Are Tariffs Protecting Local Jobs or Corporate Welfare?

Ararat Cement, owned by Gagik Tsarukyan, who is also the head of a political party with the second-biggest representation in Parliament. (Photo: Ararat Cement)

This week, the workers at the Ararat Cement plant took to the streets in protest following news of mass layoffs. The plant, located just outside Ararat, is one of two in the country and employs almost 1200 workers, making it the single largest source of jobs in the impoverished region. A number of other Soviet-era manufacturing plants have long shut their doors.

Multi Group, the corporation owned by business mogul Gagik Tsarukyan, insists that the layoffs are due to harsh competition from Iranian cement imports. The company has shifted blame for the plant’s financial misfortunes toward the government, arguing that it doesn’t do enough to protect local companies.

Multi Group’s chief executive, Sedrak Arustamian did not mince words when he announced that the plant’s closure would result in an exodus of Armenian workers. The implicit threat to the Pashinyan government was clear. The government which took office on the promise of creating jobs, he said, will bear responsibility for losing them.

The government responded to these complaints by discussing the possibility of a tariff on Iranian cement imports. Crucially, a final draft of the tariff omitted cement clinker, a paste containing limestone and aluminosilicate materials mixed into the cement for construction purposes. Cement clinker is an important ingredient in Portland cement, the most common type produced in Armenia. Tsarukyan, who also happens to be the leader of the Prosperous Armenia Party, currently heading the Parliamentary opposition, declared that the government’s decision to remove the crucial compound was politically motivated, since they coincide with raids by tax auditors of other businesses owned in his conglomerate, Multi Group. Kentron TV, which also happens to be owned by Mr. Tsarukyan,has been hyping up this narrative. Prime Minister Nikol Pashinyan has denied claims of political vendettas.

Though Tsarukyan has used his position in parliament, the media and dominance of Armenia’s market to leverage his claims to more government assistance, the truth is that Multi Group’s Ararat Cement Factory essentially operates as a duopoly in the cement market. The only other local competitor is Hrazdan Cement, formerly owned by Mika Bagdasarov (more on that later). Under the protection of previous governments, Ararat Cement not only thrived in Armenia, but also exported to both Georgian and Iranian markets.

During the boom years of the 2000s (when the country enjoyed a double-digit GDP growth), Armenian cement sold for $75 a ton (for reference, Georgian cement cost $140 and Iran, a whopping $220 a ton). The price of local Armenian cement would go on to peak at $100 per ton and last year, eventually settled at around $80 per ton. In short, the market was good.

It seems like quite a coincidence that his cement factories financial fortunes turned under a new government which does not play favorites in the business world. How did Armenia’s cheap cement suddenly become non-competitive with Iranian imports?

The Baku-born businessman Mika Bagdasarov, the aforementioned former owner of Hrazdan Cement (the only competitor to Tsarukyan in the country), tried to attribute the price leap to increased demand for cement in Azerbaijan and Georgia, which had outpaced supply. This, he said, caused a 15 percent cost increase in Armenia (though even a 15 percent increase would still yield lower prices than Iran, making this argument incomplete).

Perhaps it has more to do with poor management than it does with actual market fluctuation. Incidentally, his own cement plant, Mika Cement, would end up filing for bankruptcy in 2014. It would later be purchased by new owners and re-named Hrazdan Cement. Bagdasarov’s other business, the national carrier Armavia, was also spectacularly run aground that same year, despite enjoying a government-sponsored monopoly on air travel in the country, stranding thousands. Armenia would sign the Open Skies agreement later that year.

Armenia has a history of wealthy government-connected businessmen whose businesses fail despite the full support of the government. So one cannot imagine how they would fare without it. Perhaps that’s the reason why so many hide behind import tariffs to protect their corporate interests.

Armenia’s oligarchs even go so far as to back unlikely causes to fend off foreign competition. Back in 2013, an organization of small, local independent grocers managed to stall the entry of the French grocery giant Carrefour into the Armenian market for over two years. It was a David and Goliath story on its surface, until evidence appeared linking this activist group to Samvel Aleksanian, former MP and owner of the country’s largest supermarket chain, City Supermarkets.

In 2018, the government voiced its concern over video footage showing a car with license plates belonging to a certain Vahe Hakobyan delivering supplies to protesters blocking the Amulsar mining site. Hakobyan, is the head of the Syunik chapter of the Republican Party of Armenia and also happens to be a shareholder in the neighboring Zangezur Copper-Molybdenum mine. It almost seems like he may have had a vested interest in removing a foreign competitor.

