US embassy cable - 04YEREVAN592

UNCLAS SECTION 01 OF 06 YEREVAN 000592 
 
SIPDIS 
 
DEPT FOR EUR/CACEN, EUR/ACE, EUR/PGI, INL/AAE, INL/C 
EUR/ACE FOR MARIA LONGI 
DEPT FOR USAID 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: PREL, PGOV, AM 
SUBJECT:  USATF MID-TERM REVIEW FOCUSES ON CUSTOMS, 
TAXATION ISSUES 
 
1. (U) Sensitive But Unclassified.  Please treat 
accordingly. 
 
2. (SBU) The March 1 meeting of the U.S.-Armenia Task 
Force on Economic Cooperation (USATF) mid-term review 
focused on issues related to corruption, U.S. technical 
assistance in the private sector, improving customs 
procedures, trafficking in persons and INL-related 
issues.  Frank discussion of GOAM misgivings over 
aspects of the USG energy efficiency assistance ended 
with an agreement to establish a working group to 
address specific concerns.  Both parties tentatively 
agreed to hold the next USATF meeting in Armenia on or 
about May 18-19 to accommodate the schedules of 
Washington visitors from EUR/ACE.  End Summary. 
 
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USATF ON CORRUPTION, SME DEVELOPMENT, BUSINESS CLIMATE 
--------------------------------------------- --------- 
 
3. (SBU) Ambassador Ordway co-chaired the March 1 USATF 
mid-term review meeting with GOAM Minister of Finance 
and Economy Vartan Khachatryan.  The two sides signed 
the final version of the USATF Action Plan from the 
November 2003 meeting of the USATF in Washington, D.C. 
(see paragraph 13 for full text).  The Ambassador 
previewed overall USG comments on the GOAM's recently 
unveiled anti-corruption (A-C) strategy and 
accompanying action plan and informed the GOAM that USG 
representatives (including USAID and State) would 
provide these comments to GOAM officials for future 
discussion.  He also mentioned the compilation of a USG 
inventory of ongoing USG technical assistance related 
to A-C.  Minister Khachatryan agreed to consider the 
USG comments and integrate them into future A-C 
programming (USATF Action Plan Item 5). 
 
4. (SBU) Following an in-depth discussion of USAID and 
USDA technical assistance for small and medium-sized 
enterprises (SMEs), Minister Khachatryan called on the 
USG to continue its program of establishing credit 
clubs that benefit SMEs in rural areas.  Minister 
Khachatryan complained about a perceived lack of 
coordination with the EBRD regarding Armenia's economic 
needs.  USAID responded that it had met recently with 
EBRD officials regarding deepening the organization's 
programs in Armenia.  The Ambassador outlined EBRD 
plans for a permanent expatriate representative in 
Armenia and predicted better collaboration once the 
EBRD re-established a full-scale Yerevan office (USATF 
Action Plan Item 6). 
 
5. (SBU) USAID informed the USATF that it was in 
contract negotiations with the American Chamber of 
Commerce in Armenia to conduct the planned Business 
Climate Review.  The GOAM requested that the USG share 
the terms of reference for the study with the Ministry 
of Finance and Economy.  Both sides discussed ways to 
ensure that the study would complement ongoing studies 
and reports sponsored by the World Bank (USATF Action 
Plan Item 7). 
 
--------------------------------------------- 
SENSITIVITIES OVER ENERGY EFFICIENCY PROGRAMS 
--------------------------------------------- 
 
6. (SBU) A review of pending customs cases revealed 
misperceptions and reservations by the GOAM regarding 
some of USAID's ongoing energy efficiency programs. 
Minister Khachatryan said the GOAM was wary of a 
specific heating and cooling initiative that appeared 
to benefit wealthy Armenians instead of Armenia's 
poorest communities.  He said that the GOAM was holding 
equipment related to this program at the border until 
the USG provided further information about the design 
of the program and its beneficiaries.  Ambassador 
Ordway condemned this practice as damaging to our 
bilateral assistance relationship and called on the 
GOAM to release commodities immediately.  The two sides 
agreed to a working group meeting to further educate 
the Ministries of Energy and Finance and Economy about 
USAID's energy efficiency programs in order to avoid 
similar problems in the future (USATF Action Plan Item 
11). 
 
