Foreign Capital

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A very reputable magazine The Deal had an article about the economy of Argentina, and that prompted me to make some comparisons between Argentina and Armenia, and first of all about the foreign investment. The example of Argentina shows that even though capital flight has its bad consequences, there are some positives in it too. It allows local capital, which is more stable and won't leave at first signs of trouble and instability as it happened in some Latin American and East Asian countries, to be more entrenched in the country. Instead of wooing foreign capital to the country at any cost I think developing business climate and infrastructure is more essential. The current saga of ArmenTel is a great example of flaws of privatization and it's consequences of foreign ownership. As welcoming as Armenians look toward foreign capital I don't think it should be viewed as white knight of Armenian economy. The people of Republic of Armenia, not Diasporans, or foreigners should be the integral part of rebuilding the country. Interesting article I think it's an interesting one.

 

 

As foreigners flee, Argentines buy

by Leslie M. Mira in Buenos Aires Posted 03:04 EST, 2, Oct 2003

 

Pundits have dubbed it the "Argentinization" of Argentina's economy — the slow but steady acquisition by Argentines of foreign-owned companies, many of which plunged into insolvency after the country's currency, the peso, became unglued from the dollar last year

With president Nestor Kirchner nursing their country back from an 11% fall in GDP last year, Argentines have become white-knight investors, buying cheap assets in sectors including telecommunications, banking, Internet and media from fleeing foreign investors. Most recently, on Sept. 9, Grupo W., owned by Argentina's agriculture-producing Werthein family, announced it would buy a 48% stake of France Télécom SA's share of Telecom Argentina for $135 million.

 

Local entrepreneurs are the logical successors as they best understand the economic and political uncertainties (Argentina last year had five presidents in less than a month). "They're more comfortable with the risk," observes Alex Kook, an M&A attorney with Baker & McKenzie's Buenos Aires office. "They don't panic or get scared, and they're looking for long-term opportunities."

 

The flurry of purchases by Argentines contrasts sharply to the exuberant 1990s, when foreign investors — led by Spaniards and French — invested billions in Argentina's key telecom, natural gas and oil assets. Now many have cut their losses.

 

Canada's Scotiabank, which last year took after-tax charges of C$540 million ($399 million) on Argentina losses, sold its 91 Scotiabank Quilmes branches to two Argentine-owned companies, Banco Bansud SA and Banco Comafi. Terms of the sale were not disclosed.

 

Two other Argentine groups, Banco Banex and Grupo Roggio, are in line to bid for the assets of the Argentine operations of Crédit Agricole SA, which is selling majority stakes in three provincial banks, Banco Suquia, Banco Bisel and Banco Bersa. Citing currency losses, the French bank pulled out in May 2002, and a government-led auction is expected to name the winners later this year.

 

Last year Argentine media celebrity Daniel Hadad and other local investors bought Argentina's Canal 9 from Spanish-owned Telefónica SA for a reported $30 million. And Datco SA, an Argentine-owned Internet technology company with operations in Argentina, Chile and Uruguay, last year bought the Argentine subsidiaries of broadband operators Velocom Inc. and Winstar Communications Inc.

 

Argentine-owned companies "will have a better grasp of the politics and enjoy a higher degree of social acceptance compared to foreigners," says Raphael Ber, a consultant with Argentine Research. But the local buyers face plenty of challenges, too, he adds. "These are banks which aren't very competitive," he notes, adding that their relatively small scale will generate higher costs compared with their larger competitors. "They'll be limited by how much capital they'll have to invest in their operations."

 

Foreigners have also been lured by bargain Argentine assets, especially risk-acclimated Latin Americans. Last year Brazilian-owned Petróleo Brasileiro SA bought Perez Companc SA's natural gas and oil interests for $1 billion. Pending debt restructuring negotiations, Mexican-owned América Móvil SA de CV and other investors are angling to buy a stake of cellular phone company CTI Móvil SA, which Verizon Communications Inc. opted to ditch after the cell-phone operator defaulted on $1.1 billion in debt.

