Identifier
Created
Classification
Origin
04YEREVAN592
2004-03-11 09:04:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Yerevan
Cable title:  

USATF MID-TERM REVIEW FOCUSES ON CUSTOMS,

Tags:  PREL PGOV AM 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 06 YEREVAN 000592 

SIPDIS

DEPT FOR EUR/CACEN, EUR/ACE, EUR/PGI, INL/AAE, INL/C
EUR/ACE FOR MARIA LONGI
DEPT FOR USAID

SENSITIVE

E.O. 12958: N/A
TAGS: PREL PGOV AM
SUBJECT: USATF MID-TERM REVIEW FOCUSES ON CUSTOMS,
TAXATION ISSUES

UNCLAS SECTION 01 OF 06 YEREVAN 000592

SIPDIS

DEPT FOR EUR/CACEN, EUR/ACE, EUR/PGI, INL/AAE, INL/C
EUR/ACE FOR MARIA LONGI
DEPT FOR USAID

SENSITIVE

E.O. 12958: N/A
TAGS: PREL PGOV AM
SUBJECT: USATF MID-TERM REVIEW FOCUSES ON CUSTOMS,
TAXATION ISSUES


1. (U) Sensitive But Unclassified. Please treat
accordingly.


2. (SBU) The March 1 meeting of the U.S.-Armenia Task
Force on Economic Cooperation (USATF) mid-term review
focused on issues related to corruption, U.S. technical
assistance in the private sector, improving customs
procedures, trafficking in persons and INL-related
issues. Frank discussion of GOAM misgivings over
aspects of the USG energy efficiency assistance ended
with an agreement to establish a working group to
address specific concerns. Both parties tentatively
agreed to hold the next USATF meeting in Armenia on or
about May 18-19 to accommodate the schedules of
Washington visitors from EUR/ACE. End Summary.

-------------- --------------
USATF ON CORRUPTION, SME DEVELOPMENT, BUSINESS CLIMATE
-------------- --------------


3. (SBU) Ambassador Ordway co-chaired the March 1 USATF
mid-term review meeting with GOAM Minister of Finance
and Economy Vartan Khachatryan. The two sides signed
the final version of the USATF Action Plan from the
November 2003 meeting of the USATF in Washington, D.C.
(see paragraph 13 for full text). The Ambassador
previewed overall USG comments on the GOAM's recently
unveiled anti-corruption (A-C) strategy and
accompanying action plan and informed the GOAM that USG
representatives (including USAID and State) would
provide these comments to GOAM officials for future
discussion. He also mentioned the compilation of a USG
inventory of ongoing USG technical assistance related
to A-C. Minister Khachatryan agreed to consider the
USG comments and integrate them into future A-C
programming (USATF Action Plan Item 5).


4. (SBU) Following an in-depth discussion of USAID and
USDA technical assistance for small and medium-sized
enterprises (SMEs),Minister Khachatryan called on the
USG to continue its program of establishing credit
clubs that benefit SMEs in rural areas. Minister
Khachatryan complained about a perceived lack of
coordination with the EBRD regarding Armenia's economic
needs. USAID responded that it had met recently with
EBRD officials regarding deepening the organization's
programs in Armenia. The Ambassador outlined EBRD
plans for a permanent expatriate representative in

Armenia and predicted better collaboration once the
EBRD re-established a full-scale Yerevan office (USATF
Action Plan Item 6).


5. (SBU) USAID informed the USATF that it was in
contract negotiations with the American Chamber of
Commerce in Armenia to conduct the planned Business
Climate Review. The GOAM requested that the USG share
the terms of reference for the study with the Ministry
of Finance and Economy. Both sides discussed ways to
ensure that the study would complement ongoing studies
and reports sponsored by the World Bank (USATF Action
Plan Item 7).

