US embassy cable - 04YEREVAN2588

C O N F I D E N T I A L YEREVAN 002588 
 
SIPDIS 
 
DEPT FOR EUR/CACEN SIDEREAS, EB/IFD/OMA GALLAGHER, TREASURY 
FOR OASIA/MDM FRANKO 
 
E.O. 12958: DECL: 12/03/2014 
TAGS: EFIN, EAID, AM 
SUBJECT: ARMENIA, TRANSPARENCY OF BUDGETS/MILITARY SPENDING 
 
REF: A. STATE 239929 B. YEREVAN 2510 
 
Classified By: A.F. Godfrey for reasons 104 (b) and (d) 
 
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SUMMARY 
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1.  (U) Following is Yerevan's response to ref A request for 
information. 
 
Section A:  Overview of Military Expenditure Audits 
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2.  (U) The primary responsibility for auditing the GOAM's 
military spending lies with the Ministry of Defense's 
internal auditing mechanism, the Department of Financial 
Inspection.  The Defense Ministry's Department of Financial 
Inspection conducts internal audits and reports to the 
Minister of Defense.  The framework for the internal auditors 
is decided annually upon receipt of the Ministry's budget 
allotment. 
 
3.  (U) The Ministry of Finance and Economy is also charged 
to audit military spending to the level of "the most detailed 
version of the government budget."  The Ministry of Finance 
and Economy may review budget expenditures for military 
spending before the funds are allocated and again at the time 
of disbursement.  Upon request of the Prime Minister, the 
Ministry of Finance and Economy may carry out a special 
inspection to ensure proper use of the budget funds for 
military expenditures, but the Prime Minister has never 
exercised this option. 
 
4.  (U) The National Assembly has a Supervisory Committee 
that is charged with auditing any part of the government 
budget upon request of a Deputy of Parliament, although this 
committee has never reviewed defense expenditures. 
 
5.  (C) Comment:  While Armenia claims it does not provide 
for the defense of the self-proclaimed "Republic of 
Nagorno-Karabakh," in fact it is common knowledge that it 
does.  Funds for this purpose are not accounted for in public 
documents and are therefore not subject to independent 
oversight.  End Comment. 
 
Section B: The Military Budget 
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6.  (U) The state budget has separate lines for the Ministry 
of Defense and the Ministry of the Interior (security 
enforcement). 
 
7.  (C) Several mechanisms exist for significant off-budget 
spending for defense purposes, including the transfer of 
state revenues to foundations and the direct sale of state 
assets (ref. B).  The Ministry of Defense reportedly uses 
these assets to provide for the defense of Nagorno-Karabakh 
(see above).  Because there is no effective independent 
oversight of these expenditures, it is widely suspected that 
senior Ministry of Defense officials take advantage of these 
off-budget funds for personal use. 
 
Section C: Spending Priorities 
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8.  (C) In the official state budget, national defense, 
national security and law enforcement spending in 2004 was 
74.7 bln dram (USD 150 million), or 23.6 percent of the 
budget.  Spending on the social sector, (health care 
education and culture) was 111.7 billion AMD (USD 220 
million) or 35.5 percent of the budget.  There was debate in 
Parliament this year after the Minister of Defense objected 
that defense spending was less than spending on education for 
the first time.  The Ministry of Defense also typically 
benefits from supplemental spending bills throughout the year 
as well as off-budget expenditures. 
EVANS