ARMENIA'S ECONOMY INSULATED FROM PLANE CRASH,

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000666

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SIPDIS

DEPT FOR EUR/CARC, EUR/ACE

E.O. 12958: DECL: 05/12/2016
TAGS: ECON EAIR EAID PREL RS BE AM
SUBJECT: ARMENIA'S ECONOMY INSULATED FROM PLANE CRASH,
OLIGARCH AIRLINE OWNER MAY NOT BE SO LUCKY

REF: A) YEREVAN 623 B) 05 YEREVAN 1986

Classified By: DCM A.F. Godfrey for reasons 1.4 (b,d).

Summary
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1. (C) On May 3, an Armavia flight to Sochi crashed into the
Black Sea, killing all 113 aboard. Two days later, a fire in
a Brussels maintenance hangar destroyed another Armavia
aircraft as well as a second plane owned by another Armenian
company. Investigations into both the crash and the fire are
ongoing. It appears that the economic impact of the two
events will be relatively limited; passenger service is
largely restored and arrangements are being made to lease
replacement aircraft. The fate of Mikhail Baghdasarov, the
oligarch owner of Armavia (and other companies) is less
certain. If blame for the crash can be laid at his doorstep,
even his close relationship with Defense Minister Sargsian
will probably not protect him. End Summary.


2. (C) Despite the relatively low loss of life for such an
event, the May 3 crash of an Armavia Airbus A-320 (ref a) was
treated as a national calamity. Two days of national
mourning were declared and events are still being cancelled
nearly two weeks later. The cause of the accident is still
not known. Russian Transport Minister Igor Livitin told the
press that weather was the most likely cause. We understand
that a French-owned bathysphere began the search for the
ill-fated aircraft's "black boxes" on May 11. Ongoing storms
have hampered the investigation into the causes of the crash
and efforts to retrieve the black boxes located 450 meters
below the surface of the Black Sea.


3. (C) Executive Director of Armenia International Airports
(AIA) Juan Pablo Gechijyan (protect) told us that for an
aircraft of this type, blaming the crash on poor weather just
does not make sense. He said -- with perfect hindsight --
that Armavia's "safety curve" suggested that such an event
was likely. Armavia had three separate incidents in the past
months, including one serious mishap on landing in Moscow.
He said that blame, if there is any to be spread around,
should go to Armavia's owner Mikhail Baghdasarov.
Baghdasarov, a local oligarch, became the only shareholder of
the company in June 2005, when his company, Mika Armenia
Trading LLC purchased the remaining 70 percent of the shares
from Siberia Airlines. Oddly enough, Armavia leased the
aircraft from the British Government, which became the owner
when SibAir defaulted on its loans guaranteed by HMG.


4. (C) Gechijyan said that Baghdasarov was having serious
cash flow problems and was in arrears to the airport in
excess of USD 1 million for landing fees and other charges.
Gechijyan speculated that Baghdasarov's pattern of delaying
payments for fuel deliveries (ref b) was probably repeated
with managing training for pilots as well as paying wages and
for routine maintenance. This poor management style could
have led to a confluence of various factors in a "perfect
storm" to bring about the tragic crash. Armavia Press
Secretary Jasmine Vilyan told us, however, that the plane was

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well maintained and had undergone capital maintenance by
Lufthansa in Budapest. The Civil Aviation Authority
confirmed this information.

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INSURANCE INDEMNITY LIKELY
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5. (SBU) Armavia Airlines carried insurance for the flight
with Armenian Grand Insurance Company, which reinsured its
risks with 14 London-based reinsurance companies. The
reinsurance companies appointed Airclaims and Beaumont and
Son to determine appropriate levels of compensation in this
case. The GOAM has also provided AMD 1.5 million (USD 3,300)
to the relatives of passengers and crew for funeral expenses
and has opened a special account for private donations
(currently valued at USD 100,000) to support families of
crash victims.

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HANGAR FIRE IN BRUSSELS
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YEREVAN 00000666 002 OF 002



6. (C) On May 5, just two days after the Sochi crash, a
hangar fire in Brussels which destroyed four planes including
an Armavia A-320 and an Armenian International Airlines plane
leased to Air Arab. According to the Armenian Embassy in
Belgium, the fire was caused by a short circuit which ignited
an alcohol-based cleaning fluid being used on one of the
plane's wings. A local insurance expert, however, disputed
this and said that Belgian investigators are seeking evidence
of arson.

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ARMAVIA WILL LEASE THREE NEW AIRBUSES
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7. (SBU) Armavia announced on May 6 that it plans to lease
three new Airbus planes. The first one, an Airbus A-319, is
scheduled to arrive in Armenia by May 15. The arrival date
for the two other planes, Airbus A-320s, has not yet been
set. Armavia currently has one Airbus A-320, two A-319s, an
Il-86, a Yak-42 and a Yak-40.

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COMMENT
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8. (C) The long-term economic impact of these events on the
Armenian economy is likely to be limited. The economic
impact on Armavia's owner, Baghdasarov, may be far more
serious. Baghdasarov's economic empire has suffered from a
poor cash flow for a number of months (ref B). Baghdasarov's
long-time association with Defense Minister Sargsian might
not be enough to keep him out of trouble this time.
EVANS