I. COMMERCIAL OVERVIEW Overview Of Import Market Armenia at present is a country with a low importing capability. State imports are basically aimed at satisfying a less than modest scope of foodstuffs which are rationed to the population of the country, and a minimum supply of energy and fuel. Imports conducted by the newly born private sector mainly include food, fuel, and a modest range of apparel, household items and consumer electronics. Active imports for 1993 totalled USD 91,144,400 and were comprised of the following: Food.............................................40.8 % Non-food raw materials...........................17,1% Equipment, devices, and machinery.................8,9 % Products of chemical and related industries.......4,2 % Food imports consisted mainly of vegetable oil, sugar, tobacco, and alcohol beverages. If humanitarian aid, grain purchased on international credits, and fuel deliveries in clearance of countertrade transactions are factored in, the Armenian imports for 1993 totalled USD 205,430,600. Humanitarian aid provided to Armenia in 1993 totalled 48,347 tons; 30,878 tons of foodstuffs, 924 tons of medicines and medical equipment, 700 tons of potato seeds, 5,664 tons of heating fuel, and other - 10,181 ton. Brief Synopsis On Commercial Environment Armenia is in the midst of a severe economic crisis. Almost all its industries suffer shortages of fuel, electricity and raw materials, as a result of the ongoing blockade of the country by neighboring Azerbaijan and Turkey, and civil unrest in Georgia. The average purchasing power of the population remains very low and limits trade opportunities. The level of corruption inherited from Soviet times remains stubbornly high and shows a tendency for further growth. The country, however, is fully determined to follow the path from a planned to a free-market economy market. Farmland privatization is complete, and major industries should be privatized in 1994-1995. Business laws are gradually being readjusted to match those of the Western developed nations. Present law permits the establishment of almost all types of private companies existing in the West, and the country's banking system, which currently is very backward and insufficient, is expected to improve in the near future. Armenia is open for foreign investors and conducts liberal foreign trade policy. Host-Country Business Attitude Toward The United States Business attitudes are positive, although the lack of experience, as well as persistent economic and infrastructure problems make trade with the United States a dim prospect for a majority of Armenian state or private businesses in the near future. Major Business Opportunities The Armenian economy is in desperate need of western development assistance, investment and management expertise. However, low local financing capabilities, combined with very low wages and often, the unwillingness of foreign lending institutions to take risks in Armenia, inhibit the scope of potential business opportunities. Most existing opportunities are concentrated in the following areas: - Privatization of national industry and services - Construction and rehabilitation works in the zone damaged by the 1988 Spitak earthquake (international financing) - Aviation development (international financing) - Improvement of the energy industry (international financing) - Food imports and food processing - Use of an inexpensive but qualified labor force for local research, development, manufacturing or assembly, and subsequent export of hi-tech hardware and software Major Roadblocks To Doing Business - Road and Rail blockade of the country - Shortages of energy resources - Difficulties in use of modern telecommunications means - Limited inner convertibility of Armenian dram and its total inconvertibility outside of the country - High and poorly controlled inflation - Non-efficient and backward banking system - Insufficient protection of foreign investments - Low purchasing power of the population - Business insecurity in the country's border areas - Low business culture Nature Of Local And Third-Country Competition No local competition is presently observed within the majority of Armenian manufacturing industries. The country inherited an extremely monopolized structure of manufacturers, some of whom relied almost entirely on the former Soviet Union for their raw materials. These industries remain under state control and, under present circumstances, work at 10-25 percent of their former capacity. Their products are mainly exported to improve Armenia's trade balance and augment the budget. The private sector, during three years of energy shortages and the blockade, concentrated mainly on retail sale of foods and consumer goods, shipped mainly from the NIS, Iran, Turkey, and Arab Emirates. Here one can observe emerging competition although many store owners are forced by "shadow kings" to artificially mark up prices for the goods being sold. Iran is gradually becoming Armenia's the most important trading partner for it maintains a neutral position towards the conflict and has a land border with Armenia.