The Simple Secret of Strong Economy

The Simple Secret of Strong Economy

Charity is Not Investment: Foreword

“They came to Armenia to make money”. Let’s agree, this phrase usually has a strong negative connotation for many of us, post-Soviet people. Years ago, I tried to explain to a well-educated person that Amulsar brings investments of several hundred million dollars. In response, I got an absolutely “serious” counter argument: “They don’t invest that money for nothing, they want to make money”. Well… yes! And that is the core concept of investment. Money invested “for nothing” is called charity. Are there many countries in the world whose economic success is based on charity? I am not aware of any.

During one of the Amulsar project Public Hearings community members said, they were waiting for the jobs created by the project. Young activists who were present at the hearings confronted them by stating that it is the state that must create jobs. Do we need to explain to even the young generation that states don’t create jobs? Jobs are created by profitable businesses. Of course, there are state created jobs, but to be able to create jobs, states need to have money by taxing profitable businesses.

“You can't have a healthy society unless you have healthy companies that are making a profit, that are employing people and that are growing”. This is not me. It’s Michael Porter, a world-famous economist and a Harvard professor.

The fundaments of strong economy are investments- local and foreign. When those inside the country and foreign investors are convinced that they can create added value in this country, they can invest and make profit. There is nothing shameful in the pursuit of profit. It is shameful to convince a society that hasn’t yet fully grasped the idea of free economy, that a country can survive on charity and agricultural festivals. Countries prosper only if there are investments that pursue and generate profit. A large-scale investment creates other small and medium enterprises and this is the formula that keeps away 1, 10 or 100 Armenians from seeking a job in Siberia. The more investments that seek profit, the less out-migration. So far, despite the growing number of different agricultural festivals each year, the out-migration doesn’t slow down. This is the reality. The rest is an illusion.

Why Mining

Why not? Not only as the Managing Director of Lydian Armenia but also as the President of the Union of Miners I want to challenge the perception that investments in mining are, well…not the right investments.

A couple of years ago there was an Armenian economic “know-how” idea that suggested replacing mining with honey production. Because a ton of honey costs more than a ton of copper. A small detail, though: annual export of copper from Armenia is 100 thousand tons. I want to ask the authors of the idea, where in Armenia will 100! thousands ton of honey be produced annually and what market will consume it? These kinds of utopias rarely appear in countries with established economies. In Armenia, not only they exist but are widely circulated in mainstream media.

I do not, by any means, want to insist that mining is the only sector that deserves investments. But it certainly is one of the most competitive. There are few if any other sectors at this point in Armenia capable of absorbing investments of several hundred million of dollars at once and creating industrial activity with thousands of jobs and dozens of years of economic multiplier effect.  So why not mining?

If there are still those who believe that mining is done only in Armenia and the rest of the world only sells potato seeds and computer programs, just a reminder: mining exists and prospers in Australia, USA, Canada, Argentina, Spain Russia, Poland, I can continue this list for another half a page.  Moreover, as the demand for renewable energy grows, demand for mining will also grow. Wind turbines and solar panels consume more and more metals and minerals. Thus, mining will exist for many years to come and it is in Armenia’s interest to attract quality international investments into one of the competitive sectors of its economy. This is one of the simple recopies for a strong economy.

There are No Long Queues of Investors: From the First Republic to Our Days

Years of misinformation has created a widespread perception that Armenia has hundreds of metal mines and the world capital markets are all eager to come take away our wealth.  There are in fact only 8 metal mines that operate and produce at this point. Only 2-3 out of these may be comparable to small mines for example in Sweden. Now let’s see if everybody is dreaming of opening a mine in Armenia.

Discovery of a mining project is a risky and costly enterprise. Before it even became clear that Amulsar can become an economically feasible project, several years of work and around 4 million dollars were invested. Hundreds of thousand dollars may be invested into exploration projects that might never turn into a mine. The statistics says only one in around 1000 exploration projects eventually becomes a mine. One in a thousand.

Some out of the less than a dozen metal mines that operate in Armenia were discovered even before the Soviet times- during the short existence of the First Republic of Armenia in 1918-1920. The then Prime Minister Simon Vratsyan recalls in his book “Republic of Armenia” the government’s efforts to attract mining investments. In 1920 a special reception was organized by the Department of Mining with a promise to reward potential successful geological expeditions. Those who would discover gold and gemstone mines, for example, were promised a reward of 1000-5000 Rubles. This attracted several European geological expeditions that discovered several mining projects, for example Kapan gold project, Alaverdi copper project.

During the next 100 years many projects were explored but only 8 went into production. Amulsar is the only new project discovered during the 25 years of independence. It is worth mentioning that Amulsar is a rare success story almost in all post-Soviet territory. According to the statistics only 1! percent of mining investments are done in the post-Soviet countries (minus Russia) . Discovering and building a mine may cost from several hundred million to several billion dollars. There is a huge competition among the countries for investments of this scale. Almost in all major mining shows one can see booths of developed mining countries inviting potential investors to consider their country for future investments. I don’t believe anybody will assume that Finland has chosen to promote a “bad” industry.

There are no “queues” of potential investors. If there are any, it’s the “queue” of the countries trying to successfully attract foreign investments into their mining sectors and the post-Soviet countries are not in the front of this que.

Mine diggers, our Tigran and the snobbism of downtown Yerevan

A Yerevan based journalist once worte about a hotel in Jermuk we renovated, calling it a home for Lydian ''mine diggers''. There was an explicit negative connotation in this phrase. By the same logic I am also a “mine digger” and I am proud of it. I feel proud that while having a PHD in geology, I didn’t sit in a comfortable office in Yerevan, waiting for charity, donation or a grant. Years ago, together with other “mine diggers” I spent months at Amulsar with a geological hammer in my hand, collecting rock samples.

As a result, an investment worth hundred millions of dollars was brought to the country. But mining does not only employ “mine diggers’’ like myself. If IT sector employs IT specialists, tourism creates jobs in services, modern mining is a rare sector that creates jobs across a range of different professions.

Several members of our environmental team live in Jermuk with their families. These are young Armenian specialists, some of whom were trained abroad. We have health and safety specialists who were sent to trainings in the UK and Canada, social workers, mapping specialists, finance, IT and other professionals. We employ a team of around 10 highly-qualified Armenian engineers. Some of them are young professionals, such as Tigran Avagyan, that is one of the excellent graduates of the American University of Armenia. He is a highly skilled engineer and I am proud that he is part of our team. I am proud that he hasn’t left the country and I am sure that Armenian economy will grow thanks to young professionals like Tigran and his colleagues. The utilized potential of young professionals is the secret of a strong economy.

Right now, heavy equipment of Caterpillar is being ensembled at Amulsar. It is worth several million dollars. To train our local employees, including those from the communities to use this equipment, we have also imported an ultra-modern simulator worth another almost 1 million USD. A training on this simulator is equivalent of a course in some of Armenia’s technical colleges. Those who are successfully trained for the job will be able to drive these modern machines, with fully computerized cabins, almost the size of an office. Who decides that this job is inferior to that of a honey producer? And who says that one excludes the other? The basis of a strong economy is diversification. The community member should have a choice and the less snobbish comments from downtown Yerevan and abroad, the better.

The Driving Force, Khosrov Reserve and Development Routs

Sweden is among the top 3 countries with the most diversified economies. It is also among top 5 mining countries.

Some other interesting statistics. Among the largest agricultural exporters in the world are Belgium, Germany, and countries with a huge mining sector like the USA and Canada. In these countries with advanced agricultural sector the share of agriculture in the GDP is 0,5% - 1,5%. Now let’s see some of the countries with 20 and more percent of agriculture in the GDP- Nicaragua, Guinea, Mauritania, Benin, Cote d’Ivoir and Armenia among them with 20,81% share of agriculture in the GDP. The higher the share of agriculture grows, the closer we will be to Burkina Faso or Rwanda. Because modern agriculture that brings real economic effect is not the backyard land of a heavy working villager. Modern agriculture means industrial volumes, hectares of greenhouses, with minimal workforce. To reach these volumes development of other industries is essential so that the wealth created by economic activity is re-invested into the modernization of the agricultural sector. This is what happened in dozens of developed countries. Thanks to the mining boom Australia, once a poor agrarian country, turned into a modern industrial state with science, education and healthcare competitive with European economies.

Mining can become the driving force that can bring fast and tangible economic results and can become one of the fundaments of economic development.

And last but not least, I want to speak about the nature, particularly about the fire in Khosrov Reserve this summer.

Amulsar project has committed a little less than 6 million dollars for the establishment of Jermuk National Park. This is a project to offset the possible impact of Amulsar infrastructure on the biodiversity, for example the Brown Bear. By the way studies have confirmed that Brown Bear population is not confined to Amulsar- only 2 or 3 species hibernate in Amulsar. Another 500 thousand USD is being spent on the preservation project of a Red-Listed plant at Amulsar.

I am not aware of the calculation of the damage caused by Khosrov fire to the biodiversity. What I know is that the Ministry of Nature Protection was calling the surrounding villagers not to kill Red-Listed animals that were running away from the fire. This was a widespread issue those days. So, what is a threat to the nature? A responsible mining project that creates a new national park, or poverty that leaves all preachers about environment unheard?

Are there issues in the mining sector? Undoubtedly so. The issues are many and the modernization of the sector is a priority. But you don’t cut a leg, if it needs treatment, you cure it. And the best cure in this case is quality international investments. The key to a strong economy is sober assessment of a country’s competitive advantage by putting aside emotional perceptions and wishful thinking. It is good marketing of that competitive advantage, fair treatment of existing investments and by that- attracting new ones.

There is no other formula neither in theory nor in practical economics.

Hayk Aloyan is the Managing Director of Lydian Armenia. These views are his own.


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