DEMOCRACY, MCA AND CORRUPTION FOCUS OF USATF

UNCLAS SECTION 01 OF 06 YEREVAN 000255

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/CARC, EUR/ACE, PLEASE PASS USAID

E.O. 12958: N/A
TAGS: EAID PGOV AM
SUBJECT: DEMOCRACY, MCA AND CORRUPTION FOCUS OF USATF
MID-TERM REVIEW


YEREVAN 00000255 001.2 OF 006


Sensitive But Unclassified. Please treat accordingly.

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SUMMARY
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1. (SBU) Minister of Finance Vardan Khachatryan and
Ambassador Evans co-chaired the mid-term review session of
the U.S.-Armenia Task Force on Economic Cooperation (USATF)
February 17. The USG raised issues linked to the Action Plan
of the September 2005 USATF meeting held in Washington and
requested updates on items related to governance, corruption,
customs, avian influenza and education. The two sides signed
the final version of the September 2005 Action Plan (text
below). The conversation focused on USG concerns about the
GOAM's commitment to free and fair elections and cooperation
with the USG plans to support technical assistance programs
in this area. The Ambassador made special note of the recent
exchange of letters between President Kocharian and MCC CEO
Ambassador Danilovich and urged the GOAM to pay special
attention to MCA indicators in the "ruling justly" category
and match public rhetoric with reforms in the lead-up to the
2007-2008 elections in Armenia. The GOAM did not formally
react to the proposed May 2 date for the next USATF meeting
in Washington but promised to get back to us with an official
response. End Summary.

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FREE AND FAIR ELECTIONS (ACTION PLAN ITEM 1)
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2. (SBU) During the February 17 mid-term review session of
the U.S.-Armenia Task Force on Economic Cooperation, the
Ambassador welcomed the GOAM's willingness to work together
on improving electoral integrity in Armenia but made it clear
to the GOAM that shortcomings in the November 2005
constitutional referendum were still an area of concern
(USATF Action Plan Item 1). Ambassador Evans mentioned the
recent exchange of letters between President Kocharian and
MCC CEO Ambassador Danilovich and urged the GOAM to keep in
mind the warnings raised in the exchange in the lead-up to
the 2007-2008 elections in Armenia. Khachatryan responded
generally to the statement, but said he "understood elections
were linked to MCA assistance" and said the GOAM was aware of
the USG's plans for election-related technical assistance.

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ANTI-CORRUPTION (ACTION PLAN ITEM 2)
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3. (SBU) In response to USG queries on the GOAM's
Anti-Corruption Action Plan, Khachatryan said that GOAM was
in the process of discussing several action plans (at the
level of the Prime Minister) and that the GOAM would
establish a new governmental body "in the near future" with
responsibility for its implementation. Khachatryan promised
the GOAM would provide a written response on the status of
the GOAM's action plan. The USG side encouraged the GOAM to
include civil society in the process of action plan
implementation and to give special attention to the media's
role in the process.

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MCA (ACTION PLAN ITEM 3)
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4. (SBU) Both sides discussed the latest developments related
to Armenia's Millennium Challenge Account compact and noted
plans for a high-level signing ceremony in Washington. In
response to the Ambassador's admonition that the MC-Armenia
hiring process be transparent, Khachatryan said that the
process was well underway and noted that Deputy Minister
David Avetissian was managing the MCA process, including
hiring and civil society engagement, in the interim period
until the GOAM and USG identify an appropriately qualified
MC-Armenia CEO. Khachatryan said that the GOAM was working
on procedures to elect NGO representatives to Armenia's MCA
Board and that, building on its positive experience working
with NGOs as part of the Poverty Reduction Strategy Paper
(PRSP) process, the GOAM would engage with civil society on
MCA implementation.

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CUSTOMS PROBLEMS (ACTION PLAN ITEM 18)
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5. (SBU) The USG side noted that customs clearance problems
were again hindering delivery of USG assistance. The GOAM

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said it would look into a pending problem with a USAID
implementing partner and get back to the Embassy on the
reasons for the delay. The Ambassador discussed the
provisions of the bilateral agreement that governs
customs-related issues and encouraged the GOAM to honor its
commitments under the agreement and work to solve the
systemic problems that continue to cause customs delays.

