CELL PHONE NETWORK FAILURE HIGHLIGHTS ARMENIA’S TELECOM WOES
By Emil Danielyan

Eurasia Daily Monitor, DC
The Jamestown Foundation
Aug 17 2005

Tuesday, August 16, 2005

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)