US embassy cable - 05YEREVAN1229

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001229 
 
SIPDIS 
 
DEPT FOR EUR/CACEN, EB/CIP 
 
E.O. 12958: DECL: 07/07/2015 
TAGS: BTIO, ECON, EINV, AM 
SUBJECT: COMPETITION COMES TO ARMENIA'S TELECOM SECTOR 
 
REF: 04 YEREVAN 2388 
 
Classified By: AMB. JOHN EVANS FOR REASONS 1.4 (B/D) 
 
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SUMMARY 
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1. (SBU) In the culmination of Armenia's years-long struggle 
to end Armentel's monopoly on telecommunications in Armenia, 
a second mobile telephone operator entered the market on July 1. 
Backed by Karabakh Telecom, the monopoly operator in 
Nagorno-Karabakh, VivaCell immediately undercut Armentel's 
mobile prices in Armenia, prompting Armentel to announce 
lower tariffs for current subscribers starting July 1.  While 
VivaCell's release of 100,000 SIM cards (prepaid subscription 
accounts) has disrupted Armenia's black market in Armentel's 
SIM cards, Armentel is not yet issuing new SIM cards or 
accounts.  Given the lack of transparency in the tender to 
Karabakh Telecom and Armentel's seeming complicity in the 
deal, it is unlikely that competition will be vigorous in 
Armenia's telecom sector.  Nonetheless, some competition in a 
service that many Armenians still consider a state 
bureaucracy may helpfully illustrate the benefits of open 
markets in Armenia's highly concentrated oligopolistic 
economy.  End Summary. 
 
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NEW MOBILE OPERATOR ENTERS MARKET 
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2. (C) Suffering from high prices and woefully inadequate 
service, the GOAM tried for several years to bring 
competition to Armenia's telecommunications sector.  Having 
gone through the expense of forcing a renegotiation of 
Armentel's monopoly, most people hoped for a competitive 
international tender after the Armentel settlement.  Instead, 
the government settled the Armentel dispute and awarded the 
second mobile license to Karabakh Telecom simultaneously in a 
one-bidder, late-night tender (reftel).  (Note:  The Lebanese 
Ambassador told Ambassador over lunch July 6 that the 
Lebanese operator of Karabakh-Telecom, Pierre Fatouch, paid a 
bribe of USD 15 million for winning the tender (which may 
explain the low purchase price) and further alleged that 
Prime Minister Markarian, Minister of Defense Serzh Sargsian, 
as well as President Kocharian are all in the deal as 
shareholders.  End Note.) 
 
3. (SBU) Per the settlement agreement with Armentel last 
October, Karabakh Telecom opened for business as Armenia's 
second mobile service provider from July 1.  On June 30, 
Karabakh Telecom published the price of new SIM cards 
(prepaid service plans) and the tariffs for its calls.  On 
the same day Armentel announced 30 percent reductions in its 
tariffs beginning July 1. 
 
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MARKET STILL NOT ENTIRELY COMPETITIVE 
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4. (C) Vahe Yacoubian, an Amcit advisor to the Minister of 
Justice who helped engineer the deal, told us last October 
that there would be two mobile operators, but the market 
would not be "truly competitive."  He pointed out that each 
operator must, as part of their respective licenses, use 
extra profits from its mobile business to cross-subsidize 
investment commitments in unprofitable fixed-line service in 
Armenia (Armentel) and Nagorno-Karabakh (Karabakh Telecom). 
While Yacoubian did not tell us the details of the contract 
between the two telecommunications companies, he did say that 
"Armenia is not ready for a completely market-based telecom 
sector."  (Note:  During the negotiations Armentel and 
Karabakh Telecoms had to reach agreement on many issues 
respecting interoperability and tariff-sharing, as Armentel 
controls much of Armenia's basic telecom infrastructure.  End 
Note.) 
 
5. (SBU) Armentel seems in no hurry to protect its market 
share.  As Karabakh-Telecom's VivaCell began to issue new SIM 
cards, Armentel's office wasn't selling cards to new 
subscribers, saying that they may issue new numbers in August 
2005.  Armentel's acquiescence as VivaCell prepares to 
subscribe 300,000 mobile users over the summer suggests that 
Armentel has accepted giving up some market share immediately 
to Karabakh Telecom.  Since VivaCell entered the market, 
Armentel's service has experienced chronic difficulties that 
Armentel attributes to infrastructure controlled by the 
Ministry of Transport and Communication.  Local press alleges 
that the GOAM is intentionally creating difficulties to boost 
the early competitiveness of VivaCell. 
 
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COMMENT:  ONE STEP CLOSER TO COMPETITION 
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6. (SBU) Even though the tender process was neither 
transparent nor competitive, and Armenia's two mobile phone 
operators may not compete as vigorously as we had hoped, some 
broad benefits of a second operator are already evident.  The 
quick demise of the black market for Armentel's cards (which 
always seemed to end up in the same hands) alone is a great 
boon to consumers, who until now had to spend a year on 
Armentel's waitlist or purchase black market SIM cards for 
USD 120 (more than four times their nominal cost).  More 
importantly, the effect of competition in Armenia's costly 
and inadequate telephone service could remind Armenians of 
the benefits of competition elsewhere, and may raise public 
and political support for nascent institutions like Armenia's 
Competition Commission and the Public Services Regulatory 
Commission.  These bodies are beginning to enforce 
competition law not only in the telecommunications sector, 
but in other sectors where informal monopolies or oligopolies 
control the entire market share in a particular good or 
service. 
EVANS