Important notice

Building on their historic and strong political relations, in recent years, Armenia and Georgia have increased their bilateral cooperation, especially in such areas as energy, transport, trade, education and culture. High-level meetings between various branches of the two governments are regularly held, with specific issues of cooperation discussed within the framework of the intergovernmental Commission on Economic Cooperation between Armenia and Georgia. Energy cooperation is actively being discussed, including possible construction of an electricity plant and new transmission lines. In addition, the neighbouring countries hold many programmes for cultural exchange. As a gesture of goodwill to Armenia, Georgia opened its “Kazbegi” customs checkpoint on the Russian border on 1 March 2010, permitting movement from the Russian “Zemo Larsi” checkpoint.

Azerbaijan and Armenia have no formal relations and are engaged in peace talks over the Nagorno-Karabakh conflict, mediated by France, Russia and the United States in the framework of the OSCE Minsk Group Co-chairmanship. Armenia supported the Nagorno-Karabakh forces in full-scale hostilities in 1991-1994 with Azerbaijan until the May 1994 ceasefire, signed between Azerbaijan, the de facto authorities of Nagorno-Karabakh and Armenia. The agreed truce line has effectively left a swath of southwestern Azerbaijan under control of Nagorno-Karabakh forces. Skirmishes break out from time to time along the truce line. Armenian citizens are prohibited entry into Azerbaijan. Armenia fully supports the basic principles for the settlement of the conflict as proposed by the mediators.

Various incidents can heighten tensions in relations as in August 2012 when the Azeri President freed an Azeri officer convicted of killing an Armenian army lieutenant during a NATO seminar in Hungary upon his extradition to Azerbaijan to serve out his sentence, in the summer of 2014 when an outbreak of fighting along the ceasefire line led to the deaths of over twenty soldiers and in November 2014 when Azeri forces shot down an Armenian-manned military helicopter. Significant outlays in military expenditure by Azerbaijan, fueled by its oil and gas revenues, are a source of concern. See “Risk Factors—Regional Tensions—Nagorno-Karabakh and Relations with Azerbaijan.”

Turkey

Armenia’s political relations with Turkey have been strained since Armenia regained its independence in 1991.

In part this stems from Turkey’s refusal to acknowledge Ottoman Turkey’s responsibility for the Armenian 1915-1918 genocide. Turkish authorities actively lobby and discourage any commemoration of the genocide by other nations – such as occurred in March 2010 after the Committee on Foreign Affairs of the U.S. House of Representatives voted in favour of a bill to acknowledge the genocide (which has never been passed by the U.S. Congress).

In 1993, in reaction to Armenian support for the population of Nagorno-Karabakh, Turkey closed its border with Armenia, which remains closed to this day. This has stymied the development of mutual trade between the countries. In October 2009, the foreign ministers of Armenia and Turkey signed two protocols, which envisioned the establishment of diplomatic relations, re-opening of the land border, recognition of the existing frontier and other mutual cooperation. There was hope this would lead to improved relations and the opening of the border. This has not occurred. Instead, Turkish authorities have held off ratification and implementation of the protocols and taken the position that resolving the final status of Nagorno-Karabakh is a pre-condition to its ratifying the protocols; the Armenian authorities have forwarded the protocols to the National Assembly where their ratification remains pending, although in September 2014 in a speech before the U.N. General Assembly President Sargsyan suggested the protocols may be recalled given the lack of progress with Turkish ratification.

The Islamic Republic of Iran promptly recognised the independence of Armenia upon its founding, and soon afterwards the two countries signed a declaration on establishing diplomatic relations. In 1995, the two countries signed an agreement on construction of an Iran-Armenia gas pipeline, which came into operation in May 2009. The Iranian gas is bartered for Armenian electricity. In 2014, 389.2 million cubic metres of gas were supplied under this arrangement, roughly 15.9% of Armenia’s natural gas supply. See “Economy of Armenia—Energy—Oil and Natural Gas.” Transport infrastructure between Iran and Armenia remains very limited. In general, Armenia’s relations with Iran are cordial. At the same time, Armenia is conscious of the international sanctions that have been imposed on Iran, and complies with the sanctions. See “Risk Factors—Risk Factors Relating to Armenia—Relations with the Islamic Republic of Iran.”

Russia has traditionally been the stalwart ally of Armenia. Armenia and Russia enjoy strategic allied relations, and work constructively in regional multilateral institutions such as the CIS, the CSTO and the EEU. Maintaining good relations with Russia is vital for Armenia given the role that Russia plays in Armenia’s trade and investment, workers’ remittances, energy supply and distribution, and military security. Russia is the largest investor in Armenia and maintains a military base there. See “Risk Factors—Relations with Russia.”