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AVIAN FLU (ACTION PLAN ITEM 22)
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6. (SBU) The GOAM thanked the USG for its engagement on Avian
Influenza and agreed with the USG's assessment that
confinement of domestic poultry was a good idea in light of
the upcoming migratory season. Ministry of Agriculture
representative Levon Rukhkyan said that working groups in
rural Armenia were meeting to discuss implementation of a
nationwide confinement program. Khachatryan said that GOAM
plans to acquire AI treatments such as Tamiflu would be a
major drain on government resources and made a veiled request
for USG assistance in procuring large amounts of Tamiflu.
Minister of Health Norayr Davityan outlined GOAM measures
underway and gave assurances that the GOAM was giving the
problem the attention it deserved.

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INTERNET CONNECTIVITY (ACTION PLAN ITEM 24)
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7. (SBU) The USG noted ongoing discussions with the GOAM
regarding the transition of the Armenia School Connectivity
Program (ACSP) and reiterated the need for funds from the
GOAM budget to be released as soon as possible to ensure
smooth operation of the program. Khachatryan confirmed that
the GOAM's 2006 budget contained a line-item for the ACSP and
equipment upgrades but was non-committal on when those funds
would be released.

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NEXT USATF MEETING
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8. (U) The GOAM has not yet reacted to our proposed May 2
date for the next USATF session in Yerevan. The Ambassador
raised the issue during the mid-term review session and
Khachatryan said his staff would be in touch with the Embassy
soon. (Note: Khachatryan has tentative plans to travel to
Washington in late March for the MCA compact signing and we
understand that he will likely seek an appointment with
EUR/ACE to preview the next USATF session during his trip.
End Note.)

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SIGNED ACTION PLAN
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9. (SBU) Per tradition, the two sides signed the September
2006 Action Plan as part of the mid-term review session. The
full English text of the signed document is attached below
(copies of the signed document have been sent to EUR/ACE Noah
Krystel):

U.S.-Armenia Task Force on Economic Cooperation
September 26, 2005 - Washington, D.C.
Action Plan

--1. Free and Fair Elections: The USG outlined plans for its
comprehensive package of assistance activities leading-up to
the elections of 2007-2008. The GOAM reassured its goal is
to help ensure free and fair elections and reassured the USG
that the GOAM would do everything in its power to ensure free
and fair elections. The GOAM side pointed to the upcoming
referendum elections surrounding the constitutional
amendments package as an important step.

--2. Anti-corruption: The USG noted that two years have
passed since the GOAM adopted its anti-corruption strategy
and suggested specific measures the GOAM could take to assure
the public and international community of its commitment to
this strategy. The U.S. side noted that while there have
been some positive steps (especially in the areas of
business-related anti-corruption activities),there has been
a general lack of energy in this area. The USG stated that,
in most countries where there has been significant progress
in anti-corruption, there has been a strong message from the
highest levels of government that corruption would not be
tolerated. The USG also suggested that an independent

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assessment of implementation of the GOAM's anti-corruption
strategy would indicate the most pressing areas where action
is needed. The GOAM said it would present these suggestions
to the anti-corruption council and agreed that accountability
to the public of the last two years would be an important
step for the GOAM. The USG encouraged the GOAM side to
consult with USAID as it moved ahead on its front.

--3. Millennium Challenge Account: The USG and GOAM side
noted considerable progress on the technical aspects of the
Millennium Challenge Account compact proposal negotiation
process. The U.S. side reminded that eligibility for the
Millennium Challenge Account process was contingent upon
Armenia's performance on sixteen indicators relative to other
candidate countries. The U.S. applauded the GOAM on its
increased allocations in the areas of health and education.
MCC representatives made special mention, however, that early
indications suggest that declines in indicator areas of civil
liberties, political rights and voice and accountability were
a concern for the USG. The U.S. side reminded the GOAM that
U.S. legislative provisions require Eligible Countries to
maintain policy performance on the indicator and allow
suspension -- or even termination -- of a country's MCA
eligibility or assistance if performance deteriorates. The
USG said it would provide the GOAM with a written description
of specific concerns with regard to MCC indicators and
suggested that the conduct of the upcoming referendum is a
critical event.

--4. Fiscal Policy: The USG noted the apparent success of
GOAM with the publication of the country's top taxpayers and
called this move an important step toward increased
transparency. The GOAM encouraged USAID to coordinate with
the IMF and World Bank as it embarks on its analyses is in
the area of customs administration. With so much dynamism in
the construction sector, the USG encouraged the GOAM to
continue looking at ways to improve tax collection schemes
related to construction and methods and
small-and-medium-sized enterprises.

--5. Financial and Banking Sectors: The sides noticed
positive technical cooperation in the areas of banking policy
and administration and capital markets. The GOAM noted
pending legislation that would better regulate the sector.
The sides raised concerns, however, that certain uneven
concentrations of business activity had emerged in the sector
and could threaten future growth. Both sides encouraged more
transparency in the sector and previewed future cooperation
to address such issues as: remittances, auditing, bank
supervision and inflation targets.

