Armenia shows potential for chemicals industry

Following the collapse of the Soviet Union, much of Armenia’s chemical sector was laid waste. Now, improving economic stability and infrastructure mean it once again has the potential to prosper

IN THE former Soviet Union, Armenia was the chemical powerhouse of the Caucasus. In the 1970s, it produced synthetic rubber, latex, acids and adhesives, predominantly for military applications. By the 1980s, chemicals accounted for 6.6% of industrial production. However, after 1988, the industry fell into decline.

The collapse of the USSR began a chain of events that dealt Armenia’s chemical industry a series of blows. The rise of the environmental movement in the late 1980s, the war with Azerbaijan over the autonomous region of Nagorno-Karabagh in 1988-1994 (and today’s continuing violence there), and energy crises between 1992-1993 meant production fell to such low levels that the industry essentially shut down, with some plants and companies laying dormant for more than 10 years.

Attempts to resuscitate chemical production on a domestic level and by inviting foreign investment during the late 1990s and early 2000s were largely unsuccessful. A few major companies changed hands several times because of gas and electricity debt, which resulted in little market stability. The industry has limped on unsteadily, slowly recovering its stride.

THE TIME IS NOW

Is 2009 the time for things to finally kick off? According to the Interfax Centre for Economic Analysis, Armenia has the capability to produce a great range of chemical products, including plastics, rubber, latex, asbestos products, acids, oxides, salts, paint materials, perfumes, cosmetics, polymers, resins, agricultural chemicals and fertilizers and household chemicals, as well as chemical elements and compounds.

Over the past eight years, Armenia jumped a staggering 56 places up the Index of Economic Freedom (a series of 10 economic measurements created by the Heritage Foundation and Wall Street Journal) , and in 2008 stood in 28th place, making it the most economically free country in the Caucasus (Georgia was 32nd, Azerbaijan 107th, and Russia 134th. Incidentally, it was ranked higher than a few Western European countries, the most noteworthy being France, which was in 48th place). During those years, foreign investment in the Armenian chemical industry has risen, with interest being shown from countries such as Iran, Great Britain, the US, and Switzerland.

The communications and mining sectors attract the most investment from abroad (Armenia has extensive reserves of copper, gold, and precious stones), but within the chemical industry the pharmaceutical sector seems to have become the most prominent on the domestic market, where manufacturers such as Iran’s Arpimed and Switzerland’s AZAD Fine Chemicals.

The “Nairit Plant” is the largest chemical production facility in Armenia, where polychloroprene, carbinol syrup, caustic soda, liquid chlorine, and monocarboxylic acids are manufactured. Traditionally, Armenia’s greatest chemical export has been chloroprene rubber (used in the manufacture of tires). It is the only producer of this chemical in the CIS and Eastern European countries. The firm, Prometey-Khimprom, also produces carbide, corundum, ammonium, acetated tapes and threads, and melamine.

While producing many of these chemicals for export, Armenia still remains a net importer of chemicals. In 1999, chemical imports outweighed exports sixfold. That ratio has improved over the past ten years, but Armenia still remains a potentially attractive market for European exporters.

Armenia has a lot to offer the chemical industry, such as a benign economic environment, skilled workforce, and competitive cost base. Yet several areas exist that continue to raise questions. The first is transportation. Armenia’s infrastructure is in dire need of repair. Driving along these routes with truckloads of hazardous or flammable chemicals poses an amount of physical and environmental risk, which some Western companies are reluctant to take. However, a certain amount of progress is being made on certain routes, for example Yerevan-Stepanakert, because of the lack of restrictions on remittances from the large expatriot Armenian community abroad.

The second is energy. Armenia is completely reliant on other countries for oil and gas. Gas comes from Russia from a pipeline through Georgia, and pipeline projects implemented from Iran have been suggested. There is no oil pipeline infrastructure, although one from Russia has been discussed for the future.

Therefore, Armenia is almost completely dependent on imported energy. The only domestically produced primary energy is from hydroelectric power plants and a single nuclear plant, Medzamor, near the Turkish border. Armenia’s electricity-generating capacity into the early part of this decade was flat, and much of the equipment still used in these plants is outdated. However, recent privatization in the energy sector has led to greater investment to update and safely guarantee Armenia’s energy supplies.

The third is geography. Armenia is a landlocked country, sandwiched between Georgia in the north, Turkey to the west, Azerbaijan in the east, and Iran to the south. Its position means that it is subject to the delicate geopolitics that are present in the region.

Many Armenian imports from the Black Sea area have to come through Georgia. When the tension that exists between Georgia and Russia occasionally erupts, this can have knock-on effects: Russian exports destined for Armenia, waiting to be shipped through Georgia, can be halted while hostility remains, and trade stops.

Unlike its northern neighbor, Armenia’s relations with Russia are positive (Russia provided 32.5% of foreign investment in 2007, the single largest investor), and during times of conflict the Armenian public has displayed irritation at Georgia’s diplomacy with Russia, which it deems unnecessarily confrontational.

BORDERS REMAIN A PROBLEM

Following Armenia’s war with Azerbaijan over Nagorno-Karabagh, both Turkey and Azerbaijan closed their borders, which remain closed to this day. Trade is at minimum levels. Turkey has a burgeoning chemical industry, whose export market could blossom in the event of the border opening. Armenia would also be able to export its mineral fertilizers into the rural areas of eastern Turkey. Market analysts in the area admit that these markets could be lucrative, and that the benefits might work to counterbalance short-term negative conflicts between the two countries.

A reopening of the border with Azerbaijan would arguably offer unbridled opportunities for the petrochemical industry in the southern Caucasus, certain market players believe. It would enable an oil pipeline to be built from Baku, the capital of Azerbaijan, directly through Armenia into Turkey and beyond – a pipeline that bypasses Russia.

“Armenia’s chemical processing capabilities are more advanced than those in Azerbaijan. If the border were opened, Azeri oil companies could then pipe crude over the border for Armenia to refine. It could be the start of a profitable bilateral business relationship,” a spokesperson for a petrochemical company in the region said.

Unfortunately, neither Turkey nor Azerbaijan will consider reopening borders until Armenia relinquishes its claims over Nagorno-Karabagh’s sovereignty. Relations between Armenia and Turkey are also becoming increasingly strained as a result of the lobby among the diaspora there calling for Turkey to recognize the mass slaughter of Armenians in 1915 in the Ottoman Empire as genocide.

On a more positive note, however, the Turkish president’s invitation and attendance at a football match in Yerevan last September are encouraging. Also, meetings between the presidents of Armenia and Azerbaijan, Serzh Sargsyan and Ilham Aliev, in St. Petersburg and Moscow last year and in Davos, Switzerland, on January 28, herald a new era of diplomacy, and offer a sign of hope to trade and cooperation in the region. As the Armenian proverb says, “If the village stands, it can break a trunk,” meaning “strength increases in unity.”

“Looking at where Armenia is, it is a gateway to the Middle East, and an inland link from the Black Sea to the Caspian. With the right level of investment, the chemical industry in the region would offer healthy growth and open new pathways for the industry,” a Russian-based producer said.

Whether investment would look so attractive during the global economic downturn remains to be seen, but sentiment remains hopeful. “With any luck, things can now move forward positively,” a market participant commented.

Stuart Moir is a markets reporter for ICIS pricing, covering polymers and plastics. In 2007 he worked in Yerevan, Armenia, at the Noyan Tapan news agency.

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