CUSTOMS REFORM: THE WINDS OF REAL CHANGE OR A

C O N F I D E N T I A L SECTION 01 OF 03 YEREVAN 000628

SIPDIS

E.O. 12958: DECL: 08/05/2018
TAGS: PREL EAID ETTC EINV KNNP AM
SUBJECT: CUSTOMS REFORM: THE WINDS OF REAL CHANGE OR A
SHIFTING SUMMER BREEZE?

Classified By: CDA Joseph Pennington, reasons 1.4 (b,d)


1. (C) SUMMARY: President Sargsian's young administration
has made much of its new campaigns to overhaul customs and
tax. CDA called on the new Chairman of the State Customs
Committee, Gagik Khachatrian, with an eye toward assessing
the new man's commitment and energy to change fundamentally
the dysfunctional agency's ways of doing business. The new
chairman outlined a pedestrian program of incremental
improvements, but failed to dazzle us with dynamism. He made
only a tepid pitch for greater U.S. assistance, and was
lukewarm on our thought that U.S. advice could help improve
the management effectiveness, efficiency, and throughput of
the customs organization. We are reserving judgment on
whether the budding reform process will prove serious. END
SUMMARY


2. (C) CDA called on Khachatrian August 1, accompanied by
Pol/Econ and EXBS, for an introductory meeting and to take
the pulse of the new leadership. We had speculated that if
the new customs management seems willing to seriously rethink
its methods of operation, there may be a good opportunity for
targeted U.S. assistance to galvanize big changes in customs
management, which could potentially eliminate the serious
drag that the existing Customs regime -- corrupt,
unpredictable, cumbersome, expensive, and slow -- has created
on the local investment climate. In fact, Customs has
already undertaken some very positive initial steps to
improve the transparency of its tariff assessments, and
widespread reports from the business community affirm that
corruption is at an all-time low. We had therefore arrived
at the meeting in a hopeful mood. In the event, the new
Customs chairman was highly ineffective at presenting even
the achievements that have already been accomplished. A
career veteran who has long served as the number two man at
the chronically troubled agency, Khachatrian may not be
disposed to acknowledge directly to a foreign diplomat the
profound ills plaguing his organization. The lack of any
willingness to discuss frankly the many and serious past
problems was not the opening we were looking for as a
pre-requisite to ratcheting up U.S. assistance to the agency
in the near future. Khachatrian was flanked in this meeting
by his recently-promoted number two, Artur Afrikian, who has
been a long-standing bete noir in the embassy's customs
relationship from his previous perch as a micro-managing and
intransigent chief of staff.


3. (C) Khachatrian reported that the president has issued
firm instructions and clear timelines for Customs overhaul
from 2008-2010. He spoke of a new website scheduled to go
live in 10 days, which will provide importers substantially
more information about Customs procedures. He noted that the
benchmark prices Customs uses to calculate tariffs on all
types of goods will be available on the internet, as well as
the tariff rates to be charged. He commented that it will
reduce opportunities for customs officer corruption if
businessmen have access to correct information in advance.
The move will also help importers to plan in advance what
their customs charges will be. (COMMENT: In the past,
importers could at best only make an educated guess about
what their tariff costs would be, as the process for valuing
goods and determining what tariff rate to use was opaque.
END COMMENT). CDA and Khachatrian discussed the
desireability of discarding the current system of index
pricing in favor of using invoice pricing (direct trade
inputs) to assess customs value, in combination with a
risk-based fraud detection system. Khachatrian noted that
this transition is planned. Khachatrian said the agency had
also installed new hotline telephones at every port of entry,
which importers could use to get answers directly from
Customs headquarters in the event of disagreements or
questions about the Customs officers' assessments. He noted
that the agency has been getting approximately ten questions
per day from its website and 15 from the new hotlines. He
claimed that the agency was providing answers and solutions
within one day.


4. (C) Khachatrian spoke of upcoming plans, soon to be
phased in, for greater use of self-declarations (aka direct
trade inputs) in customs assessments. He noted that a new
procedure to do customs clearances right at customs
warehouses -- instead of the recently-discarded requirement
that importers appear separately at the Customs headquarters
in Yerevan, and then go to claim their goods from the bonded
warehouse -- is already saving importers time and effort.
Khachatrian said that the agency needed more international
donor investments in equipment, computers, and training, in
order to realize fully the reform vision.

