Sep 172012
 September 17, 2012  Add comments

Foreign investments in Armenia at risc

(Also see Part 1, Part 2, Part 3Part 4Part 5Part 6Part 7, Part 8, Part 9)

May 11, 2009

Source: Ostinvestor Zertifikat


Armenia – with giant steps backwards?
Several German, Austrian and Swiss entrepreneurs and businessmen know Armenia from our investor trip. All participants were impressed by the people’s friendliness, the country’s potential and the beginnings there of an economic and democratic boom.

Despite the recent war over its two breakaway republics, the boom in neighboring Georgia is long since tangible. The conditions in Armenia were similar to those in Georgia and the expectation was strong that Armenia would undergo similar developments. Unfortunately it didn’t turn out that way. Despite the takeover of the Armenian stock market by NASDAQ OMX as well as other promising early signs, the reality looks quite different. Neither laws nor regulations but rather national self-interest is dictating commerce with foreign investors.

The following chronology of one of our investments in Armenia shows the arbitrary nature of dealings with foreign investors:

We bought 1,520 common shares (3.2% of the company) of Yerevan Ararat Brandy Factory NOY on the Armenian stock market in May 2006. Participants on our investor trip in autumn 2007 visited this company as well as a fraction of its enormous real estate holdings and even sampled its outstanding Armenian cognac.

At the time of our purchase, the majority stockholder was the Armenian oligarch Gagik Tsarukyan, the richest living Armenian in the country. He holds his shares through his Armenian firm Multigroup. He is a powerful force in Armenian politics and presides of a (=his) political party called “Prosperous Armenia“. The party has 26 of the 131 seats in parliament and is a coalition partner in the current government. It is represented by the heads of three ministries: Health, Sport & Youth and Urban Planning. Search engines like Yahoo and Google provide much additional information for those interested in learning more. Many clips can also be found on YouTube.

On the Prosperous Armenia party website, just click on ENG at the top-right of the screen. The homepage contains several links including those to YouTube presentations, the party’s Word Press BLOG, its leader and to other websites.

The majority shareholder’s background was encouraging to us as political activities led us to trust that proper procedure would be followed. On the basis of continued democratic developments in the medium term, we were convinced that Armenia – following Georgia’s example – would welcome foreign investors. Furthermore, there were several other domestic and foreign minority shareholders. In addition, the purchase price for our block of shares was very low.

Suddenly in June 2008, we were “politely yet forcefully” (the details will be spared) requested to transfer our NOYstock to Multigroup.
The CEO of Multigroup (his interpreter, rather) shared with us by telephone that the cognac firm now belonged only to Multigroup. We would have no right to own shares in this company. At this point Multigroup already owned around 90% of the stock. The rest was split between small investors, all domestic except for Ostinvestor (among these small investors, Ostinvestor was the largest with 3.2% of the shares).

As a portfolio investor we were and are interested in neither controlling or ever owning NOY nor in thwarting the company in any way. We explained our readiness to sell the shares at a halfway realistic price. We declinedMultigroup‘s request that we gratuitously transfer our shares or, perhaps, sell them at a symbolic price.

As we only found out many months later (as a shareholder, we were never issued a public invitation) an extraordinary meeting of the NOY shareholders occurred in October 2008 where a type of reverse split was decided:

One new stock was to be created from exactly 2,363.5 old stocks. Ostinvestor owned only 1,520 stocks. In order to have claim on one entire stock, we would have had to buy more. But we had no opportunity whatsoever to purchase further stocks on the market, even at a higher price, because, as we later heard, corresponding pressure was exercised on the remaining domestic minority shareholders.
Fractions of stocks are not registered by the CDA (Central Depository of Armenia). In this case, Armenian law stipulates that the small shareholder be reimbursed. The compensation offered to us was laughably low. Using undisclosed methods, a completely unknown Armenian public accountant calculated a “generously assessed market value” (in the expert opinion of the CPA) of 28,000 AMD per stock. Naturally we tried everything to obtain the details of how this “generous” value was determined. We never received an answer.>

A “market value” of 28,000 AMD per stock – with 47,250 existing “old” stocks – calculates to a measly value of 2.65 million euros (498 AMD = 1 Euro) for the entire company.

