Free Economic Zones in Armenia: boundless opportunities in a “bounded country”
As the plans of the new North-South corridor are set to revive the historic role of the South Caucasian countries as a land bridge between East and West, Armenia sparks investors’ interest offering great investment opportunities and an internationally recognized high level of investment freedom. The new International North-South Corridor (commonly known as North-South Corridor) will improve the transport infrastructure in the region connecting Armenia’s capital city Yerevan to Iran and Russia. In this regard, the 3 working FEZs — two in Yerevan and one in Meghri located on the Armenia-Iran border — are of an increasing strategic importance.
FEZs in Armenia : drivers of a focused investment
There are currently 4 operating FEZs in Armenia with a fifth one to open in Gyumri by 2022[i], focusing on production, high-tech and blockchain.
Those include[ii] :
- The Alliance FEZ, which also houses the Yerevan Computer R&D Institute, specialises in the production and export of innovative technologies in the areas of electronics, precision engineering and pharmaceuticals, among others.
- The Meridian FEZ, which is a unique cluster of jewelry, diamond cutting and watchmaking manufacturing companies in the center of Yerevan.
- The Meghri FEZ has a large sectoral scope including agriculture, manufacturing, trade, cargo shipment, and storage. Meghri’s unique location puts it 2 km from the Iranian FEZ “Aras”, making it a strategic cooperation point. Thanks to its commercial and logistical capabilities, as well as Armenia’s multi-sector preferential trade regimes, the FEZ is a bridge between Iran, the Eurasian Economic Union and the European Union.
- The ECOS FEZ[iii] specializes in High-Tech. The basis was the idea of creating an FEZ for IT startups based on blockchain technology and AI. It houses an equity mining service and an industrial mining center is currently being built.
- The construction of the new FEZ in Gyumri will be completed by 2022.[iv] The city is part of the North-South road corridor and is located near the the Shirak International airport, which greatly facilitates the transportation of goods. Its aim is to position Armenia as a global leader in Air Based Logistics. The main investor is an Israeli company, an experienced leader with previous success stories in terms of establishment of FEZ.
The reason why so many of these FEZs focus on High-Tech is because it is now the largest foreign investment in Armenia. Indeed, investors in the Armenian IT sector benefit from the country’s large pool of low-cost and highly qualified technical specialists. According to Prof. Bertrand Venard, Rector of UFAR (French University in Armenia), “we train IT specialists in Armenia who are at the highest level of competencies, needed by the most demanding international IT firms.” Many of the world’s most powerful technology firms — including Intel, Microsoft, Google, IBM, Synopsys and Cisco — all have had a physical presence there, as the country’s tech sector grew 33% in 2018 to become a $250 million a year industry.[v] A 2020 report from the World Bank also highlights Armenia’s Hi-Tech potential.[vi]
Armenia’s investor friendly environment
Investors consider Armenia as a safe country to live and to work. Business environment in Armenia is favorable for investment as it is the most liberal economy in region. According to The Heritage Foundation’s 2021 Economic freedom ranking, the country ranks 18th among 45 countries in Europe and 32nd in the world.[vii] According to this world renowned index, Armenia has one of the most investor friendly regulatory frameworks for foreign investment in the world.
Plus, the tax system of the country is stable and favorable for potential investors. The laws on FEZs and tax legislation grant exemptions from proft tax, income tax, property taxes, VAT and customs duty.[viii] Investors in the agricultural and IT sectors benefit from tax incentives supported by the government and from minimal bureaucratic barriers. Business registration procedures are fast and simple (up to 2 working days). Regarding funding, the Armenian financial sector is very developed — most of international banking and financial groups are well-established in the market. According to Achal Kumar Malhotra, India’s former Ambassador to Armenia & Georgia, “Armenia offers an excellent destination for corporate conferences in luxury environments at affordable costs, besides tourism in general.”
There is an impression amongst some foreign investors that Armenia suffers from monopolies, which do not allow the entry of “outsiders”. However, this perception is incorrect since the country does not impose ant restrictions on the rights of foreign nationals to acquire, establish, or dispose of business interests and does not limit the conversion and transfer of money. Foreign investor have the freedom to repatriate profits and there are no limitations on the volume and type of foreign ownership, the number of foreign employees’ and access to financial sources. There are also no industrial and sector-specific restrictions for future entrepreneurs registering enterprises in the Armenian FEZs. Foreign investment is fully secured by a five-year grandfathering clause protecting against legislative changes. Foreigners have a right to buy real estate in Armenia and enjoy equal rights with the citizens of the country in the creation of enterprises in Armenia.[ix]
In a nutshell, Armenia has all the great opportunities of a smaller developing country :
- Availability and full support from the Government
- A highly qualified intellectual capital
- A network of the offices of major IT companies and of world-class brands with Armenian roots
- Free and unlimited exchange of foreign currencies and repatriation of property and profits
- 100% ownership permission for the foreign investors as well as guarantees against nationalization and fair compensation in case of expropriation
- Exploitation of natural resources through concession contracts
Among the three South Caucasus countries, Armenia has by far the highest level of entrepreneurial activity. Prof. Venard highlights that “the dynamism, expertise and resilience of Armenian entrepreneurs are well-know. For example, we have an UFAR Accelerator 28 to mentor our students- entrepreneurs. After the idea development, in just a few weeks, we already witnessed great progress and business opportunities. Armenians are born entrepreneurs.”
The country’s geographical location offers privileged access to the Eurasian Economic Union market. Armenia is also a member of Commonwealth of Independent States, of the EAEU and of the Eurasian Economic Union, and is the only CIS country that enjoys GSP+ status with EU countries.