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5. (C) CDA thanked Khachatrian for the overview, and noted
that we welcome the president's and prime minister's strongly
stated commitment to reform Customs as a priority goal of the
new administration. He complimented Khachatrian on the fact
that our business contacts have reported a clearly different
climate in customs with regard to corruption. CDA promoted
the idea of customs outreach to its business constituencies,
to work together to identify and improve process bottlenecks,
inefficiencies, and unnecessary costs in customs processing.
Khachatrian indicated that he intends to create a "public
council" -- echoing other types of new government "public
chambers" -- as a mechanism for outreach and feedback from
the business community. The customs version of the public
council is to be made up of major business advocacy
organizations.


6. (C) CDA commented that past U.S. assistance efforts have
not born as much fruit as we would have hoped. Officers
would attend U.S.-sponsored training, but show no discernible
change in day-to-day practice. U.S. funding had provided
computer systems able to provide sophisticated tracking,
analysis, and record-keeping of import data, only to have
customs agents subvert the system by entering every shipment
under a "miscellaneous" category. He mentioned that when we
have offered training, absenteeism and lack of continuity had
been serious problems. For a five-day course, for example,
instructors might find themselves addressing completely
different trainees each day. Khachatrian nodded, and briefly
(rather unconvincingly) suggested that there would be greater
commitment to taking advantage of foreign training and
assistance.


7. (C) Khachatrian segued into another call for more funding
for computer systems, and renewed customs' long-desired wish
for foreign funding of a second bridge at the main
Armenian-Georgian border checkpoint as well as a customs
laboratory. He said he was in discussions with his Georgian
counterparts to create a unified customs and border police
checkpoint with the Georgian government, which would reduce
the border crossing procedure from four stops down to just
one. He also renewed the GOAM's request to negotiate a
formal Customs cooperation and information sharing agreement
with the United States. CDA commented that the USG had had
no appetite to negotiate such an agreement given the
difficult relationship that had so long prevailed between the
embassy and customs. However, this can be reopened for
discussion if we find ourselves in a new climate with
customs, marked by a collaborative spirit.


8. (C) The two briefly discussed personnel issues.
Khachatrian reported that 89 customs officers have resigned
since the start of the new government's reform drive, and he
is making efforts to improve hiring and training practices to
staff up the customs agency. He made a rather ham-handed nod
toward gender equity, noting that through the great personal
efforts of deputy director Afrikian, the agency had managed
to hire three women as customs officers (apparently this was
unprecedented) and was "watching after them very closely"
apparently to ensure they found a congenial work environment.
Khachatrian said that he intended to make a real effort to
hire "young, attractive women with foreign language skills"
into the customs service, "especially for the airport."
(NOTE: The customs agency employs roughly 850 staff
altogether. END NOTE)


9. (C) COMMENT: Khachatrian's hopelessly misogynist
stereotypes aside, a careful review of the content of his
presentation shows that he highlighted a number of
encouraging areas for reform. The problem is that he and his
deputy, Afrikian, lack credibility as the standard bearers of
organizational transformation. Both men have been top
leaders in the organization through years of profoundly
corrupt, deeply politicized, and predatory practices.
Another off note is that he failed to substantively engage on
any point ventured by CDA -- failing to bite even on
assistance ideas -- but rather moved quickly to other topics.
Khachatrian's interest in international assistance seemed
limited to high-tech equipment and expensive infrastructure
projects, neither of which fit with our preference for slowly
re-establishing trust through training and technical
assistance until the reform process becomes further
entrenched. Nonetheless, the president and prime minister
continue to invest significant political capital in the
premise of customs reform, and Khachatrian's prepared talking
points cover many of the right themes. It is also a
perversely encouraging sign that over ten percent of customs
staff have resigned since the reform process was launched, as

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this would seem to imply that many of the officers who were
in the agency for the wrong reasons have already decided that
the anti-corruption drive will be long-lasting. Though we
are disinclined at this time, on the basis of Khachatrian's
performance, to recommend any major new U.S. assistance
engagement with customs, we will certainly watch closely to
see if the postive rhetoric bears fruit. It may be that by
the mid-October U.S.-Armenia Economic Task Force (USATF)
meetings in Washington, there could be more basis for
fruitful collaboration.
PENNINGTON