Alone, the property value of the company’s vast plot in a prime Yerevan location is worth many times more. If one considers the value of the highly renovated building, the huge inventory of barrels filled with excellent Madeira and Port – some over a century old – and adds the value of the very well-run business operation and then evaluates the (virtual) market worth of “Ararat Brandy” (that possesses a very high local value in Russia and the CIS), we then very quickly reach a figure in real terms of more than 100 million euros for the entire company. The difference between this and the “generous compensation offer” is simply astronomical. As mentioned, Ostinvestor holds (or considering current prospects, one should unfortunately say “held”) 1,520 common shares. Calculated using the offer of 28,000 AMD per stock, our packet converts to about €85,000.

We did not want to accept our arbitrary ouster; we were determined to fight and to initiate legal proceedings.

Easier said than done:

We spent countless days just searching for a lawyer and invested in more trips to Armenia for this purpose alone. We used all imaginable and unimaginable contacts in order to find a lawyer to represent us in this matter. It was utterly impossible: No Armenian lawyer was prepared to take on an official mandate against Multigroup (and against its powerful owner). Those who initially agreed to take our case later rescinded their offers. Finally a lawyer who splits her time between Yerevan and the U.S., who has Armenian roots but a U.S. passport, took on the mandate and became involved at once, with professionalism, and even passion.

We found two possible courses of legal action:

1.   To contest our “expropriation” as such, that is, ultimately to override our having been stricken from the shareholders’ register. Because the legal situation is somewhat ambiguous and there is no clear “squeeze-out” law in Armenia, we would need to appear before the Armenian Constitutional Court and perhaps a European court in order to contest our “expropriation” as such. This takes many years, years that I would happily dedicate to serve as an example. Above all, however, it costs very much money.

2.   To make a claim for a higher compensation
This seems to us to be the most sensible route. However, it carries with it the following problem:
The submission of a claim requires a well-founded statement of argument. In our case, the latter requires a public accountant’s counter opinion on the value of NOY. Here, too, we had the same initial problem: To find a CPA willing to work with us. Even well-known international concerns refused (I will publicly mention no names here, but firms from the “Top 5” were indeed among them). They usually refused not because, for example, they were representing our opposition and so may have had a conflict of interest. Rather, we were told informally that they would simply not take on a mandate directed at the richest and apparently most powerful man in the country.

One of the “Top 5” accounting firms agreed to take on our mandate if we provided them with the complete balance sheet from NOY. This is impossible given the current political situation within Armenia. In the meantime, NASDAQ OMX, or rather CDA (Central Depository of Armenia) which is owned by NASDAQ OMX, has removed us from the shareholders’ register. In order to force the release of the balance statement, we would need to call on the local authorities. It has since become clear that no help can be expected from these guys.

The Armenian government is sending clear signals:

In mid-April 2009 Armenian´s prime minister Tigran Sargsyan publicly praised NOY as a “model for the Armenian economy that others should take as an example for its transparency and corporate culture”. He said this despite verifiably having been informed of the details of our problem.
There could hardly be a clearer sign that we’re fighting a losing battle…

I write “verifiably” because we have of course made sure that official Armenia knows everything. Not only did we describe the circumstances in various hand-delivered letters, we sent the first letter on September 27th, 2008, to the president as well as the prime minister. On January 19th, 2009, we sent another letter in both English and Armenian. In addition, in February we personally handed a copy of the letter to a consultant of the president who later assured us that the president had read the letter in detail. We had a long and personal conversation with Armenia’s economic minister. We informed the Armenian embassy and the Armenian consulate in Germany about the case. And likewise, we notified authorities such as the Armenian Development Agency (ADA), whom we apprised of the situation back on July 5th, 2008, previous to taking any action. One of the actual roles of the ADA is to look after and assist foreign investors – but the reality is the direct opposite (see next page).

The German ambassador in Yerevan also kindly intervened, sending a representative to speak with the Armenian prime minister about our case and then reporting back to us.

Not from one single(!) Armenian authority did we receive even a hint of an answer. Not one single reply – nothing!

But rather, our inquiries (including that to the Armenian Development Agency) have jeopardized our other investments in Armenia:

After we described our situation to the ADA in July 2008 and asked for advice about how we might proceed, theCentral Bank of Armenia there and then revoked the license of one of Armenia’s leading investment house, which had till then done an excellent job to promote Armenia’s capital market.


