RUSSIA AND ARMENIA SIGN AGREEMENT ON USD 500

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000348

SIPDIS

E.O. 12958: DECL: 05/20/2019
TAGS: EAID ECON AM RU
SUBJECT: RUSSIA AND ARMENIA SIGN AGREEMENT ON USD 500
MILLION LOAN

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SUMMARY
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1. (C) Russia and Armenia on May 20 signed a long-anticipated
agreement under which Russia will provide Armenia a USD 500
million loan aimed helping the GOAM mitigate the impact of
the global financial crisis. A GOAM official has told us
these funds will be used primarily for infrastructure
projects and SME lending. The GOAM has consistently denied
that the loan carries any non-financial conditions. FM
Nalbandian mentioned to the Ambassador on May 9 that an
additional loan from Russia could be in the cards. Since the
start of the crisis, Armenia has received over USD 1 billion
in pledges from the IMF, World Bank and Asian Development
Bank, and is in the process of requesting additional IMF
assistance to bolster its declining economy. End Summary.

LOAN AGREEMENT SIGNED
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2. (SBU) On May 20 in Moscow, Russian Finance Minister Alexey
Kudrin and Armenian Finance Minister Tigran Davtyan signed an
agreement on the release of a USD 500 million loan. This
loan had been expected for several months, and had recently
been approved by the Russian Duma. The agreement still needs
to be ratified by the National Assembly, and the GOAM expects
to receive the funds by late June.


3. (C) The loan, which had been agreed in principle in
February, will be repayable in 15 years, with a five-year
grace period, and it carries an interest rate of four percent
(LIBOR 3 percent). GOAM officials told us last week that
there will also be a five-year grace period on repayment.
Deputy Finance Minister Vardan Aramyan told us today that the
GOAM plans to use half the money for housing construction in
the earthquake zone around Gyumri, and the other half for SME
lending; the GOAM will most likely buy the loan portfolios of
banks that agree to provide SME loans at slightly reduced
interest rates (15-16 percent compared to prevailing rates of
18-19 percent).


4. (C) GOAM officials have consistently denied that there are
any "non-financial" terms attached to the loan, nor any plans
to turn over ownership of any infrastructure as repayment for
the loans. Several years ago the GOAM transferred ownership
of the Hrazdan Thermal Power Plant fifth unit to a
state-controlled Russian company as payment on a debt. In a
meeting with the Ambassador on May 9, FM Nalbandian hinted at
the possibility of yet another Russian loan to Armenia later
in the year.

LATEST IN A SERIES OF CREDITS
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5. (U) The GOAM has previously received pledges of USD 525
million (over four years) from the World Bank and USD 540
million from the IMF, and is currently negotiating several
programs with the Asian Development Bank. So far about USD
340 million of that money has been disbursed. The World Bank
approved a package of four operations for a total of USD 85
million in February, as the first installment of a four-year
program: USD 35 million under the International Development
Association (IDA) Fast Track Facility to support rural roads
(USD 25 million),the Armenian Social Investment Fund (USD 8
million) and rural enterprise and small-scale commercial
agricultural development (USD 2 million). Through the IBRD
it is providing USD 50 million as a credit line for access to
finance by SMEs. The World Bank loan carries a zero percent
interest rate for the first USD 150 million, with the
remainder at LIBOR one percent.


6. (U) The USD 540 million IMF Stand-By Arrangement for
Armenia made USD 240 million out of a total USD 540 million
loan available immediately upon its approval on March 6. The
remainder will be disbursed in nine installments, though GOAM
officials have indicated that they will seek to have those
disbursements expedited. The IMF program requires certain
exchange rate, monetary, financial and fiscal policies, as
well as continued structural reforms. The IMF loan is
provided at Special Drawing Rights (SDR) interest rate of
1.54 percent. The GOAM is in the process of requesting an
additional loan of approximately USD 500 million from the
IMF; an IMF team was in Yerevan last week to review the
request with GOAM officials.


7. (U) The GOAM is negotiating for Development Policy Loans
with the ADB for USD 40 million. It has also provided

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proposals for a USD 70 million Public Expenditure Support
Program and USD 170 million for the North-South Road
Corridors Investment Program, which will be presented to the
ADB board for approval later this year. ADB is providing
Armenia both concessional and hard window lending.

TIMELY AGREEMENT
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8. (C) The Russian loan agreement was reached just as the
latest information arrives about Armenia's declining economic
performance. During the first four months of 2009, Armenia's
GDP declined by 9.7 percent compared to the same period in
2008, construction declined by 20 percent, overall industrial
output by 11 percent and exports by 48 percent. The Central
Bank says it expects GDP to fall 5.8 percent this year,
though at this point that estimate seems highly optimistic.
Further details on Armenia's first quarter performance will
be reported septel.

COMMENT
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9. (C) The Russian loan has been discussed publicly for
months, and it appeared to be just a matter of time before it
would receive the required approvals and ratifications.
Given Russia's own financial difficulties, the loan, however
welcome by the Armenians, also has strategic benefit as
Russia seeks to enhance ties with its CIS neighbors. Russian
companies already own significant sectors of the Armenian
economy. While in principle we give little weight to GOAM
denials that it might transfer assets to Russia to repay the
loan, it is useful to recall the comment of a GOAM official
several months ago, who noted "there is nothing left to
sell." End Comment.
YOVANOVITCH