The depredations that Armenia has endured over the centuries (and especially at the time of persecution and genocide in the Ottoman Empire at the beginning of the 20^th century) has led hundreds of thousands of Armenians to emigrate. There are significant ethnic Armenian communities in the United States mostly concentrated in Los Angeles and the Boston areas; Europe, with the largest community in France; Latin America, most significantly in Argentina; as well as in the Middle East, with significant concentrations in Syria, Lebanon and Egypt. A large population of ethnic Armenians live in Russia (some on a seasonal basis), augmented by emigrants in the past three decades escaping civil strife in the South Caucasus and drawn by better economic conditions. Worker remittances from Russia (predominantly from ethnic Armenians to their families in Armenia), estimated at U.S.$1.43 billion in 2014, are a key source of capital and investment for the Armenian economy, although such remittances are expected to fall in 2015 as a result of the slowdown in the Russian economy. See “Risk Factors—Relations with Russia”. Some of the diaspora has returned to Armenia after it achieved its independence (mostly recently, approximately 16,000 ethnic Armenians arriving from Syria), although there is still a net migration flow out of the country of approximately 25,000-30,000 persons per year. The Armenian diaspora provides important moral and financial support to Armenia. Since 2008, Armenia has operated a Ministry of the Diaspora, which was established to strengthen ties between the Armenian diaspora and their homeland and to promote Armenian national identity.

ECONOMY OF ARMENIA

Overview

Armenia has made the successful transition from a centrally planned economy to a market economy, having implemented a broad set of political and economic reforms designed to stimulate growth and investment, maintain price stability, restore confidence in the dram and improve tax collection.

The principal sectors of the Armenian economy are agriculture, trade, construction and industry. In 2013, agriculture accounted for 19.3% of nominal GDP, followed by trade, which comprised 12.8% of GDP, mining and manufacturing, which, on a combined basis, accounted for 12.5% of GDP, and construction, which comprised 10.5% of GDP.

The reforms adopted by the Government since independence resulted in a period of strong economic growth between 2000 and 2008. However, as a result of the global financial crisis, Armenia entered into a recession in 2009, with the economy (in real terms) contracting by 14.1%, caused largely by a 41.6% decline in construction and a 6.9% decline in industry. The Government responded to the global financial crisis with a series of anti-crisis measures, including large-scale road renovation projects, intended, in part, to support employment levels in the regions of Armenia. See “—Principal Sectors of the Economy—Transport and Storage—Road Transport.” Consequently, in 2009, the budget deficit as a percentage of GDP increased in 2009 to 7.6% from 0.7% in 2008. Since 2010, the Armenian economy returned to growth, expanding (in real terms) by 2.2% in 2010, 4.7% in 2011, 7.2% in 2012 and 3.5% in 2013. The budget deficit fell to 5.0% of GDP in 2010, 2.8% of GDP in 2011, 1.5% of GDP in 2012 and 1.7% of GDP in 2013

FDI is an important source of financing for Armenia. The Government has put into place a legislative framework designed to promote foreign investment in Armenia. Key components of this framework include a streamlined tax system with beneficial tax regimes for certain projects, a progressive customs regime with low import tariffs and no export restrictions, and a system that allows for the free movement of capital and the repatriation of earnings, dividends or interest. See “—Economic Policy.” In 2013 and the nine months ended 30 September 2014, FDI inflows equalled U.S.$304.4 and U.S.$796.9 million, respectively, allocated across a wide range of sectors, including telecommunications, mining, real estate, agriculture, financial services, food and beverage and power and gas supply. See “—External Sector—FDI.”

Remittances are also an important feature of the Armenian economy and are used to finance a substantial share of Armenia’s trade deficit, which for goods and services equalled 21.1% of GDP in 2013 and 21.4% of GDP in the nine months ended 30 September 2014. In 2014, net remittance inflows amounted to U.S.$1,389.0 million. Most remittances come from Russia. See “—External Sector—Remittances.”

