GOAM RESCUES N-K TELECOM OPERATOR IN BACK-ROOM DEAL TO END ARMENTEL MONOPOLY

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 002470

SIPDIS

DEPT FOR EUR/CACEN, EUR/ACE, EB/CIP AND EB/CBA
DEPT PLEASE PASS USTR FOR KUHLMANN

E.O. 12958: DECL: 11/12/2014
TAGS: ECON EINV KPRV PREL AM BEXPPLM
SUBJECT: GOAM RESCUES N-K TELECOM OPERATOR IN BACK-ROOM
DEAL TO END ARMENTEL MONOPOLY

REF: A) YEREVAN 1456 B) YEREVAN 2388

Classified By: DCM A.F. Godfrey for reasons 1.4 (b) and (d).

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SUMMARY
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1. (C) During the week of November 15 the GOAM is due to seal
the deal it has made with Armentel, Armenia's incumbent
monopoly telecommunications service provider. The Government
of Armenia will end its protracted dispute with Armentel and
license a second mobile telephone provider to compete with
Armentel's unsatisfactory service (ref A). The government
immediately named the grantee of the second license,
Karabakh-Telecom, the "winner" of a midnight tender. While
the public has supported renegotiating Armentel's monopoly,
critics have cried foul at the lack of transparency in
granting the second license. Representatives of the Ministry
of Justice told us that the choice of Karabakh-Telecom was
political -- presumably designed to protect Karabakh's
embattled telecom company and preclude Russian control over
yet another of Armenia's sectors. Competition in the mobile
market will be a good thing even if achieved improperly, but
we expected a better deal with Armentel and a better process
in awarding a new license. End Summary.

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DONE DEAL: DID ARMENIA GET WHAT IT WANTED?
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2. (SBU) Ending a years-long dispute with Armentel and its
parent corporation, OTE (Hellenic Telecommunications) of
Greece, Armenia tightened Armentel's monopoly rights over
international calls to include voice-over-internet protocol
(VoIP) in exchange for adding a competing mobile licensee.
This deal also formalized the de facto status quo in
international data transmissions: Armentel keeps the
monopoly on uploads, downloads stay unrestricted. Despite
the GOAM's weak legal position before the London arbitration,
we expected a better deal. Any deal had to include a second
mobile operator, but the GOAM's concession over VoIP is
surprising. Armenia currently has 240 VoIP operators,
providing international calls at rates more than ten times
cheaper than Armentel's. Presumably Armentel will use its
monopoly in VoIP to try to end the service altogether. The
cost to consumers and businesses for closing Armenia's VoIP
could outweigh the gains by adding competition in mobile
communications.

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BACKGROUND: GOAM SPENT A LOT OF TIME, MONEY, TO GET HERE
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3. (C) Armenia's telecommunications infrastructure has long
been woefully inadequate: connections are poor, villages are
without service, and new mobile accounts are unavailable
except on the black market. Armentel, which had a monopoly
on all telecommunications in Armenia until 2013, has failed
to live up to its investment commitments and been unable to
earn enough in lucrative sectors like mobile and
international service to justify continued large investment
in the unprofitable fixed line system. Following disputes
about Armentel's investment level, the GOAM took legal and
regulatory actions -- some meritorious, others not -- to
restrict the monopoly license and allow a competitor in
cellular telephony and international data transmission.
Armentel's parent company, OTE, pledged that it would invest
no new money to upgrade Armenia's telecommunications
infrastructure while its monopoly rights hung in balance. By
threatening to amend unilaterally Armentel's license, the
GOAM successfully pushed Armentel to settle. The Minister of
Justice told the Ambassador that had they not reached an
agreement this week, the GOAM could not afford to continue
its legal processes in London arbitration (ref B).

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CIRCLING THE WAGONS AROUND KARABAKH?
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4. (C) The day following the settlement with Armentel, the
GOAM granted a second mobile license to Karabakh telecom, the
mobile operator in Nagorno-Karabakh. Karabakh Telecom had
always been one of the contenders for the license: it has
3,500 mobile subscribers in nearby Karabakh but capacity for
100,000. But the government's point on the deal, Vahe
Yacoubian, an Amcit lawyer for the GOAM and advisor to the
Minister of Justice, previously told us that the tendering
process would be open and transparent (ref A). It was
neither. The tender took place in six hours in the middle of
the night: the details of the deal are still secret. In a
November 5 meeting with the Ambassador, Yacoubian
acknowledged the unseemliness of the deal but said the deal
was more political than corrupt. Recently Karabakh telecom
has been the subject of various efforts by Azerbaijan to
isolate the company. In May 2004, the Government of
Azerbaijan lobbied foreign mobile companies to not cooperate
with Karabakh Telecom or make roaming agreements. Azerbaijan
has also appealed to the International Telecommunication
Union (ITU) and the GSM association to withdraw Karabakh
Telecom's membership. Granting the license to Karabakh
Telecom would weaken Azerbaijan's argument that the company
is operating illegally. Now rather than operating
exclusively within the disputed Karabakh region, Karabakh
Telecom will operate in Armenia (a far bigger market) and
also cover Karabakh, which shares Armenia's country code.
November 10 news reports cited the Ministers of Justice and
Transport and Communication claiming that the decision had
been taken because Armenia "could not leave Karabakh cut off
from the world."

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COMMENT: AN OPPORTUNITY SQUANDERED?
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5. (C) Having gone through the trouble and expense to force a
renegotiation of Armentel's contract, most here hoped for
more. The original deal with Armentel was a bad one for
Armenia, but it was legal and the government of Armenia
nevertheless took financial and reputation risks to force a
renegotiation. To settle the dispute the GOAM has
surrendered additional, likely valuable, services to
Armentel's monopoly, but it has not guaranteed a strong
competitor on the Armenian market, and further it has failed
to follow through with an international open tender that
would have given the population and international investors
confidence in the deal or the business environment. All this
may have been a high price to pay to protect
Karabakh-Telecom, although politically the advantages to the
government are clear -- the one thing on which politicians
across the spectrum agree is that Karabakh must be protected.
While any competition in Armenia's beleaguered
telecommunications sector will be welcome, Armenia has failed
to make a positive step towards the ultimate liberalization
of the market that would best serve consumers and tackle
Armenia's capacity problems.
EVANS