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Identifier
Created
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04YEREVAN1456
2004-06-29 11:47:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Yerevan
Cable title:  

ARMENIA SEEKS TO END ARMENTEL MONOPOLY

Tags:   ECON  ECPS  KPRV  EINV  EFIN  BEXP  AM 
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						UNCLAS SECTION 01 OF 04 YEREVAN 001456 

SIPDIS

SENSITIVE

STATE FOR EUR/CACEN FOR SIDEREAS, EUR/ACE FOR LONGI, EB/CIP
FOR FINTON, GROSS, AND EB/CBA
STATE PASS TO USTR FOR KATRIN KUHLMANN
USDOC FOR DANIKA STARKS

E.O. 12958: N/A
TAGS: ECON ECPS KPRV EINV EFIN BEXP AM
SUBJECT: ARMENIA SEEKS TO END ARMENTEL MONOPOLY


SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY

-------
SUMMARY
-------

UNCLAS SECTION 01 OF 04 YEREVAN 001456

SIPDIS

SENSITIVE

STATE FOR EUR/CACEN FOR SIDEREAS, EUR/ACE FOR LONGI, EB/CIP
FOR FINTON, GROSS, AND EB/CBA
STATE PASS TO USTR FOR KATRIN KUHLMANN
USDOC FOR DANIKA STARKS

E.O. 12958: N/A
TAGS: ECON ECPS KPRV EINV EFIN BEXP AM
SUBJECT: ARMENIA SEEKS TO END ARMENTEL MONOPOLY


SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY

--------------
SUMMARY
--------------


1. (SBU) In eleventh-hour negotiations to reach an agreement
in the Armentel dispute, Minister of Justice David
Harutiunian agreed to put off the June 30 deadline for
reaching a settlement until September 28, 2004. Despite the
extension, the government's threat still stands: If the
sides do not reach agreement by September 28, the Ministry
of Transport and Communication (MOTC) intends to
unilaterally replace Armentel's monopoly license with a more
restricted concession allowing competing service suppliers
to provide mobile and international data transmission
services. Vahe Yacoubian, Amcit special advisor to the
Minister, told us that the government had made progress in
the negotiations, and was confident that Armentel will
acquiesce to its demand for the introduction of a second GSM
service provider. The government believes that competition
will end the poor service and high cost in
telecommunications that burden consumers and the Armenian
economy. END SUMMARY

--------------
GOVERNMENT SEEKS SETTLEMENT ENDING MONOPOLY
--------------


2. (SBU) Whether by mutual agreement or by unilateral
action, the Armenian government intends to end Armentel's
monopoly in the provision of GSM mobile services and
international data transmission. According to Gevorg
Gvorgyan, Head of Telecommunications Department at the MOTC,
the Government is seeking a settlement with Armentel that
permits other service suppliers to provide public mobile
services (including cellular telephone service, paging
personal communication services, specialized mobile radio,
GSM and mobile satellite services) as well as local and
international data transmission including international
upload and download services. Yacoubian believes that

settlement is possible because Armentel management has
agreed in principle to a second license for GSM services,
with Armentel and the Government splitting the proceeds from
the tender. In an effort to "facilitate the negotiations",
Yacoubian moved the deadline for agreement to September 28,

2004. If Armentel and the government have not reached
agreement by then, Yacoubian said that the government will
immediately amend Armentel's license to provide for
competition in GSM and data transmission services and will
promptly offer licenses to competing service suppliers.

