regard to the structure of trade between Armenia and the
EU, it is worth noting that Armenian exports mainly consist of base metals (61.1% of total exports),
precious stones and metals (26.8% of total exports), and textiles (5.9% of total exports), accounting in total for about 94% of all Armenian exports. Imports to Armenia from the EU are more diversified. The main importing products are precious stones and metals (27.8%), machinery, electrical
equipment, etc. (25.5%), vehicles (11.1%), chemicals (8.2%), foodstuffs, beverages, spirits, and
tobacco products (5.9%), base metals (4.7%), and textiles (3.5%), which together constitute more
than 86% of the total Armenian imports. (See also Chart 12).
54 All calculations are made at the 8-digit level for the period of 2005.
66
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Chart 12 Share of product groups in EU-Armenia trade (2005)
At present, the Armenian export to the EU benefits from the scheme of Generalised System of
Preferences, within the framework of which the EU grants tariff reductions in respect to some
goods. To benefit from this scheme, Armenian exporters must meet all the requirements prescribed
by the EU and in particular those relating to the rules of origin, otherwise general (conventional)
duties are applied to Armenian exports. Thus, not all the products are charged with the preferential
duties, but for convenience it is assumed that Armenian exports fully benefit from the GSP scheme.
Under the current regime (taking into account the reductions provided under GSP) the total duty
levied on Armenian exports in 2005 by EU customs authorities accounted for 2.2 million EUR, which
constituted about 0.6% of the total Armenian export to the EU. Duties collected from EU exporters
by Armenian customs authorities in 2005 amounted to 11.1 mln. EUR. This constitutes about 2.7%
of total Armenian imports.
Application of the Algerian Free Trade Agreement Model
Why the Algerian FTA was taken as a model for the future EU-Armenia FTA? A comparison of
various EU FTAs55 shows that the difference between the Agreements in respect to customs duty
reduction or elimination is not essential. All the tariffs in regard of products falling under HS chapters 25-97 (industrial products) are eliminated. Such a broad coverage is due to the WTO requirement in regard of any free trade agreement signed between WTO members. The Article XXIV of
General Agreement on Tariffs and Trade (GATT) states that:
“A free-trade area shall be understood to mean a group of two or more customs territories in
which the duties and other restrictive regulations of commerce are eliminated on substantially all
the trade between the constituent territories in products originating in such territories”.
A slight difference between EU FTAs exists regarding the reduction or elimination of customs
duties imposed on agricultural and processed agricultural products, but this will not have a significant effect on the final results of this analyses.
The second reason for considering the Algerian experience is the fact that both Armenia and
Algeria are engaged in the European Neighbourhood Policy, which makes it possible for Armenia
to expect a regime similar to that of Algeria.
55 Agreements with Mediterranean countries, EU – South Africa Agreement on Trade, Development and Cooperation
(TDCA), EU – Mexico Global Agreement and Association Agreement with Chile.
67
UNREALISED OPPORTUNITIES
EU-Algeria Association Agreement
Following the conclusion of negotiations in December 2001, Algeria and the EU signed an
Association Agreement in April 2002 in Valencia. The agreement entered into force in
September 2005. It replaced the 1976 Co-operation Agreement.
The Association Agreement provides for tariff-free trade in industrial goods with the EU. This
means that all duties and other equivalent charges imposed on the products falling within chapters 25-97 of the Harmonised System are abolished. In contrast to industrial goods, the liberalisation of trade in agricultural products (HS chapters 1-24) is slack, and is mainly provided
through tariff rate quotas, which is explained by high domestic protection and as a result low willingness on the EU side to open this sector for other countries' access.
Besides liberalisation of trade in goods, EU-Algeria FTA includes also other elements, which are
listed below:
•
Political dialogue and regular economic dialogue;
•
Clauses on freedom of establishment, liberalisation of services, free movement of capital
and the application of Community rules on competition;
•
Clauses in the area of justice and home affairs;
•
Strengthening economic co-operation;
•
Setting up social and cultural co-operation;
•
Financial co-operation;
•
Setting up an Association Council and Association Committee with decision-taking powers.
Total customs duties levied on Armenian exports by the customs authorities of the EU Member
States will amount to about 159,000 EUR, having a further decrease by 92.6% in comparison to the
amount levied under the fully applied GSP regime. But, on the other hand, the concessions provided in the FTA framework must be reciprocal and thus the Armenian duties in respect of some products must also be reduced or abolished. In case of signing a Free Trade Agreement like the Algerian
one, the total amount of duties levied by Armenian customs authorities will constitute about 2.6 million EUR, whilst under the current regime this figure equals to 11.1 million EUR. Thus, the reduction of the total customs duties will constitute 76.9%.
