ARMENIAN IMPORTER SPELLS OUT THE CASE AGAINST

UNCLAS SECTION 01 OF 02 YEREVAN 001169 SIPDIS DEPT FOR EUR/CACEN, EUR/ACE, PASS USTR FOR KULHMANN E.O. 12958: N/A TAGS: ECON ETRD EAID AM SUBJECT: ARMENIAN IMPORTER SPELLS OUT THE CASE AGAINST CUSTOMS REF: YEREVAN 52 SENSITIVE BUT UNCLASSIFIED, PLEASE PROTECT ACCORDINGLY -------------- SUMMARY -------------- ¶1. (SBU) In a rare kiss-and-tell affront to Armenia's powerful Customs Service, a major Armenian coffee importer has gone to press and publicly described corruption in the service, alleging that Customs is trying to push them out of business because they refuse to continue paying bribes to government officials. Royal Armenia Coffee alleges (and other importers confirm) that the Armenian Customs Service cuts illegal deals with importers to undervalue basic goods in exchange for a bribe. This practice reduces tax revenue, enriches Customs officials, restricts competition and protects the monopolies of Armenia's oligarchs. End Summary. -------------- THE CASE AGAINST CUSTOMS -------------- ¶2. (SBU) Like nearly all importers to Armenia, Royal Armenia Coffee (Royal) operated for ten years under a tacit agreement not to follow the law. Regardless of the true price of the coffee they imported (about USD 1.24/kilo),Customs evaluated it at USD 1.10/kilo for purposes of VAT and duty, in exchange for an 11 cent/kilo bribe. (If Royal refused to pay the bribe, coffee imports would be assessed at USD 1.80/kilo.) Royal's director, Aram Ghazaryan, told us that he was happy with this deal until a well connected oligarch entered the coffee business and was able to get customs to value his coffee at 82 cents/kilo, making Royal's coffee less competitive. Unable to informally solve the situation, Royal stopped paying bribes and went to the press to challenge the Customs Service to follow the law. Not only is their coffee now over-assessed at USD 1.80, but the Customs Service has now levied nearly USD 500,000 in administrative fines for having (admittedly) bribed the Customs officers in the past. -------------- CUSTOMS SERVICE V. THE FREE MARKET -------------- ¶3. (SBU) The Customs Service has long been a tool of the oligarchs. Although Royal is the first company to come forward so publicly against the Customs Service, their situation is familiar to all Armenian importers (reftel). Rather than following Armenian law and WTO procedures on Customs valuation, the Customs Service has used different valuations for different importers, often resulting in a laughably low tariff burden for favored importers and a prohibitively high tariff burden for new market entrants. Indeed, the things that people consume everyday (wheat, sugar, salt, beer, cigarettes, gasoline, and coffee) are highly concentrated markets in Armenia; often a single oligarch entirely controls one or two basic goods. -------------- -------------- DESPITE INTERNATIONAL PRESSURE, CUSTOMS RESISTS REFORM -------------- -------------- ¶4. (SBU) Despite President Kocharian's January 2005 call to reform the Customs Service in order to raise revenue and create a level playing field (reftel),importers report no change in the bribe-or-die import environment. For several years, the IMF has made correct customs valuation a conditionality in its programs, and the Customs Service speciously reports progress saying that now over 50 percent of all goods are estimated by their invoice price. (Note: This means 50 percent by value, not by transaction, where the proportion is far smaller. End Note.) Deals like these where the "invoice price" has been negotiated beforehand between the customs service and the importer appear as if they are processed in compliance with the valuation law, although in reality both parties are cooking the books. End Note.) -------------- COMMENT: CORRUPTION HAS SEVERAL VICTIMS -------------- ¶5. (SBU) Corruption in the Customs Service has several victims. The most direct loser is the state budget, which loses tax revenue to bribes to corrupt officials at all levels in the Customs Service. Far greater than the cost to government coffers is the cost to Armenian consumers and would-be businessmen. Consumers cannot benefit from competitive prices: despite the recent sharp appreciation of the dram, prices for imported foods have stayed the same. Moreover, trade in basic consumables, which has the potential to be an easy business to enter, is off-limits to would-be traders. Reform of the Customs Service could have far-reaching effects on Armenia's economy, and by reducing consumer prices, could assuage poverty too. But reform of Customs will also be the hardest to approach from the inside, as the vested interests in maintaining a corrupt system are deeper than the cost of the bribes. Recognizing the difficulties of reform, USAID is collaborating with the IMF to make a diagnostic study of the problems in the Customs Service a conditionality in Armenia's new IMF program. As Royal Armenia Coffee discovered this week, importers of basic goods do better to settle their market share with the Customs Service rather than rely on free-market competition and the rule of law. EVANS