If only due to Armentel’s fixed-line monopoly, internet telephony looks unlikely to be on the cards for some time. Armenia established a permanent internet link in March 1994, although it has had non-permanent dial-up access since 1992. However, the paucity of the infrastructure - particularly the PSTN’s low digitalisation - hampers advances in internet connectivity. Local scientists and computer experts are taking a very active role in pushing for improvements, for instance bringing a NATO advanced networking conference to Yerevan in May 1997. The Armenian Internet Users’ Group (AmIUG) - a public organisation that unites major internet users - has established the Armenian Network Information Centre (AMNIC), the country’s official network information centre.

There are five main internet providers in Armenia: Armentel, the Yerevan Physics Institute, the National Academy of Sciences, the Armenian Information Company (Arminco), and Infocom (chosen by the MC as the national commercial data carrier). The landscape is not yet very competitive.

Leading Players

In 1994, Armenian-Russian joint venture Arminco (Armenian Information Company) became the country’s first internet service provider. In addition to access via the PSTN and separate communication channels, Arminco also provides its AIRNET network - a wireless radio-modem network that in 1998 had a speed of two megabits/second.

Arminco also provides web design services and hosts the Armenian Network Information Centre, which manages internet usage and runs the country’s national domain (‘AM’). In terms of data communications, it designs and installs LANs (local area networks), and elaborates turn-key projects. In early 1998, Arminco won an important dispute with Armentel. The latter was criticised by the MC for obstructing Arminco’s activities in data communications.

Apart from Arminco and Armentel, there are three other major internet service providers: Yerevan Physics Institute (primarily a scientific data carrier), the National Academy of Sciences (runs a scientific network connecting 42 research institutes), and Infocom. Infocom (www.amilink.net) is the international operator of the Armenian National Data Transfer Network (ArmPAC), and it provides data transfer networks (X.25, internet), fax, telegraph, and even telephone via Iskra-2 station.

Equipment

Leading Players

The main equipment providers in Armenia include: OTE, Hellascom (Greece), Siemens and AT&T and Lucent.

Regulatory Environment

The Ministry of Communications is the policy-maker and regulator for the industry, but its ownership of the PSTN was withdrawn in 1993. Telecoms regulation has so far been insufficient.

Ministry of Communications
28 Nalbandyan Str.
Yerevan 375010
Armenia
Tel: (374 2) 52-6632
Fax: (374 2) 15-1446
Email: mailto:ADerDFA@ptt.armernia.su

Government Strategy

The government’s strategy is officially favourable to liberalisation. Thus, the function of operator was quickly separated from that of policy-maker/regulator after the fall of the USSR. However, the need for clear regulation and the opening-up of the industry is taking longer to be recognised. Privatisation has been more of a priority than liberalisation, in the belief that foreign investment was the key to rapid improvements in the PSTN. Thus, whilst OTE has bought up 90% of Armentel, the licence includes a stifling 15-year monopoly on basic fixed-line services, as well as a similar monopoly on cellular communications (to be reduced to five years at an unspecified date) and a CATV licence, leaving little room for competition to strengthen. However, the OTE licence may have paved the way for further improvements. Thus, the Greek operator’s entry into the market made the need for clear regulation more pressing. A new Telecom Law came on stream in 1998/1999, laying the foundations for improvements in practice. Furthermore, the country’s parliament actively lobbied against Armentel’s 15-year monopoly and managed to secure a constitutional court ruling against it. The legislature’s motivation was not so much a disinterested commitment to open telecom markets as a combination of nationalism and consumer defence.

The monopoly issue, as well as the sensitive nature of tariff rebalancing and allegations of corruption surrounding the OTE takeover, led President Robert Kocharian to set up an investigative commission in early 1999.

The work of the presidential commission, which started on 3 March 1999, is divided along three lines: (i) from 1988 to 1994 (date of the launch of Armentel as a joint venture between the state and Trans World Telecom); (ii) from 1994 to 1997, examining alleged irregularities in the terms of TWT’s involvement; (iii) the period after 1997, when OTE won a tender for 90% of Armentel. In July 1999, worryingly, the commission was unofficially reported to have found irregularities in both the formation and the privatisation of Armentel. The finger was pointed at former Prime Minister Hrant Bagratian, who retaliated by reminding the commission that the OTE deal had gone through in July 1997, at which time the prime minister was none other than current President Robert Kocharian.