The following exports from Armenia to the EU will mostly benefit from the EU – Armenia FTA
(see also Table 36):
Products falling within Section 11 of Harmonised System: Textiles and textile articles – 65.2%
of total duties reduced (this mainly refers to HS heading 621256);
Products falling within Section 15 of Harmonised System: Base metals and articles of base
metal – 25.2% of total duties reduced (this mainly refers to HS heading 810257);
Products falling within Section 17 of Harmonised System: Vehicles, aircraft, vessels and associated transport equipment – 5.79% of total duties reduced (this mainly refers to HS heading
870358).
56 Brassieres, girdles, corsets, braces, suspenders, garters and similar articles and parts thereof, whether or not knitted
or crocheted.
57 Molybdenum and articles thereof, including waste and scrap.
58 Motor cars and other motor vehicles principally designed for the transport of persons, including station wagons and
racing cars.
68
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Table 36 Product groups most benefiting from the EU-Armenia FTA
(Exports from Armenia to the EU)
The reduction of total duties regarding imports into Armenia mainly occurs in respect of the
product groups listed below (see also Table 37):
• Section 17 of Harmonised System: Vehicles, aircraft, vessels and associated transport equipment – 41.9% of total duties reduced (this mainly refers to HS heading 8703);
• Section 16 of Harmonised System: Machinery and mechanical appliances; electrical equipment; parts thereof; sound recorders and reproducers, television image and sound recorders
and reproducers, and parts and accessories of such articles – 18.7% of total duties reduced
(this mainly refers to HS Chapter 8559) ;
• Section 11 of Harmonised System: Textiles and textile articles – 13.4% of total duties reduced
(this mainly refers to HS heading 6212).
Table 37 Product groups most benefiting from the EU-Armenia FTA
(Imports into Armenia from the EU)
59 Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound
recorders and reproducers, and parts and accessories of such articles
UNREALISED OPPORTUNITIES
69
Accession of Bulgaria and Romania
Taking into account the accession of Bulgaria and Romania to the EU on 1 January 2007, it is
necessary to analyse also the impact of their accession on the EU-Armenia trade flows. The
Algerian model was designed for the analysis of FTA impact on trade with the EU-27.
Trade with these countries in 2005 amounted to 0.9 million EUR for exports and 82 million EUR
for imports. The large volume of imports from these countries is due to the fact that the main imports
to Armenia are those of automotive fuel (about 92.7% of total automotive fuel imported), which constitute 83.0% of total imports from Bulgaria and Romania. The other largest product groups are
Section 460 and Section 1661 which account for 3.2 million EUR (3.9%) and 3.0 million EUR (3.7%)
respectively. Exports from Armenia to these countries mainly consist of products of the Sections 4
(0.41 million EUR or 45.2%), 1162 (0.21 million EUR or 22.7%) and 1563 (0.15 million EUR or 16.5%).
Under the current regime, these two countries collect about 12,000 EUR from Armenian
exporters, having an average tariff rate of 1.34% on Armenian exports. On the other hand, Armenian
customs authorities levied about 0.6 million EUR on imports from Bulgaria and Romania, the main
source of which are prepared foodstuffs, beverages, and tobacco products (about 0.3 million EUR).
The average tariff rate fixed in regard of imports from these two countries accounts for 0.68%. The
simulations show that the reduction of customs duties in respect of products imported from Bulgaria
and Romania will constitute about 0.26 million EUR, whilst Armenian exporters will gain about
12,000 EUR, which means that all Armenian exports to these countries will be totally free of any
customs duties and applicable charges.
Thus, under the current regime the total duties levied from imports from the EU-27 by Armenian
authorities account for about 11.5 million EUR, whilst the customs authorities of the EU-27 levy
about 2.2 million EUR. The reduction of duties levied from imports into Armenia from the EU
accounts for about 8.8 million EUR (reduction of the average tariff rate from 2.38% to 0.59%), and
the duties levied on Armenian exports will be reduced by 2.0 million EUR.
FTA Impact on EU-Armenia Trade Flows
The next step is the evaluation of the customs duty elimination impact on EU-Armenia trade
flows. It is assumed that the prices of Armenian products exported to the EU will decrease by the
value of the customs duty imposed on the products before conclusion of an FTA. The same is true
for the imports into Armenia from the EU. Taking into account also the import demand elasticity of
a certain product,64 the growth of trade volumes can be calculated.
The evaluation shows that in total the elimination of customs duties on the EU side will contribute approximately to a 1.5% growth of Armenian exports to the EU. The table below shows the
product groups of Armenian exports which will be mostly affected by the EU-Armenia FTA (see
Table 38 and Annex 3).
60 Section 4: Prepared foodstuffs; beverages, spirits and vinegar; tobacco and manufactured tobacco substitutes.
61 Section 16: Natural or cultured pearls, precious or semi-precious stones, precious metals, metals clad with precious
metal, and articles thereof; imitation jewellry; coin.
