US embassy cable - 04YEREVAN1238

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001238 
 
SIPDIS 
 
EUR/CACEN FOR EUGENIA SIDERAS, EUR/ACE FOR MARIA LONGI, 
DEPARTMENT PLEASE PASS USAID, DEPARTMENT PLEASE PASS 
MILLENNIUM CHALLENGE CORPORATION 
 
E.O. 12958: DECL: 05/27/2014 
TAGS: PREL, PGOV, EAID 
SUBJECT: KOCHARIAN DISCUSSES REFORMS, ARMENIA'S ECONOMIC 
FUTURE AND MCA WITH EUR/ACE AMBASSADOR PASCUAL 
 
 
Classified By: Ambassador John Ordway for reasons 1.5 (b) and (d). 
 
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SUMMARY 
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1. (SBU) EUR/ACE Ambassador Carlos Pascual, accompanied by 
the Ambassador, met with President Robert Kocharian May 18 
following the meetings of the U.S.-Armenia Task Force on 
Economic Cooperation (USATF).  The meeting focused on the 
potential role for Armenia as an example of progress and 
freedom in the region, ways to improve economic economic 
conditions, protecting civil liberties and fighting 
corruption.  The discussion also included Armenia's recently 
announced eligibility for funding through the Millennium 
Challenge Account (MCA).  Kocharian defended the GOAM's 
record on rule of law and touted recent economic growth as 
indicative of Armenia's ongoing progress.  End Summary. 
 
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KOCHARIAN DEFENDS GOAM PROGRESS ON COE COMMITMENTS 
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2. (SBU) EUR/ACE Ambassador Carlos Pascual, accompanied by 
Ambassador Ordway, met with President Robert Kocharian May 18 
following the final session of the U.S.-Armenia Task Force on 
Economic Cooperation (USATF).  Also present at the meeting 
were Minister of Finance and Economy Vardan Khachatryan, 
Deputy Minister of Foreign Affairs Ruben Shugarian and Chief 
Economic Advisor Vahram Nercissiantz. 
 
3. (C) Ambassador Pascual opened the meeting with a 
discussion of the link between democratic and economic 
reforms and the general "neighborhood" in which the world 
classifies and views Armenia.  Discussion centered around the 
need for the GOAM to perform along the lines of northern tier 
European countries if it wanted to be considered part of 
their league.  Kocharian reacted to Ambassador Pascual's call 
on the GOAM to accelerate reforms and stand out as a leader 
among neighboring countries by enumerating a lengthy list of 
GOAM initiatives keyed to Armenia's Council of Europe 
obligations.  He pointed to the privatization of major 
industries, recent anti-monopoly legislation, private 
property disclosure laws, civil service reform and efforts to 
de-centralize the power structure of government bureaucracies 
as proof that GOAM was "well on its way toward Europe." 
Kocharian argued that democracy in Armenia was inextricably 
tied to economic opportunity and the possibility of more jobs 
and a better standard of living.  Ambassador Pascual 
responded that increased economic opportunities would come to 
Armenia if the GOAM made the internal changes necessary for 
an image as a fully democratic state. 
 
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SIDES DISCUSS BANKING SECTOR, CORRUPTION 
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4. (C) The meeting included a discussion of issues related to 
reforms in the banking sector, highlighting it as one of the 
most important important economic issues Armenia currently 
faces.  Both sides discussed the conclusions of the May 17-18 
meetings of the U.S.-Armenia Task Force on Economic 
Cooperation (USATF) including the need to increase lending as 
a percentage of GDP and address impediments to lending. 
Ambassador Pascual highlighted the fact that a lack of 
financial intermediation locally would preclude sustainable 
growth and diversification in the Armenian economy.  He 
underlined the need for legislation on collateral rights and 
said that the USG and GOAM would cooperate on these issues 
following the completion of the USAID-sponsored financial 
sector study being coordinated with the World Bank and 
International Monetary Fund. 
 
5. (C) In response to Kocharian's outline of the GOAM's 
recently adopted anti-corruption strategy, Ambassadors Ordway 
and Pascual suggested that the GOAM first take concrete 
actions that would resonate among the Armenian population as 
a whole and lend credibility to the the stategy and signal 
real commitment from the government.  The sides discussed 
possibilities for such initiatives in areas that impact the 
lives of everday citizens, including law enforcement. 
Ambassador Pascual pressed for action in Armenia's courts and 
said that corrupt individuals needed to fear a risk of 
imprisonment for corrupt behavior.  Kocharian expressed 
concern regarding this last point, responding that he would 
rather find ways to "eliminate the roadblocks that cause 
corruption."  His comments suggested that he would prefer to 
address the issue systematically rather than crack down on 
corrupt individuals in positions of authority or economic 
influence. 
 
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KOCHARIAN ON MCA:  "WE'RE READY TO GO" 
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6. (C) Kocharian reacted enthusiastically to news of the 
visit to Armenia of MCC CEO Applegarth and his delegation 
scheduled for early June.  He said that the GOAM was "ready 
to go" and was already making preparations for an MCA compact 
submission, including the designation of a local board of 
directors (likely headed by the Prime Minister) and 
sponsoring preliminary discussions among appropriate 
ministries regarding areas of greatest need.  Kocharian said 
he was committed to the need for broad consultation with 
civil society during the process of developing an MCA compact 
submission.  When informed that regression in important areas 
involving democracy and governance could potentially reverse 
a country's MCA eligibility, Kocharian stated emphatically 
that the GOAM had actually made progress in terms of 
individual freedoms.  While generally skeptical of the 
organizations or methods used to obtain MCA indicators, 
Kocharian said he was confident that Armenia's scores would 
only improve in these areas. 
 
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IMPLEMENTING USATF CONCLUSIONS VAT REFUNDS 
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7. (C)  During a discussion of conclusions from the recent 
USATF meetings, Kocharian recognized that some U.S. business 
had complained about the need for quicker, more complete VAT 
refunds.  He said, however, that the GOAM was concerned that 
tax fraud, including bogus transfers of VAT refund 
eligibility among businesses, could represent a major drain 
on potential state income.  He thanked the USG for its offer 
to work with the GOAM to address these issues. 
 
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COMMENT 
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8. (C) Kocharian's remarks indicate that he is acutely aware 
of international criticism after the fallout of the mid-April 
opposition rallies in Armenia.  While citing MCA eligibility 
as a positive evaluation of the country, he simultaneously 
expressed somewhat defeatist views of his domestic and 
international reputation at the moment.  His opinion that, 
"Either way I appear to be guilty," however, does not seem to 
have hampered his pro-active approach to the process of 
developing an MCA compact.  He appears to be investing 
political capital and listening carefully to signs from 
Washington regarding MCA so that a full team is in place to 
greet the MCC delegation in early June. 
 
9. (U) Ambassador Pascual has cleared on this message. 
ORDWAY