-------------- --------------
ARBITRATION TO CONTINUE CONCURRENTLY WITH NEGOTIATION
-------------- --------------


3. (SBU) While Yacoubian said that a settlement is
preferable to ongoing arbitration (probably followed by
litigation in Armenian courts), both sides are nevertheless
pursuing their case scheduled for September 6 before a
London arbitration panel. Yacoubian expects that the sides
will complete arbitration, but will ask the arbitrator to
withhold the decision if the sides reach an agreement.
Comment: The extension of the settlement deadline to a date
after the arbitration increases the likelihood of a workable
settlement and, in the other event, provides the basis for
more informed unilateral action by the government.
Yacoubian commented that the government intends to seek
Armentel's comments on the amended license and the draft
Telecommunications Law, which had been prepared without
input from Armentel due to the dispute. Armentel's
acceptance of the outcome is critical to a successful
market, as ultimately Armentel will have the dominant market
position and will maintain control of the non-liberalized
communications infrastructure. Any additional mobile
license would require Armentel's cooperation for interchange
with fixed line and mobile subscribers. The arbitration
process will also likely give the government an idea of the
scope of damages they may face for unilaterally depriving
Armentel of its monopoly license. Yacoubian had earlier
told the Ambassador that the government intends to offer
Armentel the proceeds of the sale of a new mobile service
license to Armentel as compensation. He again confirmed the
GOAM's intention to do this, and added that part of the
OTE's opening negotiating approach was to ask "how much" of
the license sale's proceeds the GOAM was prepared to provide
in compensation. End Comment

-------------- -
GOAM NOT PREPARED TO ISSUE ADDITIONAL LICENSES
-------------- -


4. (SBU) Even were the government to amend Armentel's
monopoly license on July 1, the regulatory framework is not
yet ready for a competitive telecommunications market. To
suspend Armentel's exclusive license is not the same thing
as issuing new licenses to competing service providers.
Asked whether changing the license is legally sufficient to
permit a tender offer or the solicitation of licenses by
would-be Internet service providers, Gvorgyan replied, "In
theory, yes". Armenia's General Agreement on Trade in
Services (GATS) schedule contains a specific commitment to
provide "unlimited market access for any and all basic and
value-added telecom services subsector initially covered by
the monopoly immediately upon suspension or termination of
monopoly rights...." In fact, many other conditions have to
be met. Armentel is principally regulated not by law but by
its license. To issue new licenses in a liberalized market
the MOTC would have to establish a regulatory framework
allowing for multiple service providers, as well as some
competition safeguards to prevent Armentel from abusing its
dominant position when competing in liberalized sectors.
Gvorgyan claims that the MOTC is not ready to regulate a
liberalized market in telecommunications and data
transmission until licensing procedures are established and
the draft Law on Electronic Communication passes.

-------------- --------------
GOAM NEGOTIATING WITH WOULD-BE MOBILE SERVICE PROVIDERS
-------------- --------------


5. (SBU) Yacoubian conceded that it was still unclear how a
new mobile telephony license would be issued. Yacoubian
said that ideally, there would be a public tender, but if
there was not enough interest he said that the government
would "have a beauty contest" and pick the best candidate.
The MOTC's Director of International Relations, Gagik
Grigoryan said that "many" service providers had already
approached the Ministry about providing service, and that
the Ministry was engaging in "preliminary negotiations".
When asked directly he confirmed information from another
source that a Russian telecommunications company Zont
Holding has been negotiating with the Ministry about bidding
on a mobile telephony license. When asked if an interested
company should wait for a public tender offer or if they
could approach the Ministry directly, Gvorgyan suggested
that they approach him at the Ministry any time. Asked
whether a tender would be only for GSM or would allow for
open standards, Gvorgyan replied that the government had not
yet made a decision but that he suspected they would "follow
Western Europe."

-------------- --------------
REGULATORY AUTHORITY TO MOVE FROM MINISTRY TO COMMISSION
-------------- --------------


6. (SBU) The draft Law on Telecommunication will deprive
the MOTC of the authority to regulate in the
telecommunications sector, and will endow the Public
Services Regulatory Commission for (PSRC) with that power.
(Note: the law has passed its first reading, and will likely
pass in September. End Note.) Gvorgyan added that at that
point the Ministry will cease to issue licenses and will
become strictly a policy-making body. The PSRC, which
currently regulates water and electricity distribution, will
undertake to set the legal and regulatory framework for
telecommunications licensing and will implement competition
and universal service safeguards. (Note: USAID's Commercial
Law and Economic Reform Program is currently giving
technical assistance to the PSRC. End Note.)

-------------- --
CURRENT TELECOMMUNICATION SYSTEM STYMIES GROWTH
-------------- --


7. (SBU) Armenian businesses (and the general public)
complain that the high cost and poor service of
telecommunications service stymie growth in Armenia,
especially in the emerging IT sector. Armenia's IT
comprises more than 100 firms employing 3,500 people and
generating US 50 million in annual revenue. Because nearly
all these firms are cost centers for foreign IT development
companies, reliable and inexpensive international
communications are essential to the competitiveness of the
industry. While large companies have been able to establish
their own satellite link with their home offices, industry
managers consistently cite the dependence on Armentel as the
greatest impediment to growth in the industry as a whole.