--------------------------------------------- ---- 
CUSTOMS PROCEDURES AND TAXATION OF USG ASSISTANCE 
--------------------------------------------- ---- 
 
7. (SBU) The USG detailed other cases of commodities 
that the GOAM was holding at the port of entry pending 
customs clearance.  Ambassador Ordway reminded the GOAM 
of USG legislation forbidding the taxation of USG 
assistance and ongoing USG efforts to secure buy-in 
from GOAM stakeholders including relevant ministries 
and government offices to avoid such delays.  Both 
sides acknowledged new procedures agreed to during the 
November USATF meeting and agreed to consult with 
government counterparts in the event of discrepancies. 
The USG reviewed the mostly positive (preliminary) 
results from Embassy Yerevan of the 2003 "Section 579" 
report on taxation of government assistance. 
Ambassador Ordway called on the MFE to look for ways to 
expedite reimbursement of VAT paid by implementing 
offices or USG offices (USATF Action Plan Items 22 and 
23). 
 
--------------------------------------------- ----- 
FORENSIC LABORATORY, MONEY LAUNDERING, RULE OF LAW 
--------------------------------------------- ----- 
 
8. (SBU) Following discussion among GOAM 
representatives over which ministry should have 
technical oversight of the INL-sponsored Forensic Lab 
Project, the GOAM suggested the organization of a new 
internal task force to address the issue.  DCM and INL 
representative Ed Schack agreed to meet with the 
interministerial group in late March to monitor 
progress on this issue (USATF Action Plan Items 13 and 
14). 
 
9. (SBU) The GOAM agreed to provide copies of two 
recent anti-money laundering draft laws to the Embassy 
within the month.  The USG will translate the laws into 
English and provide them to INL anti-money laundering 
experts in Washington for comment (USATF Action Plan 
Item 16).  The Ambassador discussed the status of USG 
assistance in the judicial sector.  He reported that 
USAID was considering reinstating programs in this 
sector that could include a national code of ethics and 
technical assistance in case management (USATF Action 
Plan Item 16). 
 
---------------------- 
TRAFFICKING IN PERSONS 
---------------------- 
 
10. (SBU) DCM expressed USG disappointment in the 
inadequate GOAM anti-trafficking efforts over the past 
year and warned the GOAM of the risk of classification 
as a Tier 3 country in the Department's Trafficking in 
Persons Report.  The USG called on the GOAM to take 
greater ownership of the issue in order to avoid 
possible negative consequences that could include 
sanctions. 
 
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COMMENT 
------- 
 
11. (SBU) The four months following the last USATF 
meeting did not leave sufficient time for 
implementation of Action Plan items.  The mid-term 
review had the effect, however, of reminding GOAM 
ministries of their November 2003 commitments and 
encouraging dialogue with USG counterparts to produce 
measurable results before the next USATF meeting in 
late May.  Minister Khachatryan appears increasingly 
comfortable in his role as USATF facilitator and 
moderator among counterparts in other ministries.  We 
should capitalize on this dynamic by crafting a 
succinct, more action-oriented Action Plan during the 
next USATF meeting that will clearly define required 
actions and allow Minister Khachatryan to more 
effectively hold his colleagues to their end of USATF 
agreements.  Despite tensions over customs issues, the 
USATF mechanism continues to prove its worth as our 
principal forum for dialogue on bilateral assistance 
issues. 
 
12. (U) Point of contact is Embassy Assistance 
Coordinator Aaron Sherinian (SherinianAH@state.gov). 
Additional copies of the Action Plan and supporting 
briefing memos from the mid-term review have been sent 
to the Department (EUR/CACEN and EUR/ACE). 
 
------------------------------- 
FINAL TEXT OF USATF ACTION PLAN 
------------------------------- 
 
13. (U) The final text of the USATF Action Plan (as 
signed by Ambassador Ordway and Minister Khachatryan) 
follows.  Begin text: 
 
-- Action Plan 
-- U.S.-Armenia Economic Task Force 
-- November 4-5, 2003 
 
(1) The U.S. Government recognizes the linkages between 
the newly adopted Poverty Reduction Strategy, anti- 
corruption, and economic development, and congratulates 
the Government of Armenia in finalizing its PRSP in 
August 2003.  The U.S. Government will coordinate with 
the Government of Armenia as we develop our monitoring 
plan to ensure that it can also measure contributions 
to PRSP goals. 
 