62 Section 11: Textiles and textile articles.
63 Section 15: Base metals and articles of base metal.
64 The data on import demand elasticity was obtained from the World Integrated Trade Solution (WITS) – a software
developed by the World Bank, in close collaboration with the United Nations Conference on Trade and Development
(UNCTAD). It provides access to the major trade and tariffs data compilations, such as the COMTRADE database maintained by the United Nations Statistics Division (UNSD), the TRAINS database maintained by the UNCTAD, the IDB and
CTS databases maintained by the WTO.
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ARMENIA AND GEORGIA ECONOMIC RELATIONS
Table 38 Armenian exports to the EU most benefiting from the EU-Armenia FTA
Similarly, the reduction or elimination of customs duties on the Armenian side will stimulate
about 4.9% growth of imports from the EU. The product groups which will mostly gain from a Free
Trade Agreement are as follows (see Table 39 and Annex 3):
Table 39 Armenian imports from the EU most benefiting from the EU-Armenia FTA
UNREALISED OPPORTUNITIES
71
The simulation also shows that the exports from Armenia to Bulgaria and Romania will have an
increase of 4.51% (about 41,000 EUR), whilst the growth of imports to Armenia from these countries will constitute 0.84% (about 685,000 EUR) (see Annex 4).
Growth of Georgian Exports of Transport Services
To understand what effect the analyzed FTA may have on the growth of Georgian transport
services, the Georgian component of transportation costs must be calculated. It is worth noting that
all the Armenian trade with the EU, with the exception of precious stones and metals, is carried out
through the territory of Georgia. Besides, the mentioned products will not be affected by the FTA
and thus are not included in this analysis. It is also assumed that only 20 feet containers are used
during transportation through the territory of Georgia.
Taking the average cost per ton calculated in the second part of the current report (32.13 USD
or 25.83 EUR65) for all products traded with the EU, the total transportation cost is calculated, which
is equal to 2,246,800 EUR in case of exports from Armenia, and 2,474,564 EUR in case of imports
to Armenia, the sum of which is the same as Georgian transport service export to Armenia
(4,721,364 EUR in total), which originates from the EU-Armenia trade (see also Annex 3). The
Georgian transport service export to Armenia originating from Armenia’s trade with Bulgaria and
Romania accounts for 5,347,385 EUR (see also Annex 4). This figure is mainly due to the fact that
most of the fuel imported to Armenia comes from these two countries. Thus, Georgian transport
service exports originated from the EU-27 - Armenia trade amounts to 9,968,749 EUR. Analyses
show that a Free Trade Agreement signed between Armenia and the EU will contribute to a 1.9%
of Georgian service export growth originated from the EU-27 -Armenia trade. Besides, the overall
growth (originated not only from Armenia’s trade with the EU Member States, but also from
Armenia’s trade with other countries carried out through the territory of Georgia) of Georgian transport service export to Armenia will amount to 0.24%. Such a small growth is due to the small share
of the EU in Armenia’s total external trade by weight (for the EU-27 it is 12.37% of total products
traded through the territory of Georgia, whilst the share of the CIS countries is more than 76%).
Alternative Option: ‘GSP Plus’
As mentioned above, Armenia currently benefits from the Generalised System of Preferences,
which means that lower tariff rates are imposed on Armenian exports to the EU. The GSP Regulation66
allows a further reduction of the EU tariff rates in regard of imports from developing countries, in case
if a number of conventions are ratified by the latter. This regime officially called special incentive
arrangement for sustainable development and good governance is known as ‘GSP plus’.
Analyses show that obtaining a ‘GSP plus’ regime by Armenia will not have a significant impact
on intensification of Armenia-Georgia relations. This is due to the fact that the GSP scheme is a
non-reciprocal preferential arrangement and this regime will not affect the Armenian imports from
the EU. Although the Armenian exports to the EU will have an increase of about 1.6%, the growth
of Georgian transport service export to Armenia will constitute only about 0.06%.
Rules of Origin and Cumulation67
As trade policy often requires the differentiated treatment of foreign goods entering a given
domestic market, RoOs are used as a means of establishing the ‘economic nationality’ of goods and
their eligibility under trade preference programmes. RoOs therefore provide guidelines for establishing the origin of goods, i.e. not just the source from where they have been shipped, but also the
place where they are deemed to have been produced. This ensures that concessionary access to
65 1€ = 1.2441 $; source: European Central Bank
66 Council Regulation (EC) No. 980/2005 of 27 June 2005 applying a scheme of generalised tariff preferences, OJ L
169, 30.6.2005, p. 1–43
67 Naumann, E. 2006. Comparing EU free trade agreements - Rules of origin. (ECDPM InBrief 6I). Maastricht : European
Centre for Development Policy Management
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ARMENIA AND GEORGIA ECONOMIC RELATIONS
a given market benefits the intended recipient countries or regions rather than third-party countries.