Earlier this year, Tsarukyan announced that he would pour part of his own substantial fortune into modernizing the plant, but that was apparently not enough to save jobs or compete with Iranian cement. Furthermore, Ararat Cement has a reputation for delivering a product of dubious quality. A number of people have described negative experiences when buying cement from that factory over the decades. Again, one wonders to what extent the company’s current misfortunes are a result of mismanagement.

Tsarukyan portrays himself as a generous philanthropist who cares about the common people. His television station regularly airs footage of him literally handing out cash-stuffed envelopes to downtrodden people, who then praise him on camera. As Armenia’s wealthiest man, he could find better use for that money in diversifying the town of Ararat’s economic production instead of subjecting workers to the whims of a single employer. That is, if he truly cares about the people. Instead, his tariff proposal will only drive up housing prices for locals.

Tariffs kill jobs. The only thing they do save is corporate profit margins. Companies which cannot compete based on value proposition of their product need to make way for those that can. The Armenian government should be careful to foster a competitive economic environment that attracts more business to the regions with wider job options for local workers, rather than protecting the local rackets of oligarchs under the guise of job security.

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Raffi Elliott

Columnist & Armenia Correspondent
Raffi Elliott is a Canadian-born entrepreneur and occasional journalist who likes to ramble on about socioeconomic and political issues in Armenia. He lives in Yerevan with his family. He also holds a masters degree in International Relations.

4 Comments

  1. I totally agree with Raffi that tariffs kill competition but I am surprised he made no mention of the fact that Iran itself is the country of tariffs. Free trade leads to competition and prosperity when both sides are equally interested in it. Iran has one of the most protectionist economies in the world. Armenia sells more goods to Iraq than Iran which is it’s neighbor. Not because Armenian goods are of low quality but simply due to the barriers that Iran creates for foreign companies. One more thing that the article makes no mention is the unprecedented depreciation of Iranian currency. Iranian Rial is now literally worthless and that is the main reason their export to Armenia including cement has surged the last few years.

    • Thank you for adding these important discussion points. I wish I had mentioned them in more detail, but alas, I was constrained by the article’s length.

      You’re right about Iran’s protectionist policies being some of the absurd in the World, but it’s worth noting that these same policies were in place back in 2006 (when Armenian cement sales to Iran were supposedly high) – Furthermore, a free trade agreement is expected to enter into force between Armenia (& the EEU) and Iran this year, which should make it cheaper for Armenian cement exports to Iran, not higher.

      As for the second point: Despite the hit to the Iranian currency following the new sanctions, the Rial has almost doubled in value since 2006 – so again, this goes against conventional explanation for why Iranian cement is suddenly more competitive than its Armenian counterpart.

  2. Raffi,
    Additionally to the good points made by ritooli, you missed some crucial points in your analysis.
    1. Iranians cement producers, and overall all the Iranian companies that need a lot of energy to produce their goods, are now getting their gas almost for free. It wasnt the case in 2006 when oil prices were high, as Iranian gvt was at that time prioritising export of crude/refined/gas over export of goods. Subventionning energy and encouraging export of energy related goods is a way to mitigate the effect of sanctions to get the max foreign currency possible. So the competition is not exactly fair. Not mentioning the transportation cost, importing from Iran will always be cheaper than exporting to Iran.
    2- I dont know where did you get that Rial value almost doubled, it seemed highly doubtful to me, so I checked amd/ rial and could only get the 10y history. Rial plummeted x4, about. I dont need to check any further until 2006, patterns were the same.
    3. Cement is a strategic asset. As where fertilisers (RIP Vanadzor khimprom). Although investing in increasing the productivity of the factory should be the priority, you need to protect such strategic assets at least momentarily with tariffs, if needed. It is called the protection of infant industry. Its a macro economic basic and widely used all over the world to industrialise or re industrilise a country. Considering the unfair competion faced by our cement producer, it is only fair to apply those tariffs for some time, if we dont take into consideration all other political/strategic issues such as gas vs electricity agreement, very advantageous to Armenia.
    4. Armenia has already the most open economy of the region. We wipe ourselves with Turkish paper, we have Belarusian apotatoes and Iranian carotts. Carotts, potatoes and toilet paper for god sake. These are just examples among many others that should raise questions about the comparative disadvantages of our economy. Shall we, on the holy principle of “laissez faire laissez passer”, stop producing those goods together with your subliminal suggestion of letting Ararat cement go bankruptcy? Tarrifs are not a solution, but it is high time for more economic patriotism and Ararat cement is a good place to start with.
    Last but not least, since you question the quality of the domestic cement, Im sure you had done analysis performed by a survey cie? It cost abt 500 usd + DHL.

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