Vache Gabrielyan


Vache Gabrielyan

“More Active Policies are Needed to Help Businesses Better Adapt to the New Reality”

Regional Post discussed the many challenges and opportunities for the Armenian economy with Vache Gabrielyan, the Dean of the Manoogian Simone College of Business and Economics at the American University of Armenia (AUA). 
Dr. Gabrielyan’s insights come from a deep understanding of the issues, also given that he has served Armenia in a range of capacities in the public sector, including Vice-Governor of the Central Bank of Armenia (2008-2010), Minister of Finance (2010-2012), Deputy Prime Minister of Armenia and the Minister of International Economic Integration and Reforms (2014-2018).

Interview : Nazareth Seferian
Photo : AUA 

In 2022, we witnessed considerable economic growth in Armenia against the backdrop of the war in Ukraine. Still, there are fears that this could just as quickly turn into a rapid decline. What risks does the Armenian economy face in this regard, and what steps should be taken today to prevent such a thing?

— I do not expect a dramatic decline, but it is essential to understand that this economic growth was higher than our potential allows. In this case, the potential is the economy’s ability to produce goods and services to a certain level. To increase this potential, we either need more capacity and inputs in terms of materials, resources, and labor, or we need to increase productivity, which basically means that we innovate or secure technological advancement through newer, more productive capital that allows us to produce more with the same level of available resources. Given the rate at which we invest in new technology in Armenia, we can have the potential for economic growth at around 4.5-5% annually. Even the Government analysis in 2021 (and the 2022 budget address) estimated the possibility of 4-4.5% for economic growth to be realistic.

Of course, the Minister of Finance explained the setting of a “stretch” target of 7%, but the estimate remains the same. We see now that we have grown more than three times what was considered realistic, and we clearly cannot sustain this without taking some actions. We must understand that the basis for this considerable growth was not the sudden threefold increase in productivity – we did not build large new factories or installed production lines to secure a thrice increase in output. As you said, it was all related to the war in several ways. 

Given the rate at which we invest in new technology, we can have the potential for annual economic growth at around 4.5-5%. Even the Government analysis in 2021 (and the 2022 budget address) estimated these numbers to be realistic.

The most important factor was the fleeing of capital from Russia. Due to the war and rapidly increasing list of sanctions, economic agents (investors, businessmen, etc.) saw the uncertainty in the country (especially those dealing with the West) and decided to move some or part of their capital and their operations outside of Russia and Ukraine, which is a very logical move. To secure, say, their future imports and exports and many Russian banks being sanctioned without any predictable pattern, they need to ensure legal ways of payments. This is not about escaping sanctions (our banks are pretty sensitive to the topic, they often choose the motto ‘better safe than sorry’) but simply about making sure that your money and your businesses are in a relatively safer environment. So, many Russians – including Russian-Armenians – chose to move their capital, and Armenia was not the unique beneficiary of this phenomenon.

Turkey, the UAE, Kazakhstan, and Georgia all benefited to varying extents. Comparing the numbers in Armenia and Georgia, we will see roughly the same trends for this period, even though the two economies are quite different. There was a similar rate of increase in bank accounts serving foreign citizens in Georgia and the same growth in solo entrepreneurship licenses to foreigners. The picture is the same regarding more free reserves on the bank’s balance sheets in both countries. On the other hand, in both countries, we do not see a significant increase in business loans, for example. There is one sector where we see growth in productivity due to a substantial increase in human capital. This is the IT sector. We have an increase in the potential here, but we must be clear that this is a “mobile” increase. 

Unlike a new factory, which is more or less stationary and fixed in the country. This potential consists of people who can leave Armenia on relatively short notice – not necessarily back to Russia, but to third countries. I don’t think that the tens of thousands of IT professionals coming here will leave so quickly. Still, these people are not organically linked to the Armenian economy. The sector where they work serves the external market. By and large, they are part of international IT companies that have customers abroad. They do not have a major impact in Armenia regarding B2B solutions, either. They are not increasing the capacity of other Armenian businesses (of course, there are sources of increased demand for goods and services). 