Cumulation is an important concept in RoOs and can determine the level at which countries are
able to use the trade preferences available to them within a free trade agreement or a unilateral
preference programme. Cumulation refers to the extent to which production may be aggregated
with other countries without losing originating status for the purposes of the applicable RoOs. In
effect, cumulation is a derogation from one of the core concepts of origin, i.e. that of a product having to be ‘wholly obtained’ in the exporting country.
Different forms of cumulation are provided for under the EU’s free trade agreements:
• Bilateral cumulation with the EU is the simplest form of cumulation, and provides for the use of
EU-made inputs in the production of EU-destined goods made in the beneficiary country. Such
cumulation therefore deems EU-inputs to originate in the exporting country for the purpose of
qualifying under a free trade agreement;
• Diagonal cumulation is also provided for in the EU’s free trade agreements, and allows a limited use of intermediary inputs from third countries that are not party to a particular FTA to be
counted as being of domestic origin. However, such diagonal cumulation is usually only possible following the conclusion of FTAs or administrative cooperation agreements between the
cumulating countries. Diagonal cumulation certainly has the potential to significantly widen free
trade areas by incorporating countries with established trade links.
• Full cumulation refers to provisions that allow the unlimited use by the home country of inputs
originating in certain other countries.
The Euro-Mediterranean Agreements provide only for limited cumulation, generally allowing
only bilateral cumulation with the EU and vice versa (cumulation with third countries is possible if
the non-originating inputs have undergone sufficient working and processing). The EU’s bilateral
agreements with Tunisia, Morocco and Algeria provide for additional cumulation between these
countries. The TDCA allows bilateral cumulation between South Africa and the EU, diagonal cumulation with other ACP (African, Caribbean, and Pacific) countries, as well as full cumulation with
countries that are members of the Southern African Customs Union (SACU). The agreements with
Mexico and Chile allow EU-Mexico and EU-Chile cumulation of origin.
Generally, only 10% of imported input is allowed to consider a product ‘originating’ in a country
party to an EU FTA (under tolerance rules). In a small number of cases this threshold is set at a
level of 15%. This greatly limits the possibility of exportation of goods under the FTA tariff rates in
the production of which both Armenian and Georgian input is used. For that purpose, it is important
to envisage cumulation of origin during negotiations on the EU-Armenia and EU-Georgia Free
Trade Agreements.
Summarizing the impact of the EU-Armenia possible Free Trade Agreement on ArmeniaGeorgia economic relations, the following points are worth mentioning:
1. The EU27’s trade-weighted average tariff rate will be reduced by 0.55%, while the Armenian
trade-weighted average tariff rate will have a decrease by 3.11%;
2. This will contribute to 1.55% and 4.24% increase of Armenian exports and imports to and from
the EU-27 respectively;
3. The growth of exports of Georgian transport services to Armenia will constitute 0.24%;
4. Obtaining the ‘GSP plus’ regime by Armenia will contribute to 1.6% growth of Armenian exports
to the EU, and to 0.06% growth of Georgian exports of transport services to Armenia.
5. To extend the benefits of the EU-Armenia FTA, it is important to include provisions on ‘cumulation of origin’ between Armenia and Georgia, which will promote joint production of Armenian
and Georgian exports to the EU,
6. As the possible FTAs concluded with the European Union by Armenia and Georgia do not lead
to a significant increase in economic relations between the latter two, the emphasis should be
made on other components envisaged by the ENP Action Plans. Implementation of the Action
Plans in compliance with the EU legislation will allow Armenia and Georgia to have harmonised
rules in various fields of economic activity, which will highly contribute to the improvement and
intensification of economic relations between these two countries.
UNREALISED OPPORTUNITIES
73
Conclusions and Recommendations
The findings of this Study led to the following main conclusions:
1. Armenian and Georgian economies are rather liberal, however there are some differences in
the field regulating customs issues, investment, and trade. As a result, the differences existing
in the legal bases of these two countries have their negative impact on the development of trade
relations, especially on the level of business representatives and private investors, which is one
of the core components for overall trade and investment relations development. In addition, it
will create daily losses through delays at borders, excessive documentation requirements, and
long deadlines for customs clearance.
2. The provisions of the bilateral investment treaty (including the double taxation treaty) are not
utilized effectively and there is a need to ratify the other outstanding bilateral investment treaties
and negotiate new ones.
3. There is no balance between investment protection and governmental regulatory activity by
providing international standards of treatment guaranteed to foreign investors: fair and equitable treatment, full protection and security, most-favoured-nation treatment, national treatment.
