Armenia: Spurned by MCC, Yerevan Looks to Iran, Russia for Road Money

The Millennium Challenge Corporation's recent decision to slash funds for its Armenia program has prompted the Armenian government to seek alternative financing for infrastructure improvements from Iran and Russia.

Citing the Armenian government's alleged inability to meet the program's "eligibility criteria" on civil rights, the Millennium Challenge Corporation's board of directors decided on June 10 to take $64 million out of an original $235.6 million budget for rural road reconstruction. [For background see the Eurasia Insight archive]. MCC Senior Executive Director Rodney Brent noted in a statement that "I do not anticipate that the Board will revisit this issue in the future."

Hit hard by the global financial crisis -- the Armenian economy could shrink by 20 percent this year, according to Prime Minister Tigran Sarkisian. Thus, the MCC decision is forcing the Armenian government to scramble for ways to make up for the lost funding. The MCC program was touted as a way to support the country's agricultural sector and to slash poverty rates. "Reconstruction of rural roads is highly important and we will do our best to restart the program with the support of other international structures," stated Eduard Sharmazanov, spokesperson for the governing Republican Party of Armenia.

Sharmazanov said discussions had been held with Iran about providing some part of the $64 million. But those discussions took place before Iran's bout of post-election unrest began in Tehran in mid-June. Iran, which borders Armenia to the south, is an ally with whom Yerevan has enjoyed growing energy ties. The two countries share a gas pipeline and work has begun on a cross-border railway. Plans for an oil pipeline have also been announced. "We were discussing the involvement of the Iranian side [with Tehran] before the political tensions there began," Sharmazanov said.

Emma Hakobian, an advisor to Economy Minister Nerses Yeritsian, whose ministry coordinates the road reconstruction project for the government, said that the possibility of asking for funding from Iran and Russia was debated internally as soon as the MCC made its June 10 decision. Russia has already pledged to extend a low-interest $500 million "stabilization" loan to Armenia this year. [For details, see the Eurasia Insight archive].

Neither Hakobian nor Sharmazanov would elaborate about the status of discussions to find make-up funds. Talks with "very weighty [international] organizations" about compensatory financing had commenced, said Hakobian, who declined to identify the organizations by name. "We'll announce their names shortly, as soon as everything becomes clear," she said.

Some 25 kilometers of road had been reconstructed and put into use before the June 10 decision hit, according to Millennium Challenge Armenia Chief Executive Officer Ara Hovsepian. About 350 kilometers of road were originally slotted for repair. Work has since stopped on the project until alternative financing can be found, Hovsepian said.

Further cuts for US assistance to Armenia could be in store. On July 9, the US Senate Appropriations Committee approved a bill that would slice 2010 aid to Armenia by $17 million compared to this year's allocation, according to the Armenian Reporter, a US-based weekly publication.

Meanwhile, the blame game for Armenia's lost MCC funds has started. Despite a recent political amnesty that scored points with international observers, government critics charge that Yerevan still has far to go in proving its democratic credentials. They argue that not only was the March 1, 2008, political violence in Yerevan responsible for the loss of MCC funding, but also the government's conduct during the May 31 City Council elections in the Armenian capital - a vote that opposition leaders allege the Republican Party stole. [For background see the Eurasia Insight archive].

"Authorities . . . do everything just the opposite way of how they should!" complained Hrant Bagratian, who served as prime minister from 1993 to 1996 under former president Levon Ter-Petrosian, who now leads Armenia's main opposition movement.

Others blame the recent slow-down in Armenia's diplomatic rapprochement with Turkey. With the normalization initiative stalling, Armenia is losing leverage as it tries to curry favor with the international community, argued independent analyst Yervand Bozoian. [For background see the Eurasia Insight archive]. "Armenia has drastically lost its credits internationally due to both its foreign and domestic policies," Bozoian said.

It remains unclear what specific action or actions triggered the MCC's decision to revoke road-construction funds.

Armenia MCC Director Hovsepian told EurasiaNet that "[t]he decision to suspend the financing of road construction programs temporarily was made after last year's March 1 events." [For background see the Eurasia Insight archive]. In a March 20, 2008 letter to then-outgoing president Robert Kocharian, MCC Chief Executive Officer John Danilovich warned that the crackdown "could have negative effects on Armenia's eligibility for MCC funding."

A May 2009 letter from US Secretary of State Hillary Clinton to Armenian President Serzh Sargsyan, however, noted that Yerevan's May 31 municipal elections "will definitely play an important role while discussing Armenian issues during the session of the MCC's board planned for early June."

Republican Party spokesperson Sharmazanov dodged the suggestion that the MCC took action in response to the government's questionable election practices. While there are "some problems" with democracy in Armenia, he said, building a democracy is an ongoing process. "We don't think Armenia has regressed," he said. "[E]verything has been done to comply with the criteria for a democratic country."