By that point we had amassed a 51% share in that investment house. We (by that time) still had a strong believe in a prospective future of Armenia’s capital market. Instead further pressure was apparently being applied to us in the NOY situation through this investment. We were informed (informally, not in written, but absolutely clear) that this company can immediately receive its license back – as soon as we have solved our problem with Multigroup. We were faced with quite a dilemma. We had taken part in a massive capital increase of that investment house in order to adequately capitalize this company for future projects.  And what’s more, we had just gotten Sweden’s renowned foreign investor East Capital on board with a 25% holding. We were and are morally obligated to this investor as well as to numerous other foreign investors, which we brought into Armenia. It took months to get the company’s license back. I flew to Yerevan specifically to have a previously arranged appointment with the Central Bank of Armenia. Upon arrival, I would learn that they were too busy to meet. Only in the evening of the third day, as I was preparing for my departure, was a meeting suddenly possible. Our treatment during the meeting was rather reminiscent of an interrogation, that is, it was anything but courteous. In order to rescue our investments, we put up a brave front and brought along all required documents – even if they sounded ludicrous. In the end we at least had some success in this particuliar case ….

There is much more to report. But much is better left unsaid. The NOY story is enough material for a book.

I would like to briefly mention the following:

First of all, a bit about NASDAQ OMX, the new owner of the Armenian Stock Market. I had the support of both the stock market’s Armenian CEO as well as the regional director of the entire NASDAQ OMX Group. They did all that was able to be done within the realm of possibility – while not jeopardizing their own enterprise, of course.

I am also very pleased about the dedication shown by the German embassy in Armenia. It is not a matter of course that an embassy becomes so engaged in such a comparatively small case. To those at the German embassy in Yerevan, an emphatic “thank you”!

On May the 11th 2009 Gagik Tsarukyan was honored as “Armenia´s best European” by the European Movement Armenia. The movement is headed by Pat Cox, former president of the European Parliament, and boasts former presidents of France and Portugal among its honorary presidents. Its secretary general, Henrik Kroener, was on hand to personally hand the annual award to Tsarukian.

Do we have to add more? Maybe this one:

Update from June 2009:

Now we were taken off the shareholder´s registry and will receive the new book value per share which is 9,731 AMD* per share. At the current FX this translates to a valuation of the whole company of 0.90 Mio €uro –while our independent due diligence considers the real value of NOY at above 180 Mio €
So all Non-Armenian-investors are thrown out with a compensation at less than 0,5% of the real value.

*According to Company’s balance-sheet from beginning of 2008, the Book value of the company’s shares were around 150,000 AMD at the beginning of 150.000 AMD. Quite “funny”, how it suddenly could fall to 9.731 AMD per share within a few months while the company was not at all exposed to the financial turbulences…..

There had been taken several legal steps as well from Multigroup. We were informed that another minority shareholder has taken legal actions in various points, such as the striking-off from the shareholder´s registry. This minority shareholder has lost all claims. We were informed that this minority shareholder is related with Multigroup, so these legal actions appear to have been inspired by Multigroup in order to provide some already decided claims, should we decide to take legal actions against certain things.

Some legal side comments on the valuation from us:

According to Armenian legislation the mentioned shares should be repurchased by the Company at a valuated market price.
According to 59th article of Law of RA “On Joint-Stock Companies” : “… the market price of Company’s shares cannot be less than the price that was calculated based on joint-stock company’s net assets”.

According to Company’s balance-sheet from beginning of 2008, the market price of the company’s shares could not be less than 150,000 AMD. And as already mentioned, even these 150.000 AMD per share reflect only a very small fraction of the real value. However as mentioned above, now suddenly the book value dropped to 9.731 AMD per share within a few months.


Above all, emerging markets bear political and corporate-governance risks. All of us know this; it’s part of the principle. But I have no desire to conceal that I am deeply disappointed about Armenia’s chosen path. I once believed in Armenia’s path to becoming a state governed by the rule of law, and brought many investors into the country. That is now history. What remains is a hypothetical democracy under whose guise national and personal interests dictate dealings with westerners like us. It is Armenia itself – nobody from outside – that is blocking the road to its own future. Old thinking once again wins the upper hand. What a world of difference to neighboring Georgia which, despite all the trouble along its way to democracy, is now a state of law, with an open heart onto Europe – and always giving a warm “welcome” to foreign investors.

Continue “Gagik Tsarukyan vs Ostinvestor, Part 3”