4. The Governmental Decree of Georgia No 27 of 8 February 2006 has fully entered into force. It
applies to all forms of transportation (except for passenger cars), whether loaded or empty, that
cross the Georgian border and are subject to customs control, and requires them to comply with
the weight and size requirements as provided for by the Georgian legislation.
5. Georgia provides a favourable transit tariff of 50% on the railway freight transportation based
on the Agreement on Co-ordination of Railway Transportation. As regards Armenia, Georgia
provides only 24% discount for fuel and petroleum oil products and 17% for the rest of cargoes.
In this context, Georgia violates the MFN and national treatment principles of WTO trading system by (a) discriminatory railway tariff discounts, (b) internal taxes and charges imposed on foreign vehicles, (c) compulsory motor insurance, which are also applied to transit, as well as the
rules of freedom of transit provided in GATT.
6. Georgia and Armenia must ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles. The countries are now adopting the EU’s new
approach to harmonisation of technical regulations and standards, the implementation of which
is vital to prevent technical barriers to trade. The countries must make all efforts to accelerate
the process of approximation to the EU new approach and to remove burdensome administrative procedures.
7. Economic relations between Armenia and Georgia are concentrated in the fields of trade in
goods and services, investments, and transit. The Study shows that within framework of these
relations the two countries have different roles in terms of the nature of the role: Armenia is the
more active economic partner considering that trade in goods is one of the main areas of
Armenia’s interaction with Georgia, while Georgia can be considered as a passive partner, taking into that Georgia is mainly providing transit services to Armenia.
8. The Armenian export structure, including exports to Georgia - although there is clear diversification tendency within the product groups involved - remains highly concentrated, with diamond processing, jewellery and copper and molybdenum ore and concentrates still accounting
for more than half of the total export to the World and with ores and mineral products (mainly
cement) accounting for more than 40 percent of total exports to Georgia. The commodity composition of Armenia’s export to Georgia has remained fairly constant over the observed period,
with the top seven group of products accounting for more than 80 percent of the Armenian
exports, however the number of products (at the 8-digit GNFEA level) has significantly
increased from 85 in 1998 to 299 in 2006.
Nevertheless, taking into account that gas constitutes the most part of cement production, the
increase in prices of imported gas from 2009 can have a negative effect on the volumes of
Armenian cement exported to Georgia. It is also worth noting that increase of welfare in Georgia
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ARMENIA AND GEORGIA ECONOMIC RELATIONS
may bring to substitution of fruits imported from Armenia by imports with higher quality from
other countries.
9. The main product groups imported from Georgia to Armenia are prepared foodstuffs, chemical
products, wood, and vegetable products, the share of which in total imports from Georgia
amounted to 40.0%, 30.3%, and14.8% respectively in 2006.
10. The concentration indices for exports to Georgia are decreasing year by year, which means that
products exported to Georgia from Armenia are constantly being diversified. Despite the fact
that compared with 1998, in 2006 a quantitative growth of goods exported from Armenia to
Georgia was observed (from 85 to 299), due to the weights of processed industrial goods
(cement, plastic products) and some processed foods the increase of diversity of exports does
not seriously ‘soften’ the concentrated character of exports. In case of imports from Georgia,
the concentration index is still relatively high, but volatile.
11. It is also important to analyse the exported products that Armenia and Georgia have a high level
of specialization. Armenia has presented seven main types of products (at the 4 digit level)
where the level of specialization was very high. These groups of goods included cement, eggs,
coffee, prepared meat, electrical energy, where the export specialization index had absolute
advantages. Georgia has high level of specialization in nuts, citrus fruits, sugar, cyanides, and
fertilizers, where a high level of specialization is observed.
12. Both Armenia and Georgia are considered open economies in regard of external trade, but at
the same time, the transportation costs are extremely high. The transportation costs in Armenia
are more than twice higher than the world average, which is explained by the fact that Armenia
is a landlocked country. The high ratio of transportation services to external trade turnover in
Georgia is mainly due to the fact that Georgia is a transit country for Armenia and Azerbaijan,
and transportation services currently are the largest item of Georgian exports. Thus, the high
turnover of transport services indicates the high level of transportation costs for Armenia, whilst
on the other hand it is a source of revenues for Georgia.
13. The analysis of trade in services between the observed two countries shows that Georgia highly benefits from its favourable geographical location, as well as from the fact that Armenia is a
landlocked country. High transportation costs for Armenian exporters and importers are significant source of revenues for the Georgian economy. Besides, high prices of domestic tourism
services and low prices of passenger transportation to Georgia is an incentive for Armenia to
use Georgian tourism services.
