GOAM TELECOM DEAL SUBSIDIZES N-K PHONE NETWORK

C O N F I D E N T I A L YEREVAN 002505

SIPDIS

STATE FOR EUR/CACEN SIDEREAS, EUR/ACE FOR LONGI, EB/CIP,
PLEASE PASS USTR FOR KULHMANN

E.O. 12958: DECL: 11/19/2014
TAGS: ECON EINV KPRV BEXP PREL AM
SUBJECT: GOAM TELECOM DEAL SUBSIDIZES N-K PHONE NETWORK

REF: YEREVAN 2470

Classified By: DCM A.F. GODFREY FOR REASONS 1.4 B AND D

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SUMMARY
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1. (C) On November 19 the Armenian Government published the
details of a second mobile license that it granted to
Karabakh-Telecom during a six hour tender process during the
night of November 4 (Reftel). The government granted the
license rights very cheaply, with no investment commitment
inside Armenia, but, curiously, an investment commitment
inside Nagorno-Karabakh. The terms of the deal show that
although the GOAM claimed it sought to end Armentel's
monopoly in order to improve phone service in Armenia, they
used the opportunity of a second license to subsidize
telephone service in Nagorno-Karabakh. End Summary.

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GOOD DEAL FOR K-TELECOM
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2. (SBU) According to information published on a GOAM
website, Karabakh-Telecom, the Lebanese firm that was
selected as Armenia's second mobile phone operator paid only
USD 7 million for the license. Of that seven million, it
must pay USD 5 million to the GOAM over the next four years,
and USD 2 million to the All-Armenian Hayastan Fund, a
Diaspora-funded private charity whose mission is to build up
Nagorno-Karabakh. In a break with expectations and practice,
the GOAM did not specify a minimum investment level for
K-Telecom in Armenia, but did call for an additional USD 10
million investment in Nagorno-Karabakh's telephone network,
which it has run since 2001. (Comment: The investment
commitment for mobile service in Armenia is likely
unnecessary, as investment will be in the company's interest.
The commitment for Karabakh is necessary to compel K-Telecom
to continue investment in its unprofitable fixed line service
there. End Comment.)

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GOAM MADE DEAL TO PROTECT KARABAKH'S TELEPHONE NETWORK
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3. (C) The Lebanese Ambassador to Armenia told the Ambassador
November 16 that the owner of K-Telecom, Pierre Fatouch was
a personal friend. Fatouch is a wealthy Christian Lebanese
with no particular Armenian connection except that he is
friendly with both President Kocharian and Defense Minister
Sargsian. According to the Lebanese Ambassador, Fatouch has
lost upwards of fifteen million investing in Nagorno-Karabakh
telecommunications and told the Armenians that he would have
to pull out of Nagorno-Karabagh unless there was something
for him in Armenia proper. As noted in Reftel, Azerbaijan is
pressuring international bodies regulating telecommunications
and private telecom companies to exclude K-Telecom from
roaming agreements. The Lebanese Ambassador said that
President Kocharian, Defense Minister Sargsian and the
government of Armenia basically "gave" the license to
Fatouch, expecting that he would bring down rates for
Armenian users. He has also been asked to look at water and
electricity in Nagorno-Karabakh.

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ARMENIA'S MOBILE USERS TO SUBSIDIZE KARABAKH PHONE SYSTEM
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4. (C) COMMENT: Under the Armentel Monopoly, profitable
mobile service subsidized unprofitable fixed line service in
Armenia. Now, a second mobile service in Armenia will
subsidize unprofitable fixed line service in
Nagorno-Karabakh. The deal to end Armentel's monopoly was an
opportunity to pursue the GOAM's stated goal of moving to a
more liberalized telecommunications sector where relative
prices of fixed and mobile services would reflect relative
costs and competition could be less restricted. With this
deal the GOAM scotched that opportunity and took a step
backwards. Because K-Telecom is counting on its profits in
Armenia to compensate for losses in Karabakh, it is unlikely
that the deal will bring down Armentel's high prices.
Because Armentel is already oversubscribed, creating a black
market for new SIM cards, K-Telecom can easily absorb excess
demand without improving services or reducing prices.
EVANS