US embassy cable - 04YEREVAN2470

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 002470 
 
SIPDIS 
 
DEPT FOR EUR/CACEN, EUR/ACE, EB/CIP AND EB/CBA 
DEPT PLEASE PASS USTR FOR KUHLMANN 
 
E.O. 12958: DECL: 11/12/2014 
TAGS: ECON, EINV, KPRV, PREL, AM, BEXPPLM 
SUBJECT: GOAM RESCUES N-K TELECOM OPERATOR IN BACK-ROOM 
DEAL TO END ARMENTEL MONOPOLY 
 
REF: A) YEREVAN 1456 B) YEREVAN 2388 
 
Classified By: DCM A.F. Godfrey for reasons 1.4 (b) and (d). 
 
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SUMMARY 
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1. (C) During the week of November 15 the GOAM is due to seal 
the deal it has made with Armentel, Armenia's incumbent 
monopoly telecommunications service provider.  The Government 
of Armenia will end its protracted dispute with Armentel and 
license a second mobile telephone provider to compete with 
Armentel's unsatisfactory service (ref A).  The government 
immediately named the grantee of the second license, 
Karabakh-Telecom, the "winner" of a midnight tender.  While 
the public has supported renegotiating Armentel's monopoly, 
critics have cried foul at the lack of transparency in 
granting the second license.  Representatives of the Ministry 
of Justice told us that the choice of Karabakh-Telecom was 
political -- presumably designed to protect Karabakh's 
embattled telecom company and preclude Russian control over 
yet another of Armenia's sectors.  Competition in the mobile 
market will be a good thing even if achieved improperly, but 
we expected a better deal with Armentel and a better process 
in awarding a new license.  End Summary. 
 
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DONE DEAL:  DID ARMENIA GET WHAT IT WANTED? 
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2. (SBU) Ending a years-long dispute with Armentel and its 
parent corporation, OTE (Hellenic Telecommunications) of 
Greece, Armenia tightened Armentel's monopoly rights over 
international calls to include voice-over-internet protocol 
(VoIP) in exchange for adding a competing mobile licensee. 
This deal also formalized the de facto status quo in 
international data transmissions:  Armentel keeps the 
monopoly on uploads, downloads stay unrestricted.  Despite 
the GOAM's weak legal position before the London arbitration, 
we expected a better deal.  Any deal had to include a second 
mobile operator, but the GOAM's concession over VoIP is 
surprising.  Armenia currently has 240 VoIP operators, 
providing international calls at rates more than ten times 
cheaper than Armentel's.  Presumably Armentel will use its 
monopoly in VoIP to try to end the service altogether.  The 
cost to consumers and businesses for closing Armenia's VoIP 
could outweigh the gains by adding competition in mobile 
communications. 
 
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BACKGROUND:  GOAM SPENT A LOT OF TIME, MONEY, TO GET HERE 
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3. (C) Armenia's telecommunications infrastructure has long 
been woefully inadequate:  connections are poor, villages are 
without service, and new mobile accounts are unavailable 
except on the black market.  Armentel, which had a monopoly 
on all telecommunications in Armenia until 2013, has failed 
to live up to its investment commitments and been unable to 
earn enough in lucrative sectors like mobile and 
international service to justify continued large investment 
in the unprofitable fixed line system.  Following disputes 
about Armentel's investment level, the GOAM took legal and 
regulatory actions -- some meritorious, others not -- to 
restrict the monopoly license and allow a competitor in 
cellular telephony and international data transmission. 
Armentel's parent company, OTE, pledged that it would invest 
no new money to upgrade Armenia's telecommunications 
infrastructure while its monopoly rights hung in balance.  By 
threatening to amend unilaterally Armentel's license, the 
GOAM successfully pushed Armentel to settle.  The Minister of 
Justice told the Ambassador that had they not reached an 
agreement this week, the GOAM could not afford to continue 
its legal processes in London arbitration (ref B). 
 
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CIRCLING THE WAGONS AROUND KARABAKH? 
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4. (C) The day following the settlement with Armentel, the 
GOAM granted a second mobile license to Karabakh telecom, the 
mobile operator in Nagorno-Karabakh.  Karabakh Telecom had 
always been one of the contenders for the license:  it has 
3,500 mobile subscribers in nearby Karabakh but capacity for 
100,000.  But the government's point on the deal, Vahe 
Yacoubian, an Amcit lawyer for the GOAM and advisor to the 
Minister of Justice, previously told us that the tendering 
process would be open and transparent (ref A).  It was 
neither.  The tender took place in six hours in the middle of 
the night:  the details of the deal are still secret.  In a 
November 5 meeting with the Ambassador, Yacoubian 
acknowledged the unseemliness of the deal but said the deal 
was more political than corrupt.  Recently Karabakh telecom 
has been the subject of various efforts by Azerbaijan to 
isolate the company.  In May 2004, the Government of 
Azerbaijan lobbied foreign mobile companies to not cooperate 
with Karabakh Telecom or make roaming agreements.  Azerbaijan 
has also appealed to the International Telecommunication 
Union (ITU) and the GSM association to withdraw Karabakh 
Telecom's membership.  Granting the license to Karabakh 
Telecom would weaken Azerbaijan's argument that the company 
is operating illegally.  Now rather than operating 
exclusively within the disputed Karabakh region, Karabakh 
Telecom will operate in Armenia (a far bigger market) and 
also cover Karabakh, which shares Armenia's country code. 
November 10 news reports cited the Ministers of Justice and 
Transport and Communication claiming that the decision had 
been taken because Armenia "could not leave Karabakh cut off 
from the world." 
 
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COMMENT:  AN OPPORTUNITY SQUANDERED? 
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5. (C) Having gone through the trouble and expense to force a 
renegotiation of Armentel's contract, most here hoped for 
more.  The original deal with Armentel was a bad one for 
Armenia, but it was legal and the government of Armenia 
nevertheless took financial and reputation risks to force a 
renegotiation.  To settle the dispute the GOAM has 
surrendered additional, likely valuable, services to 
Armentel's monopoly, but it has not guaranteed a strong 
competitor on the Armenian market, and further it has failed 
to follow through with an international open tender that 
would have given the population and international investors 
confidence in the deal or the business environment.  All this 
may have been a high price to pay to protect 
Karabakh-Telecom, although politically the advantages to the 
government are clear -- the one thing on which politicians 
across the spectrum agree is that Karabakh must be protected. 
 While any competition in Armenia's beleaguered 
telecommunications sector will be welcome, Armenia has failed 
to make a positive step towards the ultimate liberalization 
of the market that would best serve consumers and tackle 
Armenia's capacity problems. 
EVANS