This report provides an update on the activities of the U.S.-Armenia Task Force on Economic Cooperation (USATF), which was created in January 2000 to facilitate closer cooperation between the United States and Armenia on economic reform and to promote the most effective uses of US assistance. The USATF is co-chaired by the Coordinator for US assistance to the NIS, Ambassador William B. Taylor, Jr., and the Minister of Finance and Economy of Armenia, Levon Barkhudaryan. The inaugural meeting of the Task Force took place on May 9 in Yerevan and the second meeting will take place in Washington D.C. on September 12-13.

In the months since the inaugural meeting of the USATF we have worked to maximize the effectiveness of our efforts to foster Armenia’s economic reform and economic growth. In addition, President Kocharian’s June visit to Washington D.C. helped to further focus the attention of the US government agencies on Armenia. Ambassador Taylor continues to meet with representatives of the Diaspora, members of the US assistance team and the international financial institutions (IFIs) to evaluate methods to promote investments and job creation, the primary goals of the USATF. Regardless of our best efforts, however, the programs of the US government agencies and other donors can have a beneficial impact only if the Government of Armenia (GOAM) is willing to continue fiscal reforms and confront corruption. In the cases of both privatization and reform in the energy sector crucial nest steps are up to the GOAM. On the more complex issues of corruption and civil service reform both GOAM action and assistance from international agencies are required.

Though the prospects for long-term economic revival would be substantially enhanced by (and might even require) a Nagorno Karabakh peace settlement, it may be necessary for now to focus on efforts to stimulate the Armenian economy before a peace settlement is achieved. Population outflow is critical (some estimates put the current population of Armenia at 1.5 million compared with the official figure of 3.4 million in 1988), and without immediate job creation rapid emigration will likely continue. Armenia cannot afford to wait in the hope that peace will provide a tonic for the region’s economic woes. Concerted efforts in the development on the high-tech sector, energy, tourism, and agriculture, as well as in banking and financial sector reform could provide much-needed economic stimulus. For US support to achieve maximum effect the GOAM must make an honest effort to institute the rule of law, transparency, ethics in government, a reliable judiciary and civil service reform. To improve the business climate, the USG, other donors and private investors continue to recommend that the GOAM create a Foreign Investors Advisory Council to provide recommendations for developing effective investment and economic strategies and to help policy makers understand the impact of policy on the marketplace.

The Armenian government blames many of its fiscal and monetary challenges on the October 27 assassinations, but the problem runs deeper, as the lack of strong institutional framework appropriate to a market economy discourages the private sector investment. The GOAM agrees that political instability and the lack of a strong judiciary sector are hampering its ability to support private investment.

The government has nevertheless had a number of successes of late. International accounting standards have been introduced and are widely used now in Armenia. Cooperation with Georgian customs, hopefully the first step toward custom harmonization in the region, helps to prevent smuggled goods such as tobacco from entering the country. The GOAM has made a significant progress in its land titling and registration programs supported by the USG, the World Bank, and the EU. The titling and registration of the privatized land is critical to private sector development. Still needed, however, is a law on the alienation of land under enterprises to be privatized.

Armenia is currently considering simplified tax legislation that would be less confusing to private business and the GOAM is reviewing options with the World Bank, IMF, and USAID. As agreed to at the first session of the USATF, a delegation of senior Government of Armenia is in the United States until August 5 participating in a program designed by the Department of Commerce’s International Tax and Investment Center to help develop professional tax and custom services. USAID is also providing assistance to Armenian Customs. It has completed a customs diagnostic report that identified the most significant barriers to efficient cross-border trade and is now designing a targeted assistance program based on this report. The National Assembly passed a new WTO-compliant customs code in July that should help facilitate trade.

After much delay, the National Assembly passed a Securities Market Regulation Law in July. USAID will continue to offer assistance in this area to encourage broader participation in the private sector and corporate responsibility to shareholders. A Securities Commission responsible for regulation of the securities market is due to be formed by August 11.

Following concerns over the slow pace of privatization the first half of this year, the GOAM now appears prepared to continue its privatization program. Of primary importance is the privatization of Armenia’s four electricity distribution companies. The National Assembly passed a law in July mandating that the companies be privatized. Four firms, including one American Company, have been short-listed as pre-qualified bidders. Another American firm has been chosen to be the legal advisor to the government on this privatization. The scene is now set for a transparent privatization by the end of the year.

The Ministry of State Property Management is a strong supporter of the electricity distribution companies’ privatization. Moreover, it has indicated that it is willing to proceed with the privatization of at least ten enterprises through open cash tender by the end of the year, a positive step in revitalizing Armenia’s privatization program. The Ministry will also review Armenia’s liquidation decree and propose a law to simplify the process of liquidation where assets are not attractive to potential buyers. As a result of these commitments, USAID will continue to work closely with the government on its privatization program.

Various parts of the government have begun to openly discuss the possibility of privatizing Armenian Airlines, the country’s national carrier. US assistance to the airlines’ privatization will be discussed at the September USATF meetings as part of an overall strategy to upgrade Armenia’s aviation infrastructure.

