Before the earthquake in 1988, Armenia exported trucks, tires, electronics and instruments to other republics. A number of these plants were destroyed by the earthquake. Armenia was also a major producer of chemical products, some 59% of which were exported to other republics. Armenia has the highest number of specialists with higher education and second highest number of scientists of all the former Soviet republics. Since the collapse of the Soviet Union, industrial production has been severely disrupted by political instability and shortages of power. Much of Armenia's industry is idle or operating at a fraction of its capacity.
Economic blockades by Turkey and Azerbaijan as part of the continuing dispute over Nagorno-Karabakh have cut Armenia off from an old direct gas pipeline from Azerbaijan, as well as precluded it from participation in any of the east-west pipelines being built in the post-Soviet era. The alternative Armenia has pursued is a gas pipeline from Iran delivering Turkmenistan gas (to avoid sanctions on customers of Iran, which were renewed by the US Congress in August 2001). Intergovernmental agreements on the project were signed in 1992 and 1995. In December 1997 the Korpezehe-Kurt-Kwi pipeline feeding Turkmen natural gas directly into the Iranian system was opened. In December 2001 agreement was reached on a route that bypassed the Azeri exclave of Nakhichevan, running from Kadzharan to the southern border at Megri. Work on the Armenian section of the Iran-Armenian gas pipeline was to have begun in 2002 but was delayed until 2003 by disputes over the price Iran was intending to charge.
Light industry dominates Armenia's industrial sector and is striking for its diversity. The leading industries in 2002 included metal-cutting machine tools, forging-pressing machines, electric motors, tires, knitted wear, hosiery, shoes, silk fabric, chemicals, trucks, instruments, microelectronics, gem cutting (in 2002, 53 diamond-polishing companies exported $150 million worth of diamonds), jewelry manufacture (up 200% in 2002), software development, food processing and brandy. Most of the country's small and medium-sized enterprises have been privatized, spurring the recovery of industrial growth.
Progress has been slower with larger industries often due to the lack of viable bidders. About 70% of the larger operations had been privatized by 1998, the year Armenia passed legislation for the sale of the country's electricity transmission and distribution networks, retaining government control over power generation. To support the privatization, the European Bank for Reconstruction and Development (EBRD) bought a 20% share in each of Armenia's four distribution companies in an agreement preserving the government's right to buy back the shares should the agreement be abrogated. In 2002, after two failed offerings, management of the electricity distribution network was won by Daewoo Engineering. In 2001, Armenia reached a debt-to-equity agreement with Russia to exchange the debt it owed Russa—at almost $100 million and requiring about $20 million a year to service, the largest and only nonconcessional part of Armenia's external debt—for five non-performing state-run enterprises. The centerpiece was the Hrazdan Thermal Power Plant, valued at about $100 million, but also including the "Mars" Electronics Factory established in 1986 for making robots, and three research institutes which had been part of the USSR's military-industrial complex. Under the debt for property agreement the Russian government will turn the operations over to private entrepreneurs.
Armenia has the highest number of cooperatives (per capita) in the Commonwealth of Independent States. By CIA estimates for 2000, industry accounted for 32% of GDP, but employed about 42% of the labor force. In 2002, with 12.5% overall GDP growth, industry grew 16%, including a 42% growth in construction. The country is projecting growth along with partnership opportunities in areas such as power generation, aviation, construction, electronics, apparel, tourism, food processing, industrial property acquisition, banking, and other areas.