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DE RUEHYE #0448/01 1751838
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R 241838Z JUN 09
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC 9238
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 YEREVAN 000448 
 
SENSITIVE 
 
SIPDIS 
 
E.O.12958: N/A 
TAGS: ECON EFIN ETRD KTDB AM
SUBJECT: ARMENIA'S AMCHAM DISCUSSES CONCERNS WITH AMBASSADOR 
 
YEREVAN 00000448  001.2 OF 002 
 
 
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SUMMARY 
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¶1. (SBU) During their June 15 meeting with the Ambassador, members 
of the American Chamber of Commerce in Armenia (AMCHAM) discussed 
taxes and customs, rule of law, and the general business environment 
in Armenia.  AMCHAM members expressed dismay at the GOAM's 
ineffective tax administration and the ways in which it is 
attempting to compensate for decreased state revenues amid the 
mounting economic crisis.  One member also warned of an imminent 
collapse in Armenia's housing market due to spiraling mortgage 
defaults.  Against this gloomy backdrop, however, the AMCHAM members 
offered solutions to achieve greater transparency and fairness in 
tax and customs administration, and inquired about the possibility 
of participation in future meetings of the U.S.-Armenia Joint 
Economic Task Force (USATF) where they could table their proposals. 
END SUMMARY. 
 
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Disgruntled with ArmeniaQs Tax System 
------------------------------------- 
 
¶2. (SBU) During a June 15 meeting with Ambassador Yovanovitch, 
AMCHAM members expressed their concerns with a proposed tax increase 
under discussion in Armenia's parliament.  The bill calls for a five 
percent increase in income tax, as well as an as-yet-unspecified 
increase in property tax.  Most AMCHAM members did not seem 
persuaded when First Mortgage Company's David Atanessian said: "I 
don't think it (the bill) will pass as there is a lot of opposition 
to the draft law both within the government and the public." 
Another draft law aims to modify the ratio of tax revenues 
(increasing income tax while lowering value added taxes) in the 
budget, which may be a result of pressure by the IMF and World Bank 
on the GOAM to restructure Armenia's tax revenues. 
 
¶3. (SBU) Some members expressed dismay at another draft law that 
would embed tax representatives within large businesses to ensure 
better compliance with tax laws.  Even though Ameria Bank's Tigran 
Jrbashian argued that this will actually help to combat the culture 
of corruption, other members felt such a strategy would simply be 
countered by wealthy oligarchs "buying off" their new "tax 
inspectors."  Overall, AMCHAM members said they are very frustrated 
with a tax system that they find both inequitable and outdated. 
 
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Customs: Unfair and Unpredictable 
--------------------------------- 
 
¶4. (SBU) AMCHAM members railed against Armenia's customs regime, 
calling it a "systemized victimization of honest businesspeople" 
that is rife with corruption and cronyism.  "Only ten percent of all 
imported goods go through proper customs procedures, while others 
(importers) avoid payment of appropriate duties," complained First 
Mortgage Company's David Atanessian.  In addition, AMCHAM members 
complained that Armenian businesses waste valuable time and 
resources when they must constantly  argue with tax authorities on 
pro forma issues that should be easily resolved.  Members also 
complained that government over-regulation is strangling their 
ability to grow, while customs inspectors' lack of skills inhibits 
equality and efficiency.  The issues of customs valuation and 
reference pricing remain the biggest concerns for importers, as the 
decisions of customs officials are often arbitrary and ungrounded. 
 
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Rule of Law: Porous and Outdated 
-------------------------------- 
 
¶5. (SBU) AMCHAM members unanimously agreed that ill-enforced or 
non-enforced rules regarding customs and taxes were hindering 
business development.  Members complained that amidst such a crooked 
business culture, honesty becomes a disadvantage.  Oligarch-owned 
businesses prosper while small and medium enterprises are being 
squeezed for additional tax payments.  "I'm facing unfair 
competition," griped Hakob Hakobian from the Tufenkian Heritage 
Hotels firm, and "my competition is stealing my employees after I 
have trained them for years, just because they have cash" as a 
result of getting away with tax evasion.  Several members grumbled 
that the government remains oblivious to the negative impact that 
unenforced or crooked tax and customs regulations have on business 
development inside Armenia. 
 
¶6. (SBU) AMCHAM members claimed that approximately seven 
well-connected oligarchs currently control the construction industry 
in Yerevan, and that they operate unhindered in spite of their 
blatant non-compliance with tax and customs regulations.  They also 
complained that legal processes are complicated by the lack of case 
law in Armenia's judicial system, and that the rules on the books 
are not only selectively enforced, but also outdated.  "We are still 
 
YEREVAN 00000448  002.2 OF 002 
 
 
using Soviet rules for sanitation and construction inspection," 
protested Tigran Jrbashian of Ameria Bank.   . 
 
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Impending Mortgage Crisis 
------------------------- 
 
¶7. (SBU) Gurgen Potikian, CEO of Peak Realty, warned of an imminent 
collapse in Armenia's housing market this fall due to spiraling 
defaults on mortgages.  The local impact of the economic crisis had 
left many people unemployed and with no income generation.  And 
because many Armenians had collateralized their real estate prior to 
the onset of the crisis, they are now facing extreme difficulty in 
repaying their loans.  Unless there is a significant change in 
home-owners' ability to pay their mortgages, Potikian predicted the 
housing market would collapse by September.  In addition to the 
default on mortgages, the construction industry in Yerevan has 
ground to a near halt due to the economic crisis. 
 
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Possible Solutions to Improve the Business Culture 
--------------------------------------------- ----- 
 
¶8. (SBU) Regarding customs administration, one solution proffered by 
AMCHAM members would be to encourage more transparency by cracking 
down on the corrupt practices of customs officials and those who 
bribe them.  Another option could be a policy of "double-checking" 
customs documentation, and stronger oversight on the business 
practices of the oligarchs.  Some members said the only way to 
change customs administration would be through litigation against 
the State Revenues Committee that controls tax and customs 
administration.  In this respect, some members voiced optimism over 
"The Law of Legal Acts" that goes into force in 2010; the law will 
oblige the GOAM to report on issues such as competition and 
anti-corruption.  The members thought the law would improve the 
ability of Armenia's legal system to rule on business disputes. 
 
¶9. (SBU) Andrew Hovannisian, the Deputy Director of the Synopsis IT 
firm, expressed disappointment that the GOAM has not supported the 
emergence of Yerevan's "mini-Silicon Valley," and has instead 
supported the establishment of a techno-park in the city of Gyumri. 
He recommended that the government focus more on the businesses 
already present in Armenia.  Finally, AMCHAM members agreed that 
their businesses needed better cooperation in order to realize 
AMCHAM's goals, and they suggested using the U.S.-Armenia Joint 
Economic Task Force (USATF) as a forum to raise the concerns of 
Armenia's business community. 
 
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COMMENT 
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¶10. (SBU) The testimonies of AMCHAM members show just how 
challenging it is to navigate the labyrinth of Armenia's corrupt and 
overly bureaucratic business culture.  The local impact of the 
economic crisis intensifies these challenges.  We find it 
disconcerting that while the GOAM perennially complains of a paucity 
of US investment, it has selective hearing when the AMCHAM, one of 
Armenia's major business associations, raises legitimate concerns in 
regular meetings with Cabinet officials.  We will continue to 
impress upon GOAM officials that if they is serious about attracting 
US investment, they must first reform Armenia's unwelcoming business 
culture. 
 
PENNINGTON