Old Soviet plans have become unlikely blueprints for recovery in Armenia’s rocky hinterland. More than two decades after many gold and copper mines shut their gates, prospectors are returning to Armenia to pick up where the Russians left off.

A mineral and energy boom is changing this tiny Caucasus nation. Buoyed by rising commodity prices and a 20% devaluation of the dram last year, mining companies are flooding in, keen to tap a geological formation known as the Tethyan Belt, which is home to some of the world’s largest gold deposits. “Armenia has a history of mining, but the country just hasn’t been able to sustain investment,” says Bill Mavridis, president of Canadian firm Caldera Resources. “There’s enormous local demand for things like copper, but a lot of the mines shut down because they couldn’t run efficiently.”

Advertisement

Caldera is spending $3m on two sites close to the Iranian border, which Soviet-era surveys say are plentiful in gold, silver and copper. It is a scene being played out across the country, with such projects expected to lead to a 60% growth in foreign investment by 2015, according to International Monetary Fund forecasts.

A timely boost

It is a big turnaround for the country, still reeling from a 14.4% collapse in its economy last year following the bursting of a massive construction boom. With remittances from its huge diaspora abroad ebbing, Armenia is now looking to foreign investors. Empty building sites that adorn routes out of capital city Yerevan are a stark reminder of that bubble, which accounted for about 40% of all growth in Armenia between 2003 and 2008. Under IMF assistance, the government is now hoping to diversify its economy – led by resurgence in energy, mining and industry.

“It’s widely accepted, in light of the construction downturn, that Armenia’s economic base is overly narrow,” says Anthony Thomas, an analyst at Moody’s. “The country has a good base for diversification, in that its workforce has relatively high educational standards and the current government is considered to be pro-reform.”

Through its devaluation of the dram last year, the government has already shown its readiness to kick-start the economy – with further liberalisation promised. The first fruits of that policy are already beginning to show: GDP grew 7.2% year on year in the first four months of 2010, driven by a huge up-tick in exports and industries such as mining, prompting the IMF to double its annual forecasts.

“While economic conditions remain difficult, the Armenian economy is gradually recovering,” says Mark Lewis, who recently led highlevel talks in Yerevan as part of the IMF’s mission to the country. “Growth is expected to rebound in 2010, external inflows are picking up, and public finances have improved,” he adds.

According to the IMF, FDI could reach $758m by 2015 – compared with $478m last year. It is working closely with the government in Armenia to attract cash from abroad, and has already secured commitments to open up the economy and reduce red tape as part of its efforts to secure growth. Indeed, making the country’s mines globally competitive will require precisely that international expertise and capital, according to Mr Mavridis. With modern drilling equipment and laboratories unavailable within the country, he has had to export in machinery as part of his exploration efforts.

German injection

The Zangezur copper and molybdenum mine – one of the country’s largest employers – is a prime example of what foreign capital and expertise can do. German company Cronimet Mining has invested more than $200m in the concession. Cost savings and production efficiency drives are expected to increase processing to 14 million tonnes in 2011, from just 8.5 million tonnes in 2005.

 “We can already see a great deal of local demand for copper,” says Mr Mavridis. Although Caldera is targeting domestic buyers for its produce, he says there are huge prospects for export. “There’s great potential for many neighbouring countries – Iran is close by and it could be a great stepping stone for access to the Commonwealth of Independent States [CIS] market.”

A timely boost: Armenia’s mining boom has helped soften the blow of the collapse of its construction industry, with the discovery of gold in the Tethyan Belt promising to be particularly lucrative

A timely boost: Armenia’s mining boom has helped soften the blow of the collapse of its construction industry, with the discovery of gold in the Tethyan Belt promising to be particularly lucrative

It is Armenia’s proximity to some large and resource-hungry countries that is driving investment for many of the companies operating there. As part of the CIS, the country has free-trade agreements in place with a number of other members, a huge plus for international firms. But it is the prospect of peace with neighbouring Turkey and Azerbaijan that is a major pull for foreign cash. Yerevan and Ankara are close to normalising ties after decades of hostilities linked to mass killings in Armenia in 1915; likewise, it is in talks with Azerbaijan authorities to settle differences over which of the two countries should control the Nagorno- Karabakh region.

Such agreements would be a massive boost to trade for the tiny country, according to David Parry, senior vice-president of Transeuro Energy. The Vancouver-based company is searching for oil and gas in the west of Armenia, by the Turkish border. It has spent about $10m so far drilling for hydrocarbon deposits. “It is difficult being isolated,” says Mr Parry. “If the border opens with Turkey then that’s going to create huge potential, not only for the export of things like gas, but also textiles and agricultural produce. It’s a huge selling point for us, and makes the energy industry the one with the highest potential.”

According to Mr Parry, an opening of the border with Turkey would allow Armenian firms and their foreign investors to export electricity. As well as the gas deposits currently being explored, the country also has huge potential for developing hydroelectric and other renewable electricity, says Moody’s Mr Thomas. He estimates that opening the border could mean transport costs fall by up to 30%.

However, while international businesses seem keen to exist, many are vocal about the problems still present in the country. Without peace with its neighbours, exports will have to continue up the long route through Russia – adding days and millions of dollars in additional costs. The infrastructure in the country is also very poor – even Armenia’s best highways are riddled with potholes, making for rough and slow journeys.

“There is a good rail link to Georgia and some good roads, but elsewhere the infrastructure in the country is completely lacking,” says Mr Parry.

Diversification hope

Corruption, too, remains a problem. But there are hopes that working with the IMF will help alleviate that burden on investors. Mr Thomas, for one, is bullish and says that if reforms are properly implemented, the country could even diversify its economy further to include tourism and agri-business.

 The government for its part seems keen to reform, and has signed a letter to the IMF promising to improve Armenia’s business environment. It says it intends to continue anticorruption efforts, notably by addressing conf lict of interest issues involving public officials, as well as implementing measures to increase competition.

Still, Armenia’s recovery remains in the balance, according to the IMF. The actions of the government – and the success of the current influx of foreign cash in creating growth and profits for the investors – will determine the future of this tiny country.

“The authorities have adjusted policies in a manner consistent with macroeconomic stability, and are clearly aware of the challenges ahead,” says a report prepared by the IMF. “Risks to medium-term growth remain two sided, reflecting the outlook for the regional and global recovery.”