US embassy cable - 04YEREVAN1456

UNCLAS SECTION 01 OF 04 YEREVAN 001456 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/CACEN FOR SIDEREAS, EUR/ACE FOR LONGI, EB/CIP 
FOR FINTON, GROSS, AND EB/CBA 
STATE PASS TO USTR FOR KATRIN KUHLMANN 
USDOC FOR DANIKA STARKS 
 
E.O. 12958: N/A 
TAGS: ECON, ECPS, KPRV, EINV, EFIN, BEXP, AM 
SUBJECT: ARMENIA SEEKS TO END ARMENTEL MONOPOLY 
 
 
SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY 
 
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SUMMARY 
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1. (SBU) In eleventh-hour negotiations to reach an agreement 
in the Armentel dispute, Minister of Justice David 
Harutiunian agreed to put off the June 30 deadline for 
reaching a settlement until September 28, 2004.  Despite the 
extension, the government's threat still stands: If the 
sides do not reach agreement by September 28, the Ministry 
of Transport and Communication (MOTC) intends to 
unilaterally replace Armentel's monopoly license with a more 
restricted concession allowing competing service suppliers 
to provide mobile and international data transmission 
services.  Vahe Yacoubian, Amcit special advisor to the 
Minister, told us that the government had made progress in 
the negotiations, and was confident that Armentel will 
acquiesce to its demand for the introduction of a second GSM 
service provider.  The government believes that competition 
will end the poor service and high cost in 
telecommunications that burden consumers and the Armenian 
economy.  END SUMMARY 
 
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GOVERNMENT SEEKS SETTLEMENT ENDING MONOPOLY 
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2.  (SBU) Whether by mutual agreement or by unilateral 
action, the Armenian government intends to end Armentel's 
monopoly in the provision of GSM mobile services and 
international data transmission.  According to Gevorg 
Gvorgyan, Head of Telecommunications Department at the MOTC, 
the Government is seeking a settlement with Armentel that 
permits other service suppliers to provide public mobile 
services (including cellular telephone service, paging 
personal communication services, specialized mobile radio, 
GSM and mobile satellite services) as well as local and 
international data transmission including international 
upload and download services.  Yacoubian believes that 
settlement is possible because Armentel management has 
agreed in principle to a second license for GSM services, 
with Armentel and the Government splitting the proceeds from 
the tender.  In an effort to "facilitate the negotiations", 
Yacoubian moved the deadline for agreement to September 28, 
2004.  If Armentel and the government have not reached 
agreement by then, Yacoubian said that the government will 
immediately amend Armentel's license to provide for 
competition in GSM and data transmission services and will 
promptly offer licenses to competing service suppliers. 
 
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ARBITRATION TO CONTINUE CONCURRENTLY WITH NEGOTIATION 
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3. (SBU) While Yacoubian said that a settlement is 
preferable to ongoing arbitration (probably followed by 
litigation in Armenian courts), both sides are nevertheless 
pursuing their case scheduled for September 6 before a 
London arbitration panel.  Yacoubian expects that the sides 
will complete arbitration, but will ask the arbitrator to 
withhold the decision if the sides reach an agreement. 
Comment:  The extension of the settlement deadline to a date 
after the arbitration increases the likelihood of a workable 
settlement and, in the other event, provides the basis for 
more informed unilateral action by the government. 
Yacoubian commented that the government intends to seek 
Armentel's comments on the amended license and the draft 
Telecommunications Law, which had been prepared without 
input from Armentel due to the dispute.  Armentel's 
acceptance of the outcome is critical to a successful 
market, as ultimately Armentel will have the dominant market 
position and will maintain control of the non-liberalized 
communications infrastructure.  Any additional mobile 
license would require Armentel's cooperation for interchange 
with fixed line and mobile subscribers.  The arbitration 
process will also likely give the government an idea of the 
scope of damages they may face for unilaterally depriving 
Armentel of its monopoly license.  Yacoubian had earlier 
told the Ambassador that the government intends to offer 
Armentel the proceeds of the sale of a new mobile service 
license to Armentel as compensation.  He again confirmed the 
GOAM's intention to do this, and added that part of the 
OTE's opening negotiating approach was to ask "how much" of 
the license sale's proceeds the GOAM was prepared to provide 
in compensation.  End Comment 
 
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GOAM NOT PREPARED TO ISSUE ADDITIONAL LICENSES 
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4.  (SBU) Even were the government to amend Armentel's 
monopoly license on July 1, the regulatory framework is not 
yet ready for a competitive telecommunications market.  To 
suspend Armentel's exclusive license is not the same thing 
as issuing new licenses to competing service providers. 
Asked whether changing the license is legally sufficient to 
permit a tender offer or the solicitation of licenses by 
would-be Internet service providers, Gvorgyan replied, "In 
theory, yes".  Armenia's General Agreement on Trade in 
Services (GATS) schedule contains a specific commitment to 
provide "unlimited market access for any and all basic and 
value-added telecom services subsector initially covered by 
the monopoly immediately upon suspension or termination of 
monopoly rights...."  In fact, many other conditions have to 
be met.  Armentel is principally regulated not by law but by 
its license.  To issue new licenses in a liberalized market 
the MOTC would have to establish a regulatory framework 
allowing for multiple service providers, as well as some 
competition safeguards to prevent Armentel from abusing its 
dominant position when competing in liberalized sectors. 
Gvorgyan claims that the MOTC is not ready to regulate a 
liberalized market in telecommunications and data 
transmission until licensing procedures are established and 
the draft Law on Electronic Communication passes. 
 
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GOAM NEGOTIATING WITH WOULD-BE MOBILE SERVICE PROVIDERS 
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5.  (SBU) Yacoubian conceded that it was still unclear how a 
new mobile telephony license would be issued.  Yacoubian 
said that ideally, there would be a public tender, but if 
there was not enough interest he said that the government 
would "have a beauty contest" and pick the best candidate. 
The MOTC's Director of International Relations, Gagik 
Grigoryan said that "many" service providers had already 
approached the Ministry about providing service, and that 
the Ministry was engaging in "preliminary negotiations". 
When asked directly he confirmed information from another 
source that a Russian telecommunications company Zont 
Holding has been negotiating with the Ministry about bidding 
on a mobile telephony license.  When asked if an interested 
company should wait for a public tender offer or if they 
could approach the Ministry directly, Gvorgyan suggested 
that they approach him at the Ministry any time.  Asked 
whether a tender would be only for GSM or would allow for 
open standards, Gvorgyan replied that the government had not 
yet made a decision but that he suspected they would "follow 
Western Europe." 
 
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REGULATORY AUTHORITY TO MOVE FROM MINISTRY TO COMMISSION 
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6.  (SBU) The draft Law on Telecommunication will deprive 
the MOTC of the authority to regulate in the 
telecommunications sector, and will endow the Public 
Services Regulatory Commission for (PSRC) with that power. 
(Note: the law has passed its first reading, and will likely 
pass in September.  End Note.)  Gvorgyan added that at that 
point the Ministry will cease to issue licenses and will 
become strictly a policy-making body.  The PSRC, which 
currently regulates water and electricity distribution, will 
undertake to set the legal and regulatory framework for 
telecommunications licensing and will implement competition 
and universal service safeguards.  (Note: USAID's Commercial 
Law and Economic Reform Program is currently giving 
technical assistance to the PSRC.  End Note.) 
 
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CURRENT TELECOMMUNICATION SYSTEM STYMIES GROWTH 
--------------------------------------------- -- 
 
7. (SBU) Armenian businesses (and the general public) 
complain that the high cost and poor service of 
telecommunications service stymie growth in Armenia, 
especially in the emerging IT sector.  Armenia's IT 
comprises more than 100 firms employing 3,500 people and 
generating US 50 million in annual revenue.  Because nearly 
all these firms are cost centers for foreign IT development 
companies, reliable and inexpensive international 
communications are essential to the competitiveness of the 
industry.  While large companies have been able to establish 
their own satellite link with their home offices, industry 
managers consistently cite the dependence on Armentel as the 
greatest impediment to growth in the industry as a whole. 
 
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BACKGROUND ON ARMENTEL DISPUTE 
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8. (U) In March 1998, Greek telecommunications company OTE 
invested USD 142.5 million for a 90 percent equity stake in 
Armentel, giving it the exclusive right to provide all 
telecommunications services in Armenia, including exclusive 
public fixed switched technology, mobile telephony, 
broadband, Internet and directory services until 2013.  In 
return, OTE agreed to support Armentel in developing and 
expanding the telecommunications infrastructure in Armenia, 
including digitizing the public switched telephone network 
and providing for mobile GSM coverage throughout the 
territory of Armenia. 
 
9. (U) In February 2000, the Republic of Armenia filed a 
petition for arbitration with the International Court of 
Arbitration of the International Chamber of Commerce 
alleging the non-fulfillment of OTE's investment obligations 
as prescribed in Armentel's share purchase agreement.  OTE 
had an obligation to invest at least USD 100 million before 
March 2000.  The Government of Armenia eventually walked 
away from this initial claim and the parties reached an 
agreement that OTE would invest a further USD 65 million. 
OTE claims that it has invested USD 200 million in Armentel 
up to March 2003.  The Government of Armenia claims that 
this number is grossly inflated and refuses to recognize 
much of the claimed investment. 
 
10. (U) In May 2003 the Ministry of Transport and 
Communication again initiated a claim that investment that 
OTE and Armentel had failed to meet their investment 
commitments--specifically not achieving the prescribed 
teledensity requirements, the investment program, Internet 
and data transmission upgrades, and for not meeting the 
mobile telephony coverage commitments on time.  OTE 
counterclaimed, and Armentel commenced separate ICC 
arbitration proceedings against the GOAM, arguing that OTE 
and Armentel have suffered losses because the GOAM prevented 
Armentel from exercising its exclusive rights and from 
charging call-rates as provided for in the license.  Both 
cases are currently pending before the Arbitration panel in 
London. 
 
11. (U) Since 2002, Armentel has been financing its 
investment plan exclusively from operating revenues, without 
support from OTE.  Armentel's operating revenues for the 
first quarter of 2004 amounted to Euro 17.6 million, while 
net income for the quarter was Euro 2.4 million, while the 
number of mobile customers is up 58.7 percent to 131,237. 
Armentel mobile service is vastly oversubscribed.  New SIM 
cards are not available; black market SIM cards sell for up 
to USD 300.  The service for those who do have SIM cards is 
poor and unreliable.  OTE's quarterly report states that OTE 
will not fund any further capital requirements in Armentel 
and is trying to exit the Armenian market. 
 
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CONCLUSION 
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12. (SBU) The current state of the telecommunications system 
in Armenia is unsatisfactory.  Poor service and high cost 
stymie growth and burden consumers.  For three years 
Armenia's monopoly telecommunications provider and the 
government have been locked in a stalemate where the service 
supplier refuses to invest more in infrastructure because it 
intends to exit the market and the government threatens to 
deprive it of its monopoly.  Now the government looks set to 
liberalize important telecommunications subsectors, 
specifically public mobile communications and international 
data transmission. 
 
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COMMENT 
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13. (SBU) While any competition will likely improve service 
and reduce prices to consumers, it is incumbent on Armenia 
to liberalize the sector in a way that will generate true 
competition and will comply with Armenia's WTO obligations. 
It is not clear that Armenia is off to a good start. 
Premature negotiating with would-be service providers 
suggests that the GOAM may not intend to have a transparent 
and non-discriminatory tender for new service supplier 
licenses, but rather cut a back-room deal before an official 
tender is announced.  Yacoubian, however, made clear that he 
understands the damage a non-transparent, self-serving 
process would do.  It is also not clear when the government 
will transfer regulatory authority to the PSRC.  Gvorgyan 
claims that the Ministry is keen to transfer its regulatory 
power, and that it will be complete in September.  Our USAID 
contractor claims that the Ministry has tacitly fought the 
transfer as well as the Armentel license change because 
certain officials have a cozy and profitable relationship 
with Armentel, although we cannot independently confirm this 
allegation.  Sources close to the Commission suggest that 
the PSRC is in any case ill-equipped to provide transparent 
and non-discriminatory regulation of the liberalized market 
while preventing abuse of position by Armentel and 
maintaining universal service guarantees. 
 
ORDWAY