IFI'S CONCERNED ABOUT TRANSPARENCY

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 002579

SIPDIS

STATE FOR EUR/CACEN SIDEREAS, EUR/ACE LONGI

E.O. 12958: DECL: 11/29/2014
TAGS: ECON EFIN AM
SUBJECT: IFI'S CONCERNED ABOUT TRANSPARENCY

REF: A. YEREVAN 2505 B. YEREVAN 2510

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

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SUMMARY
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1. (C) Lack of transparency in recent GOAM financial actions
is an increasing concern for the representatives of the IMF
and World Bank in Yerevan. Because Armenia continues to
record steady economic growth and will likely continue to
meet criteria set by both the Fund and the Bank, these
concerns will probably not have an immediate effect on their
programs. The World Bank raised concerns about transparency
just prior to a November 18 board meeting, but nevertheless
approved a Poverty Reduction Support Credit (PRSC). The IMF
-- in advance of its board meeting on December 1 -- wrote to
Armenia's Prime Minister to flag its concerns about:

-- The award of a second mobile contract to K-Telecom without
an open tender process;
-- The transfer of profits from a large copper mine to a
defense oriented foundation;
-- The Central Bank's failure to liquidate an insolvent
commercial bank and opaque dealings with that bank's single
asset, the Nairit Chemical Factory;
-- The failure of the government to pass a draft anti-money
laundering law without amendments easing reporting
requirements on international money transfers; and
-- The failure of the government to pass a law requiring the
use of cash registers in order to tackle tax evasion.

While the GOAM has moved forward with the two legislative
requirements (perhaps prompted by the IMF's query),we share
the concerns of the IFI's about the GOAM's opaque dealings.
End Summary.

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DODGY TELECOM TENDER...
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2. (C) The GOAM recently ended a prolonged dispute with its
monopoly telephone service provider Armentel in a deal that
gave little to consumers or the Armenian government (ref A).
While Armenia did restrict Armentel's monopoly to allow a
second mobile service provider, it gave the second license
away in a closed, six-hour nighttime tender to
Karabakh-Telecom for only USD 7 million, USD 2 million of
which went not to the government budget but to a private
non-profit organization that sponsors infrastructure
reconstruction in Nagorno-Karabakh. As part of the deal the
GOAM expanded Armentel's remaining monopoly to include Voice
over Internet Protocol (VoIP),closing many existing firms
and maintaining Armentel's ability to charge high rates on
international phone calls. While we have been told that the
GOAM had political reasons to support Karabakh-Telecom, the
lack of transparency in the tender process and the fact that
the GOAM paid a potentially high price to Armentel in
exchange for the mobile monopoly
has raised concerns among IFI's and in the press about the
propriety of the deal. Several newspapers have accused the
Minister of Justice, the deal's broker, of having a corrupt
interest in the deal.

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...DODGY PROFIT TRANSFERS
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3. (C) In August 2004, the GOAM issued a decree that
transferred the earnings from the profitable state-owned
Zangezour Copper Molybdenum plant to a foundation that had
been created two days earlier (ref B). Although the
foundation's board members are unknown, it is registered at
the address of another foundation controlled by Armenia's top
military brass. These assets (USD 20 million per year) could
be used for off-budget military spending on Karabakh as well
as for the personal use of those who control the foundation.

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...DODGY BANK DEAL
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4. (C) The Central Bank has decided to rehabilitate rather
than liquidate ArmCommunications Bank, whose main asset, the
dilapidated and obsolete Nairit Chemical Plant, must be worth
more than fourteen million dollars for the bank to be
solvent. Central Bank board Member Vache Gabrielyan told us
that one of Armenia's oligarch oil importers acquired
ArmCommunications Bank from the Central Bank in order to
strike a deal on the chemical plant. The Central Bank has
given the bank's new owner six months to sell Nairit or the
Central Bank will reassert supervision over the bank. The
IMF's concern is that the Central Bank has not followed its
procedures for evaluating the solvency of this bank but has
been pressured to keep an insolvent bank alive to benefit a
few businessmen who are the bank's depositors.

COMMENT
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5. (C) We share the concerns of the IMF and the World Bank
about the transparency of the three deals outlined above. We
believe that the GOAM has also paid short shrift to its
international obligations: the sudden Karabakh-Telecom deal
seems to violate Armenia's WTO telecommunications commitments
in its General Agreement on Trade in Services (GATS)
schedule.


6. (C) The Minister of Justice has requested a meeting with
our USAID director to request technical assistance related to
the telecommunications sector. We plan to echo the concerns
of our colleagues in the IFIs about transparency and the
appearance of impropriety in the recent telecommunications
deals and the apparent violation of Armenia's WTO
obligations. We plan to inform the Ministry that the GOAM
will have to clean up its act before it can expect USG
assistance in this sector.
EVANS