UNCLAS SECTION 01 OF 02 YEREVAN 001899

SIPDIS

SENSITIVE

STATE FOR EB/CBA, EUR/CACEN, EUR/ACE

E.O. 12958: N/A
TAGS: ECON EAID EIND ETRD PGOV KCOR AM
SUBJECT: ARMENIA'S OLIGARCHS: STAYING RICH ON FOOD, GAS, AND
CIGARETTES

Refs: A) Yerevan 1456 B) 03 Yerevan 2975 C) Yerevan 777


1. (U) Sensitive but unclassified. Please protect
accordingly.

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SUMMARY
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2. (SBU) Trade in the most basic goods in the Armenian
economy is controlled by a small number of oligarchs with
strong ties to government. While it is considered common
knowledge that oligarchs use political power and their
dominant market position to keep competitors at bay, there
is little political will to investigate or regulate these
businesses under Armenia's competition law. The
government's fledgling State Commission for Protection of
Economic Competition (the Commission) is not yet strong
enough to successfully tackle the goliaths who control basic
commodities. The Commission has taken on small cases and
the unpopular Armentel telephone monopoly (ref A), Armenian
consumers and would-be competitors are the losers as basic
goods remain subject to the control of a few. Until the
GOAM is willing to address the corruption throughout
government which allows the oligarchs to control their
markets, they will continue to gouge Armenia's most
vulnerable consumers, the poor. End Summary.

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OLIGOPOLIES IN FOOD, GAS AND CIGARETTES
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3. (SBU) While the empires controlled by Armenia's oligarchs
are insignificant when compared to those in Russia, they
have managed to amass impressive holdings by controlling
access to basic goods, like wheat, sugar, salt butter,
gasoline, beer and cigarettes (ref B). Key to their ability
to control much of the supply of these staple goods are
close relationships with powerful government actors. A
single importer, Samvel Aleksanian (aka Lfik Samo) controls
90 percent of sugar imports, nearly all butter imports and a
large sector of the grain market. Areg Ghukasian, a
National Assembly member and brother of Nagorno-Karabakh's

"president," controls all the salt sold in Armenia. Wheat,
which is the most important commodity in the consumer price
basket, is controlled by three major players: Gagik
Tsaroukian (aka Dodi Gago, a National Assembly member and

SIPDIS
Armenia's best-known oligarch), Samvel Aleksanian, and
Mikhail Bagdasarov, a friend of Serzh Sargsian, the powerful
Minister of Defense. Close friends of Sargsian, including
Bagdasarov, control nearly all the competing interests in
the gasoline market.

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COMPETITION COMMISSION STILL LEARNING TO WALK
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4. (SBU) The Commission was created in January 2001 to
address the undeniable de facto monopolies of the oligarchs,
but clearly lacks the clout or political support to take on
the major "crony capitalists." Pavel Ghaltakhchyan, Deputy
Chair of the Commission is quick to point out that his is a
young agency (the age of its members notwithstanding).
Charged to enforce Armenia's competition law, the Commission
members lack authority to request information from other
government agencies and to inspect business records.
Commission members also point to their lack of practical
experience in competition policy and enforcement. Even
though its decisions are subject to judicial review, the
Commission has no lawyer. While the activity of the
Commission has nonetheless increased, it has enforced no
decision involving wheat, gas, sugar, or poultry, despite
widely publicized recent prices increases and pressure from
critics.

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OTHER GOVERNMENT AGENCIES PROTECT OLIGOPOLIES
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5. (SBU) The ultimate capacity of the Commission to deliver
a competitive market in the goods dominated by oligarch
traders is severely limited by the Commission's weakness vis-
a-vis other government agencies. Among the government
entities instrumental in preserving the oligopolies is the
Customs Committee. For dominant importers, it appears that
Customs lets imports pass under the table: official imports
of gasoline have inexplicably declined over the last three
years despite double digit growth in GDP and increasing
traffic. New market entrants can expect much worse
treatment. Commissioner Hrayr Aramyan told us that if a new
company sought to import sugar, for example, "Customs might
not let it in, or might hold it in storage for a long time."
(Note: The Embassy knows of two cases where Customs
wrongly held a market entrant's shipment of wheat until it
rotted. End Note.) Aramyan pointed out that in such a case
the shipper would complain to Customs, rather than to the
Commission, as the dominant importer cannot be liable for an
illegal act of Customs except in the unlikely event the
Commission could prove that there was an arrangement between
the two.

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COMMENT: CORRUPTION MUST END FIRST
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6. (SBU) The creation of the Commission was only a first
step in solving Armenia's competition problems. In most
cases the oligopolies' competitive advantage lies in a cozy
relationship with some other government agency, and the
government overall lacks the political will to challenge the
oligarchs' control over markets. The uncompetitive
environment in Armenia's basic goods is as much a question
of corruption in government -- especially Customs -- as it
is of abuse of dominant position or anti-competitive
agreements between private companies. We believe that
reform of the Customs administration and a change in
Armenian cultural tolerance to a certain level of
corruption, rather than a European-style competition law,
that will eventually reduce barriers to entry in Armenia's
markets.
EVANS