(2) The U.S Government supports the concepts in the 
PRSP on targeting social payments, creating jobs, and 
investing in education and health.  Both sides also 
recognize that it is critical to increase savings in 
the economy and allowing for the creation of basic 
conditions for increased investment. 
 
(3) The U.S. Government recognizes and applauds 
Armenia's strong macroeconomic performance in the past 
few years.  However, both sides agree on the importance 
of increasing revenue as a share of GDP and that 
closing the fiscal deficit is critical for further 
growth.  The Government of Armenia is working on a 
strategy to increase revenue, and the U.S. Government 
will explore new mechanisms for working with the 
Government of Armenia and the National Assembly to 
support this strategy. 
 
(4) The Government of Armenia will provide the U.S. 
Government with a copy of the Strategy for Sustainable 
Economic Development as soon as it is available.  The 
U.S. Government, in coordination with other donors, 
will then work to complement the efforts of the 
Government of Armenia to achieve the stated priorities 
in this Strategy. 
 
(5) The Government of Armenia will provide the U.S. 
Government with a copy of the latest draft Anti- 
Corruption Strategy as soon as it is available, 
anticipated to be November 2003.  Although there was no 
U.S. Government input into the final draft that was 
approved on November 6, 2003, the U.S. Government, in 
coordination with other donors, will consider how it 
can best contribute to achieving the goals of the Anti- 
Corruption Strategy. 
 
(6) The U.S. Government recognizes Armenia's progress 
on enterprise development, especially in the 
development of SMEs and the accompanying creation of 
over 10,000 jobs.  Both sides agree that continued SME 
development and bringing them into the formal economy 
is critical to the creation of jobs and alleviation of 
poverty in Armenia.  The U.S. Government, through USAID 
and USDA programs, will continue to provide assistance 
to entrepreneurs and micro and SME lending facilities, 
and - noting the Government of Armenia's interest in 
this program - will work with the EBRD to support SME 
development in Armenia. 
 
(7) The U.S. Government will consult with the 
Government of Armenia, representatives of the Diaspora 
and other donors, including the World Bank, in 
sponsoring the design and implementation of a "Business 
Climate Review" that will evaluate constraints to 
foreign direct investment in Armenia.  Upon completion 
of any survey undertaken in this regard, the U.S. 
Government will provide its results to the Government 
of Armenia, the High Business Council, the local 
business community and Diaspora representatives. 
 
(8) The sides recognize the need to increase the level 
of financial intermediation in the economy.  They also 
recognize that a major impediment to increased 
intermediation is the high level of "connected lending" 
in the Armenian economy.  The U.S. Government will work 
with the Central Bank of Armenia to look for ways to 
strengthen the banking sector and the availability of 
long term credit, with the objective of increasing the 
provision of credit to SMEs, while addressing risk 
issues. 
 
(9) The U.S. Government has reviewed the Government of 
Armenia's request to the U.S. Government to transfer 
repayments related to Armenia's concessional Pl 480 
debt to Assistance Program budgets in Armenia.  The 
U.S. Government, due to legal constraints, cannot 
respond positively to this request.  No further actions 
are expected on this issue. 
 
(10) Both sides recognize that, based on per capita 
income, Armenia could be eligible for funding under the 
Millennium Challenge Account (MCA), once the U.S. 
Congress passes the necessary legislation.  The U.S. 
Government notes its desire to begin the MCA process as 
soon as possible and the Government of Armenia 
expresses its intent to strengthen its qualifications 
for, and prepare for possible participation in MCA. 
 
(11) The U.S. Government recognizes the progress that 
Armenia has made on restructuring and privatizing its 
power sector, and will continue to work with the 
Government of Armenia to help it develop an energy 
strategy with concrete targets that provides safe, 
stable, and reliable energy to the Armenian people. 
The U.S. Government will also work with the Government 
of Armenia to develop heating alternatives and energy 
efficiency.  The U.S. Department of Energy agrees to 
work with the Ministries of Energy and Foreign Affairs 
to organize an energy conference to discuss energy 
policy and investment in the energy sector. 
 
(12) The U.S. Government agrees to continue to provide 
technical assistance to the Natural Monopolies 
Regulatory Commission.  In particular, U.S. assistance 
will focus on ways to help it perform effectively in 
its expanded role as the Public Utilities Regulatory 
Commission. 
 