In January 2015, Moody’s downgraded Armenia’s government bond rating to Ba3 from Ba2, changing the outlook to “negative” from “stable,” and lowered Armenia’s local-currency ceiling to Ba1 from Baa3. In January 2015, Fitch downgraded Armenia’s long-term foreign currency and local currency issuer default ratings to “B+” from “BB-” (with stable outlook), affirmed its short-term issuer default rating of “B” and revised its country ceiling to “BB-”from “BB.” In announcing the downgrades, the agencies highlighted the linkage of Armenia’s economy to the faltering Russian economy, citing as possible consequences the fall in remittances, a decline in Armenian exports to Russia and uncertain FDI, in turn leading to a deterioration in Armenia’s balance of payments and currency reserves. See “Risk Factors—Risk Factors Relating to Armenia--Slowing of the Armenian Economy and Ratings Downgrade.” A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. See “Risk Factors—Risk Factors Relating to Armenia—Armenia’s Credit Rating.”

Economic Policy

The Government is committed to alleviating poverty, reducing unemployment and improving the overall socio-economic condition of the Armenian population. To achieve these goals, the Government adheres to a liberal economic policy that is designed to increase the competitiveness of the Armenian economy and foster sustainable, long-term economic growth.

In 2014, the Government passed the Armenia Development Strategy for 2014-2025 (the “ADS”), which outlines Armenia’s main socioeconomic priorities in the medium term. For 2014-2025, the ADS sets out the following four priority areas: (i) employment growth, with a focus on job creation and fair wages; (ii) the development of human capital, with a focus on enhancing the scope and accessibility of public services (including health care and education) and on reducing emigration; (iii) improvement of the social protection system, with a focus on maintaining a comprehensive programme for the provision of social services (while gradually shifting to a needs-based approach to delivering public assistance from one that prioritised the disbursement of monetary aid) and on reducing poverty; and (iv) modernization of public administration and governance, with a focus on improving Government efficiency, reducing corruption, increasing transparency of decision-making processes and encouraging greater participation on the part of civil society in the country’s governance.

The following table sets forth certain information about Armenia’s GDP for the periods indicated:

Notes:

(2) Calculated on the basis of 2008 prices.

Note:

(1) Represents expenditures on final consumption.

Armenia maintains a diverse economy, with particular strengths in agriculture, trade, construction and manufacturing. Agriculture is the single largest contributor to the Armenian economy, accounting for 19.1% and 19.3% of nominal GDP in 2012 and 2013, respectively, and 19.4% and 18.7% of nominal GDP in the nine months ended 30 September 2013 and 2014, respectively. Armenia’s main agricultural products include vegetables, dairy products, grains, fruits and berries. Trade (both retail and wholesale) continues to account for a consistently large share of the Armenian economy, representing 12.8% of nominal GDP in 2013, compared to 12.7% in 2012. Trade comprised 12.2% and 11.8% of nominal GDP in the nine months ended 30 September 2013 and 2014, respectively. As a share of nominal GDP, construction has declined significantly in recent years, in large part due to the effects of the global financial crisis in 2008-09. Nevertheless, construction remains an important part of the Armenian economy, accounting for 10.5% of nominal GDP in 2013, compared to 12.4% in 2012, and 7.8% of nominal GDP in the nine months ended 30 September 2014, compared to 8.9% of nominal GDP in the nine months ended 30 September 2013. Armenia has also developed a strong manufacturing sector, ranging from the production of foods and beverages to the processing of metals. Its principal food products include canned foods, meat, dairy products and candy, while natural juices, mineral waters, brandy, wine, beer and vodka account for most of Armenia’s beverage production. Armenia’s manufacturing sector is supported by the country’s sizable deposits of copper concentrate, zinc concentrate and molybdenum. In 2013, manufacturing represented 10.1% of Armenia’s nominal GDP, compared to 9.9% in 2012. In the nine months ended 30 September 2014, manufacturing accounted for 10.3% of nominal GDP, compared to 10.5% of nominal GDP in the nine months ended 30 September 2013.

In 2011, Armstat changed the methodology it uses to classify economic activities. In this Prospectus, figures are presented in the following manner:

• 
  for nominal GDP by economic activity and share in nominal GDP by economic activity in 2009, figures are presented in accordance with the Statistical Classification of Economic Activities in the European Community (“NACE”) 1.1.
  
• 
  for the growth rate of nominal GDP by economic activity in 2009 and 2010, figures are presented in accordance with NACE 1.1.
  
• 
  for nominal GDP by economic activity and share in nominal GDP by economic activity for 2010, 2011, 2012 and 2013 and the nine-month periods ended 30 September 2013 and 2014, figures are presented in accordance with NACE 2.0.
  
• 
  for the growth rate of nominal GDP by economic activity for 2011, 2012 and 2013 and the nine-month periods ended 30 September 2013 and 2014, figures are presented in accordance with NACE 2.0.
  

The following table sets forth the composition of Armenia’s nominal GDP by economic activity for 2009 in accordance with NACE 1.1 methodology: