FORECAST FOR REFORM IN ARMENIA: MOSTLY CLOUDY

C O N F I D E N T I A L SECTION 01 OF 04 YEREVAN 000281

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SUBJECT: FORECAST FOR REFORM IN ARMENIA: MOSTLY CLOUDY

REF: YEREVAN 272

YEREVAN 00000281 001.2 OF 004


Classified By: CDA JOSEPH PENNINGTON, 1.5(B,D)

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SUMMARY
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1. (C) Recent public comments by PM Sargsian suggest that he
understands his "legitimacy problem" and views a return to
reform as the best way to overcome it. Serious questions
remain, however, about Sargsian's understanding of basic
concepts of democratization and his willingness to take on
the entrenched, corrupt interests that make up his political
base. An oligarch close to Sargsian insists that the PM is
prepared to make "big changes," but then cites Putin and
Brezhnev as successful role models. An analyst close to the
PM says Sargsian will choose the reform path "because he will
have no other choice." But few we have spoken to believe the
PM, either by background or temperament, has a natural
inclination to reform. His leading role in improving
Armenia's relations with NATO and developing the policy of
"complementarity" with the West provide grounds for hope.
But internal reforms will likely prove much more difficult
and entail a higher degree of risk. With popular frustration
soaring following the election,, its aftermath, and the
violence of March 1-2, a more authoritarian approach may be a
more likely outcome. End Summary.

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SARGSIAN'S "LEGITIMACY PROBLEM"
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2. (C) Despite the recent coalition agreement reached by four
parties that collectively won (according to the official
count) over 70 percent of the vote on February 19, observers
from across the political spectrum agree that PM Sargsian
will begin his tenure as president facing a crisis of
legitimacy. Actions taken by the authorities and Sargsian
supporters before, during, and after the election,
culminating in the violence of March 1-2, have disappointed
and frustrated most Armenians, many of whom have drifted
toward defiant opposition leader Levon Ter-Petrossian (LTP) -
for lack of any other outlet for their disgust. Sargsian has
seemingly recognized his problem, and has attempted to
distance himself from those events while promising that
change is on the way. The PM recently told the media that
"change is coming even though it will be painful for some,"
an apparent hint that he intends to reduce the influence of
the widely-disliked group of oligarchs that control most of
Armenia's wealth.


3. (C) The question of the moment for Armenians is whether
the PM can or will make good on his pledge to take Armenia in
a new direction. Judging by his background and record as a
public figure, there is some basis for cautious optimism but
plenty of room for doubt. As Armenia's Defense Minister,
Sargsian was instrumental in expanding cooperation with NATO,
one of the signature elements of Armenia's "complementarity"
policy, through which Armenia sought to balance its
touchstone relationship with Russia with increased ties to
the West. Significantly, however, these policies never ran
into heavy opposition, foreign or domestic. So success was
measured in incremental implementation of steps that were not
opposed by the Russians or by other significant players in
Armenia. In his short stint as Prime Minister, Sargsian has
essentially continued the policies of his predecessor,
including a gradual economic liberalization, while deferring
to President Kocharian on questions of foreign policy and
internal political reform. Significantly, however, he has
failed to move against Armenia's rampant corruption problem,
and has not been heard from on the rule of law issues that
are at the heart of Armenians' grievances against the regime.

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YES TO REFORM -- LIKE PUTIN AND BREZHNEV!
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4. (C) Mikhal Bagdassarov, a leading (and, we believe,
relatively clean) oligarch close to Sargsian, recently
recounted for the Charge how the PM had called all of the
oligarchs together before leaving for Moscow on March 24.
His message, according to Baghdassarov, was clear -- "there
is going to be change, and some of you are not going to like
it." Baghdassarov argued that the PM is "fully committed" to
changing course, and is willing to take on powerful interests
that stand in the way. When pressed on the kind of reform
the PM had in mind, however, Baghdassarov was less clear.

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When asked what kind of leadership might Sargsian bring to
the Presidency, he described Russian President Putin and
former Communist leader Leonid Brezhnev as "the most
successful leaders" of recent times. According to
Baghdassarov, Putin and Brezhnev "succeeded" because they
"understood the need to bring in their own teams."
Khrushchev and Gorbachev, by contrast, "thought they were so
smart that they could succeed with anybody." Serzh Sargsian,
he said "understands the importance of the team."


5. (C) In fact, most of the speculation surrounding the
Sargsian Presidency is focused more on who will be on the
team rather than what that team might try to do. Senior PM
staffers are adamant about the PM's desire for reform, but
they are unable to articulate what that reform might look
like. To the extent that they offer specifics, they tend to
focus more on economic policy and innovation rather than on
democratization and expanding freedoms. As PM Sargsian has
told us repeatedly in the past, "you can't have political
reform unless you have a strong economy." Baghdassarov also
stressed economic changes as the PM's likely priority, and
seemed non-plussed when asked about a possible reversal of
politically motivated detentions or expansion of media
freedom. Even in the economic field, some question whether
the PM has a real vision of where he wants Armenia to go.
"He keeps talking about second-generation reforms," a senior
World Bank official told us, "but when you ask him what that
means, he has a hard time answering."

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SWEEPING REFORMS...BUT NO SUDDEN CHANGES?
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6. (C) Leaving aside the content of reform, there are
conflicting signals on the depth and pace of change that may
take place after the inauguration. Mikhail Minasyan, senior
advisor (and son-in-law) to the PM, told CDA on April 1 that
PM Sargsian had commented earlier that day that changes would
be so sweeping that "even you will be shocked." But when
describing Sargsian's decision to keep Kocharian's chief of
staff (and anti-reform attack dog) Armen Gevorkian on in that
position, Minasyan cautioned that "the Prime Minister doesn't
like sudden change." Tevan Poghosyan, an analyst and
fellow-Karabakhi who knows the PM well, has predicted that
Sargsian will be bold in his reforms "because he has no other
choice." That view is echoed by Armenians of various
political leanings. Opposition supporters contend that if
the PM resists change (as they expect),the new
administration will not survive long. Somewhat surprisingly,
even many who are more sympathetic to the authorities
privately agree. Salpi Ghazarian, a top aide to FM Oskanian,
recently expressed concern to the Charge that if reform
doesn't come quickly, the PM could be in trouble. "This is
not a five-year process," she argued.


7. (C) Polchief spoke with Prosperous Armenia parliamentarian
(and former Kocharian aide) Avet Adonts March 31 and
Republican MP Samvel Nikoyan April 1, seeking clues to the
new administration's program. Neither man could offer
specifics on what policy initiatives were planned, as both
said that the coalition remains focused on who will be in the
new cabinet. Both men, who are each relatively liberal
thinkers within the ruling establishment, said that there
will be a serious political reform agenda. They highlighted
the deeply corrupt and politically powerful Customs Service
as an early target for overhaul. (Comment: This would be a
welcome gesture, and indeed one we had privately floated to
PM staffers weeks ago. End comment.) Both Adonts and Nikoyan
also predicted that public television would have a shake-up
aimed at more balanced political programming -- another
welcome step, if realized, that we have urged on the GOAM.
Adonts and Nikoyan asserted that though political reform
would be genuine and widespread, they expect it to start
slowly and proceed incrementally. As Adonts put it, "Armenia
is no country for shock therapy," though he quickly added
"except maybe for Customs."

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AND WHAT ABOUT THE GOONS?
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8. (C) Virtually everyone agrees that the biggest obstacle to
reform, if indeed the PM is inclined in that direction, is
the sense of entitlement enjoyed by the many unsavory
characters who have helped Sargsian in his longtime quest for
the Presidency (and indeed, throughout the Kocharian
Presidency, during which Sargsian was the preeminent
partner). Although the goons who terrorized voters, stuffed

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ballot boxes, and intimidated pollworkers may not have been
asked to do so by the PM, they thought they were doing his
bidding and will expect to be rewarded for their efforts.
For all of his optimism about Sargsian as a reformer,
Poghosyan acknowledges that "he will need to find a way to
ease those people out and build a new set of elites." This
will not be easy, as the election day goon squads report to
some of the richest and most powerful men in Armenia under
the Kocharian-Sargsian regime. Even Baghdassarov, the PM's
confidante, admits he is "troubled" by some of the advisors
who have become close to the Prime Minister in recent years.
"I used to see him all the time," he complained, "but now I'm
lucky if we can have dinner together once a month. The Prime
Minister needs to be careful."


9. (C) Senior Armenian revolutionary Federation
(Dashnaktsutyun) party politician and recent presidential
candidate Vahan Hovanissian -- whose daughter is married to
Sargsian's nephew -- told polchief of his own recommendation
to the PM: Sargsian should turn on the pro-government thugs
with a profession of rage that they failed to deliver a 70
percent win for him in the election despite all the money,
patronage, and resources the PM had provided them to ensure
his victory. Only through this justification -- a reason
that Hovanissian thought the goons themselves would accept as
"legitimate" -- could Sargsian free himself from such men's
entangling embrace. "Otherwise, he will be their prisoner
for the next five years." Adonts and Nikoyan acknlwledged
the thug problem to polchief, and assured that unsavory and
notoriously corrupt figures will be excluded from the new
government. They grimaced helplessly, however, at the idea
that such figures should be prosecuted for their flagrant
misdeeds during the election period.

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DEMOCRACY AND FREEDOM -- FOREIGN CONCEPTS?
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10. (C) Yet another factor working against serious reform is
that the Prime Minister, through no fault of his own, may not
have a conceptual framework for what a free, democratic
society really looks like. His recent expression of paranoia
about alleged embassy support for the opposition (reftel) and
his clumsy efforts to manipulate press reporting on official
meetings illustrate the lingering Soviet world-view that
informs the PM's statements and actions. When asked to
comment about the bombing of an opposition newspaper office
during the presidential campaign, PM Sargsian answered
snidely "I don't even read that newspaper." His useful
initiative to take questions from the public, through
moderators reading the questions aloud, was undermined when
the PM became visibly testy by the end of the two-hour live
program over what he clearly considered the temerity of some
of the questions. Despite his efforts to cast himself as a
reformer, Sargsian excluded all opposition media from the
press conference he held last week. More troubling is that
few if any from the PM's inner circle have the background or
experience to counter his authoritarian instincts. There are
signs, though, that at some level Sargsian understands he
needs help -- during the election campaign he turned to PR
giant Burston-Marsteller to advise him on dealing with the
foreign media. A similar infusion of talent in the area of
democratic reform would raise confidence that the PM, even if
well-intentioned, will have the capacity to produce real
change.


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COMMENT
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11. (C) Predicting the trajectory of the Sargsian presidency
is difficult. So far we have little to go on, apart from the
cautious, nuanced statements over the past few weeks that
stand in welcome contrast to Kocharian's arrogant bombast.
The challenges he faces as he assumes the office represent a
significant threat to his political survival. Surmounting
them will require political -- and even physical -- courage.
A re-energized opposition will almost certainly try to goad
Sargsian into taking more authoritarian measures, thereby
increasing public anger and the likelihood of a street
revolution. To head off this possibility, the PM will need
to start fast and be bold. Sargsian's trademark caution will
not serve him well under these circumstances. There are many
reasons -- temperament, upbringing, inexperience -- to expect
the PM to fall short, and to choose a dangerous,
authoritarian path. The best course we can take to avoid
such an outcome is to tell him the hard truths --

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half-measures won't cut it, and mouthing platitudes about
change won't ease the crisis. By being candid with the PM,
we give him his best chance for success. End Comment.

PENNINGTON