--------------
SENSITIVITIES OVER ENERGY EFFICIENCY PROGRAMS
--------------


6. (SBU) A review of pending customs cases revealed
misperceptions and reservations by the GOAM regarding
some of USAID's ongoing energy efficiency programs.
Minister Khachatryan said the GOAM was wary of a
specific heating and cooling initiative that appeared
to benefit wealthy Armenians instead of Armenia's
poorest communities. He said that the GOAM was holding
equipment related to this program at the border until
the USG provided further information about the design
of the program and its beneficiaries. Ambassador
Ordway condemned this practice as damaging to our
bilateral assistance relationship and called on the
GOAM to release commodities immediately. The two sides
agreed to a working group meeting to further educate
the Ministries of Energy and Finance and Economy about
USAID's energy efficiency programs in order to avoid
similar problems in the future (USATF Action Plan Item
11).

-------------- --------------
CUSTOMS PROCEDURES AND TAXATION OF USG ASSISTANCE
-------------- --------------


7. (SBU) The USG detailed other cases of commodities
that the GOAM was holding at the port of entry pending
customs clearance. Ambassador Ordway reminded the GOAM
of USG legislation forbidding the taxation of USG
assistance and ongoing USG efforts to secure buy-in
from GOAM stakeholders including relevant ministries
and government offices to avoid such delays. Both
sides acknowledged new procedures agreed to during the
November USATF meeting and agreed to consult with
government counterparts in the event of discrepancies.
The USG reviewed the mostly positive (preliminary)
results from Embassy Yerevan of the 2003 "Section 579"
report on taxation of government assistance.
Ambassador Ordway called on the MFE to look for ways to
expedite reimbursement of VAT paid by implementing
offices or USG offices (USATF Action Plan Items 22 and
23).

-------------- --------------
FORENSIC LABORATORY, MONEY LAUNDERING, RULE OF LAW
-------------- --------------


8. (SBU) Following discussion among GOAM
representatives over which ministry should have
technical oversight of the INL-sponsored Forensic Lab
Project, the GOAM suggested the organization of a new
internal task force to address the issue. DCM and INL
representative Ed Schack agreed to meet with the
interministerial group in late March to monitor
progress on this issue (USATF Action Plan Items 13 and
14).


9. (SBU) The GOAM agreed to provide copies of two
recent anti-money laundering draft laws to the Embassy
within the month. The USG will translate the laws into
English and provide them to INL anti-money laundering
experts in Washington for comment (USATF Action Plan
Item 16). The Ambassador discussed the status of USG
assistance in the judicial sector. He reported that
USAID was considering reinstating programs in this
sector that could include a national code of ethics and
technical assistance in case management (USATF Action
Plan Item 16).

--------------
TRAFFICKING IN PERSONS
--------------


10. (SBU) DCM expressed USG disappointment in the
inadequate GOAM anti-trafficking efforts over the past
year and warned the GOAM of the risk of classification
as a Tier 3 country in the Department's Trafficking in
Persons Report. The USG called on the GOAM to take
greater ownership of the issue in order to avoid
possible negative consequences that could include
sanctions.

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


11. (SBU) The four months following the last USATF
meeting did not leave sufficient time for
implementation of Action Plan items. The mid-term
review had the effect, however, of reminding GOAM
ministries of their November 2003 commitments and
encouraging dialogue with USG counterparts to produce
measurable results before the next USATF meeting in
late May. Minister Khachatryan appears increasingly
comfortable in his role as USATF facilitator and
moderator among counterparts in other ministries. We
should capitalize on this dynamic by crafting a
succinct, more action-oriented Action Plan during the
next USATF meeting that will clearly define required
actions and allow Minister Khachatryan to more
effectively hold his colleagues to their end of USATF
agreements. Despite tensions over customs issues, the
USATF mechanism continues to prove its worth as our
principal forum for dialogue on bilateral assistance
issues.


12. (U) Point of contact is Embassy Assistance
Coordinator Aaron Sherinian (SherinianAH@state.gov).
Additional copies of the Action Plan and supporting
briefing memos from the mid-term review have been sent
to the Department (EUR/CACEN and EUR/ACE).