(13) The U.S. Department of State will provide the 
Ministry of Finance and Economy, the Ministry of 
Justice, and the already-established Armenian 
interagency task force with detailed plans and 
requirements for the development of a Forensics 
Laboratory in Armenia.  The Government of Armenia will 
work to expedite execution of the amended Letter of 
Agreement with the U.S. Government, which allows for 
additional law enforcement assistance. 
 
(14) Both sides recognize that money laundering, while 
not an obviously identified problem in Armenia today, 
could become a problem in the future, especially if the 
number of bank transactions increases as anticipated. 
The U.S. Government encourages the Government of 
Armenia to prepare internationally acceptable 
legislation and implementation plans to address this 
issue now, and the U.S. Government, through the 
Treasury Department, will provide technical assistance 
as requested by the Government of Armenia. 
 
(15) A representative from the U.S. Embassy will meet 
with Ministry of Foreign Affairs representative to 
review the status of Armenia's ratification of 
international counterterrorism conventions.  The U.S. 
Government will consider providing technical assistance 
in this area if requested by the Government of Armenia. 
 
(16) Both sides agree that weaknesses in rule of law 
and due process are impediments to economic growth, 
democratic development, and poverty reduction in 
Armenia.  The Government of Armenia commits to 
strengthening the rule of law and due process, and 
welcomes U.S. Government assistance toward this end. 
Both sides will work together to address and improve 
these issues. 
 
(17) The U.S. Government recognizes the positive 
progress made by the Government of Armenia in the area 
of trafficking in persons, as evidenced by Armenia's 
improved ranking in the U.S. State Department's most 
recent Trafficking in Persons Report.  The Government 
of Armenia and the U.S. State Department will continue 
to cooperate on developing and implementing programs to 
combat trafficking in persons. 
 
(18) Prior to the next meeting of the U.S.-Armenia Task 
Force, the Government of Armenia will seek ways to 
coordinate international assistance through the PRSP 
mechanism that will advance national development, 
economic reform, and cooperation.  Noting the PRSP as a 
current priority for the GOAM, these coordination 
efforts will harmonize the PRSP, national anti- 
corruption plan and other proposed strategies for 
economic development. 
 
(19) Both sides support the removal of Armenia from 
Jackson-Vanik as quickly as possible to reflect the 
progress made on both religious freedom and trade 
issues.  The U.S. State Department will provide the 
Government of Armenia with a paper on the U.S. 
Administration's position on removal of Armenia from 
the provisions of the Jackson-Vanik Amendment. 
Ambassador Ordway will hold a press conference in 
Yerevan to explain Jackson-Vanik and the status of 
trade relations between the U.S. and Armenia. 
 
(20) The Government of Armenia will provide the U.S. 
Embassy with a compendium of WTO compliance issues. 
Upon receipt, the U.S. Government, in cooperation with 
other donors, will evaluate concrete assistance 
possibilities.  Both sides recognize that enforcement 
of intellectual property rights is important.  The U.S. 
Government is committed to providing technical 
assistance on IPR issues and will discuss with the GOAM 
possible technical assistance in other areas. 
 
(21) The Government of Armenia agrees that use of any 
type of minimum value reference pricing violates its 
WTO commitments.  The Government of Armenia will 
provide a written statement to the U.S. Embassy stating 
unequivocally that no computerized minimum value 
reference pricing system is in place in Armenia.  The 
U.S. Government agrees to consider providing technical 
and other assistance to the relevant Armenian agencies 
to help address import valuations. 
 
(22) Both sides acknowledge that problems existed when 
importing technical assistance and humanitarian 
commodities into Armenia under the Bilateral Agreement 
of 1992.  Both sides agree that the following procedure 
will be followed whenever the U.S. Government and other 
covered parties want to import commodities under this 
Bilateral Agreement in order to make this process more 
effective: 
 