--6. Tax and Customs Administration: The GOAM noted the
leadership of President Kocharian when he called on tax and
customs authorities early in 2005 to improve procedures in
these areas. USAID noted its new programs in these areas and
invited the GOAM to a future dialogue to discuss in greater
detail the parameters and goals of these programs.

--7. Encouraging Foreign Investment: The USG emphasized the
role the GOAM must take to help promote foreign investment in
Armenia. The Department of Commerce outlined federal
programs designed to promote with American audiences the
possibilities for investment in Armenia. The U.S. side noted
the announced opening of a California State trade
representation in Armenia as well as the October 2005
American Chamber of Commerce (AmCham) regional conference.
The GOAM noted recent steps it has taken to limit
administrative barriers to foreign direct investment, its
plans to establish a permanent trade attach who will operate
as part of the Armenian Embassy in Washington, and plans to
establish a trade promotion office on both U.S. coasts.

--8. Small-and-Medium-Size Enterprise (SME) Development: The
USG encouraged the GOAM to continue in its efforts to reduce
administrative barriers to SME development. USAID outlined
the recently unveiled competitiveness program that will
likely concentrate on the information technology and tourism
sectors to identify barriers to SME development. The GOAM
said that plans for the 2006 budget envisage increases in SME
development assistance and called for future collaboration
with USG agencies (USAID, Peace Corps and others) aimed at
stimulating SME activity in Armenia.

--9. VAT refund administration: The USG noted recent
improvements in GOAM's VAT refund regime but conveyed
continued concerns of U.S. companies regarding the existing
stock of VAT arrears (specifically the case of the Hotel
Armenia Marriott). The GOAM said that there were legislative

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and judicial concerns related to this case and both sides
noted that the Court of Economic Disputes would hold hearings
on the case in September 2005.

--10. WTO compliance: The USTR reiterated the agency's
willingness to discuss WTO compliance issues in detail at a
future date and suggested that the sides agree to convene the
next meeting of the Trade and Investment Working Group once a
full agenda of issues was identified.

--11. Intellectual Property Rights: The USG said it was
encouraged by recent police activity aimed at increasing
enforcement of intellectual property rights and noted USG
assistance programming in this area. The GOAM said pending
legislation mandating conformity with TRPS principles would
enhance effectiveness in this area. The GOAM encouraged the
USG to increase police training in this area.

--12. Support for the Judiciary: Both sides agreed that
support for the judiciary should include greater emphasis on
appropriate salary levels for judges, increased training for
judges and lawyers, and improved management of the court
system. The GOAM said it was considering an increase in
judges' salaries in the 2007 budget. The GOAM said it
expected to continue its cooperation with USG (USAID and
other USG agencies) to improve the legal framework governing
the judiciary.

--13. Resident Legal Advisor: The USG reminded the GOAM that
the Department of Justice would send a Resident Legal Advisor
to Armenia later this year in an effort to assist with policy
reforms and technical assistance in this area (areas of
expertise will include money laundering, trafficking in
persons, criminal procedure, corruption, legal management
issues, ethics et al.).

--14. Education and Science: The sides discussed the recent
Science Study commissioned by the USG and pointed to the
document as a potential roadmap for cooperation in these
areas. The USG reiterated the results of recent research by
the U.S. Science Fellow that pointed to potentially
competitive sectors where scientific development may lead to
business applications. The sides agreed to continue its
dialogue on cooperation in the fields of science and
education and the GOAM committed to organizing a structured
dialogue on these issues. The GOAM announced that it had
developed a 2005-2010 strategy for scientific innovation and
would invite the USG to participate in future discussions of
this program and all aspects related to science, including
consultations on possible future technical assistance.

--15. Trafficking in Persons: The GOAM outlined its efforts
to combat trafficking and the USG requested a copy of the
statistics presented by the GOAM side. The GOAM expressed a
need to strengthen capacities for the prosecution of
trafficking and requested USAID to discuss with the
Prosecutor General's office their specific needs to combat
trafficking. The USG encouraged the GOAM to move beyond
discussion and take concrete steps to combat this problem and
requested that the GOAM to provide a list of detailed
recommendations to target specific areas where actions were
lacking.

