Publication: Eurasia Daily Monitor Volume: 2 Issue: 160

A small group of protestors outside the ArmenTel headquarters

The long-awaited liberalization of Armenia’s underdeveloped mobile phone sector could not have had a more unexpected and illogical outcome: the near-collapse of the country’s main wireless network. ArmenTel, the unpopular national telecommunications monopoly that operates the system, has still not clearly explained the causes of the serious breakdown despite facing heavy government fines. The situation is indicative of the murky nature of the telecom business in Armenia due to a lack of government transparency and corruption.

ArmenTel has developed a controversial reputation ever since it was purchased by the Greek telecom giant OTE in 1998. In return for $142 million, OTE also gained 15-year exclusive rights on all forms of telecommunication in Armenia. The Soviet-era fixed-line phone network was in shambles at the time, and the Greeks have since made considerable investments to modernize it. However, they have grossly (and inexplicably) failed to develop wireless communication. ArmenTel has capitalized on its legal monopoly only by setting disproportionately high fees, rather than expanding network capacity and rapidly increasing the number of its subscribers.

Consequently, public demand in mobile phones has by far exceeded supply, leading ArmenTel to resort to Soviet-style rationing of prepaid phone cards. Such was the shortage of those cards that they were at one point worth a staggering $200 each on the black market. Armenians wishing to buy them at their “legal” price of about $25 had to register with ArmenTel and wait for months, if not years. No wonder that Armenia had less than 300,000 mobile phone users as of the beginning of 2005, lagging behind neighboring Azerbaijan and Georgia, which each boast more than a million users.

That is one of the reasons why relations between ArmenTel and the Armenian government have been tense over the past seven years. The government has also accused the Greeks of inflating the volume of their investments in the Armenian telecom sector and abusing their monopoly on the country’s Internet connection with the outside world. Local Internet service providers have long complained about the high cost and poor quality of connections offered by ArmenTel. The latter has always denied any wrongdoing.

The two sides were on the verge of litigation at the London-based International Court of Economic Arbitration before announcing a compromise settlement last November. Under that deal, ArmenTel abandoned its grip on the mobile telephone market but retained its other exclusive rights. The government in Yerevan was quick to choose a little-known Lebanese-owned firm as Armenia’s second cell phone operator.

The provider, VivaCell, launched its network on July 1, quickly attracting tens of thousands of subscribers. The move coincided with a drastic deterioration of wireless connections provided by ArmenTel. Making or receiving phone calls through its network has since been extremely difficult and at times impossible. ArmenTel’s Greek managers have repeatedly apologized to the furious public for the flop, but they have not yet clearly explained its reasons, pledging only to fully fix the network by the end of August. The company’s chief executive, Vasilios Fetsis, admitted on August 11 that failure to do so could lead to a mass flight of ArmenTel customers to VivaCell. The latter hopes to have 300,000 subscribers by November.

This, however, did not keep the State Commission on the Protection of Economic Competition from fining ArmenTel $400,000 on August 12 on the grounds that the company abused its “dominant position” in the sector. “This is not a phone, I can only use it as a hammer,” the chairman of the regulatory body, Ashot Shahnazarian, said, angrily brandishing his handset.

ArmenTel strongly disagreed with the penalty and is now considering challenging it in court. Yet it is not only criticism that the OTE subsidiary has heard from Armenian officials. Meeting with Armenian students in Moscow on June 23, President Robert Kocharian praised ArmenTel for its investments in the fixed-line phone network that he said is now the most advanced in the South Caucasus. Kocharian also downplayed the problems with mobile telephone technology, saying that competition will sort them out in a matter of months. Indeed, that competition has already forced ArmenTel to cut its cell phone tariffs by half.

But nagging questions about the motives for Yerevan’s telecom-related decisions will remain. ArmenTel was set up in the early 1990s as a small joint venture of the Armenian government and a U.S.-owned offshore firm. It handled only external phone calls until August 1997, when it was mysteriously granted ownership of Armenia’s entire phone network free of charge. Armenian officials never clarified why they showed such generosity toward the obscure U.S. investor that received almost half of the $142 million paid by OTE in an international tender for ArmenTel a few months later. According to a lawyer privy to the tender’s details, the Greeks did not submit the highest bid for ArmenTel at the time but somehow got hold of the company anyway.

The Armenian authorities did not hold any tenders at all for the second mobile license that was granted to VivaCell for just $7 million. A competitive tender for that license could have clearly fetched tens of millions of dollars, a huge sum by Armenian standards. The cash-strapped government has similarly failed to officially explain why it has foregone the potential extra revenue to the state budget.

(Aravot, August 16; RFE/RL Armenia Report, August 11-12, June 23; Armenian Public Television, June 23)