14. The two countries are weakly linked with each other in terms of foreign direct investment,
although the flows from Armenia to Georgia are increasing. This means that Armenia again
plays the role of an active partner. The high growth of investment inflows into Georgia during
recent years can be explained by the construction of the BTC pipeline. The growth of FDI
inflows into the Georgian economy shows that the investment climate has improved during the
recent years.
15. Increased living standards in Georgia will lead to a decrease in the imports from Armenia, since
Georgia will substitute the Armenian imports by similar products - with higher quality - imported
from the EU and other countries.
16. One percent increase in unit prices of exportable goods has a very minor impact on the exports:
it will decrease only by approximately 0.09%. In other words, the price elasticity of Armenian
exports to Georgia is very inelastic, because of the high level of concentration of Armenian
exports to Georgia. Nevertheless, it can be assumed that the price elasticity of exports will
grow as Georgia starts diversifying its imports, finding other sources of substitutes.
17. A one percent change in consumer prices (inflation) in Georgia brings to 1.42% increase in
exports of goods from Armenia. This is completely explained by the differences in the monetary
policies pursued in Armenia and Georgia.
18. The estimation results show that ceteris paribus one percent increase in Georgian household
expenditures in USD terms will result in a decrease in imported goods from Armenia by 1.1%.
19. Rather passive economic development in the bordering regions of Armenia and Georgia is
explained by the low development level of bordering regions. The intensification of economic
UNREALISED OPPORTUNITIES
20.
21.
22.
23.
75
relations is, therefore, rather low since there is no developed region able to promote cross-border economic development and intensification of trade and investment relations in the bordering regions of the two countries.
The industrial production, construction and services volume data comparison as well as the
comparison of data on wages show that Samtskhe-Javakheti is less developed region between
5 observed regions. This could be the decisive reason for the growth of construction in the last
years and the large development projects which shall take place in this region (for example the
funds from Millennium Challenge Corporation as well as EU TACIS projects funds). Data
analysing show that the less developed region from the Armenian side is Shirak. Taking into
account that Shirak and Samtskhe-Javakheti are neighbouring regions, the investments in
these two regions will be very effective to initiate active cooperation and future development.
The observation of agricultural data in the bordering regions and definition of some comparative advantages of the separate regions show that the cooperation between Georgian and
Armenian bordering regions can be the following: cereals and animal husbandry products from
the Georgian side (mostly from Samtskhe-Javakheti) and potato and vegetables (mainly from
Shirak) from Armenian side (as well as fruits from Tavush).
The volumes of construction are comparably higher in the Armenian bordering regions (especially in Lori region). During the preceding two years, the volume of construction in SamtskheJavaketi region of Georgia is growing faster than in the neighbouring Kvemo Kartli region
It is projected that the conclusion of separate FTAs with EU-Armenia and EU-Georgia will intensify the economic relations between Armenia and the EU as well as Georgia and the EU, but
will have a very low impact on the development of Armenia-Georgia economic relations.
Conclusion of an EU and Armenia-Georgia FTA will promote joint production of Armenian and
Georgian exports to the EU. Moreover, it is important to include provisions on ‘cumulation of origin’ between Armenia and Georgia.
Summarizing the above mentioned conclusions, it can be stated that the creation of a single
economic area between the two countries will reduce the possibility of application of trade restrictions on Armenia and Georgia by other more developed countries, will create wider possibilities for
development of trade relations with the EU-27, will reduce trade related transaction costs (certification, accreditation, conformity assessment, etc.), will promote internal investments in the area, will
attract foreign investments, and will significantly contribute to the overall development of Georgia
and Armenia.
In order to enhance the economic relations in the fields of trade and investment and to strengthen their cooperation in view of liberalizing trade and investment between the countries, as well as
taking into consideration that both countries have a liberal external trade policy and are taking steps
towards EU integration, it is necessary to undertake several measures which can be divided mainly into two separate groups:1) short-term actions, and 2) long-term actions.
In a SHORT-TERM period it is recommended to develop the existing rules which can have an
immediate influence on the economic cooperation between the countries.
1. The Free Trade Agreement between Armenia-Georgia, which entered into force in 1995,
must be mutually reinforced by the participating parties so as to provide greater opportunities in the goods and services sectors to a wide range of Armenian and Georgian
exporters, and to further strengthen trade and investment links between the countries.
Actions such as reduction of railway tariffs (up to 50%) between the countries, mutual elimination of road taxes shall be undertaken.
2. Countries should take measures for a maximum simplification and unification of customs
formalities, in particular, by introducing single forms of customs and goods accompanying
documentation, being guided by current international agreements and arrangements. They
should notify each other of the operating tariffs and all their exceptions.
3. To implement the agreed policy on export control towards third countries, Armenia and
Georgia must hold regular consultations and take mutually agreed measures for establishment of an effective export control system.
