The closing of the Russian market has created a new and complicated reality for Armenian agricultural products. While the government is talking about quickly reorienting towards Europe and covering the losses with state subsidies, the former Minister of Finance of the Republic of Armenia Vardan Aramyan approaches the issue with sober calculations, breaking the myth of replacing one market with another in transit. VERELQIn an interview with , the economist reveals the hidden barriers to entering the European market and warns. the money given without a clear “exit strategy” does not save the business, but simply postpones the inevitable blow, the real weight of which the economy will feel already in the fall.

Vardan Aramyan is in the photo, the source is banks.am

VERELQ: Mr. Aramyan, as we can see, the Russian market is almost completely closed at the moment, at least for the quarantined goods exported from Armenia, agricultural products. There is a lot of talk about the fact that now they are quickly trying to find other markets, including European ones. At this moment, is there a possibility that the Russian market will be replaced, and local producers will not suffer big losses in terms of the sale of agricultural products?

Vardan Aramyan. If we talk about opportunities, then they are always there, but we need to understand how realistic it is and in what time frame it can be realized. If we consider the realism in terms of one or two years, then I do not consider it probable. first of all, it requires long-term work. Second, it is not realistic to completely replace one market with another without additional costs.

Why? On one occasion, I spoke to you about the well-known tool set by Professor Pankaj Ghemawat of the Stern Business School, which is called “CAGE distance”. Its meaning is that the system gives a preliminary indication of how local businessmen can export their products. Various instruments exist for exports, direct investment or mergers and acquisitions. In the academic world, this model is based on gravity models, which Gemavat simply improved by measuring, for example, which area a specific Armenian exporter can enter more easily.

If we measure it and compare the pure physical distance to the CAGE distance (both in kilometers), the difference is that the CAGE model takes into account four main factors:

1. Cultural. Includes language barriers, time zones, discussion and norms based on Geert Hofstede’s theory of cultural differences.

2. Administrative/Administrative. Differences between legal and state systems.

3. Geographical. Includes logistics, roads and the number of transit hubs.

4. Economic. Market structure and costs.

I have already played several numbers to you, but I will repeat them. The physical distance from Armenia to Russia in a straight line is about 2100 km. When we apply the above four CAGE parameters, we see the following pattern. if the new distance obtained is greater than the physical distance, it means that these factors work against you and create serious obstacles, which you have to spend to avoid. For example, in case of language and cultural barriers, you have to hire a translator, it is not possible to do it without cost. Or the administrative factor. maybe you are in different legal zones, one is governed by Anglo-Saxon (English) law and the other by French civil law.

In the case of Russia, those 2100 km are reduced by about 23% with the CAGE model. This means that the barriers for our entrepreneurs are mitigated and the environment is familiar. In the case of European countries, the picture is different. For example, the distance in a straight line to Austria is about 2480 km, but when the system takes into account the CAGE parameters, it turns into 3100 km. The same is the case with Germany, Europe’s largest market. The physical area of ​​2900 km becomes 3500 km by calculating four factors.

VERELQ. What does this tell us? The government’s view that the issue can be resolved with subsidies.

Vardan Aramyan. No, it’s a myth. Subsidies cannot be endless. if the business depends on them, then it is de facto not competitive. We train them for government support, while it’s our taxpayers’ money. We need to target such markets where the entrepreneur is able to compete.

Let me give a simple example of how the administrative or economic factor works. Entering the German market requires large-scale “sunk costs / iceberg costs” aimed at marketing, promotion and networking. In Russia, we are exempted from these costs. there is no need to explain to the Russian consumer what Armenian brandy is, they have been consuming it for decades and know the quality. And you have to prove it to the French, by competing with famous local brands. The Russians do not need to be convinced that the Armenian fruit is of high quality, but the Austrian or the French need to be convinced.

In addition, there are other favorable circumstances in Russia, such as a united Armenian diaspora, while in Europe it is much more dispersed. Our businesses and products easily enter the Russian market also due to the fact that many owners of commercial outlets are Armenians, who support our businessmen, and a significant part of the buyers are Armenians. An Armenian consumer living in Moscow will prefer to pay two to three times more for Armenian apricots than to buy cheap Uzbek apricots, thus also feeling homesick for the homeland. We do not have these factors in Europe.

Let’s also remember the example of Georgia. they also had a similar problem at one time. Although the Europeans tried to help them by providing a free trade regime, as soon as the Russian market was reopened, Georgian wines immediately returned there, and Russia once again became the number one buyer of their wine. The reason is that the mentioned barriers – logistical, administrative, cultural, etc. – imply serious economic costs for business, and the Russian market is more familiar and accessible.

In addition, there is the issue of quality standards. If you want to meet the high European standards, it is not possible to do it in one or two days. it requires large investments. The European market is oversaturated, there are many times more players, and it is extremely expensive to position and advance. If the government intended to enter that market, it should have started preparing for it already in 2018.

I always emphasize that if the government uses a subsidy tool, it must have an exit strategy. And that strategy should be presented to the business owner in advance, so that he is prepared that the support will not be permanent. Remember the example of the income tax to support empowerment and exit the program after empowerment?

VERELQ: Is there an exit strategy now, in your opinion?

Vardan Aramyan. No, this is just a cost recovery, at least I’m not aware of such a strategy. Do you understand, first we create the problem ourselves, then we begin to heroically overcome it? this is the most dangerous and ineffective approach.

Moreover, one more important circumstance. We must realize that the economy is a living organism, and the processes there do not manifest themselves all at once. We will see the real consequences of the May restrictions in September-October. Why? Because when an entrepreneur faces obstacles in the sales markets, he does not immediately go for a drastic reduction of production volumes or jobs. It is also a costly process. first, according to the Labor Code, before dismissing an employee, he must be notified two months in advance. Second, it is very difficult to get people back after being fired. When a person is fired, they are looking for a new job, and you can’t bring them back all at once.

That is why, in the beginning, businessmen try to endure and temporarily put up with the loss. And the government is simply compensating for that loss at the expense of my and your taxes, without any strategy and basic tools. It is just delaying the problem. Time will tell, but we will see that companies will first face a liquidity problem, which they will try to cover either with state compensation or by attracting new credit funds. After that, they will already face the problem of solvency, and only in that second stage will they start thinking about reducing volumes and laying off people.