--------------
FINAL TEXT OF USATF ACTION PLAN
--------------


13. (U) The final text of the USATF Action Plan (as
signed by Ambassador Ordway and Minister Khachatryan)
follows. Begin text:

-- Action Plan
-- U.S.-Armenia Economic Task Force
-- November 4-5, 2003

(1) The U.S. Government recognizes the linkages between
the newly adopted Poverty Reduction Strategy, anti-
corruption, and economic development, and congratulates
the Government of Armenia in finalizing its PRSP in
August 2003. The U.S. Government will coordinate with
the Government of Armenia as we develop our monitoring
plan to ensure that it can also measure contributions
to PRSP goals.

(2) The U.S Government supports the concepts in the
PRSP on targeting social payments, creating jobs, and
investing in education and health. Both sides also
recognize that it is critical to increase savings in
the economy and allowing for the creation of basic
conditions for increased investment.

(3) The U.S. Government recognizes and applauds
Armenia's strong macroeconomic performance in the past
few years. However, both sides agree on the importance
of increasing revenue as a share of GDP and that
closing the fiscal deficit is critical for further
growth. The Government of Armenia is working on a
strategy to increase revenue, and the U.S. Government
will explore new mechanisms for working with the
Government of Armenia and the National Assembly to
support this strategy.

(4) The Government of Armenia will provide the U.S.
Government with a copy of the Strategy for Sustainable
Economic Development as soon as it is available. The
U.S. Government, in coordination with other donors,
will then work to complement the efforts of the
Government of Armenia to achieve the stated priorities
in this Strategy.

(5) The Government of Armenia will provide the U.S.
Government with a copy of the latest draft Anti-
Corruption Strategy as soon as it is available,
anticipated to be November 2003. Although there was no
U.S. Government input into the final draft that was
approved on November 6, 2003, the U.S. Government, in
coordination with other donors, will consider how it
can best contribute to achieving the goals of the Anti-
Corruption Strategy.

(6) The U.S. Government recognizes Armenia's progress
on enterprise development, especially in the
development of SMEs and the accompanying creation of
over 10,000 jobs. Both sides agree that continued SME
development and bringing them into the formal economy
is critical to the creation of jobs and alleviation of
poverty in Armenia. The U.S. Government, through USAID
and USDA programs, will continue to provide assistance
to entrepreneurs and micro and SME lending facilities,
and - noting the Government of Armenia's interest in
this program - will work with the EBRD to support SME
development in Armenia.

(7) The U.S. Government will consult with the
Government of Armenia, representatives of the Diaspora
and other donors, including the World Bank, in
sponsoring the design and implementation of a "Business
Climate Review" that will evaluate constraints to
foreign direct investment in Armenia. Upon completion
of any survey undertaken in this regard, the U.S.
Government will provide its results to the Government
of Armenia, the High Business Council, the local
business community and Diaspora representatives.

(8) The sides recognize the need to increase the level
of financial intermediation in the economy. They also
recognize that a major impediment to increased
intermediation is the high level of "connected lending"
in the Armenian economy. The U.S. Government will work
with the Central Bank of Armenia to look for ways to
strengthen the banking sector and the availability of
long term credit, with the objective of increasing the
provision of credit to SMEs, while addressing risk
issues.

(9) The U.S. Government has reviewed the Government of
Armenia's request to the U.S. Government to transfer
repayments related to Armenia's concessional Pl 480
debt to Assistance Program budgets in Armenia. The
U.S. Government, due to legal constraints, cannot
respond positively to this request. No further actions
are expected on this issue.

(10) Both sides recognize that, based on per capita
income, Armenia could be eligible for funding under the
Millennium Challenge Account (MCA),once the U.S.
Congress passes the necessary legislation. The U.S.
Government notes its desire to begin the MCA process as
soon as possible and the Government of Armenia
expresses its intent to strengthen its qualifications
for, and prepare for possible participation in MCA.

(11) The U.S. Government recognizes the progress that
Armenia has made on restructuring and privatizing its
power sector, and will continue to work with the
Government of Armenia to help it develop an energy
strategy with concrete targets that provides safe,
stable, and reliable energy to the Armenian people.
The U.S. Government will also work with the Government
of Armenia to develop heating alternatives and energy
efficiency. The U.S. Department of Energy agrees to
work with the Ministries of Energy and Foreign Affairs
to organize an energy conference to discuss energy
policy and investment in the energy sector.