According to Amb Malhotra, “Armenia’s special trade and investment agreements and arrangements with three big international players namely the USA, EU and Russia, provide for duty free or concessional duty on commodities exported from Armenia to these countries. In other words, if there are limitations on bilateral commodity trade, the opportunities for investments in Armenia for local manufacturing for third-country exports are in abundance. The Special Economic Zones in Armenia provide the relevant platform for establishing business entities for manufacturing products for exports as well as local consumption as import substitutes.”
Indeed, the Armenian FEZs give access to a number of major markets :
- The Armenian market of 3 million consumers
- The Eurasian Economic market of 180 million consumers
- Duty free access to almost all CIS countries’ markets of 250 million consumers
- GSP Regime with USA, Japan, Canada, Switzerland, Norway ( 3500 products)
- GSP+ Regime with the EU countries (6400 products)
Another opportunity is the “Trade and Investment Framework Agreement” signed between Armenia and the USA which creates favorable conditions for investments, commodity and trade promotion between the both countries.
Amb. Malhotra further noted that “in the context of connectivity, Armenia’s closed borders and troubled relations with two of its neighbours namely Azerbaijan and Turkey place some limitations. However its excellent relations with Iran and business-like relations with Georgia offer a good opportunity for Armenia to act as a transit for the transportation of cargo from Iran’s Chabahar Port via land route to Armenia and further to Europe via Georgia». He also stressed that «the possibility of direct routes with extension to some third destination with Fifth Freedom Rights must be explored : for example New Delhi-Yerevan-Rome or New Delhi-Yerevan- Birmingham.”
The 2021 CEPA Agreement with the EU : the result of a long history of economic partnership
The ambitious Comprehensive and Enhanced Partnership Agreement (CEPA) between the EU and Armenia entered into full force on 1st of March 2021 providing an effective framework for Armenia and the EU to work together.[x]
The EU has historically been Armenia’s key export and import market and one of the largest sources of net flow of FDI into the Armenian economy (in particular thanks to the trade preferences offered under the GSP+). Companies from the EU Member States are among the largest taxpayers, investors and employers in Armenia. The EU has supported the modernisation of the Armenia-Iran border crossing point in Meghri as well as exports to new markets through the EU4Business initiative. The Union almost doubled its annual allocation in grants to €65 million annually in 2019 and 2020. Since 2014, more than €1 billion of blended loans and grants have been invested in the energy, agriculture and transport sectors.
Achal Malhotra, India’s former Ambassador to Armenia, noted that — “Armenia, being a recipient of foreign assistance, offers opportunities for participation in global tenders floated by International Financial Institutes such as World Bank, IMF etc., particularly for the development of infrastructure.”
In short, rather than diving head first into the promises of the New Silk Road or industrialization like its neighbours have been doing for many
decades, Armenia has taken a different path : the one of innovation and consistent investment. The country intends to become a unique bridge between the member states of the European Union and the Eurasian Economic Union. In this regard, the Armenian FEZ are a unique opportunity to be seized by foreign investors who wish to profit form the country’s investor-friendly environment giving access to 5 large costumer markets as well its increasing number of collaborations with the EU.
Author — Méri Hovhannisyan is an intern with the Caucasus-Asia Center.
[Disclaimer- The opinions expressed in this article are those of the author. They do not purport to reflect the opinions or views of the Caucasus-Asia Center or its members.]
References:
[i] 1 Ministery of Economy of the Republic of Armenia https://mineconomy.am/en/page/360; Repat Armenia, «Free Economic Zones in Armenia», http://repatarmenia.org/en/practical- info/business/a/free-economic-zones-in-armenia;
[ii] World Free Zones Organisation Index Cards — Armenia, https://www.worldfzo.org/Portals/ 0/OpenContent/Files/487/Armenia_FreeZones.pdf
[iii] ECOS FEZ’s Official site , https://ecos.am/en/about
[iv] International Wealth, ’’FEZ in Armenia: by 2022 a new logistics park will be operating in Gyumri’’, https://internationalwealth.info/en/business-abroad/fez-in-armenia-by-2022-a- new-logistics-park-will-be-operating-in-gyumri/
[v] Forbes, «Welcome To The World’s Next Tech Hub: Armenia» by Wade Shepard, 31/01/2020, https://www.forbes.com/sites/wadeshepard/2020/01/31/welcome-to-the- worlds-next-tech-hub-armenia/? fbclid=IwAR3P8tvCt56l7UC4IoXfY0quEHJdqTd2uZynMsQQqadXPGbYvJYMhc0JHJI&sh=2 6a704bd4192
[vi] World Bank (2020), “Realizing Armenia’s Technology Potential”, Washington, D.C, https:// openknowledge.worldbank.org/handle/10986/33027
[vii] The Heritage Foundation, 2021 Index of Economic Freedom, https://www.heritage.org/ index/country/armenia
[viii] Global SPC, Invest in Armenia : Foreign direct Investment and Free economic Zones, http://investinarmenia.am/en/foreign-direct-investment-and-free-economic-zones? display=2
[ix] Ilex Law Firm., “Armenia is the 38th among 190 countries according to the ranking of WB “Doing Business 2017”, Investment incentives in Armenia — ILex Law Firm Armenia
[x] European Commission, «Facts and Figures about EU-Armenia Relations», March 2021 https://ec.europa.eu/neighbourhood-enlargement/sites/default/files/ eap_factsheet_armenia.pdf