There is one sector where we see growth in productivity due to a substantial increase in human capital. This is the IT sector. We have an increase in the potential here, but we must be clear that this is a “mobile” increase.

In any case, they have impacted Armenia as a whole, and all the other sectors – hospitality, transport, finance, etc. – have had to adapt to the changes that their arrival (together with many tourists) has brought to the country. When it comes to how they have adapted, this has also more or less mirrored the situation in Georgia, the UAE, and Turkey. In terms of balance sheet growth, at first glance, our banking sector has been a bit more conservative than their colleagues in Georgia, for example, but a more detailed analysis is needed to discern whether the pattern is due to harsher compliance, the more considerable inflow of people, or other factors.

So, to prevent a possible economic decline, steps must be taken to keep these people in the country for as long as possible. This includes visa regime solutions and developing an infrastructure that serves foreign citizens well – medical facilities, educational institutions, etc. I am not saying that we should neglect the local needs here and focus only on this group of people, but we should support the system to effectively serve a larger international (expat) labor force. And I do not suggest that we need to open Russian-language schools, for example. Many Russians that have moved here would be happy for their children to get an English-language education or Armenian education with more foreign-language classes, and they would be satisfied with being treated in European-style clinics, and so on. Comparing Yerevan to Tbilisi, the latter seems better prepared to serve an international labor force. However, this has always been the case given that city’s historic role as the political center of the Caucasus, the Armenian-Azerbaijani conflict, the permanently larger expat community, etc.

Making rentals more affordable is one clear area where action is urgently needed. But unfortunately, this is a major obstacle to attracting business in Armenia today, not just for those who have arrived recently; it is also a problem for the local population. 
These are the general areas in which action may be needed. Although, again, I am not implying that the Government is not acting (there is not enough information to claim either that or the opposite), I mention the essential directions.


Speaking of the IT sector, the Government has used specific protectionist policies for this part of the economy, including subsidization. In your opinion, is there a need for such actions, and is this the most effective approach?

— Like all exporting sectors, the IT sector had significant problems in 2022 due to the rapid appreciation of the Armenian Dram. And the Government has decided to provide support of around 10 billion AMD. However, this support should not have come through co-financing their costs but by providing liquidity until the companies adapted their cash flows to the new reality. 

Let us take a closer look at what happened. The greatest degree of appreciation of labor costs (December 22 compared to January 21) was against the Euro, around 60% – i.e., the labor is now that much more expensive when expressed in Euros than it was in 2021. This means that the most significant blow was for the countries that export to Europe and only then for the ones that sell in USD. From this point of view, I see no reason why one should not also subsidize the companies that export, for example, agricultural products to Europe when they impact a bigger value chain in Armenia than the IT sector. Not to mention that average salaries in the IT sector are around three times the national average.

The IT sector could have adapted more quickly and less painfully than other parts of the economy, and the best solution for this would have been liquidity support, not co-financing. This liquidity could have been provided for the medium term, and the interest on provided financing could have been subsidized. When you fund the Armenian companies’ costs as our state did, that money often goes to foreign companies where the proportion of their Armenian operations may be relatively insignificant. So, the Government did the right thing in supporting the IT sector, but they needed to choose the best tool, which would have been liquidity support.



You mentioned the appreciation of the Dram, another consequence of the War in Ukraine, and the massive foreign currency inflows into Armenia. But unfortunately, this was also accompanied by inflation. What risks or opportunities come with these developments for the Armenian economy today?

— I disagree that there was inflation due to the foreign currency inflow. If one asks why the Central Bank did not buy even more dollars (it bought a lot), then the answer is clear – so that the appreciating Dram would control inflation (in Armenia, the consumer basket has more imported than locally produced elements). It was not the inflow of foreign currency that caused the inflation. There was inflation already, and the appreciation of the Dram helped control it.
Inflation was already a problem before this, it had been from the previous year, which is why the Central Bank is keeping interest rates high, which impacts the available credit in the economy. All that is true. But this inflow of foreign currency has not caused inflation.

