By Simon Black

June 27, 2012; Yerevan, Armenia

Despite being neighbors, there are no flights between Tbilisi, Georgia and Yerevan, Armenia. No reason to bother with air travel from one poor country to another, I suppose, the demand just isn’t there.

So I opted for the train. Specifically the overnight Armenian train. And everything about it is a throwback to the Soviet days… Metal seats. Bathrooms without running water. No food. And that’s the first class carriage.

The train creaks along like a rusty swing set, winding its way down the Caucasus Mountains for about ten hours through a nearly pitch-black evening devoid of any human civilization.

When we reached the border last night, we were ‘greeted’ by several gruff, slovenly Armenian customs officers sporting wrinkled GI Joe outfits and terrible body odor.

My fellow passengers consisted of several locals, some Japanese tourists, a few Europeans, and a handful of Iranian farmers.

I crossed the border with my US passport, and upon seeing this, one of the Iranians grabbed my arm and said to me in broken English:

“In Iran, we like America. [Iranian president] Ahmaenijad is bad man. Very bad man.”

This has been a consistent theme from Iranians I’ve met all over the world. They’re an incredibly kind and warm people, not the evil terrorists often portrayed in Western media.

At the risk of getting all ‘We Are the World’ on you, I couldn’t help wondering whether these guys… just happy, simple farmers, would survive a US-led war with Iran, or perish in a drone strike gone bad. Perhaps they were wondering as well.

Anyhow, after a bureaucratic fiasco, we were all stamped in to the country and sent off to complete the rickety ride to Yerevan.

No doubt, while there are some nice parts of the city and a small handful of wealthy people, this is a very poor place.

When the train pulled in this morning, it was well past 8am… a time when most cities would be alive with buzz and bustle. Yet there was barely a vehicle on the street, hardly a soul in sight.

Abandoned construction sites all over town…

Within an hour or so, the city began to show signs of life; yet throughout the day, I was continually amazed at how empty all the shops and stores were, even in the nice parts of town.

The economy is here is quite ill– output is still well below 2008 levels, and the official unemployment rate is about 10%… though the propaganda department is excellent at conjuring statistic and inventing new mathematics.

For instance, everyone in Armenia who owns property is considered employed by the government, whether he realizes it or not.

The same government agency claimed that 620,000 foreign tourists visited Armenia in 2010. Private data from local hotels, however, showed only 65,000 visitors during the same period– a 90% difference. And you thought your government told big lies…

The actual rate of unemployment here is closer to 30%, and close to 50% for the youth. You can see it on the streets.

There are a few brightspots for the economy though. One is remittances–money sent back home from Armenians abroad.

Central bank data releases show that, after remittances soared by over 23% to $1.24 billion in 2011, the first quarter of 2012 is showing another 13.8% gain over last year.

Armenia counts so much on the inflow of payments from foreigners, relatives, and Armenians working abroad that regulators have made it easy for just about anyone to open a bank account here.

And just like neighboring Georgia, liquidity and capitalization ratios in Armenia are substantial. It’s not uncommon for Armenian banks to hold 35%+ of their deposits in cash or equivalents, compared to 5% or less in the developed West.

Mining activity is another bright spot. Sort of. The country has fairly generous deposits of industrial metals, gold, uranium, etc.

In typical form, though, many politicians use their positions for personal benefit. They award valuable mining concessions to holding companies that they control, then rake in millions of dollars selling the companies to foreign investors.

Everyone else has to figure out how to survive on $200/month.

Corruption is a major problem in Armenia. These Soviet-era kleptocratic practices hold the economy back and keep the people in a state of poverty.

Across the border, Georgia’s economy is growing because they’re working to stamp out corruption, incentivize investment, reduce red tape, cut taxes, increase transparency, and establish an environment where everyone has a fair shake.

There are two ways to become wealthy in this world– you can either create value, or you can steal it from someone else. One of these models is sustainable, the other is not.

This region represents a remarkable bifurcation in that decision tree… showing what happens when nations pursue a corrupt, rigged system stacked for the elite vs. following the path to economic freedom.

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