Armenia: risks of political favoritism in business

One of the main systemic obstacles to the development of Armenia is corruption. Although Armenian officials have called it an internal problem, this problem is in the focus of international structures. According to the head of the EU Delegation to Armenia, Ambassador Peter Switalski, Yerevan has no effective programs to combat corruption, and if the country will not effectively fight corruption it cannot develop dynamically. According to the US Ambassador to Armenia, Richard Mills, corruption impedes not only the development of the country, but also creates a threat to national security: "If we cannot solve this problem, it will affect the relations between our countries, for example, the issue of attracting US investments to Armenia."

In early February, the government of Armenia and the United States Agency for International Development (USAID) signed an agreement on the program ‘Support for the implementation of the anti-corruption strategy of Armenia’, the total cost of which is $806,390. The purpose of the program is to assist the apparatus of government in the implementation of the anti-corruption strategy for the years 2015-2018.

This is not the first US step to assist Armenia in the fight against corruption. All previous attempts have failed. Experts believe that now the Americans are hoping to make a breakthrough in this regard.

It is not the efforts of foreign countries or international organizations to solve the problem that are crucial, but the political will of the authorities. Chaired by Prime Minister Hovik Abrahamyan, the Council for Fighting Corruption, which has existed for exactly one year, has not taken any real steps. The Council has held just two meetings, at which the program of action for 2015-2018 was adopted. Similar councils on anti-corruption measures were created by Hovik Abrahamyan's predecessors, Andrannik Margaryan and Tigran Sargsyan. These structures were not distinguished by an effective fight against corruption, and Sargsyan even became the protagonist of a large "offshore corruption scandal".

According to the head of the Armenian office of the anti-corruption center ‘Transparency International’, Varuzhan Hoktanian, the results of the operations of the Council in the fight against corruption are not visible, this structure is a mere formality. According to an individual deputy, Marukyan Edmond, he studied the 19-page report on the annual activities of the Board and concluded that significant steps were not taken, but 750 thousand dollars provided by USAID were spent on the creation of an electronic system.

As a result of the inaction of the Council and declarative steps of the authorities about the fight against corruption, there are risks of political favoritism in business. In the Heritage Foundation economic freedom ranking for 2016, Armenia came 54th in the group of countries with moderately free economies. By comparison, Georgia took 230th place in the ranking of countries with mostly free economies. According to the fund's information, bribery and  favoritism displayed to business remain common practice among public officials, punishments for which are extremely rare.

Last but not least, this relationship has led to problems in the development of the country. The constant excess of imports over exports as a result of the patronage of the authorities' import monopoly, has led to the formation of a payments deficit in the foreign trade balance and consequently to a lack of funds to meet the needs of the population and ensure the economy. These funds are replenished at the expense of the external debt.

According to some experts, Armenia has destroyed the economy and the country has entered a vicious circle, in which the debts are taken on, interest is paid, but  the problem of raising standards of living and economic development has not been solved. Even large medical centers and educational institutions have become major taxpayers, sometimes ahead of the largest companies that occupy a monopoly position in the economy. According to the opposition newspaper Newsbook, the Yerevan Brandy Company, which is on the list of 1000 major taxpayers for 2015, paid 4 billion 929 million drams ($ 1 - AMD 495). Exactly the same amount of taxes paid by Yerevan State University and Medical University. And the powerful ‘Unibank’, having a lot of credit agreements with citizens, pays less tax than the Medical University. Belonging to the family of Prime Minister Hovik Abrahamyan, the Artashat cannery pays almost as much tax as a health centre for children and adolescents.

Experts are calling for major economic reforms, similar to Singapore in the early 1960s. Then the reforms themselves will create a demand for the reduction of corruption that prevents the development of the country.

According to other experts, economic reforms and the fight against corruption are one and the same. However, corruption in Armenia pursues political goals and aims to ensure that there is no free competition in the economy or in politics or anywhere else. According to the economist Vahagn Khachatryan, the current political system cannot exist without corruption, but corruption cannot exist without this political system.

So, because of the lack of a fight against corruption and the monopolies in Armenia's economy, negative trends  appear that contribute to the formation of new vicious models, and among the terms of these models are corruption and political favoritism towards business, using the punitive tax policy rather freely.