The appreciation of the currency is not a problem in itself. Economic development always leads to currency appreciation. The problem is the rate at which this took place. When currency rates change as quickly as they did in 2022, it needs to give companies more time to adjust their business models. You might suddenly find that your costs have doubled when expressed in foreign currency, and your current model no longer makes business sense. As I said earlier, the Government should provide liquidity but not solve the companies’ problems for them. It should be careful not to create “zombie companies,” meaning companies that were on the path to failure anyway, and are now being kept alive artificially, thanks to state support. More work should be done on understanding each company’s issues in these conditions so that the support provided can be better tailored to their needs.

According to anecdotal evidence, currently, the Government is more actively engaged in industrial policy, which is good. But there have yet to be any published reports on this policy (neither the scope nor the implementation), so we cannot make any judgments about the impact yet. It would be wrong to say that nothing is being done, but it is still quite hard to evaluate the impact of the action that has been taken.


We briefly touched on the agricultural sector earlier, but let us take a closer look at it. There has been a decline in agriculture, which needs further analysis. Would you say this signifies the economy’s modernization, or is it a cause for worry?

— I do not see modernization as a possible cause for this picture. If this were the case, we would have seen greater productivity, which we have not. Part of this is because of the security situation in the country. We have lost some of the state’s territories, and certain parts are no longer usable for agricultural purposes because they are within the crosshairs of the Azerbaijani army. This is true for both arable lands as well as pastures. All the results show a decline in animal husbandry, except for sheep rearing, when expressed in terms of actual mutton production. 

On the other hand, there is an increase in fruits and vegetables and processed agricultural products. These are all items that are predominantly sold in the Russian market. Moreover, the War in Ukraine has not affected Armenia’s sales to Russia – the Ruble has shown less variation with regard to the Armenian Dram compared to other foreign currencies. And the Russian market has absorbed a much higher volume of Armenian products than before, given that it now has a more limited range of options from which to choose. Once again, as we saw in 2015, our economic ties with Russia only grow stronger when there is economic turmoil.

The agricultural sector’s main issue is the lack of new technologies and innovation. The Government is taking the proper steps regarding land consolidation or cooperative cultivation, which will allow greater productivity on the same land and facilitate the use of new technologies.

The agricultural sector’s biggest problems – water or irrigation issues, small land plots, and a lack of technology – are not new, and they need serious investment and know-how when it comes to finding solutions.


According to the World Bank’s human capital index, Armenia has results that are among the worst in Europe and Central Asia. What are the factors behind such a result?

— It is difficult to say, this needs more research. But the results are not as far behind the rest as you suggest – Armenia is equivalent to Georgia with a score of 0.5 and is close to the same level as some Eastern European states such as Romania and Moldova, as well as some Central Asian countries.

We need more clarity when it comes to the overall infrastructure. There are three components to this human capital index – education, healthcare, and social protection. Unfortunately, changes in these areas do not occur quickly, irrespective of the country being considered. These systems have considerable inertia, they progress slowly.

Research suggests that Armenia stands to gain the most from investing in preschool education in rural areas. Everyone knows that early intervention is crucial when it comes to developing the education system. If you better prepare children, their performance improves in school, and these gains benefit the rest of their educational path. And the gap with their peers in urban areas decreases.

But it is easier said than done. It is difficult to do this in Armenia as this is linked to the development of whole communities. We need an educational infrastructure in communities that can deliver general education at every level, i.e., from preschool through grade 1 to the end of high school. And, for this, we need well-trained teachers, equipped facilities, and so on.

This will take time. The first step in this direction is community consolidation, which is now ongoing in the country (the decisions have been made already). But if this is not followed by the consolidation of schools in the communities, it would be a missed opportunity. These are broad issues, so more than an intervention in just one school or community will be needed to produce an impact. 


Mining in Armenia is once again a hot topic, with one official recently stating that it is impossible to imagine the Armenian economy without mining. Regarding the state budget, 10% came from the mining sector in 2022. Do you agree that it is impossible to imagine the Armenian economy without mining? Do you believe in responsible mining?

— In theory, the Armenian economy can exist without mining. But taking the country down that path would be a terrible decision. Let me explain why. Syunik is the only region in the country where salaries are comparable to Yerevan – even higher for some jobs. Syunik also has the lowest levels of labor migration. These are the direct results of the opportunities created by the mining sector in that part of the country. If we did not have any mines in Syunik, we would have a smaller population there, which would mean less resilience in what is now a politically critical part of the country.

