EUR DAS BRYZA'S MEETING WITH ARMENIAN PRIME

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000580

SIPDIS

E.O. 12958: DECL: 08/12/2019
TAGS: PGOV PREL EAID ECON AM
SUBJECT: EUR DAS BRYZA'S MEETING WITH ARMENIAN PRIME
MINISTER

YEREVAN 00000580 001.2 OF 002


Classified By: Ambassador Marie L. Yovanovitch. Reasons 1.4 (b/d).

SUMMARY
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1. (C) Prime Minister Tigran Sargsian provided EUR DAS
Matthew Bryza an overview of Armenia's current economic
difficulties, and noted the severe blow represented by the
continued hold placed on Millennium Challenge Corporation
(MCC) roads funding. Bryza reminded that the MCC program is
performance-based, and that the USG hopes to see continued
progress on democracy and human rights, particularly with
regard to amnesty for political detainees. He hopes that
such progress could lead to renewed USG support, and
indicated the USG would continue financial and technical
assistance in key areas targeted for reform. Bryza assured
that the USG would continue to support credits to Armenia
from international financial institutions to help the country
weather the crisis. Sargsian showed interest in a proposed
USG initiative reach out to diaspora communities to support
projects in various countries, agreeing it could be used to
support a priority road project from the Georgian border to
Yerevan. END SUMMARY.

LARGEST GDP DECLINE IN THE CIS
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2. (C) EUR DAS Matthew Bryza's August 7 meeting with Armenian
Prime Minister Tigran Sargsian focused on the impact of the
global economic crisis on Armenia. Armenia's GDP declined by
16.3 percent in the first half of 2008, the largest drop in
the CIS. This year the GOAM projects a budget deficit of
about USD 700 million, equal to 7.5 percent of GDP. Most of
this shortfall will be made up by loans from the IMF, World
Bank, ADB and Russia. The GOAM expects as large a deficit in
2010 and at best one percent growth in GDP, which will create
serious social problems in the country.

LOSS OF MCC FUNDING A BLOW
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3. (C) Sargsian lamented that the June decision to continue
the hold on MCC road funds was a serious blow to the GOAM,
particularly in light of the global financial crisis and its
impact on the government's budget, which earlier this year
was cut about 10 percent due to severe revenue shortfalls.
While last year the GOAM made up for about USD 16 million in
withheld MCC funds to continue road projects, it is not able
to do so this year. The still-uncompleted projects will be
transferred from MCA-Armenia to the Ministry of Transport,
which will need to find funding for their completion.
(Comment: We understand the GOAM is seeking funds from the
World Bank and ADB for these projects. End Comment).


4. (C) Bryza indicated that the USG is well aware of the
impact of the financial crisis on Armenia, and understands
the loss from the continued hold on MCC roads funding. He
reminded Sargsian, however, that MCC was designed not simply
as an aid program but as a means to promote democracy and
good governance. He noted that despite the hold, the USG has
maintained two-thirds of the program's funding (for
irrigation canals and other non-road projects) and hopes that
with recent encouraging developments like the detainee
amnesty, there might be a way for the USG to eventually
provide assistance for remaining road projects, though
outside the auspices of MCC. With regard to budget support,
Bryza noted that the U.S. is the largest stakeholder in all
three institutions, and has consistently supported increased
budget support to Armenia to help the country weather the
current financial crisis.

CUSTOMS AND TAX REFORM KEY TO DEMOCRATIZATION
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5. (C) The PM asserted that reforms of the customs and tax
Services -- perennially among the most corrupt and
dysfunctional parts of the GOAM -- are the cornerstone of all
democracy reforms. Armenia cannot be truly free and
democratic without free elections and fair tax
administration. The GOAM has sought USG technical and
financial assistance to pursue reforms in these areas
(Note: USAID will soon have a tax reform program in
operation, replacing one that was terminated in mid-2008. End
Note). Bryza agreed that democracy and fundamental issues
like tax reform go together, and praised Sargsian for
focusing on these areas.

ENGAGING THE DIASPORA
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6. (C) Bryza advised Sargsian of the Secretary's nascent

YEREVAN 00000580 002.2 OF 002


initiative to engage diaspora communities around the world in
support of projects in their ancestral countries. Sargsian
noted that the GOAM has a project with the German agency KfW
that might serve as a useful model. Bryza suggested that a
continuation of the MCC-funded road in Georgia connecting
Javakh and Tbilisi that extends to the Armenian border and
eventually to Yerevan is a potential project to be funded
through such an entity. The Prime Minister, who is seeking
funding for such a project, was extremely interested.

COMMENT
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7. (C) The Prime Minister faces serious challenges in
addressing Armenia's troubled economy, and with the crisis
caused largely by external factors, he has few tools at his
disposal. Sargsian understands the reason for the loss of
MCC funding, but is not in a position to enact the changes
that could have restored it. We are hopeful that Sargsian is
serious in his stated intention to pursue reform in the tax
and customs services, but with the entrenched interests he
will face, it may be a challenge too great for even his best
intentions. END COMMENT.


8. EUR DAS Bryza has not cleared this cable.
YOVANOVITCH