(12) The U.S. Government agrees to continue to provide
technical assistance to the Natural Monopolies
Regulatory Commission. In particular, U.S. assistance
will focus on ways to help it perform effectively in
its expanded role as the Public Utilities Regulatory
Commission.

(13) The U.S. Department of State will provide the
Ministry of Finance and Economy, the Ministry of
Justice, and the already-established Armenian
interagency task force with detailed plans and
requirements for the development of a Forensics
Laboratory in Armenia. The Government of Armenia will
work to expedite execution of the amended Letter of
Agreement with the U.S. Government, which allows for
additional law enforcement assistance.

(14) Both sides recognize that money laundering, while
not an obviously identified problem in Armenia today,
could become a problem in the future, especially if the
number of bank transactions increases as anticipated.
The U.S. Government encourages the Government of
Armenia to prepare internationally acceptable
legislation and implementation plans to address this
issue now, and the U.S. Government, through the
Treasury Department, will provide technical assistance
as requested by the Government of Armenia.

(15) A representative from the U.S. Embassy will meet
with Ministry of Foreign Affairs representative to
review the status of Armenia's ratification of
international counterterrorism conventions. The U.S.
Government will consider providing technical assistance
in this area if requested by the Government of Armenia.

(16) Both sides agree that weaknesses in rule of law
and due process are impediments to economic growth,
democratic development, and poverty reduction in
Armenia. The Government of Armenia commits to
strengthening the rule of law and due process, and
welcomes U.S. Government assistance toward this end.
Both sides will work together to address and improve
these issues.

(17) The U.S. Government recognizes the positive
progress made by the Government of Armenia in the area
of trafficking in persons, as evidenced by Armenia's
improved ranking in the U.S. State Department's most
recent Trafficking in Persons Report. The Government
of Armenia and the U.S. State Department will continue
to cooperate on developing and implementing programs to
combat trafficking in persons.

(18) Prior to the next meeting of the U.S.-Armenia Task
Force, the Government of Armenia will seek ways to
coordinate international assistance through the PRSP
mechanism that will advance national development,
economic reform, and cooperation. Noting the PRSP as a
current priority for the GOAM, these coordination
efforts will harmonize the PRSP, national anti-
corruption plan and other proposed strategies for
economic development.

(19) Both sides support the removal of Armenia from
Jackson-Vanik as quickly as possible to reflect the
progress made on both religious freedom and trade
issues. The U.S. State Department will provide the
Government of Armenia with a paper on the U.S.
Administration's position on removal of Armenia from
the provisions of the Jackson-Vanik Amendment.
Ambassador Ordway will hold a press conference in
Yerevan to explain Jackson-Vanik and the status of
trade relations between the U.S. and Armenia.

(20) The Government of Armenia will provide the U.S.
Embassy with a compendium of WTO compliance issues.
Upon receipt, the U.S. Government, in cooperation with
other donors, will evaluate concrete assistance
possibilities. Both sides recognize that enforcement
of intellectual property rights is important. The U.S.
Government is committed to providing technical
assistance on IPR issues and will discuss with the GOAM
possible technical assistance in other areas.

(21) The Government of Armenia agrees that use of any
type of minimum value reference pricing violates its
WTO commitments. The Government of Armenia will
provide a written statement to the U.S. Embassy stating
unequivocally that no computerized minimum value
reference pricing system is in place in Armenia. The
U.S. Government agrees to consider providing technical
and other assistance to the relevant Armenian agencies
to help address import valuations.

(22) Both sides acknowledge that problems existed when
importing technical assistance and humanitarian
commodities into Armenia under the Bilateral Agreement
of 1992. Both sides agree that the following procedure
will be followed whenever the U.S. Government and other
covered parties want to import commodities under this
Bilateral Agreement in order to make this process more
effective:

--Every six months, the U.S. Embassy will submit to the
State Customs Committee, the Ministry of Foreign
Affairs, and the Ministry of Finance and Economy an
updated list of organizations covered by the Bilateral
Agreement, with reference to specific projects that are
separately and periodically provided to the Ministry of
Finance and Economy for its assistance database.
The U.S. Embassy will designate a person who will walk
through these steps to check the accuracy of the above
mentioned database being kept by the Ministry of
Foreign Affairs and the lists submitted to the Ministry
to be sure the above system is effective. When the
interim review is conducted in early 2004 this process
will be reviewed to make sure it is working
effectively.
--The U.S. Government agrees that normally the U.S.
Embassy or an agency of the U.S. Government will submit
a letter to the State Customs Committee (with a copy to
the Ministry of Foreign Affairs) one month prior to
arrival of a commodities shipment covered by the
Bilateral Agreement, stating the details of the
shipment (arrival date, if known, else in general terms
when it will arrive; and the general nature of the
shipment). The U.S. Government will endeavor to have
the letters sent one month prior to arrival of a
shipment, and the Government of Armenia will cooperate
in clearing shipments when notice is given less than
one month before arrival.
--If any Government of Armenia officials have any
questions on shipments imported into Armenia that could
or is claimed to be under the Bilateral Agreement, then
these officials must notify the U.S. Embassy
immediately according to procedures that will be
provided to the Ministry of Foreign Affairs by the U.S.
Embassy.

(23) The Minister of Finance and Economy agrees to
rectify existing customs disputes as follows:

--AEAI attempted to import wood dryers under a U.S.
assistance program on energy efficiency. Both sides
acknowledge that this is a shipment of goods covered by
the Bilateral Agreement. USAID agrees to submit a
description of this project to the Ministry of Finance
and Economy before November 7. The Ministry of Finance
and Economy agrees to resolve this issue before
November 14 by providing a letter allowing the import
of these dryers under the Bilateral Agreement (i.e.,
without any taxes, customs duties, etc.). The Customs
Chairman acknowledges that this letter from the
Ministry of Finance and Economy will override any
position taken by the Customs Committee concerning the
import of these dryers. [Note: This case was resolved
in mid-November and the wood dryers are now in the
possession of the U.S. Government implementing
partner].
--Counterpart International imported hygiene kits into
Armenia, and has had problems with Customs officials
concerning taxation of these commodities. The Ministry
of Finance and Economy agrees to discuss this issue
with the Prosecutor General's office, since this case
has already been referred by Customs to the
Prosecutor's Office. The U.S. Embassy will assign a
person to answer any questions on this topic for the
Ministry of Finance and Economy. [Note: This case was
resolved in mid-December and the hygiene kits are now
in the possession of the U.S. Government implementing
partner]

(24) Both sides agree that two sub-committees - a
Science Panel and a Trade and Investment Panel - of the
U.S. Armenia Economic Task Force will be created before
the next US-Armenia Economic Task Force meeting. The
Government of Armenia and the U.S. Government will
designate points of contact that will report back to
the Minister of Trade and Finance and the U.S. Embassy
directly on progress made. These Panels will be
prepared to hold initial meetings at the next US-
Armenia Economic Task Force meeting, if not before.

(25) Both sides acknowledge that there will be no U.S.
government monetization programs for Armenia in FY04.
Prior to the due date for program proposals for FY05
programs, the U.S. will discuss any possible proposals
with project proponents, inviting consultation with the
Ministry of Finance and Economy and related state
agencies where appropriate. If the U.S. Embassy
supports these proposals, then it will discuss these
with the Office of the Prime Minister. If the Prime
Minister provides written assurance to the U.S. Embassy
at least six months prior to the beginning of FY05
(April 1, 2004) that the Government of Armenia will
support these programs under the Bilateral Agreement,
meaning that no customs, VAT, unreasonable storage
fees, or other import duties will be imposed, then the
U.S. Embassy will convey its support for these
proposals to the approving office within the U.S.
Government. Both sides acknowledge that such a
recommendation by the U.S. Embassy will not guarantee
that a project will be selected by the U.S. Government
agency overseeing a monetization program.

(26) The Government of Armenia is aware that any
taxation of U.S. assistance by the Government of
Armenia will be subject to a reduction in U.S
assistance levels. Both sides agree to work together
to avoid any taxation of U.S. assistance, and will
actively review any potential taxation issues in order
to resolve the issue quickly.
End text.
ORDWAY