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ARMENIA AND GEORGIA ECONOMIC RELATIONS
4. The observation of agricultural data in the bordering regions and definition of some comparative advantages of the separate regions show that the cooperation between Georgian
and Armenian bordering regions can be as follows: cereals and animal husbandry products from the Georgian side, and potato and vegetables (as well as fruits from Tavush) from
the Armenian side.
5. Developing services (tourism, trade, transportation, etc.) from the Georgian side can be
one of the main fields of cooperation with the Armenian regions. The labour from mostly
urban areas of Shirak and Lori can be useful during infrastructural constructions in this
field. In addition to this, the Armenian regions, especially Shirak, have a potential of developing manufacturing activities due to their large share of urban population.
6. Since the possible FTAs concluded with the European Union by Armenia and Georgia will
not lead to a significant increase in the economic relations between the latter two, the
emphasis should be made on other components envisaged by the ENP Action Plans.
Implementation of the Action Plans in compliance with the EU legislation will allow Armenia
and Georgia to have harmonised rules in various fields of economic activity, which will
highly contribute to the improvement and intensification of economic relations between
these two countries.
7. It is recommended for Armenia to sign a Free Trade Agreement with the EU, including provisions that allow using the trade preferences provided by the EU with unlimited use by
Armenia of inputs originating in Georgia (cumulation of origin principle). This provision
should be also included in the Georgia-EU FTA.
These steps are very important not only for the development of economic relations between the
countries but also because they may serve as a base for a more effective and closer cooperation
between the countries in the future.
Taking into account the status of the existing economic relations as well as the opportunities for
a more effective future economic cooperation and development, it is recommended from the strategic point of view (to reach the most effective cooperation between the countries in a LONG-TERM
period).
1. To sign a new free trade agreement between Armenia and Georgia which defines the following steps and appropriate actions to be implemented for the creation of a common market without
frontiers.
STEP 1. Free trade of goods
• To eliminate all customs duties and other charges on goods traded between the countries,
including all indirect taxes; to replace current principle of VAT collection at the internal frontier with the VAT collection in the country of destination principle.
• In order to enhance market access between, and economic activity in the countries, to sign
an agreement on mutual recognition of the results of conformity assessment procedures.
• In order to ensure free movement of goods, to establish a Joint Committee on customs
issues (in accordance with the EU practice), to establish a consultative procedure in order
to ensure legislative harmonisation foreseen in the fields directly related to customs such
as introduction of common rules of origin and customs valuation rules and procedures of
abolition of custom duties and other charges, and other customs procedures and rules.
STEP 2. Customs Union
• With purposes of increasing economic efficiency and establishing closer economic relations between the countries, to adopt a program of establishment of a Customs Union
between the countries aimed at the introduction of a free trade area with common custom
tariffs by setting up common external trade policy with the possibility of further introduction
of common competition policy. In order to eliminate non tariff barriers to trade, the harmonization of the standards, technical regulations and conformity assessment procedures is
highly recommended.
STEP 3. Common Market (Caucasian Common Market)
• To attain gains in economic efficiency with higher mobility of labour and capital, including
UNREALISED OPPORTUNITIES
77
free movement of goods and services that will result in a more efficient allocation of
resources (including by regional aspects), it is recommended to take steps in creation of a
common market that will remove all barriers to the mobility of all kind of resources and
eliminate non-tariff barriers to trade.
The economic integration between Armenia and Georgia along with EU integration related
advantages will result to the following important advantages:
(a) An established larger common market will attract new foreign investments to the economy,
intensify cooperation among economic operators, which will result in an improvement of
competitiveness of our economies in external markets.
(b) Due to integrated energy, telecommunication, transport infrastructure systems, the economy of scale will increase the effectiveness of the economies.
(c) The advantage of being a crossroad area. Armenia will have an easier access to the
Georgian seaports. Georgia will have an access to Iran and Russia. At the same time, it
will eliminate the reason of imposed restrictions and barriers to trade between the countries in the region (Russia-Georgia, Turkey-Armenia).
2. Different aspects of economic policy in all these stages of economic integration between the
countries should be harmonised with the EU requirements and approaches.
3. All agreements signed during the economic integration stages between the countries should be
open for other neighbouring countries to join.
4. After the completion of the Caucasian Common Market, the EU-Armenia and EU-Georgia FTAs
should be replaced with a single FTA between the EU, on one side, and Armenia and Georgia,
on the other side.