--------------
BACKGROUND ON ARMENTEL DISPUTE
--------------


8. (U) In March 1998, Greek telecommunications company OTE
invested USD 142.5 million for a 90 percent equity stake in
Armentel, giving it the exclusive right to provide all
telecommunications services in Armenia, including exclusive
public fixed switched technology, mobile telephony,
broadband, Internet and directory services until 2013. In
return, OTE agreed to support Armentel in developing and
expanding the telecommunications infrastructure in Armenia,
including digitizing the public switched telephone network
and providing for mobile GSM coverage throughout the
territory of Armenia.


9. (U) In February 2000, the Republic of Armenia filed a
petition for arbitration with the International Court of
Arbitration of the International Chamber of Commerce
alleging the non-fulfillment of OTE's investment obligations
as prescribed in Armentel's share purchase agreement. OTE
had an obligation to invest at least USD 100 million before
March 2000. The Government of Armenia eventually walked
away from this initial claim and the parties reached an
agreement that OTE would invest a further USD 65 million.
OTE claims that it has invested USD 200 million in Armentel
up to March 2003. The Government of Armenia claims that
this number is grossly inflated and refuses to recognize
much of the claimed investment.


10. (U) In May 2003 the Ministry of Transport and
Communication again initiated a claim that investment that
OTE and Armentel had failed to meet their investment
commitments--specifically not achieving the prescribed
teledensity requirements, the investment program, Internet
and data transmission upgrades, and for not meeting the
mobile telephony coverage commitments on time. OTE
counterclaimed, and Armentel commenced separate ICC
arbitration proceedings against the GOAM, arguing that OTE
and Armentel have suffered losses because the GOAM prevented
Armentel from exercising its exclusive rights and from
charging call-rates as provided for in the license. Both
cases are currently pending before the Arbitration panel in
London.


11. (U) Since 2002, Armentel has been financing its
investment plan exclusively from operating revenues, without
support from OTE. Armentel's operating revenues for the
first quarter of 2004 amounted to Euro 17.6 million, while
net income for the quarter was Euro 2.4 million, while the
number of mobile customers is up 58.7 percent to 131,237.
Armentel mobile service is vastly oversubscribed. New SIM
cards are not available; black market SIM cards sell for up
to USD 300. The service for those who do have SIM cards is
poor and unreliable. OTE's quarterly report states that OTE
will not fund any further capital requirements in Armentel
and is trying to exit the Armenian market.

--------------
CONCLUSION
--------------


12. (SBU) The current state of the telecommunications system
in Armenia is unsatisfactory. Poor service and high cost
stymie growth and burden consumers. For three years
Armenia's monopoly telecommunications provider and the
government have been locked in a stalemate where the service
supplier refuses to invest more in infrastructure because it
intends to exit the market and the government threatens to
deprive it of its monopoly. Now the government looks set to
liberalize important telecommunications subsectors,
specifically public mobile communications and international
data transmission.

--------------
COMMENT
--------------


13. (SBU) While any competition will likely improve service
and reduce prices to consumers, it is incumbent on Armenia
to liberalize the sector in a way that will generate true
competition and will comply with Armenia's WTO obligations.
It is not clear that Armenia is off to a good start.
Premature negotiating with would-be service providers
suggests that the GOAM may not intend to have a transparent
and non-discriminatory tender for new service supplier
licenses, but rather cut a back-room deal before an official
tender is announced. Yacoubian, however, made clear that he
understands the damage a non-transparent, self-serving
process would do. It is also not clear when the government
will transfer regulatory authority to the PSRC. Gvorgyan
claims that the Ministry is keen to transfer its regulatory
power, and that it will be complete in September. Our USAID
contractor claims that the Ministry has tacitly fought the
transfer as well as the Armentel license change because
certain officials have a cozy and profitable relationship
with Armentel, although we cannot independently confirm this
allegation. Sources close to the Commission suggest that
the PSRC is in any case ill-equipped to provide transparent
and non-discriminatory regulation of the liberalized market
while preventing abuse of position by Armentel and
maintaining universal service guarantees.

ORDWAY