 

But Argentine companies are leveraging their local advantages to thwart outsiders, Ber says. Indeed, some view the Werthein family's purchase of most of France Télécom's Argentine assets as a move to stymie Teléfonos de México SA de CV's entrance into Argentina. Telmex is controlled by Mexican billionaire Carlos Slim, who also controls América Móvil, and is aggressively expanding throughout Latin America.

 

France Télécom's departure is partly rooted in local politics. Kirchner, a stern critic of the International Monetary Fund, has stonewalled pleas from the IMF, France Télécom and other utilities to increase rates, which have gone unchanged since the January 2002 peso devaluation. Kirchner has said Argentines cannot afford to pay higher telephone or electricity rates.

 

Publicly, Grupo W. has toed a line sympathetic to Kirchner's. In an interview with local newspaper Pagina 12, Gerardo Werthein, director of the group, said telecom executives will "first have to see if a [rate] adjustment is necessary, and if so, how much."

 

"This sounds more like a government official and less like an operator," says Enrique Carrier, a telecom analyst with Carrier y Asociados. "For the moment, this takes pressure off the issue of higher phone rates."

 

If Argentines can gather the capital, there will likely be more chances to shop. Electricité de France, which owns Argentine electricity company Empresa Distribuidora de Electricidad de Mendoza SA, is considering leaving Argentina unless customers start paying their bills, a spokeswoman said. Debtors include the provincial government of Mendoza, which owes $30 million to EdF, according to the company.

 

"The message is 'Argentina is recuperating, and locals want to invest,'" Carrier says. "For the government, it's a vote of confidence that Argentines are able to buy distressed companies."

[TimeForChange]

Very interesting article indeed, but foreign investors are still needed if any country wants its economy to grow more than it could on its own. It's pure economic theory.

Example: The USA has been enjoying a strong economy and a strong dollar largely thanks to foreign capital. Take that capital out of the USA, and you can bet that there would be an economic depression. Why? More foreign capital = more money available to lend to companies = cheaper borrowing = companies invest, become more efficient vs other countries = prices go up, profits go up, stock market goes up = people get richer = spend more, etc...

If foreign investors leave the scene, than some entity has to replace all this money that is leaving with them. One (temporary) solution is that the government will spend more to stimulate the economy (which abush, sorry Bush, has been doing with the war in Irak, giving reconstruction contracts to US companies). Another way to remediate to this is to introduce more advantageous fiscal policies (which again, abush Bush has been doing) to encourage people to spend more money. The Central Bank (the Federal Reserve) lowers interest rates to encourage spending as well (cheaper borrowing = more spending).

 

That being said, what you said is also true. The strengths of Armenia's economy must come from within if it doesn't want to be vulnerable to foreign investors' moods. But Diasporans must also assist Armenia, because decades of soviet reign can make you forget sound business practices...and Diasporan money won't fly out of Armenia if there's a catastrophe, because there is more solidarity involved (unlike foreign investors who are there just for the money).

[Sasun]

I tend to agree with both opinions. Both domestic and foreign investment are essential for Armenian at this stage. Even if some of the foreign investment has to fly in the future, it would still be essential at this moment to create jobs and revitalize the crippled economy.

As to domestic money, it looks like there are weighty local investors now. These few magnats do invest in relatively large proportions. But we also learned recently from the news that Armenian banks prefer to invest their money abroad where there is less risk. This is like we are not getting anywhere.

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Since the above provided article is about Argentina, I think todays article in Toronto Star about demise of major industrial country of early 1900s is very interesting.

 

http://www.torontostar.com/NASApp/cs/Conte...id=971358637177

 

 

A few lessons from Argentina

 

Prior to last week's International Monetary Fund/World Bank annual meeting in Dubai, a new agreement between Argentina and the Fund was signed.