--16. Money Laundering: The GOAM requested assistance from
the USG for the digitization of its exchange database (as
part of its participation in the Egmont Group). The USG
encouraged the GOAM to ensure that the Financial Monitoring
Center at the Central Bank would be fully operational in the
very near future. The USG also underlined the need to amend
the regulatory framework in the Armenian law on money
laundering

--17. Monetization Programs: The USDA indicated that two of
the four food aid proposals it had received for the 2006 Food
for Progress program were under consideration. It also
reminded that in 2006 Armenia would be part of the USDA's
Export Credit Guarantee Program to provide high-quality
agricultural commodities to Armenia through commercial
channels.

--18. Customs Clearance Problems: Ambassador Evans reported
on his meeting with State Customs Committee Chairman
Avetissian and said that there were no pending, unresolved
customs problems involving USG assistance shipments. The USG
underscored the importance of abiding by the bilateral
Memorandum of Understanding regarding customs shipment
procedures between the two countries.


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--19. Armenian Nuclear Power Plant Decommissioning Status:
The USG stated its view that Armenia should work to close
ANPP as early as possible as the plant does not fully satisfy
modern safety-related technical standards. The GOAM stated
its view of the importance of the plant to Armenia's energy
security and said that, in accordance with the document
"Energy Development Strategy in the Context of the Armenian
Economy," approved by the GOAM, the mid-term objective
following eventual decommissioning of the ANPP would be the
adequate production of energy by using thermal or other
renewable sources. The long-term objective according to the
document would the construction of a new nuclear
power-generating unit. The GOAM further said they hoped to
have a concrete financial plan in the near future to cover
the substantial costs of ANPP closure. Building on on-going
discussions about decommissioning, including the conference
organized by PA Consulting Group in Yerevan in June 2005, the
USG indicated that it was prepared to assist Armenia in
planning for the closure and decommissioning of ANPP, and
further to provide near-term assistance to improve the
operational safety of the plant. The GOAM and USG agree that
active discussions should be held in the near future to
discuss these maters further. The GOAM said it would likely
host a donor conference on this subject in the near future,
with the assistance of the EU, to raise funds to build energy
production capabilities to replace the ANPP in accordance
with the Energy Sector Development Program, as well as to
develop energy networks and energy infrastructure aimed at
regional integration.

--20. Privatization of Energy/Telecom Sector Assets: The USG
expressed concerns regarding the announced sale of Armenia's
national electric distribution network (ENA) and the process
employed in awarding a second mobile telephone license to a
Lebanese business man earlier this year. In each case, the
USG stated that the transaction to date had fallen short of
international standards for transparency. The USG further
noted that press reports questioned whether appropriate
attention was being paid to consumer interests. The GOAM
acknowledged the importance of both transparency and
attention to the interests of consumers in reviewing or
structuring such transactions. The GOAM indicated that it
did not have available detailed information on the status of
the energy sector transaction to permit full substantive
discussion of it at the meeting. (Note from GOAM: To make
the sale of Armenia's national electric distribution network
-- ENA -- consistent with international standards of
transparency, the GOAM, by Decree No. 1560-A on Midland
Resource Holding Lt'd Invitation for Bids for 100 percent
Sale of ENA's Shares, dated September 15, 2005, assigned the
Minister of Energy, Minister of Justice and Minister of
Finance and Economy to ensure maximum transparency and
protection of consumer interests in the event of ENA's sale.)

--21. U.S. Agricultural Assistance: The GOAM requested
assistance from USAID and USDA to help develop food safety
regulations affecting food safety and food exports. The
Ministry of Finance requested assistance in areas of taxation
in the agricultural sector and financial issues related to
budgetary subsidies for farmers.

--22. Avian Flu: The U.S. Government expressed the
importance of continued cooperation with the GOAM to combat
the problem of Avian flu and thanked the relevant ministries
for their assistance in this matter.

--23. Water Management and Irrigation: The GOAM expressed
the need for a comprehensive study of underground water
resource management and requested further technical
assistance in the area of water management in Armenia. The
sides agreed that USG agencies involved in water-related
activities (the entire spectrum of water-related assistance,
including irrigation, policy, potable water resources, etc.)
should meet with GOAM agencies to discuss water management
issues in general in advance of the next USATF meeting.

--24. School Connectivity: The GOAM reassured the USG side
regarding its commitment to fully fund the school
connectivity program and said it allocated adequate funds
within the State's 2006 budget to maintain this program. The
USG asked for both sides to clarify this question among the
relevant offices (USG and GOAM) in Yerevan.

SIGNED:

For the Government of the United States of America:

/S/

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John Evans, Ambassador

For the Government of the Republic of Armenia:
/S/
Vardan Khachatryan, Minister of Finance and Economy
EVANS