Apart from the controversies mentioned above, which reflect the lack of a transparent regulatory environment, there have also been a small number of legal disputes. The two main ones are as follows:

• A dispute between Armentel and data/internet service provider Arminco was mediated by the MC in early 1998. The MC found that Armentel had unduly attempted to obstruct Arminco’s data transmission activities and stressed that, although alternative providers need to lease their long-distance connections from the telco, the data market is open.
• The MC is involved in an on-going dispute with TWT and Armentel over alleged overdue tax payments on privatisation. In July 1999, the MC obtained a court order against the two companies. The dispute is ongoing and could, in a worst-case scenario, jeopardise OTE's investment strategy.

Important Regulations

A new telecoms law was passed in February 1998, but the regulatory environment still calls for major improvements. Specific regulatory characteristics of interest in Armenia include the following:

• Regulator’s role: the MC has not had ownership of the PSTN for some time now, which has given it some independence. However, it still uncomfortably straddles for the roles of policy-maker and industry-wide regulator, which, given the amount of political controversy surrounding telecoms privatisation and liberalisation, is not a viable arrangement. In early 1999, Minister of Post and Telecommunications Artak Vardanian said that he expected an independent regulator to be set up by the end of 1999. Preparations are being made with the assistance of several European structures.
• Monopolies: the government has been advocating the view that, at this stage of telecoms development, basic fixed-line services in Armenia remain a natural monopoly. However, this has been successfully challenged by legislators, and the situation is likely to evolve substantially in the coming months and years, with a shortening of Armentel’s 15-year monopoly a distinct possibility. Already in 1998, EBRD pressure helped to reduce Arm GSM’s cellular monopoly from 15 to five years, although this is not yet set in stone. Legislation clearly determining relations between the state and natural monopolists, as well as a consistent anti-monopolistic policy, are still lacking.
• Tariffs: Tariff rebalancing and increases in line with costs are a necessary part of the overhaul of basic fixed-line services. However, this is a highly sensitive issue in Armenia, where, for indicative purposes, the average monthly salary of a civil servant is US$26.50 (Union of Armenian Consumers figure). Armentel’s tariff hikes have created an uproar. In April 1999, Armentel agreed not to raise tariffs for rural areas that have not yet felt PSTN improvements, since tariff hikes are supposed to be justified by the real cost and increased quality of service. This means that about one-third of main lines in 1999 are to escape the rises. In parallel, the MC is also pushing for Armentel to determine its tariffs in drams (the Armenian currency) rather than dollars, so as to shield consumers from exchange-rate fluctuations. In early 1999, the socially conscious parliament attempted to amend the Telecom Law in order to gain control over the setting of tariff limits. It failed, and this function remains the MC’s prerogative. In due course, the new independent regulator to be set up by the end of 1999 will take this over. In December 1999 the EBRD announced that it intends to launch a programme to create an independent regulator with the power to set tariffs. However, Ruben Tonoyan, the Telecoms Minister, does not seem to be sold on this idea.
• Licensing: the MC is responsible for licensing telecoms services. Under the Telecom Law, all telecoms services are subject to licensing.
• Cable and internet telephony: Both of these are implicitly made impossible by Armentel’s 15-year monopoly on basic telephony. The weak extent of CATV and internet access provision suggests that the issue will not rise to the top of the regulatory agenda for some time.
• Data transmission services: Data transmission is an open market, subject to obtaining a licence and finding an arrangement with Armentel over the leasing of lines. In early 1998, Arminco won a ground-breaking dispute with Armentel over the latter’s obstruction in the field.
• Quality of services and universal service: as a monopolist, Armentel is bound by its licence with the MC to honour a number of commitments and attain a number of targets (see Sector Organisation: Fixed-Line Communications). The digitalisation of the PSTN is Armentel’s number one priority. Tariff rises are being applied only in areas where digitalisation has been implemented and improved services can justify them. This provides an incentive for Armentel to close the market’s huge rural gap. Up to 2003, the telco plans to connect 800 villages to the digital network. Fixed wireless technologies are likely to play a key role in this roll-out.
• Interconnection: interconnection remains a relatively minor issue, since Armentel has no fixed-line telephony competitors and also operates the country’s only cellular and paging networks. The law provides for unhindered interconnection with the PSTN for alternative data transmission providers, and this was upheld by the MC in early 1998’s dispute between Armentel and Arminco (see above).
• Number portability/numbering: the regulatory environment does not as yet address these issues clearly.

Foreign Investment

Overview

The sale of a 90% stake to OTE in 1998 is testimony to the government’s openness to foreign investment into telecommunications. Back in 1993, the government’s move to form Armentel as a joint venture with the US’s Trans World Telecom was already groundbreaking by regional standards.