 

Afterwards, the country proposed a restructuring deal to private bondholders that would see them forfeiting on average 75 per cent of the face value of their bonds and Nester Kirchner, Argentina's president, at a speech before the United Nations General Assembly a couple of days ago, said that it is not possible to obtain repayment from the "dead," sending the message that co-operation from creditors is critical for all sides.

 

A century ago, Argentina was one of the most prosperous countries in the world, ahead of Canada and other current powerhouses. Immigrants flocked to the land of plenty and growth appeared unstoppable.

 

Today, a tepid recovery is in place after the latest of many economic crises hit in late 2001. For the locals, the pattern is all too familiar. A period of progress unexpectedly interrupted, short period of chaos, quick, dramatic drop in standards of living and a modest recovery that holds until, predictably, the next unexpected event comes along. People in Argentina have been getting poorer for the last half-century and the trend is not changing.

 

What went wrong? This question has fascinated some bright economic and political minds for a long time. I think it was Milton Friedman, Nobel Prize winner in Economic Sciences who said that coming out of the World War II, two peculiar economies should be noted. Japan, a devastated country, became an industrial nation. Argentina, a privileged country and major creditor to several of the combatants, squandered most of its wealth. Explaining it, he said, is very difficult.

 

One clear reason is that Argentina was on the wrong side of the world in geopolitical terms. Its Spanish heritage was the substantive difference from other world powers of the day. Far from the action and culturally isolated from the mostly English-speaking dominant economies, it was just a matter of time before it was sidelined.

 

Another reason is the reduction of value in its exporting goods. Food staples were once the main world commodities and viewed by Argentina as a continuous ticket to prosperity. With good climate, fertile soil, homogeneous population, away from troubled lands and social conflicts, riches came easy.

 

The counterpart was a lukewarm attitude toward industrialization and a lack of commitment to make hard choices. While the immigrant waves of the early part of the last century, almost exclusively Europeans, strengthened the industrial base, industrialization never materialized except for isolated attempts during the mid 1900s. The world moved along the path of the Industrial Revolution and the value of food staples lessened. There was no answer to reverse the trend.

 

I believe, however, that the decline has much deeper roots. The country actively participated in its demise. Even when all seemed right, Argentina managed to live beyond its means politically and economically.

 

The country acted at times like an all-powerful entity without actually being one. It copied from some empires in history the "invincibility" belief and ran with it thoughtlessly for long stretches of time. Argentina believed its destiny was to lead Latin America. The Falklands War was a glaring example. An illegitimate government happily engaged a much superior military power.

 

Like an idol with feet of clay, the state behaved reprehensibly toward certain segments of its own population. The target depended on the government of the day. While the Dirty War and the disappeared are now well-known, there is a long litany of internal misdeeds from the trivial to the tragic that prove the point. It is as if, upon arriving at a fork in the road, the country made the easy rather than the right choice most of the time and paid a heavy price in the process.

 

And yet, the country has great potential, with promising, talented people, always on the verge of getting back on the road to prosperity.

 

The current economic recovery has come with some strengthening of the democratic institutions and an apparent resolve to address fundamental issues. Not that all is well or that past mistakes will not be repeated. On the contrary, many years of tough decisions lie ahead and there is a high likelihood that the vicious cycle might be repeated.

 

There are some lessons for Canada here. The countries share some similarities: an expansive land; a small and mostly urban population; a large percentage of immigrants; and a reliance on natural resources.

 

While differences also abound, like Argentina we are always only a few wrong decisions away from following its path. To avoid it, fiscal and political responsibilities must be respected and our cultural, ethnic and religious diversity must continue to be embraced, nurtured, treasured.

 

When the U.S. runs enormous deficits, fiscal complacency might sound acceptable. As basic freedoms come under attack in the U.S. in the name of fighting terrorism, it might be tempting to follow the same path.

 

But with new leaders coming into office at all levels of government, Argentina's fate is well worth remembering.

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After what happened to Najarian family, one of the most patriotic Armenians, I think nobody should invest in Armenia, and should let the country to slowly decay. It's just embarrasing to how low the country sinked.