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ARMENIA AND GEORGIA ECONOMIC RELATIONS
Annex 1
Table A1. Types of goods exported during each of the years 2003-2006
id
1
2
3
4
5
6
7
8
9
Code
406
407
901
1704
1806
1905
2203
2501
2508
10
11
12
13
14
15
16
17
2523
2815
3004
3208
3209
3214
3402
3405
19
20
3809
3824
18
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
3808
3905
3923
4901
6305
7010
7607
8413
8422
8427
8428
8429
8474
8535
8539
8544
8701
8702
8703
8704
8708
8716
9018
9401
9403
9603
Name
Cheese and curd
Birds’ eggs, in shell, fresh
Coffee; coffee husks and skins; coffee substitutes
Sugar confectionery, not containing cocoa
Chocolate and other food preparations containing cocoa
Bread, pastry, cakes and the like
Beer made from malt
Salt and pure sodium chloride, sea water
Other clays, andalusite, kyanite and sillimanite,mullite; chamotte or dinas
earths
Portland cement and other cements
Sodium hydroxide; potassium hydroxide; peroxides of sodium or potassium
Medicaments put up in measured doses
Paints and varnishes dispersed or dissolved in a non-aqueous medium
Paints and varnishes dispersed or dissolved in an aqueous medium
Non-refractory surfacing preparations for walls, floors, ceilings or the like
Washing and cleaning preparations
Polishes and creams, for footwear, furniture, floors, coachwork, glass or
metal
anti-sprouting products and plant-growth regulators, disinfectants and
similar
Finishing agents, used in the textile, paper, leather or like industries
Prepared binders for foundry moulds or cores; chemical products and
preparations
Polymers of vinyl acetate or of other vinyl esters, in primary forms
Articles for the conveyance or packing of goods; stoppers and lids of
plastics
Printed books, brochures, leaflets and similar printed matter
Sacks and bags, of a kind used for the packing of goods
Carboys, bottles, flasks and other closures, of glass.
Aluminium foil of a thickness not exceeding 0,2 mm
Pumps for liquids, liquid elevators
Dish washing machines; and similar machinery
Fork-lift trucks; other works trucks fitted with lifting or handling equipment
Other lifting, handling, loading or unloading machinery
Self-propelled bulldozers, graders, levellers, scrapers, tamping machines
Machinery for sorting or kneading earth, or other mineral substances, in
solid form
Electrical apparatus for switching electrical circuits for a woltage
exceeding 1000
Electric filament or discharge lamps, arc-lamps
Insulated wire, cable and other insulated electric conductors
Tractors
Motor vehicles for the transport of ten or more persons
Motor cars
Motor vehicles for the transport of goods
Parts and accessories of the motor vehicles
Trailers; other vehicles, not mechanically propelled; parts thereof
Instruments and appliances used in medicine
Seats, whether or not convertible into beds, and parts thereof
Other furniture and parts thereof
Brushes, hand-operated mechanical floor sweepers, brooms
79
UNREALISED OPPORTUNITIES
Table A2. Types of goods imported during each of the years 2003-2006
id
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Code
604
802
805
808
1003
1005
1206
2208
2302
2814
2837
3004
3102
3917
3923
18
19
20
21
22
23
24
25
4818
6203
6406
7326
8309
8607
8609
9403
16
17
4403
4407
Name
Foliage, branches and other parts of plants, for ornamental purposes
Other nuts, fresh or dried
Citrus fruit, fresh or dried
Apples, pears and quinces, fresh
Barley
Maize
Sunflower seeds
Undenatured ethyl alcohol, spirits, liqueurs and other spirituous beverages
Bran, sharps and other residues, derived from the working of cereals
Ammonia, anhydrous or in aqueous solution
Cyanides, cyanide oxides and complex cyanides
Medicaments put up in measured doses
Mineral or chemical fertilizers, nitrogenous
Tubes, pipes and hoses, and fittings therefor, of plastics
Articles for the conveyance or packing of goods; stoppers and lids of
plastics
Wood in the rough, whether or not stripped of bark or sapwood
Wood sawn or chipped lengthwise, sliced or peeled, sanded or
finger-jointed
Toilet paper, handkerchiefs, cleansing tissues and similar paper
Men’s or boys’ suits, ensembles, trousers, and shorts
Parts of footwear, gaiters, leggings and similar articles, and parts thereof
Other articles of iron or steel
Stoppers, caps and lids and other packing accessories, of base metal
Parts of railway or tramway locomotives or rolling-stock
Containers
Other furniture and parts thereof
Table A3. Types of goods that were both exported and imported during each
of the years 2003-2006
id
1
2
3
Code
3004
3923
9403
Name
Medicaments put up in measured doses
Articles for the conveyance or packing of goods; stoppers and lids of
plastics
Other furniture and parts thereof
Table A4. Breusch and Pagan Lagrangian multiplier test for random effects:
Model estimated:
Estimated results
80
ARMENIA AND GEORGIA ECONOMIC RELATIONS
Annex 2
Source: Calculations based on figures from NSS Armenia