However, the controversy surrounding both of these privatisations (see Regulatory Environment) shows that there could be some improvement. There is a popular feeling among the political establishment that (i) foreign investors such as OTE are purely out to make a profit and are not sensitive to the social situation in Armenia when they set their tariffs, and that (ii) the state is selling its assets too cheaply. The way in which the Constitutional Court, following parliamentarians’ complaints, ruled against the 15-year monopoly clause in the Telecom Law is indicative of the possible obstacles to involvement.

There is no active opposition to FDI, either within the leadership or among the population at large, which, if anything, is accustomed to investment and assistance from the Armenian diaspora abroad, but the political environment is still fragile and a party system based on issues has not yet emerged. This creates a degree of uncertainty as to the specifics of telecoms development, even if the broad orientation towards liberalisation is unlikely to be questioned.

Structural Factors

Armentel already dominates the market, and its strong footing and monopoly make entry difficult. However, the data and CATV markets at least are open. Furthermore, the huge needs of the PSTN alone are set to create huge opportunities for equipment providers, financed by OTE. Manufacturers and installers of fixed wireless solutions should benefit particularly, given the need for a fast network roll-out reaching remote rural areas.

More generally, Armenia’s business environment is far from perfect. As elsewhere in the former Soviet Union, Armenia’s bloated bureaucracy needs to be reduced and streamlined in order to enhance the state’s administrative capacity and make it more conducive to business. In most cases, the bureaucracy is complicated and time-consuming. In some offices, such as the customs and tax inspectorates, foreign investors are liable to encounter over-zealousness. Corruption was also already widespread during the Soviet period. Since independence, levels have increased as a result of the country’s tumultuous transition and economic hardships. Demands for bribes and favours may be encountered at all levels of the state bureaucracy, making day-to-day business less fair and more difficult to navigate. Contacts are very important. Concepts such as the conflict of interests are absent from the legal system and business mentality. Unmonitored links between government and business have grown, and the corruption laws used are outdated adaptations of the old Soviet criminal code. Since late 1996, the government has openly sought to curb the rise of corruption. A number of top-level investigations have been launched, but tangible day-to-day improvements will take some time to be felt. The problem is unlikely to be resolved in the near future.

A background source of uncertainty that has been a brake to FDI is the dormant conflict with neighbouring Azerbaijan over Nagorno Karabakh, a mountainous ethnic-Armenian exclave inside Azerbaijan. A bloody war ended in 1995, but no settlement has since been reached. As a result of the war, Armenia faces embargoes from Azerbaijan and Turkey, and its traditional trade routes over land have been severely disrupted. The issue poses no day-to-day risk to foreign investors, but in the absence of a settlement, Nagorno Karabakh remains a time bomb: Armenia currently occupies 20% of Azeri territory, and the government recently accused Azerbaijan of plotting a resumption of hostilities.

Outlook

Trends

In the medium-to-long term, there is potential for sustained growth in all the sub-sectors of the industry:

• The economy is moving towards a market economy. The business environment is still very far from perfect, but fast GDP growth, despite such external shocks as Russia’s crisis, should, if sustained by sound economic management, in due course lead to increases in telecoms consumption. Modernisation and expansion will be required in order to give the economy and society the connectivity that they need.
• Although it is still far behind even the standards seen in Central Europe or the Baltic States, the regulatory environment for telecommunications has been evolving and is becoming clearer. There is currently some uncertainty over Armentel’s monopoly, and many issues still need to be clarified. The separation of policy-making from regulatory functions also lies ahead.
• Some deadlines and targets have been set, and although issues of contention regarding privatisation/tariff rebalancing have come to the fore, they have so far been dealt with in a transparent way.

External Factors

As mentioned in Leading Players, WTO and European structures are having an indirect influence on the sector. The Armenian diaspora, too, is helping to shape transition, and has been an important source of foreign investment. Global technological change in the industry is having an impact: in many ways: Armenia is leapfrogging several stages of Western technological development, jumping straight from antiquated Soviet equipment to advanced international standards. This is both positive and, due to the costs of modern technology, a source of social strain.

Upcoming Developments

The main deadlines and challenges for the industry in the foreseeable future are:

1999:

• Start of a new industry-wide regulator independent from the Ministry of Telecommunications
• Report of the presidential commission on telecoms controversies (June/July).
• EBRD and Levantis (Greece) buy stakes in Armentel.
• Armentel investment target: US$74m.

2000:

• Tariff increases continue as rural services expand. Armentel investment target: US$57m.

2001:

• Armentel investment target: US$57m.

2002:

• Armentel investment target: US$43m.

2003:

• Armentel investment target: US$33m.
• End of Armentel’s monopoly on cellular mobile communications.

2003/2004: