The reason for poverty in Armenia is the lack of economic reforms

Who in Armenian society should analyze government decisions and give them feedback from society? Who should analyze the experience of successful countries and give an independent assessment?

Actually, these people exist, they are journalists. But in Armenia I have not seen a single publication that would conduct economic analysis. Last June, I wrote letters to many people in the media about what the consequences would be after raising taxes, but this “insignificant” topic did not arouse any interest. Please look at the websites of leading media. Before Armenians began protesting in front of the government building, which of the major economic publications made a full review of the upcoming reforms, which will affect 1/3 of the country’s economy. I don’t know Armenian, so I can’t say for sure. In the Russian-language segment, a short critical article was published only on the Sputnik Armenia website. Honestly, I don’t know the reasons why they don’t write about the economy objectively, about the problems and difficulties of people, but the thought comes to me that perhaps their loyal attitude towards the government and the Prime Minister is having an effect. This leads to the fact that the government can make any decisions that harm the economy, slow down business activity, can stop the emerging economic growth, can drive out relocants who have come to the country with its demands, can make demands that people cannot fulfill, can encourage citizens to leave to work in other countries, and then tax their transfers to relatives, can increase taxes multiple times without looking back. No one in Armenia will come and ask difficult questions.

Craftsmen, craftsmen, cooks and builders may not know the laws of economics, may not know statistics, or may not know the successful experience of other countries. But you are journalists, you are the intellectual elite, you know that the economy develops only in conditions of reduced regulation. So why are you asking the opinion of a craftsman and not expressing your professional opinion when all the figures and facts scream about economic failure. Do you want to be good and ethical at the expense of the citizens? I am amazed by this short-sightedness, because it is obvious that the number of advertisers is decreasing, causing damage to business. If today journalists do not protect small businesses, tomorrow, due to the lack of advertisers, editorial offices will reduce staff and fire employees. Perhaps, having not found a job, many of them will try to register as entrepreneurs to start working for themselves, and will see what problems they were told about and what they were silent about all these years

I don't blame the government for these decisions. It can pass laws as bad as society agrees to accept them. When the law on raising taxes was passed in 2024, no one opposed it, did they? I don’t like to say simple and banal phrases to adults, but we must fight for a good life, and not be afraid to scold and criticize with reason. And no one wants to do this.

Maybe there is a university environment of economists, scientists and students? Smart and educated people work in economic departments, study economic specialties, they are well aware of the experience of successful countries. Did any of them give an analysis of the current situation? Did he tell you why countries create a favorable environment for starting small businesses? Maybe someone spoke publicly and made an announcement about how small businesses will behave in the face of tightening regulation and the abolition of the special regime that the Prime Minister announced? No, they receive wages from the budget and will silently watch as the economy deteriorates and the country lags behind in development. And the government can always find one beautiful figure and boast about it. And there are no people who would say that this figure does not mean anything without reference to other indicators. Honestly, I don't blame the government for these decisions if society passively accepts any tightening of rules against itself.

In Armenia there is simply no one to protect small businesses, neither in the government nor in the business community. There is no lawyer who would protect entrepreneurs from pressure from government agencies. We decided to limit registration to a simplified system and accepted without a lawyer. No one said that you can do without an electronic signature, no one said that it greatly complicates registration, in fact prohibiting it in a simplified mode. Because in the 20 days allotted for submitting an application for transition to the simplified regime, no one will issue you the ID card necessary for this, even the queue for submitting the application will not be suitable, there is no person who will tell you about it.
They decided to make it mandatory to send tax reports, but no one said that, in fact, in neighboring countries, reports are compiled automatically by banks. You don’t need an accountant to calculate 5 or 7% of turnover. It’s easier for people, and it’s easier for the tax service itself, because the bank’s computers don’t make mistakes, and the reports are checked automatically. But in Armenia no one said anything about this; there is no lawyer defending the interests of small businesses in the government. Do you see the bravura articles about how quickly the IT industry in Armenia is developing, and at the same time you could not calculate 5% of the turnover tax without manual labor? Couldn't you automate the transfer of data to the tax office to free small businesses from manual reporting? Nobody even discusses this. If you want to run a small business, pay an accountant and we are not concerned that this increases your costs and risks.

And the state will transfer you every year from the simplified taxation system to the general one. If you don't know about it, that's your problem. It doesn’t concern us that you didn’t collect documents thinking that you were on a simplified regime. The state unilaterally transfers you to a regime with payment of VAT, and if there are no documents, then pay 35% of turnover, VAT and income tax. And no one in the government will loudly say that normally this should work differently; if an entrepreneur has submitted an application for a simplified regime, it should be valid until his turnover exceeds the limits or he himself writes an application to switch to another tax regime. That is, if I filed an application for a special regime, it should be valid until I myself make a different decision. A forced transfer from a simplified regime to a basic one, despite the fact that the entrepreneur did not collect documents on expenses, leads to the closure of the company. Has anyone raised this topic? No, no one. There is no lawyer in the Armenian Society, there is no defender of the interests of small businesses.
They decided to add an obligation to report to statistical services, introduced fines, and no one stood up to protect small businesses.
They decided that they wanted to know everything about the movement of goods, but this information does not in any way affect the payment of tax, small businesses pay tax on turnover, and the movement does not lead to anything. But there is no lawyer, and no one will say that additional paper takes time and interferes with work. It’s easier for an official, so you have to do it.
We decided that each payment should be made only after an invoice has been issued on the state website. There is no lawyer who would say that for many people, creating an account correctly on a government website without a single mistake can be a problem. I may not know the Armenian language, I may not have a computer, I may not have an electronic signature, I may make mistakes in filling out documents. Under normal conditions, it is enough to say the card number or account details to receive money, because tax in normal countries is paid not from the invoice issued, but from the money received. But in Armenia there is no lawyer for small businesses. Tax must be paid on all invoices issued, this is amazing, and not on the money received. And for every amount you want to receive, you need to prepare documents on the state website. And if you can't, you don't belong in a small business. In fact, this closes the opportunity to work for yourself in all poor regions of Armenia where there is no computer at home. But no one talks about it.

The government decided that if you have opened an individual entrepreneur, then you cannot open a second legal entity under a simplified reporting regime. And if you work as an individual entrepreneur in one direction, then the state has prohibited you from opening a company under a simplified regime and working in another segment with other goods or services. And there is no lawyer who would say that, in general, people often, having gained experience in one area, open businesses in neighboring or other areas and prohibiting them from doing this would cause direct damage to the economy. But there is no small business lawyer in Armenia, and no one will say so.

And as a result, Armenia has the highest unemployment rate among the CIS countries, Armenia has the strictest regulation of small businesses, Armenia has 10 times fewer officially registered entrepreneurs compared to Georgia, the influx of foreign capital into Armenia is 4 times less than into Georgia, 1 billion instead of 4 billion, relocants left Armenia, partly moving to Georgia, the country’s GDP collapsed from 12.6 to 5.5%, while while the neighboring country maintained a high rate of growth and capital inflows.

And no one talks about it.

Against this background, a two-fold increase in taxes looks like just one of the stages, and not the last. It was bad, it got worse, and it will get even worse. Until someone remembers the role independent journalism plays in society.

I am sure of this because the current government has never really involved citizens in business and has not stimulated economic growth through this. Over the years, it has only strengthened the requirements for business and increased taxes. It knows for sure that they need more money in the budget here and now, it reports an increase in tax revenues by 40% in January 2025, presenting this as its valiant merit, forgetting that taxes are paid not by tax officials, but by citizens. Raising taxes will have a one-time effect, which will inevitably be followed by a decrease in business activity in the white sector of the economy and a shift to the gray sector, hidden from taxes. The outflow of active people from Armenia to other countries, to Georgia, to Russia, to Europe and America will increase. Evidence of such an outflow of both capital and people is before our eyes. At a recent meeting of the Prime Ministers of Armenia and Georgia, Irakli Kobakhidze, noted a 40% increase in investments by Armenian citizens in Georgia and promised to make Georgia even more attractive for Armenian business. Can you tell me why Armenian entrepreneurs invest their money in Georgia? What, everything is already fine with us and there are no places for Armenian investments within the country? You may be surprised to learn that there are 3 times more hotels in Tbilisi than in Yerevan, and 3.5 times more tourists in Georgia. I assume you know that prices for everything are lower there, for cars, for housing, for food. And for some reason, the tax on small businesses there is only 1%, while in Armenia it is 10%. Is there a pattern to this?

No one in Armenia comes to the Ministry of Economy or the Ministry of Finance with such questions. When I first arrived at the Ministry of Finance, I got the impression that I was the first person to tell them that their rules were getting in the way of their work. Journalists, as outside observers, note the outflow of relocants, a decrease in GDP growth, and an increase in prices; they publish data, but they do not write what government decisions lead to this. Small businesses believe that their opinions mean nothing. And big business comes and defends its interests in the Ministry of Finance and says that small businesses have too comfortable conditions and insists that taxes be high for everyone, and the government agrees, because their calls for equality sound logical.

Sorry, I don't have good news for you, if small businesses don't get an attorney, things will get worse.

What role does such a small turnover tax play for small businesses? I propose not to talk about the moral side of the issue now. That it helps a person when he doubts that he will succeed. By removing all formal requirements, the state thereby supports entrepreneurial initiative at the most dangerous and difficult moment. Speaking in terms of numbers, 1% of turnover creates huge incentives not to wait for vacancies to appear, but to try to organize your own business, thereby reducing a serious problem in both Georgia and Armenia - unemployment.

Three times, and I think this came as a surprise to the Georgians, it provides a colossal influx of foreign capital. When, for example, a relocant living in a small town pays one percent of the tax, where does he spend the remaining 99 percent? If he lives in a country, he spends everything within that country. It pays for housing, transportation, food and shopping. Other taxes are included with each purchase. This is a net inflow of capital into the country. If 1,000 relocants appeared in a city and each received $1,000 a month from abroad and spent it in their city, this means that in that month they began to spend $1,000,000 more in the city. That is, I want to say that a state, for example Georgia, which has established a small turnover tax, does not receive money from this tax, it receives an increase in the collection of other taxes invested in all other products that are bought with the remaining 99%. Now look at the net capital inflows into Armenia and Georgia. $4 billion net capital inflow to Georgia and $1 billion to Armenia, despite the fact that transfers are made to relatives in Armenia, but there are no such transfers in Georgia. This is the effect of mass housing construction, which in Georgia is 7 times more than in Armenia, and of course, from the money spent by relocants. Well, maybe a small tax of 1% doesn’t seem like such a stupid idea anymore?

Before 2000, there was a ranking that compared countries based on how easy it was to do business. Kakha Bendukidze set a goal to launch economic activity in the country and carried out economic reforms that brought Georgia to 7th place in the world in terms of ease of doing business. In the last year of the ranking, Armenia occupied 47th place. Since then, its position would have become even worse if the rating had continued to be compiled, because in recent years the reporting requirements have only grown. None of the journalists wants to know by what criteria the comparison was made; none of the journalists wants to know how simplification of work affects the opening of new companies, the growth of jobs, the volume of construction, the economic situation and the influx of investment? Maybe someone will ask the Prime Minister a question about whether the Armenian government sets itself the task of simplifying business? Do they even understand that the economic growth of a country is created not by the government, but by people and companies? No, sorry, journalists don’t ask these questions. Therefore, the government can tighten the rules as much as it wants without restrictions, without criticism. People will simply leave the country faster to work in other countries. And by the way, all initiatives to attract Armenians from other countries will be smashed against these same walls. Kakha Bendukidze carried out major economic reforms in 6 months. He abolished dozens of taxes, leaving the basic, simple and understandable ones. The change of power in Armenia took place 6 years ago. Naturally, none of the economic journalists or the intellectual elite of Armenia studied the experience of economic reforms in Georgia, and did not read Kakha Bendukidze’s book “The Road to Freedom”, did not make comparisons or analysis.

I have to say banal things. Things that every economically literate person knows. A business does not suddenly appear big, strong and successful. You might think that rich people start companies, and that's partly true, but the other scenario is much more common. Unemployed people start working for themselves when they see an opportunity to earn money. Someone saw a product that could be bought and sold at a profit. Someone saw beautiful furniture, and after calculating the cost, he realized that he could make the same thing cheaper. Someone quit his job and offered his services to several companies. There are many scenarios, but they all have one thing in common: people want to increase their income, they saw an opportunity and took the initiative. Statistics show that most will not succeed. But a minority will create their own product and find a buyer. This is exactly what usually happens. And if the paper side of doing business is simple and does not cause concern, many will try their hand at business. If the state requirements are such that you cannot cope without an accountant, much fewer people will try, only the bravest and most confident. Once again, in most cases, a company does not open large and successful right away, but grows from one self-employed person. To help at the very start, favorable conditions are created in terms of taxes and reporting. This is the direct responsibility of us, as a society, to help a citizen who has decided to become an entrepreneur at the most difficult stage. What will happen if they remove the possibility of simplified reporting and reduced taxes? But to my deep regret, this is what we will see in the near future!