 

Neither Courts nor Officials Care

That We Were Defrauded in Armenia

 

By K. George Najarian and

Carolann S. Najarian, M.D.

 

We would like to relate a sad, but true account of what we have experienced

within Armenia's legal system over this past year.

 

Let us first introduce ourselves: our humanitarian efforts in Armenia and Artsakh have spanned nearly 16 years. Our projects began after the earthquake and during the Artsakh liberation war and continue through today, with more than 50 trips to Armenia, the delivery of millions of dollars of medical supplies to both regions; the establishment of the Primary Care Center in Gyumri (1994) and the Arpen Center for Expectant Mothers in Artsakh (1995); hospital renovations; and many other efforts, including the rebuilding of Tsitsernavank, the 4th c. basilica in Kashatagh (Lachine corridor), assistance to villagers, invalids, veterans, orphans, and schools. Our work has been carried out through the Armenian Health Alliance, Inc. and its supporters as well as through our own private funds.

 

In response to the Armenian government's pleas to the Diaspora to invest in Armenia, George undertook a project with a young man whom he met after the earthquake and with whom he subsequently became a friend. (We even brought him to Boston to have surgical correction of his infertility for which we paid; he now has two children, thanks to us!)

 

In 1996, after a year of prodding George to finance a business venture, they opened a photo shop as partners - he did the work and George paid for everything. He also introduced George to various people with other business

propositions. One introduction led to our purchase of two parcels of land in the Ethnographic Center at Tzorakugh with spectacular views of Ararat. Throughout this time this 'friend' presented himself to us as an honest person, thankful for the assistance we had given to him and wanting to help George in whatever way he could.

 

This 'friend' was George's representative, not partner, in the development of these two parcels of land. Thus, he had Power of Attorney to represent George in his absence. However, he used this Power of Attorney to

fraudulently privatize in his name these lands and our two newly constructed buildings, in effect expropriating our substantial investment. When we understood what he had done, with the hope of avoiding a legal battle, we tried to negotiate with him for the return of the properties. This failed, despite offers of significant sums of money.

 

Without any other recourse open to us and based on the advice of legal experts in Armenia, we filed a criminal case against him, first with the Yerevan City Prosecutor's Office (September, 2003) and later with the Prosecutor General of Armenia's office (March, 2004).

 

We had assumed the facts in the case were obvious -- "open and shut" -- given the evidence of scores of witnesses, bank documents, receipts, etc.

We had not anticipated that our 'friend' would enlist the help of well-connected persons in the government who could influence the case

through bribes and whatever other means available to them, including intimidating witnesses and threatening lives. In December, 2003, after a long but superficial investigation, the Yerevan City Prosecutor's Office dismissed the case and referred us to civil court. (We suspected the prosecutor had been bribed but could not prove it.) On appeal, the case was reopened at the Prosecutor General level. This time prosecutors agreed we were the victims of fraud. They also found that the 'friend' was guilty of tax evasion. Attempts were again made to hijack the case through dismissal at this point but failed. While the Yerevan City Prosecutor who previously dismissed the case admitted during a meeting at the General Prosecutor's Office, in George's presence, that he made a mistake by dismissing the case, the current prosecutors said that the evidence was too powerful to dismiss, and sent the case to the next phase within the criminal process --

that of acquiring evidence for the trial.

 

Two investigators were assigned the task of preparing the evidence for trial: witnesses were repeatedly called and subjected to hours of

interrogation; George returned to Armenia again to testify - this time for more than 40 hours; and, documents were requested and provided by us for a third time. Again, the investigation dragged on for months and despite mountains of evidence supporting our claims, and little on the other side supporting his claim of ownership, the two investigators doing the work dismissed the case! Their decision, a shabby, crude, and even absurd document completely ignored or marginalized important evidence supporting our claims and falsified facts --openly. We were again referred to civil court. We had information that these investigators were following orders from persons within the government who stand to benefit from expropriating these properties from us.

