Publication: Eurasia Daily Monitor Volume: 3 Issue: 133

Greece’s Hellenic Telecommunications Organization (OTE) is pressing ahead with the surprise sale of its commanding share in Armenia’s national telephone company, ArmenTel. Four companies and consortiums, two of them Russian, have already been short listed to take part in a tender called by the Greek giant earlier this year.

The bidding began after OTE’s announcement on April 4 that it has “begun a procedure of examining options to sell its 90% stake in ArmenTel’s share capital.” The company said in a statement that the decision was made following “consultation with the Armenian government,” which owns the remaining 10% of ArmenTel.

The official explanation for the move was that OTE, one of Europe’s largest telecom firms, has decided to focus on its core holdings in Greece and subsidiaries in Bulgaria, Serbia, and Romania. OTE wants to confine itself to the Balkans despite the fact that ArmenTel is apparently the most profitable of its divisions. Armenia may be the poorest of the countries where the Greeks have a presence, but its national telecom operator posted $58 million in earnings last year, or almost 57% more than in 2004. In contrast, OTE as a whole posted a net loss of $275 million in 2005.

ArmenTel’s profits surged despite the abolition in late 2004 of the most lucrative of its controversial exclusive rights to telecommunication services in Armenia. The 15-year legal monopoly on fixed-line and wireless telephony as well as Internet connections with the outside world was a key term of ArmenTel’s $200 million takeover by OTE in 1998. The monopoly’s consequences were particularly negative for mobile phone communications, which became the most underdeveloped in the region. The Greeks’ inexplicable failure to invest in the local wireless network meant that demand for mobile phones far exceeded supply, with ArmenTel resorting to Soviet-style rationing of prepaid subscription cards. At one point they were worth a staggering $200 each in the black market.

OTE executives have admitted that their handling of the mobile phone sector has been a gross failure, but said it has been offset by large-scale Greek investments in Armenia’s fixed-line network, which they believe is now the most advanced in the South Caucasus. The Armenian government, however, has repeatedly accused OTE of inflating its capital investments that, according to ArmenTel chief executive Vasilios Fetsis, have totaled $300 million. The conflicting claims sparked a bitter dispute two years ago, with the two sides filing lawsuits in a London-based economic court before reaching an out-of-court settlement that ended ArmenTel’s exclusive grip on mobile telephony. The long-awaited launch in July 2005 of Armenia’s second wireless network, operated by a Lebanese-owned company, led to an explosion in mobile phone use in the country and forced ArmenTel to drastically cut its prohibitive phone charges. The number of cell phone users has since almost tripled to about 700,000.

Reports in the Armenian press have said that the authorities in Yerevan, which have the right to veto any sale of ArmenTel, have made it clear that the new owner will not be able to inherit ArmenTel’s remaining control of external Internet traffic from the Greeks. That monopoly has been widely blamed for the poor quality and relatively high cost of Internet connections in Armenia. Local and Western experts regard it as a serious obstacle to further development of information technology, one of the most promising sectors of the Armenian economy.

Michalis Tsamaz, OTE’s managing director, noted during an April news conference in Athens that the Greek group has decided to sell its Armenian subsidiary also because “there is a rather large interest from Russian companies and funds.” Three of them — Rostelekom, Sistema, and Vympelkom — were among a dozen international companies that showed interest in ArmenTel after it was put up for sale. OTE said on June 22 that Sistema and Vympelkom as well as two consortiums, led by the Dubai-based Emirates Telecommunications Corporation and Britain’s Knightsbridge Associates, have been short listed for the next stage of the tender.

Sistema and Vympelkom, which own Russia’s two biggest mobile phone operators, reportedly see themselves as the frontrunners in the race, a confidence shared by some Russian economic analysts. One of them, Yelena Bazhenova of the Aton investment group, was quoted by Kommersant daily on June 10 as arguing that they “have more contacts and connections with Armenian officials” than the other bidders do. They will also try to take advantage of the existing close relationship between Armenia and Russia that has allowed Moscow to establish near-total control over the Armenian energy sector. Ownership of ArmenTel would no doubt significantly boost Russia’s economic presence in the South Caucasus state.

Yet unlike the highly controversial and opaque Russian-Armenian energy deals, the sale of ArmenTel looks set to be expedited on a competitive basis and in a far more transparent fashion. The fact that the tender is being handled by Britain’s HSBC financial services group suggests that OTE wants to sell its Armenian subsidiary to the highest bidder, which may well turn out to be a Russian firm. Whether that would be good for Armenia is less certain. For all its failings, ArmenTel has never been suspected of tax evasion (which remains the norm in the Armenian business community) and is currently the country’s number two corporate taxpayer. Its potential Russian owners are not necessarily as committed to Western-style accounting.

(OTE press release, June 22; Kommersant, June 10; Haykakan Zhamanak, May 25; Agence France-Presse, April 4)