KOCHARIAN DISCUSSES REFORMS, ARMENIA'S ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001238

SIPDIS

EUR/CACEN FOR EUGENIA SIDERAS, EUR/ACE FOR MARIA LONGI,
DEPARTMENT PLEASE PASS USAID, DEPARTMENT PLEASE PASS
MILLENNIUM CHALLENGE CORPORATION

E.O. 12958: DECL: 05/27/2014
TAGS: PREL PGOV EAID
SUBJECT: KOCHARIAN DISCUSSES REFORMS, ARMENIA'S ECONOMIC
FUTURE AND MCA WITH EUR/ACE AMBASSADOR PASCUAL


Classified By: Ambassador John Ordway for reasons 1.5 (b) and (d).

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SUMMARY
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1. (SBU) EUR/ACE Ambassador Carlos Pascual, accompanied by
the Ambassador, met with President Robert Kocharian May 18
following the meetings of the U.S.-Armenia Task Force on
Economic Cooperation (USATF). The meeting focused on the
potential role for Armenia as an example of progress and
freedom in the region, ways to improve economic economic
conditions, protecting civil liberties and fighting
corruption. The discussion also included Armenia's recently
announced eligibility for funding through the Millennium
Challenge Account (MCA). Kocharian defended the GOAM's
record on rule of law and touted recent economic growth as
indicative of Armenia's ongoing progress. End Summary.

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KOCHARIAN DEFENDS GOAM PROGRESS ON COE COMMITMENTS
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2. (SBU) EUR/ACE Ambassador Carlos Pascual, accompanied by
Ambassador Ordway, met with President Robert Kocharian May 18
following the final session of the U.S.-Armenia Task Force on
Economic Cooperation (USATF). Also present at the meeting
were Minister of Finance and Economy Vardan Khachatryan,
Deputy Minister of Foreign Affairs Ruben Shugarian and Chief
Economic Advisor Vahram Nercissiantz.


3. (C) Ambassador Pascual opened the meeting with a
discussion of the link between democratic and economic
reforms and the general "neighborhood" in which the world
classifies and views Armenia. Discussion centered around the
need for the GOAM to perform along the lines of northern tier
European countries if it wanted to be considered part of
their league. Kocharian reacted to Ambassador Pascual's call
on the GOAM to accelerate reforms and stand out as a leader
among neighboring countries by enumerating a lengthy list of
GOAM initiatives keyed to Armenia's Council of Europe
obligations. He pointed to the privatization of major
industries, recent anti-monopoly legislation, private
property disclosure laws, civil service reform and efforts to
de-centralize the power structure of government bureaucracies
as proof that GOAM was "well on its way toward Europe."
Kocharian argued that democracy in Armenia was inextricably
tied to economic opportunity and the possibility of more jobs
and a better standard of living. Ambassador Pascual
responded that increased economic opportunities would come to
Armenia if the GOAM made the internal changes necessary for
an image as a fully democratic state.

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SIDES DISCUSS BANKING SECTOR, CORRUPTION
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4. (C) The meeting included a discussion of issues related to
reforms in the banking sector, highlighting it as one of the
most important important economic issues Armenia currently
faces. Both sides discussed the conclusions of the May 17-18
meetings of the U.S.-Armenia Task Force on Economic
Cooperation (USATF) including the need to increase lending as
a percentage of GDP and address impediments to lending.
Ambassador Pascual highlighted the fact that a lack of
financial intermediation locally would preclude sustainable
growth and diversification in the Armenian economy. He
underlined the need for legislation on collateral rights and
said that the USG and GOAM would cooperate on these issues
following the completion of the USAID-sponsored financial
sector study being coordinated with the World Bank and
International Monetary Fund.


5. (C) In response to Kocharian's outline of the GOAM's
recently adopted anti-corruption strategy, Ambassadors Ordway
and Pascual suggested that the GOAM first take concrete
actions that would resonate among the Armenian population as
a whole and lend credibility to the the stategy and signal
real commitment from the government. The sides discussed
possibilities for such initiatives in areas that impact the
lives of everday citizens, including law enforcement.
Ambassador Pascual pressed for action in Armenia's courts and
said that corrupt individuals needed to fear a risk of
imprisonment for corrupt behavior. Kocharian expressed
concern regarding this last point, responding that he would
rather find ways to "eliminate the roadblocks that cause
corruption." His comments suggested that he would prefer to
address the issue systematically rather than crack down on
corrupt individuals in positions of authority or economic
influence.

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KOCHARIAN ON MCA: "WE'RE READY TO GO"
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6. (C) Kocharian reacted enthusiastically to news of the
visit to Armenia of MCC CEO Applegarth and his delegation
scheduled for early June. He said that the GOAM was "ready
to go" and was already making preparations for an MCA compact
submission, including the designation of a local board of
directors (likely headed by the Prime Minister) and
sponsoring preliminary discussions among appropriate
ministries regarding areas of greatest need. Kocharian said
he was committed to the need for broad consultation with
civil society during the process of developing an MCA compact
submission. When informed that regression in important areas
involving democracy and governance could potentially reverse
a country's MCA eligibility, Kocharian stated emphatically
that the GOAM had actually made progress in terms of
individual freedoms. While generally skeptical of the
organizations or methods used to obtain MCA indicators,
Kocharian said he was confident that Armenia's scores would
only improve in these areas.

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IMPLEMENTING USATF CONCLUSIONS VAT REFUNDS
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7. (C) During a discussion of conclusions from the recent
USATF meetings, Kocharian recognized that some U.S. business
had complained about the need for quicker, more complete VAT
refunds. He said, however, that the GOAM was concerned that
tax fraud, including bogus transfers of VAT refund
eligibility among businesses, could represent a major drain
on potential state income. He thanked the USG for its offer
to work with the GOAM to address these issues.

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COMMENT
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8. (C) Kocharian's remarks indicate that he is acutely aware
of international criticism after the fallout of the mid-April
opposition rallies in Armenia. While citing MCA eligibility
as a positive evaluation of the country, he simultaneously
expressed somewhat defeatist views of his domestic and
international reputation at the moment. His opinion that,
"Either way I appear to be guilty," however, does not seem to
have hampered his pro-active approach to the process of
developing an MCA compact. He appears to be investing
political capital and listening carefully to signs from
Washington regarding MCA so that a full team is in place to
greet the MCC delegation in early June.


9. (U) Ambassador Pascual has cleared on this message.
ORDWAY