HARD TIMES FOR AGRC LEAVES OTHER INVESTORS WORRIED

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000459

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/16/2017
TAGS: EINV ECON PREL AM
SUBJECT: HARD TIMES FOR AGRC LEAVES OTHER INVESTORS WORRIED

REF: 06 TASHKENT 1356

Classified By: Econ Officer E. Pelletreau for reasons 1.4 (b,d).

--------------
SUMMARY
--------------


1. (C) The Armenian Gold Recovery Company (AGRC),plagued by
allegations of tax evasion and failure to report profits,
appears to be the latest casualty of rising gold prices and a
possible Russian push to increase economic ties with Armenia.
After a difficult confrontation with the Ministry of Nature
Protection in 2004 and 2005, AGRC management had believed
that its position in Armenia was secure following a September
2006 meeting between AGRC owner Anil Agarwal and President
Kocharian. Despite announcing plans to invest USD 100
million in Armenia, it now appears, however, that AGRC is
being forced out. While the GOAM is publicly accusing the
company of tax evasion and underreporting of real production
volumes, the CEO of AGRC contends that the GOAM's actions are
purely politically motivated and are designed to open up new
opportunities for Russia to invest in the Armenian mining
sector. END SUMMARY.

-------------- --------------
THE AGARWAL CLAN: AGRC, STERILITE GOLD AND VEDANTA
-------------- --------------


2. (SBU) AGRC was the largest foreign investor in Armenia in
when it entered the market in 1999 and remains the only real
employer in one of Armenia's most impoverished, north-eastern
provinces. AGRC is 100% owned by Sterilite Gold (a Canadian
company) which is in turn 83% owned by Vedanta Resources
(owned by Indian mining magnate Anil Agarwal and listed on
the London stock exchange). In 2002, AGRC acquired full
ownership of two gold mines in Armenia (Zod and Meghrazdor)
and a processing plant in Ararat. In early 2004, AGRC
proposed building a new processing plant closer to the Zod
mine. The proposal was turned down by the Minister of Nature
Protection on the grounds that it posed an unacceptable
environmental threat to near-by Lake Sevan. Around the same
time, the notoriously corrupt Minister announced that AGRC
was guilty of tax evasion and failure to report profits. The
dispute was coming to a head when Vedanta Resources Chairman
Anil Agarwal met with President Kocharian in September 2006.
Following that meeting, Agarwal unveiled AGRC's new USD 100
million investment plan for Armenia which included upgrading
and remodeling of the Ararat processing plant, purchasing
heavy mining equipment and mitigating the environmental
impact of both plant and mine operations.

--------------
A DEAL GONE BAD
--------------


3. (C) According to AGRC's local CEO B.K. Sharma, the
investment plan was part of a verbal agreement between
Kocharian and Agarwal. When AGRC received the draft written
agreement, however, it included a number of undisclosed and
unacceptable terms including a pledge of 100% of AGRC's
shares to the GOAM, a provision granting the GOAM an absolute
and unilateral right to cancel AGRC's licenses, a requirement
that AGRC forego the right to international arbitration
granted in its 2002 contract with the GOAM, and a requirement
that AGRC forego the right to sell its assets within Armenia.
Furthermore, in the original 2002 agreement, the GOAM had
agreed to cover the cost of transporting raw ore from the Zod
mine to the processing plant in Ararat. The proposed new
agreement contained no mention of transportation costs.


4. (C) AGRC found the new proposal to be unacceptable and
sent a counter offer to the President in December 2006.
Rather than negotiating, the President appears to have opted
for a more aggressive approach. In January 2007, AGRC was
notified that it was under investigation by the Armenian
Prosecutor General. According to Sharma, President Kocharian
ordered the Prosecutor General to reopen the 2005
investigations related to AGRC's alleged tax evasion and
failure to report profits. Sharma told us he was personally
threatened by staff at the Prosecutor General's office and
had been told that if the company did not sell its assets all
company staff would be arrested and the company's assets
would be confiscated.

--------------
AGRC TRIES (TOO LATE) TO RALLY THE TROOPS

YEREVAN 00000459 002 OF 002


--------------


5. (C) In February 2007, the Prosecutor General froze AGRC's
bank accounts without notice and AGRC was forced to halt
operations. AGRC tried to rally the business and diplomatic
community to its aid in February and March, making appeals to
the Indian, British, German and American Embassies and the
American Chamber of Commerce. (NOTE: The tie to Germany and
the U.S. was that AGRC recently contracted to buy millions of
dollars worth of Caterpillar equipment from a German
distributor. END NOTE.) AGRC's efforts, however, proved to
be too little too late. When the heads of the respective
diplomatic missions made a joint inquiry at the Presidency,
they were essentially stonewalled. President Kocharian's
Chief of Staff stated bluntly that Agarwal had reneged on the
verbal agreement made in September 2006 and that the
President's office would no longer intervene in the case.
AGRC's Indian-national miners and engineers have now left the
country and it appears that AGRC is making every effort to
close out its operation in Armenia on the best terms
possible.

--------------
THE RUSSIANS?
--------------


6. (C) While we are not aware of any specific offers for the
company's Armenian assets, AGRC is certain that they are
being forced out to leave the door open for an unspecified
Russian investor. Sharma provided us with press articles
quoting Kocharian saying Russia will become Armenia's number
one foreign investor and suggesting that Russia was
particularly focused on the mining industry. He personally
is convinced that the Russians and Armenians have already
struck a deal in regards to AGRC's two mines and that once
AGRC leaves, Russia will pick up the mines on the cheap.

--------------
COMMENT:
--------------


7. (SBU) Throughout the FSU, the near doubling of gold prices
in the past five years appears to have left many governments
dissatisfied with the deals they struck with foreign
investors in the early years of independence (reftel). AGRC
has a poor reputation in Armenia as an exploitative company
that does not protect workers' rights. Vedanta and Anil
Agarwal also have a poor reputation internationally and it is
plausible that AGRC may have been involved in tax evasion and
underreporting profits. The way in which the company is
being forced out of the Armenian market, however, is causing
concern throughout the business community. The fact that the
company was not given any notice before its bank accounts
were closed, the personal threats against company management,
and the likelihood that AGRC will have minimal success in
liquidating its Armenian assets leaves other foreign
investors, in the mining sector and beyond, wondering how
safe their businesses are in the face of Armenia's ever
changing political winds.
GODFREY