US embassy cable - 05YEREVAN1169

UNCLAS SECTION 01 OF 02 YEREVAN 001169 
 
SIPDIS 
 
DEPT FOR EUR/CACEN, EUR/ACE, PASS USTR FOR KULHMANN 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EAID, AM 
SUBJECT: ARMENIAN IMPORTER SPELLS OUT THE CASE AGAINST 
CUSTOMS 
 
REF: YEREVAN 52 
 
SENSITIVE BUT UNCLASSIFIED, PLEASE PROTECT ACCORDINGLY 
 
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SUMMARY 
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1. (SBU) In a rare kiss-and-tell affront to Armenia's 
powerful Customs Service, a major Armenian coffee importer 
has gone to press and publicly described corruption in the 
service, alleging that Customs is trying to push them out of 
business because they refuse to continue paying bribes to 
government officials.  Royal Armenia Coffee alleges (and 
other importers confirm) that the Armenian Customs Service 
cuts illegal deals with importers to undervalue basic goods 
in exchange for a bribe.  This practice reduces tax revenue, 
enriches Customs officials, restricts competition and 
protects the monopolies of Armenia's oligarchs.  End Summary. 
 
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THE CASE AGAINST CUSTOMS 
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2. (SBU) Like nearly all importers to Armenia, Royal Armenia 
Coffee (Royal) operated for ten years under a tacit agreement 
not to follow the law.  Regardless of the true price of the 
coffee they imported (about USD 1.24/kilo), Customs evaluated 
it at USD 1.10/kilo for purposes of VAT and duty, in exchange 
for an 11 cent/kilo bribe.  (If Royal refused to pay the 
bribe, coffee imports would be assessed at USD 1.80/kilo.) 
Royal's director, Aram Ghazaryan, told us that he was happy 
with this deal until a well connected oligarch entered the 
coffee business and was able to get customs to value his 
coffee at 82 cents/kilo, making Royal's coffee less 
competitive.  Unable to informally solve the situation, Royal 
stopped paying bribes and went to the press to challenge the 
Customs Service to follow the law.  Not only is their coffee 
now over-assessed at USD 1.80, but the Customs Service has 
now levied nearly USD 500,000 in administrative fines for 
having (admittedly) bribed the Customs officers in the past. 
 
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CUSTOMS SERVICE V. THE FREE MARKET 
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3. (SBU) The Customs Service has long been a tool of the 
oligarchs.  Although Royal is the first company to come 
forward so publicly against the Customs Service, their 
situation is familiar to all Armenian importers (reftel). 
Rather than following Armenian law and WTO procedures on 
Customs valuation, the Customs Service has used different 
valuations for different importers, often resulting in a 
laughably low tariff burden for favored importers and a 
prohibitively high tariff burden for new market entrants. 
Indeed, the things that people consume everyday (wheat, 
sugar, salt, beer, cigarettes, gasoline, and coffee) are 
highly concentrated markets in Armenia; often a single 
oligarch entirely controls one or two basic goods. 
 
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DESPITE INTERNATIONAL PRESSURE, CUSTOMS RESISTS REFORM 
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4. (SBU) Despite President Kocharian's January 2005 call to 
reform the Customs Service in order to raise revenue and 
create a level playing field (reftel), importers report no 
change in the bribe-or-die import environment.  For several 
years, the IMF has made correct customs valuation a 
conditionality in its programs, and the Customs Service 
speciously reports progress saying that now over 50 percent 
of all goods are estimated by their invoice price.  (Note: 
This means 50 percent by value, not by transaction, where the 
proportion is far smaller.  End Note.)  Deals like these 
where the "invoice price" has been negotiated beforehand 
between the customs service and the importer appear as if 
they are processed in compliance with the valuation law, 
although in reality both parties are cooking the books.  End 
Note.) 
 
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COMMENT:  CORRUPTION HAS SEVERAL VICTIMS 
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5. (SBU) Corruption in the Customs Service has several 
victims.  The most direct loser is the state budget, which 
loses tax revenue to bribes to corrupt officials at all 
levels in the Customs Service.  Far greater than the cost to 
government coffers is the cost to Armenian consumers and 
would-be businessmen.  Consumers cannot benefit from 
competitive prices:  despite the recent sharp appreciation of 
the dram, prices for imported foods have stayed the same. 
Moreover, trade in basic consumables, which has the potential 
to be an easy business to enter, is off-limits to would-be 
traders.  Reform of the Customs Service could have 
far-reaching effects on Armenia's economy, and by reducing 
consumer prices, could assuage poverty too.  But reform of 
Customs will also be the hardest to approach from the inside, 
as the vested interests in maintaining a corrupt system are 
deeper than the cost of the bribes.  Recognizing the 
difficulties of reform, USAID is collaborating with the IMF 
to make a diagnostic study of the problems in the Customs 
Service a conditionality in Armenia's new IMF program.  As 
Royal Armenia Coffee discovered this week, importers of basic 
goods do better to settle their market share with the Customs 
Service rather than rely on free-market competition and the 
rule of law. 
EVANS