Political instability fuels unattractive business environment in Armenia, says EBRD

/By AzerNews/

By Mushvig Mehdiyev

Focusing on many marketing impediments and obstacles throughout Europe, the European Bank for Reconstruction and Development explained what triggered Armenia's unattractive investment and business environment in its recent survey.

The EBRD and World Bank conducted the fifth round of their Business Environment and Enterprise Performance Survey (BEEPS) in 2013 and 2014. Competition from the shadow economy as well as access to finance and electricity remain the biggest challenges to doing business in emerging markets, said the EBRD in the survey.

The BEEPS survey defined the political instability as one of the major constraint in Armenia when it comes to business's progress.

The top three business environment obstacles identified by Armenian firms were access to finance, and tax administration in addition to political instability.

The EBRD showed the unresolved Nagorno-Karabakh conflict as the main driving factor fueling Armenia's politically unstable environment. The bank believes that the conflict which still could devolve into a full blown military escalation deters investment inflow to Armenia.

“In addition, the economic blockade imposed by Azerbaijan and Turkey, again due to the unresolved conflict, increases costs for businesses in the country. Firms are also concerned over frequent amendments in policy and legislation,” the report reads.

The Armenia-Azerbaijan Nagorno-Karabakh conflict is seen as a source of real danger in the region since its settlement seems far on the horizon given Armenia's derailment on all peace efforts. After it invaded Azerbaijani lands in early 1990s, Armenia orchestrated a bloody and fatal occupation attack which resulted in the seizure of 20 percent of Azerbaijan's internationally recognized territory.

In view of resolving the conflict, Azerbaijan's leadership expects Armenia to join Baku's diligence in breaking the twenty-year-long stalemate.

However, Yerevan continues to turn a blind eye to all peace efforts, preferring instead to play the hate game with its neighbor. Even when Baku initiated the Great Peace Agreement, Yerevan still refused to engage into a meaningful dialogue. Such political instability has of course kept investors away, impacting negatively on Armenia's growth and prospects.

Besides the Karabakh conflict's obvious impact on investments in Armenia, internal tensions between political factions have too contributed to a negative outlook.

This war of clans which is playing out between Yerevan and separatist rulers in occupied Nagorno-Karabakh is taking its tolls on Armenia’s political environment. Moreover, the destruction of the opposition forces - the Prosperous Armenia party and the Founding Parliament - by the authorities has meant that Armenia is quickly turning into a violent dictatorship.

Access to finance emerged among the main constraints for Armenian firms, the survey reported. Compared with their counterparts in eastern Europe and the Caucasus (EEC), Armenian firms relied more on bank loans and other sources, such as moneylenders, friends and relatives. Bank financing decreased from 21.7% to 9.5% and was below the EEC average, while other sources of financing were higher in Armenia than in other EEC countries.

Coming to the third main obstacle to business in Armenia, the EBRD said roughly three-quarters of firms were visited or inspected by tax officials in both rounds of BEEPS – nearly 18 percentage points above the EEC average in the latest round. This, together with the tendency of tax officers to impose at least one fine per visit even if no violation has been committed, could explain why tax administration emerged as the next biggest obstacle. Tax officials often ask for informal gifts or payments from firms.