--Every six months, the U.S. Embassy will submit to the 
State Customs Committee, the Ministry of Foreign 
Affairs, and the Ministry of Finance and Economy an 
updated list of organizations covered by the Bilateral 
Agreement, with reference to specific projects that are 
separately and periodically provided to the Ministry of 
Finance and Economy for its assistance database. 
The U.S.  Embassy will designate a person who will walk 
through these steps to check the accuracy of the above 
mentioned database being kept by the Ministry of 
Foreign Affairs and the lists submitted to the Ministry 
to be sure the above system is effective.  When the 
interim review is conducted in early 2004 this process 
will be reviewed to make sure it is working 
effectively. 
--The U.S. Government agrees that normally the U.S. 
Embassy or an agency of the U.S. Government will submit 
a letter to the State Customs Committee (with a copy to 
the Ministry of Foreign Affairs) one month prior to 
arrival of a commodities shipment covered by the 
Bilateral Agreement, stating the details of the 
shipment (arrival date, if known, else in general terms 
when it will arrive; and the general nature of the 
shipment).  The U.S. Government will endeavor to have 
the letters sent one month prior to arrival of a 
shipment, and the Government of Armenia will cooperate 
in clearing shipments when notice is given less than 
one month before arrival. 
--If any Government of Armenia officials have any 
questions on shipments imported into Armenia that could 
or is claimed to be under the Bilateral Agreement, then 
these officials must notify the U.S. Embassy 
immediately according to procedures that will be 
provided to the Ministry of Foreign Affairs by the U.S. 
Embassy. 
 
(23) The Minister of Finance and Economy agrees to 
rectify existing customs disputes as follows: 
 
--AEAI attempted to import wood dryers under a U.S. 
assistance program on energy efficiency.  Both sides 
acknowledge that this is a shipment of goods covered by 
the Bilateral Agreement.  USAID agrees to submit a 
description of this project to the Ministry of Finance 
and Economy before November 7.  The Ministry of Finance 
and Economy agrees to resolve this issue before 
November 14 by providing a letter allowing the import 
of these dryers under the Bilateral Agreement (i.e., 
without any taxes, customs duties, etc.).  The Customs 
Chairman acknowledges that this letter from the 
Ministry of Finance and Economy will override any 
position taken by the Customs Committee concerning the 
import of these dryers.  [Note:  This case was resolved 
in mid-November and the wood dryers are now in the 
possession of the U.S. Government implementing 
partner]. 
--Counterpart International imported hygiene kits into 
Armenia, and has had problems with Customs officials 
concerning taxation of these commodities.  The Ministry 
of Finance and Economy agrees to discuss this issue 
with the Prosecutor General's office, since this case 
has already been referred by Customs to the 
Prosecutor's Office.  The U.S. Embassy will assign a 
person to answer any questions on this topic for the 
Ministry of Finance and Economy.  [Note:  This case was 
resolved in mid-December and the hygiene kits are now 
in the possession of the U.S. Government implementing 
partner] 
 
(24) Both sides agree that two sub-committees - a 
Science Panel and a Trade and Investment Panel - of the 
U.S. Armenia Economic Task Force will be created before 
the next US-Armenia Economic Task Force meeting.  The 
Government of Armenia and the U.S. Government will 
designate points of contact that will report back to 
the Minister of Trade and Finance and the U.S. Embassy 
directly on progress made.  These Panels will be 
prepared to hold initial meetings at the next US- 
Armenia Economic Task Force meeting, if not before. 
 
(25) Both sides acknowledge that there will be no U.S. 
government monetization programs for Armenia in FY04. 
Prior to the due date for program proposals for FY05 
programs, the U.S. will discuss any possible proposals 
with project proponents, inviting consultation with the 
Ministry of Finance and Economy and related state 
agencies where appropriate.  If the U.S. Embassy 
supports these proposals, then it will discuss these 
with the Office of the Prime Minister.  If the Prime 
Minister provides written assurance to the U.S. Embassy 
at least six months prior to the beginning of FY05 
(April 1, 2004) that the Government of Armenia will 
support these programs under the Bilateral Agreement, 
meaning that no customs, VAT, unreasonable storage 
fees, or other import duties will be imposed, then the 
U.S. Embassy will convey its support for these 
proposals to the approving office within the U.S. 
Government.  Both sides acknowledge that such a 
recommendation by the U.S. Embassy will not guarantee 
that a project will be selected by the U.S. Government 
agency overseeing a monetization program. 
 
(26) The Government of Armenia is aware that any 
taxation of U.S. assistance by the Government of 
Armenia will be subject to a reduction in U.S 
assistance levels.  Both sides agree to work together 
to avoid any taxation of U.S. assistance, and will 
actively review any potential taxation issues in order 
to resolve the issue quickly. 
End text. 
ORDWAY