US embassy cable - 04YEREVAN2579

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 002579 
 
SIPDIS 
 
STATE FOR EUR/CACEN SIDEREAS, EUR/ACE LONGI 
 
E.O. 12958: DECL: 11/29/2014 
TAGS: ECON, EFIN, AM 
SUBJECT: IFI'S CONCERNED ABOUT TRANSPARENCY 
 
REF: A. YEREVAN 2505 B. YEREVAN 2510 
 
Classified By: A.F. GODFREY FOR REASONS 1.4 (B) AND (D) 
 
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SUMMARY 
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1.  (C) Lack of transparency in recent GOAM financial actions 
is an increasing concern for the representatives of the IMF 
and World Bank in Yerevan.  Because Armenia continues to 
record steady economic growth and will likely continue to 
meet criteria set by both the Fund and the Bank, these 
concerns will probably not have an immediate effect on their 
programs.  The World Bank raised concerns about transparency 
just prior to a November 18 board meeting, but nevertheless 
approved a Poverty Reduction Support Credit (PRSC).  The IMF 
-- in advance of its board meeting on December 1 -- wrote to 
Armenia's Prime Minister to flag its concerns about: 
 
-- The award of a second mobile contract to K-Telecom without 
an open tender process; 
-- The transfer of profits from a large copper mine to a 
defense oriented foundation; 
-- The Central Bank's failure to liquidate an insolvent 
commercial bank and opaque dealings with that bank's single 
asset, the Nairit Chemical Factory; 
-- The failure of the government to pass a draft anti-money 
laundering law without amendments easing reporting 
requirements on international money transfers; and 
-- The failure of the government to pass a law requiring the 
use of cash registers in order to tackle tax evasion. 
 
While the GOAM has moved forward with the two legislative 
requirements (perhaps prompted by the IMF's query), we share 
the concerns of the IFI's about the GOAM's opaque dealings. 
End Summary. 
 
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DODGY TELECOM TENDER... 
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2. (C) The GOAM recently ended a prolonged dispute with its 
monopoly telephone service provider Armentel in a deal that 
gave little to consumers or the Armenian government (ref A). 
While Armenia did restrict Armentel's monopoly to allow a 
second mobile service provider, it gave the second license 
away in a closed, six-hour nighttime tender to 
Karabakh-Telecom for only USD 7 million, USD 2 million of 
which went not to the government budget but to a private 
non-profit organization that sponsors infrastructure 
reconstruction in Nagorno-Karabakh.  As part of the deal the 
GOAM expanded Armentel's remaining monopoly to include Voice 
over Internet Protocol (VoIP), closing many existing firms 
and maintaining Armentel's ability to charge high rates on 
international phone calls.  While we have been told that the 
GOAM had political reasons to support Karabakh-Telecom, the 
lack of transparency in the tender process and the fact that 
the GOAM paid a potentially high price to Armentel in 
exchange for the mobile monopoly 
has raised concerns among IFI's and in the press about the 
propriety of the deal.  Several newspapers have accused the 
Minister of Justice, the deal's broker, of having a corrupt 
interest in the deal. 
 
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...DODGY PROFIT TRANSFERS 
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3.  (C) In August 2004, the GOAM issued a decree that 
transferred the earnings from the profitable state-owned 
Zangezour Copper Molybdenum plant to a foundation that had 
been created two days earlier (ref B).  Although the 
foundation's board members are unknown, it is registered at 
the address of another foundation controlled by Armenia's top 
military brass.  These assets (USD 20 million per year) could 
be used for off-budget military spending on Karabakh as well 
as for the personal use of those who control the foundation. 
 
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...DODGY BANK DEAL 
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4. (C) The Central Bank has decided to rehabilitate rather 
than liquidate ArmCommunications Bank, whose main asset, the 
dilapidated and obsolete Nairit Chemical Plant, must be worth 
more than fourteen million dollars for the bank to be 
solvent.  Central Bank board Member Vache Gabrielyan told us 
that one of Armenia's oligarch oil importers acquired 
ArmCommunications Bank from the Central Bank in order to 
strike a deal on the chemical plant.  The Central Bank has 
given the bank's new owner six months to sell Nairit or the 
Central Bank will reassert supervision over the bank.  The 
IMF's concern is that the Central Bank has not followed its 
procedures for evaluating the solvency of this bank but has 
been pressured to keep an insolvent bank alive to benefit a 
few businessmen who are the bank's depositors. 
 
COMMENT 
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5. (C) We share the concerns of the IMF and the World Bank 
about the transparency of the three deals outlined above.  We 
believe that the GOAM has also paid short shrift to its 
international obligations:  the sudden Karabakh-Telecom deal 
seems to violate Armenia's WTO telecommunications commitments 
in its General Agreement on Trade in Services (GATS) 
schedule. 
 
6.  (C) The Minister of Justice has requested a meeting with 
our USAID director to request technical assistance related to 
the telecommunications sector.  We plan to echo the concerns 
of our colleagues in the IFIs about transparency and the 
appearance of impropriety in the recent telecommunications 
deals and the apparent violation of Armenia's WTO 
obligations.  We plan to inform the Ministry that the GOAM 
will have to clean up its act before it can expect USG 
assistance in this sector. 
EVANS