 

Prominent legal minds in Armenia, including experts within the government, have advised us that this is a criminal case of fraud punishable under Armenian law. Similar cases, with less evidence, have been fully prosecuted by the Prosecutor General's Office. The attempt to move us into civil court is an attempt to kill the case completely. Under Armenian law, we have no civil case because there is no partnership agreement between the parties - we were not partners with this 'friend.'

 

It pains us to tell you we did not find an objective, fair justice system in Armenia, but instead we have seen the inside of a system wrought with deceit and corruption that crushes even their own when they try to resist. During this past year, in addition to our direct appeals, others, including a high ranking member of the Armenian government, have appealed repeatedly for a fair and objective hearing of our case to persons within the judicial system and to President Kocharian himself.

 

The US Embassy is fully aware of the circumstances of our case as are a number of US congressmen who have written to the Armenian ambassador in Washington expressing concern over the conduct of our case - judicial processes must be open and fair otherwise investors will be leery of undertaking investment risk in Armenia.

 

It is impossible to recount all that we have been through this past year. It has been an emotional roller coaster as we faced the fact that persons within this government would participate in this humiliating and base fraud against us. It appears due process of law and the protection of rights and investments are still fragile concepts for the government of Armenia. As we understand other Diasporans have encountered similar problems and have been treated in this same manner. We hope with our case being made public there will be a willingness to discuss these critical issues, and the Armenian government will take the necessary steps to clean up corruption: the judiciary should not exist to guarantee people in power wealth. It is no way to build a country!

 

Writing about our ordeal is a very painful step taken reluctantly after one year of struggling to get a fair hearing of our case. Although we are still in the appeal process, we understand that our property - including the place where we anticipated living out our retirement years - has been taken from us. What you are not seeing, though, are the tears we have shed over knowing that we may never be able to return to Armenia, to live and continue our work, and knowing not only has our property been expropriated, but we as people who have loved and worked for the good of Armenia and its people have been so dishonestly treated.

 

The pain goes very deep.

[ED]

Sad indeed,

 

I had a privilege of meeting and working with Najarians back in 1993, very devoted and patriotic individuals I must say, I remember also way back then there was lots of trash talk about Najarians, In my own experience I couldn’t say anything negative and on contrary, there efforts should serve as an example for all. Hope justice will privale!

 

I just hope this wont break there spirit.

Edited December 4, 2004 by Edward

[Sasun]

I was pleasantly surprised to read the following, there is still hope for justice.

 

 

www.armenialiberty.org

 

U.S. Citizen Wins Court Case Against Armenian Prosecutors

 

By Emil Danielyan

 

A U.S. citizen of Armenian descent has won a court case against Armenian prosecutors whom he accuses of covering up an alleged wholesale embezzlement of his business assets in Yerevan, his lawyer said on Friday.

 

George Najarian, who has engaged in extensive charitable work in Armenia and Nagorno-Artsax for the last 15years, sued the Office of Prosecutor-General for its refusal to press fraud charges against his former local business representative. The man, Grigor Igitian, is the legal owner of a photo shop and two buildings currently constructed in downtown Yerevan.

 

Najarian insists that in reality the lucrative property belongs to him and that he registered it in Igitian’s name in 1996 because Armenian law at the time did not allow foreigners to own land in the country. He claims to have been defrauded by Igitian, a charge denied by the latter.

 

The state prosecutors have twice investigated the fraud allegations but stopped short of bringing charges against Igitian, citing a lack of evidence. The Armenian-American, who suspects them of being bribed by his ex-partner, challenged the decisions in a Yerevan court of first instance.

 

According to Najarian’s attorney, Ashot Poghosian, the court recognized his client as a “victim” and ordered the Prosecutor-General’s Office to resume the fraud inquiry. “We are satisfied with the verdict,” Poghosian told RFE/RL. “We regret that things have gotten thus far and hope that the prosecutor’s office will not appeal.”

 

In a recent newspaper article, Najarian and his wife Carolann slammed Armenia’s law-enforcement authorities, describing them as “a system wrought with deceit and corruption.”