Letter to IMF

12th January 2005

International Monetary Fund

Representative Office

1 Melik-Adamyan Street

Yerevan 375010

Attn: Mr James McHugh - Resident Representative

Ref: Privatization of the "Sevan-Hrazdan HPPC" CJSC.

Dear Mr McHugh,

With respect to the ‘Government’s Integrated Finance Rehabilitation Plan’, which is subject to IMF surveillance, Item 32, Post Balance Sheet Events in the 2002 Armenergo statement includes:

• "In accordance with the RA Government decree #405A, dated 29 March 2003, the liability of 40 million USD owed to Russian companies for the nuclear fuel exported to Armenia during 1995-2001 should be secured by the Company:
• The Company undertakes the liability of ANPP CJSC at the amount of 40 million USD owed to the Russian companies, offsetting its own liabilities towards ANPP CJSC.
• The liability of "Sevan-Hrazdan HPPC" CJSC at the amount of 35 million DM is transferred to the Company.
  
• In return, the Company receives assets of "Sevan-Hrazdan HPPC" CJSC at the carrying amount of 54,400,000 KAMD as at 1 April 2003, at the equivalent to 35 million DM, determined by the realisable method.
  
• The Company disposes of the assets from "Sevan-Hrazdan HPPC" CJSC to Russian companies, at the price of 25 million USD, regarding it as payment of ANPP liability undertaken. At the same time Russian companies undertake, under the same terms, the liability of the Company owed to the State budget on the subsidiary loan provided in the framework of the project implemented by KFW."

Mr. McHugh, the sudden increase in Payables to "Sevan-Hrazdan HPPC" CJSC, to 17,242,226,000 Drams in 2003, from 1,720,864,000 Drams in 2002, is of interest, especially as the Sevan-Hrazdan HPPC has been transferred to Russian companies, and supplies only approximately 2 billion Drams worth of energy to Armenergo each year.

Assets worth 54,400,000,000 Drams have effectively been transferred to Armenergo, revalued to 35 million DM, and disposed of for $25 million, a total devaluation of about 75 or 80 million dollars.

The Russian companies undertake the subsidiary loan of 7,716,850,000 Drams (about $15 million) provided in the framework of the project implemented by KFW and receives a cash incentive from the Government of more than 15 billion Drams ($29 million approx.)

In my recent E-mail messages, I have referred to a number of IMF documents, which relate to transparency and accountability of Government activities, particularly with respect to the privatization of public enterprises. I include the following from the IMF web site, which I think adequately covers the approach of the CGHA Commission study into the liquidation of Armgasard and Armenergo, the financial rehabilitation, and the associated privatisation activities.

"Serious transparency concerns can arise over the manner in which public financial institutions and non-financial public enterprises are privatized. Privatization should be conducted as openly as is consistent with sound marketing considerations. It is a basic requirement of fiscal transparency that the privatization of government assets should be open to independent audit (e.g., by a national audit body), to ensure that it is carried out in accordance with the law, that the business is properly valued, and that there is competition among bidders. Indemnities given to purchasers should also be disclosed (and included in a statement of contingent liabilities)".

I thank you again for your assistance with our study, and I look forward to receiving the requested information.

Yours Sincerely,

Bruce Tasker

Senior Specialist and Analyst

CGHA Commission