US embassy cable - 04YEREVAN350

UNCLAS SECTION 01 OF 02 YEREVAN 000350 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EAIR, ETRD, AM 
SUBJECT: ARMENIA: INCREASING (BUT STILL MODEST) TRADE 
WITH RUSSIA 
 
 
1. (U) Sensitive but Unclassified.  Please protect 
accordingly 
 
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SUMMARY 
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2. (SBU) The Armenian press noted that trade turnover 
for the first nine months of 2003 between Armenia and 
Russia increased 84 percent over 2002 levels of the 
same period and was distributed almost equally among 
Armenian exports to Russia and Russian exports to 
Armenia.  Despite this statistical increase, actual 
trade remains at a near constant level and 
transportation through Georgia as well as a small 
domestic Armenian market remain the major obstacles for 
a substantial long-term increase of trade between 
Armenia and Russia.  Although trade turnover between 
Armenia and Russia increased, in 2003 Russia lost 
market share relative to Armenia's other major trading 
partners.  End Summary. 
 
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RUSSIAN EXPORTS TO ARMENIA 
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3. (SBU) Official statistics from the GOAM showed that 
the total value of imports from Russia to Armenia 
during January to September of 2003 was USD 165 
million, an increase from USD 118 million during the 
same period in 2002, placing Russia as the number one 
exporter to Armenia, with twice the turnover of second 
place Belgium.  Of the USD 47 million increase, USD 37 
million was in the import of diamonds.  (Note: 
Diamonds were also a significant component of trade 
with Belgium.  End Note.)  Despite growth in Russia's 
trade turnover with Armenia, Russia lost market share 
for the second year in a row:  Russia's total trade 
turnover share decreased from 19.2 percent in 2001 to 
17.3 percent in 2002 and to 15.5 percent in 2003. 
 
4. (SBU) Russian diplomat Aleksandr Zyganov told us 
that the biggest imports to Armenia from Russia were 
oil, gas, nuclear fuel and diamonds.  He stated that 
Russia was Armenia's number one trading partner and the 
trade had increased every year for the past three 
years. He gave an example of a successful Russian- 
Armenian joint venture, Armenia Lada, which sells 
approximately 400 Russian made vehicles a month in 
Armenia.  Other Russian exports to Armenia were wheat, 
sugar, chemical products and vodka. Despite the 
statistical increase Zyganov admitted that the small 
domestic market in Armenia inhibited trade and large- 
scale Russian investment. 
 
5. (SBU) According to Tigran Davtyan, the Deputy 
Minister of Trade and Economy, the main increase in 
Armenian imports for 2003 from Russia was in diamonds; 
he believed the other main exports, oil, gas, and 
nuclear fuel were about at the same level as 2002. 
Davtyan felt that the overall statistical 40 percent 
increase in imports from Russia was misleading as most 
of the imported diamonds were refinished and re- 
exported to Belgium and Israel or back to Russia for 
final sale.  Nerses Mkrtchyan, Head of the 
International Economic Cooperation Department, believed 
that the increase in diamond imports could be traced 
back to one Russian-based Armenian businessmen, Ara 
Abrahamyan.  The reason for this spike was unclear to 
Mkrtchyan; he believed it could have easily been an 
anomaly and did not represent an overall strategy of 
increasing trade between Russia and Armenia. 
 
6. (SBU) Mrktchyan, as well as Gagik Hairapetian, the 
Russian desk officer at the Armenian Ministry of 
Foreign Affairs, felt that while refined oil was a 
major Russian import, the country of origin of oil 
imports at the Georgian port of Poti was not always 
clear.  Management of MIKA, a gas station franchise 
that owns roughly 50 percent of the Armenian domestic 
market, told Hairapetian that up to half of the fuel 
sold by MIKA comes from either Romania or Turkey. 
 
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ARMENIAN EXPORTS TO RUSSIA 
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7. (SBU) Official GOAM statistics show that from 
January to September of 2003, Armenian exports to 
Russia equaled USD 64 million, as compared to USD 46 
million.  Of the USD 18 million increase, USD 6 million 
was refinished diamonds.  Zyganov said that Armenian 
exports consisted of cognac, vegetables, fruits, 
cheese, tobacco, metals, light machinery, chemicals, 
and even Armenian beer.  Hairapetian stated that since 
many Armenian farmers do not have money for 
fertilizers, there was also a demand for their 
environmentally friendly food products in Russia.  The 
USDA has encouraged this trend by helping found the 
Armenian Organic Agriculture Foundation (AOAF) as well 
as offering a USDA-Extension mini-grant program that 
encourages an organic component for crop production as 
well as livestock.  Hairapetian stated that a soon-to- 
be-opened Armenian consulate in Southern Russia, 
coupled with good cooperation with local Russian 
officials, a large Armenian Diaspora, and cheaper costs 
of transporting goods to southern Russia than to the 
Moscow region, all contributed to higher import demand. 
Hairapetian and Mkrtchyan both felt the expanding 
Russian economy would always be an outlet for Armenian 
goods. 
 
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COGNAC: NUMBER ONE EXPORT 
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8. (SBU) The Sales Manger of the Yerevan Brandy Company 
(YBC), Serge Der-Sahaggian told us that 80 percent of 
their export market was in Russia.  In 2003 they 
exported approximately 6.4 million bottles, or tens of 
millions of dollars worth of brandy, which made cognac 
the leading export item to Russia.  Der-Sahaggian 
stated that the YBC and its competition, Great Valley, 
constitute about 90 percent of the Armenian export 
brandy market in Russia.  The YBC shipped all their 
products through the Georgian port city of Poti, and 
despite the uncertain political climate in Georgia, the 
YBC had no plans to curtail exports.  Der-Sahaggian and 
Haripetian were optimistic that tariffs and duties and 
corrupt practices would finally be lowered and/or 
minimized under a new reform-minded Georgian 
government. 
 
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OBSTACLES TO INCREASED TRADE 
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9. (SBU) Der-Sahaggian, Zyganov, Hairapetian and 
Mkrtchyan all agreed that high tariffs, corruption, 
encounters with Georgian criminal groups and the 
uncertainty of goods transiting unmolested through 
Georgian customs all combined to make exporting goods 
from Armenia to Russia through Georgia a substantial 
obstacle to increased trade with Russia. Hairapetian 
and Zyganov both strongly believed that a railroad link 
through the breakaway republic of Abkhazia could boost 
trade between the nations significantly.  Zyganov 
believed that Armenian cement and construction 
materials could be sold in Russia as well as an 
increase in exporting fruit, vegetables, foodstuffs, 
and cheese.  Russia could also export more wheat, sugar 
and oil.  All agreed that politically this rail link 
was unlikely to be opened anytime soon. Zyganov stated 
that in March of 2003, Russian President Putin and 
former Georgian President Shevardnadze had agreed to 
build a new railway through Georgia to link Russia and 
Armenia, but this was still in the discussion stage. 
 
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COMMENT 
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10. (SBU) While Russia is clearly Armenia's most 
significant trading partner, any hope for significant 
growth in real trade will depend on improving 
transportation links between the two countries, a 
prospect unlikely in the near future. 
ORDWAY