Let us think about more than just mining in terms of population income or state budget revenues. If we look at foreign currency entering the country, 30-40% comes from mining. This is significant for a small country like Armenia. It would be tough to manage without the mining sector when financing the country’s economic needs.

The trickle-down effect of these mining companies, which are almost always large corporations, is also significant. Communities hosting mining companies end up having better kindergartens, clinics, etc. People with relatively low skills end up having a better quality of life in such communities than they would elsewhere in the country.

At the same time, mining companies must respect the principles of corporate responsibility to be allowed to operate. There needs to be more public dialogue in this direction. We need to ask ourselves questions such as – could the additional taxes collected in 2021-22 from the mining sector (when copper prices increase) have been used to make environmental requirements stricter? If we work with the strictest ecological norms, how many mines in Armenia would remain economically viable? What is the logical time frame that can be provided to mining companies so that they achieve these norms and remain viable businesses? Unfortunately, such questions are not part of our political discourse. We need to do more work here.


When it comes to corporate responsibility, what is the definition you use? How do you link corporate responsibility to Armenia’s sustainable development, and what should the state do to encourage its development?

— We can look at some of the principles set by a prestigious institution like the Calvert Company. For example, when discussing corporate responsibility, they look at the five directions of a company’s commitment – to its shareholders, employees, customers, the community, and the planet. If we consider mining companies again, it looks like they have no problems in Armenia regarding the first three directions, and their support to their local community is also above average since they often finance the construction or renovation of local infrastructure such as kindergartens. But they need to also commit to the planet.

Corporate responsibility is clearly linked to sustainable development. Whenever a company or an economy wants to attract investment, the best funders will be asking for data on responsible practices in one way or another. Companies need to be more accountable in this area if they want these big investors to put money. Anyone who believes that Armenia would stand to gain from more investment needs to think seriously about this.

Many have their definition of CSR, but international standards are available to us. For example, the Global Reporting Initiative (GRI) mainstreams specific criteria, and many of the initiatives that Armenian companies call CSR come far from what is expected at that level. There is perhaps only one Armenian company that has produced a CSR report in line with GRI standards, and this is probably because they are part of an international company – it is Coca-Cola. Specialized consulting companies prepare their reports. So if we look at their efforts and compare them to others, there is a large gap, and this culture of accountability needs to disseminate to the rest of the business community gradually.

In terms of the development of CSR in Armenia, the state must encourage it. For example, there is a debate in the US Congress about pension fund investments. Should pension funds be allowed to invest only in responsible companies? The progressive Democrats insist that this is how it should be, while some Republicans consider such regulations to be against the very spirit of capitalism. We need to find a balance such that the state encourages more responsible business practices without making it an obligation that goes against business viability. 


AUA  makes it mandatory for all students to take a course on an environment-related topic. In this way, we ensure that sustainability remains on the radar for all our students, irrespective of their field of study.


As the leading business school in Armenia, what is your assessment of how CSR is perceived among the student body at AUA? How is this topic being maintained on their radar?

— In general, our students accept the concept of CSR and do not consider it a foreign notion that is being artificially introduced in our discourse. Our undergraduate students, I believe, think that responsible business should be the norm, not the exception.
We talk about CSR in general terms within the scope of different courses, but we do not have a specialized course on CSR. It would be good to start by doing more research at our Acopian Center for the Environment or the Paul Avedisian Center for Business Research and Development. Then, based on that research, we can develop specific content for our students grounded in the local reality. This will only be effective if we provide theories with actual local knowledge.

I want to make a particular mention of the policy at AUA that makes it mandatory for all students to take a course on an environment-related topic. In this way, we ensure that sustainability remains on the radar for all our students, irrespective of their field of study. And we need to ensure that their engagement with these topics is also relevant on the practical level – subject matter discussions about the existing trade-offs, for example, or how to make real progress in some cases, even if it is a series of small steps.

The real benefits of corporate responsibility in terms of sustainable development will only be seen if we remain grounded and practical in the way forward.

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