When I read information about the tax increase on the official website of the ministry, I am amazed that government officials perceive me as a stupid person who does not understand anything about economics and is unable to understand the essence of two proposals. First they say that they are doubling the tax because the preferential regime gives too many benefits to small businesses. And then immediately about the fact that they provide an opportunity to reduce the tax even lower, literally down to 1%, by showing expenses. I can read and understand economic terms. At the beginning you say that small businesses pay 5% - this is too little, and you increase them to 10%, and then give the opportunity to reduce them to 1%? So where is the logic in this sentence? If you increase it, then increase it for everyone without the possibility of tax evasion and manipulation of expenses! But it turns out that the one who can keep accounts and officially show expenses will reduce taxes to 1%, and the one who does not have an accountant will pay 10 times more taxes, 10% on turnover. To say that this is not fair is to say nothing!

Do you want me to tell you right away what this reform will lead to? Large entrepreneurs will find an expense item to reduce taxes. It’s not difficult; any person with a little education in economics will tell you how to do it. For example, they will take advantage of the experience of large franchising companies. They register a trademark for a company in an economic zone with preferential taxes and pay from the Armenian company for the use of the trademark of this company abroad, reducing their profits in Armenia to a minimum. The profit center turns out to be a foreign company registered in a preferential tax area, the owners of which you do not recognize. Everything is absolutely according to the law, this plan works all over the world. It’s simple, experienced entrepreneurs with full-time lawyers and accountants will find an opportunity to pay less according to the law, and beginning entrepreneurs who do not have lawyers and accountants will simply go into the shadows or close down.

Moreover, I am sure this will surprise you, but there is an exception to this law. It turns out that IT companies will pay 1% of turnover. Don't you think this is strange? Look at the salary statistics, you will see that in IT they are the highest, 840 thousand drams, more than $2,000 on average, wages in the information technology industry and 200 thousand drams, about 500 $ in the field of trade. 2,000 and 500, please compare, maybe you have a sensible question: why is the tax less for those who earn more? And everything is simple, the government knows that IT companies will not accept new laws on increasing taxes, they will quickly pack up and move, but trade has nowhere to move, it is tied to suppliers and customers. They are developing the computer technology sector, giving them the opportunity to pay less taxes, and happily taking pictures with the directors of IT companies. But there is no need to develop other sectors? Construction, healthcare, agriculture, apparently, in their opinion, are already well developed in Armenia? Is that why they are not entitled to such benefits? I am the same IT specialist for whom they make an exception and keep the tax at 1%; I can, as before, remain at a rate of 1% when everyone around me pays 10%. I think this is unfair!

Sorry, but these are not my inventions, these are the laws of economics, and they are the same throughout the world. There are no separate laws of physics for Armenia, no separate mathematics for Armenia, and no unique economic laws for Armenia. If you are a journalist and want to cover this topic and prevent the collapse of our country's economy, contact any economist for comment. Ask why a preferential tax regime is created for small businesses. Ask what the consequences of its cancellation will be and tell your readers about it.

When I first arrived in Yerevan, I was surprised by the colossal unemployment among young people. I’m walking in a park in Erebuni and in one gazebo older men are playing backgammon, and in the next one young guys are playing cards. I remember well when I was 20 years old, we were all studying, working in the evenings, me and many of my friends were already registered as entrepreneurs. There was not a single unemployed person. We all juggled work, study and trying to make money! What you see now, unemployed guys on the street, is not normal, it shouldn’t be like this! This is Yerevan, the capital! And it’s difficult to talk about what’s happening in the regions of Armenia without tears. Hopeless poverty and lack of prospects.

Look at the unemployment statistics for the CIS regions! What place does Armenia occupy there? Maybe you should come to a meeting with the minister not just with questions, but with some data? Tens and hundreds of thousands of citizens listen to you, and you can influence the fate of the country! I don’t have this opportunity, but I try. You have channels for disseminating information, you can exert public pressure to make a decision, you can publicly ask questions to the prime minister, citing arguments and facts. So, where is your patriotism, devotion and service to the Armenian society?