The reduction of corruption in Armenia is key to making progress in all of the subject areas discussed at the initial meeting of the USAFT. A number of specific steps need to be taken by the GOAM in order to create an effective national anti-corruption program. These steps include: designating for the donors of a GOAM working group to address corruption issues; developing a licensing policy and oversight mechanisms; bringing all legislative acts and regulations into conformity with each other and the constitution; and implementing Civil Service Reform. The GOAM has completed draft laws on civil service reform and financial disclosure and these are currently under review. The GOAM expects the National Assembly to pass these laws in September 2000. A crucial step that the GOAM still must take is to appoint a working group or body to directly coordinate the GOAM’s efforts with international donors. The USG continues to work closely with other donors (primarily the OSCE and the World Bank) and the GOAM to push forward these efforts.

The Government of Armenia has submitted preliminary information on its tax system to USG. Treasury is currently reviewing this information and will speak to the issue of a Bilateral Tax Treaty (BTT) during the September meeting of the Task Force. In order to pursue a BTT, Armenia would need to demonstrate that its tax system is sufficiently stable and that there are tax issues that would need to be resolved by a BTT and US industry would need to demonstrate interest in a BTT.

USTR has taken the lead in the IPR working group that was established during the first Task Force meeting. USTR will address the September Task Force meeting with an offer to send a team to Armenia this year to assist with IPR enforcement problems. USTR will also discuss its serious concern that Armenia is in danger of losing its GSP privileges. Armenia needs to fulfill its obligations under the 1992 US-Armenia Trade Agreement. While WTO accession is moving towards its final stages, domestic laws must be harmonized with WTO rules. Enforcement of these new laws is the greatest challenge facing the GOAM. While the GOAM claims legislative improvements in customs and intellectual property rights, work remains on anti-trust and protection of competition. The adequacy of the former vis-à-vis WTO remains to be verified, and we know from our bilateral work that certain critical IPR elements are still missing from the Armenian legal regime.

OPIC: OPIC already has committed $18 million in financing to the Hotel Armenia Marriott project and $600,000 in political risk insurance to the Levon Travel Bureau. OPIC has thirteen insurance registrations for twelve projects in Armenia’s energy, communications, tourism, manufacturing and mining sectors that, if implemented, would result in significant additional US investment. Moreover, OPIC is discussing financing for two US sponsored projects, one in the manufacturing sector and on the real estate development sector.

TDA: Since our May session, TDA has approved a $250,000 grant for a feasibility study on establishing a new sugar refinery in the Spitak/Gyumri region. The GOAM has publicly stated that the re-establishment of the sugar industry is a priority in order to reduce dependence on imports and save foreign exchange resources, while at the same time creating jobs and reviving economic activity in the earthquake zone, an especially depressed area of the country.

TDA is also funding a visit of 15 agro-businessmen to the United States, 5 each from Armenia, Georgia and Azerbaijan. Agro-business and agro-tourism (wine-tasting/ bed-and-breakfast) are promising sectors in which US assistance can be used to promote development. TDA is also considering expanding its successful Georgian air-traffic control project to Armenia. Discussions are underway. TDA is also considering financing a feasibility study on upgrading Armenia’s gas storage infrastructure, a project that might address a broad range of energy issues but must be carefully examined from the overall perspective of US energy policy towards the NIS.

TDA and IFC are discussing how best to support the World Bank’s conference on investment in Armenia. Originally planned for fall 2000 in London the conference will instead take place in the United States in spring 2001. TDA has offered to work with the IFC to draft the project prospectuses, provide training to project sponsors to make presentations to investors and if necessary assist with travel costs for the project sponsors. The conference will most likely be held in New York.

Representatives of the Coordinator’s office, TDA and DOC are in ongoing discussions with Armenian-American investors interested in developing the information technology (IT) sector in Armenia. These talks are complemented by very recent studies of Armenia’s IT sector by the World Bank and USAID. Donor agencies agree that the sector is attractive because it takes advantage of existing human capital and is comparatively unaffected by Armenia’s geographic isolation. However, the ArmenTel monopoly looms large over any planning for growth in this area; at least five years remain on ArmenTel’s wireless monopoly and over ten years remain on their telephony monopoly. The lack of competition has stifled implementation of technical improvements, such as broadband telecom lines, which are needed for growth. At present the cost of connectivity is up to 1,000 times higher in Armenia than in the United States. Armenia’s initial advantage, if its IT sector is to compete globally, must be lower costs. Until the ArmenTel situation is improved, it will be difficult to imagine the IT sector providing an engine of economic growth.

The World Bank is considering funding for a business incubator to be managed by an Israeli company with relevant experience. An equity fund would be created in conjunction with the project to provide seed capital. The fund would include private funding. No decision on implementation of the project has been made at this point.

The National Institute on Standards and Technology (NIST) initiated a dialogue on standards harmonization during the Task Force’s first meeting. NIST, with support from SABIT and other DOC units, is now exploring the possibility of holding a training seminar in the region for standards officials from all three South Caucasus countries later this year (perhaps November). NIST will provide an update at the September meeting.

At the conclusion of the first Task Force meeting the Co-Chairs signed a document outlining several action items. A summary of these issues and subsequent action taken follows. Numbered items are taken verbatim from the signed USATF minutes and are followed by a description of the action taken: