US embassy cable - 04YEREVAN2510

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 002510 
 
SIPDIS 
 
STATE FOR EUR/CACEN, EUR/ACE 
 
E.O. 12958: DECL: 11/17/2014 
TAGS: PREL, PARM, ECON, EFIN, AM 
SUBJECT: THE GOAM'S CREATIVE ACCOUNTING: CREATING AN 
OFF-BUDGET WAR CHEST? 
 
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 summer and fall of 2004 the GOAM 
transferred two valuable state assets into the control of the 
Ministry of Defense or organizations it controls, keeping the 
revenues and their subsequent expenditure off the books.  In 
June the GOAM transferred 25 aircraft from the defunct 
Armenian Airlines to the Ministry of Defense, and an August 
decree allotted revenues from the Zangezour copper mine, 
Armenia's most profitable state asset, to the "Motherland 
Military Patriotic Foundation" which is reportedly directed 
by Armenia's top military brass.  The IMF has protested that 
revenues from the transfer of these assets do not appear on 
the state budgets and their subsequent expenditures are thus 
not subject to the review and scrutiny of the National 
Assembly.  Most analysts suspect that the government is 
keeping these transactions off-budget in order to obscure how 
much the GOAM spends defending Nagorno-Karabakh.  End 
Summary. 
 
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GOAM IS BANKING OFF-BUDGET REVENUES 
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2. (C) A published government decree from June 2004, approved 
by the Prime Minister and the President, has established a 
joint stock company with the assets of the bankrupt Armenian 
Airlines and assigned 100 percent of the shares to the 
Ministry of Defense.  The Ministry now owns Armenian 
Airlines' old assets:  25 old Aeroflot planes, mostly old 
Tupolev passenger aircraft, and it is not clear if any deal 
will be made with the airline's creditors.  The government 
used a similar decree on August 18, 2004 to distribute 
revenues from Zangezour Copper Molybdenum Plant, Armenia's 
single most profitable asset to the "Motherland Military 
Patriotic Fund."  (Note:  The Zangezour Copper Molybdenum 
Plant is one of Armenia's most valuable assets yet to 
privatized and one of the few state assets to make a profit. 
The copper mine was offered in a public tender early in 2004 
that attracted USD 132 million bids from an American firm and 
a German firm.  The Ministry of Trade has drawn out the sale 
and made the deal less likely, not least by insisting on 
selling both bidders 50 percent of the shares rather than 
awarding the tender to one bidder.  In a meeting with the 
Ambassador, the American entrepreneurs told us that they 
deposited USD 25 million in escrow to begin negotiations, but 
now must engage with the German firm to reach a shareholders' 
agreement, as they have had little contact with their future 
business partners.  The bidders, who currently are also the 
mine's only client, claim that Zangezour is making more than 
USD 20 million per year.  End Note.) 
 
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MOTHERLAND: A MINISTRY OF DEFENSE SLUSH FUND 
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3. (SBU) A press report quoted the Minister of Trade stating 
that Motherland is a public institution and that these funds 
would be used for state purposes.  The state register of 
foundations in the Ministry of Justice had little information 
about Motherland other than its August 16, 2004 date of 
registration (two days prior to the governmental decree) and 
its address, a building owned by the Ministry of Defense. 
Other usually-public information, notably the foundation's 
charter and the names of the founders, was absent.  Another 
organization, Martik, is a well-known fund controlled by the 
Ministry of Defense and is registered at the same address. 
Martik's board members include Minister of Defense Sargisyan, 
Deputy Minister Aghabekyan and various Armenian generals.  A 
representative from Martik told us that he knows nothing 
about the Motherland Military-Patriotic Foundation. 
 
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COMMENT: CORRUPTION OR SOURCE OF OFF-BUDGET FINANCING? 
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4. (C) Both these cases illustrate a systematic policy of 
making off-budget transfers to the Ministry of Defense and 
foundations that it controls.  In addition to avoiding the 
scrutiny of the National Assembly and international observers 
over military spending, such a mechanism doubtless 
facilitates opportunities for graft among high-level 
officials.  The government's assignment of Zangezour,s 
profits suggests that the sale itself, equal to one-fifth of 
the official state budget, may also be kept off-budget. 
Indeed, there has been no discussion of how the GOAM intends 
to spend the USD 132 million in cash it expects to receive 
from the deal.  The IMF has unsuccessfully asked the Minister 
of Finance to record profits from the copper mine and from 
the future sale of Armenia Airlines, old aircraft (or, from 
the operation of the aircraft) as on-budget non-tax revenues. 
 While the government of Armenia is careful to maintain a 
facade of separation from the "Government of 
Nagorno-Karabakh," analysts agree that these transactions are 
being kept off-budget in order to obscure how much Armenia 
spends on Nagorno-Karabakh's defense. 
EVANS