Russian Railways has threatened to pull out of Armenia’s rail sector in response to an investigation by the Armenian government, triggering the latest row between the two countries. 

Armenia’s railways currently belong to Russia. But likely, not for long.  

News broke this week that the state-owned Russian Railways (RR) company is considering terminating its agreement with the Armenian Government over a criminal investigation into its subsidiary, South Caucasus Railway (SCR).

The story was first covered by RTVI, a New-York based Russian-language television network, which claimed a source close to the Armenia-Russia negotiation process regarding the SCR had confided that the company was considering terminating the contract. 

According to RTVI’s source, Russian Railways was angered over the criminal investigation by Armenian law enforcement agencies.

In August 2018, investigators searched SCR’s offices confiscating documents pertaining to the last decade of the company’s operations. 

By December, Armenia’s Investigative Committee announced that it was looking into the last 10 years of SCR’s operations in Armenia to examine the efficiency of a ֏110 billion ($230 million) investment SCR had supposedly made into the country’s railway system. 

The Investigative Committee accused the SCR of tax evasion amounting to ֏9.7 million ($19,000). 

The SCR has claimed the accusation to be unfounded.

The Investigative Committee also announced that a former unnamed deputy transport minister was also under criminal investigation for covering up violations that had been found at the SCR during an audit in February 2015.

RTVI reported that the company strongly denied these claims. SCR reportedly said that, in recent years, in addition to undergoing inspection by Armenia’s tax authorities, the company has been audited by PricewaterhouseCoopers, a major international auditing firm. 

The company has also claimed that the confiscation of critical documents by investigators has been hindering their operations for the past year.

SCR did not respond to a request for comment.

International diplomacy

After the August 2018 investigation of the SCR’s office, Armenia’s Prime Minister, Nikol Pashinyan, spoke with Russian President Vladimir Putin by telephone. In an interview with Kommersant on 10 September 2018, Pashinyan said that he had discussed this issue with Putin and that both parties were eager to find a solution. 

Pashinyan claimed that the taxes the company had evaded amounted to roughly $60 million, and not the previously cited figure of $19,000. He did not provide further details on where he obtained the number. 

Currently, the Government of Armenia, the Russian Transportation Ministry, and Russian Railways are conducting negotiations over the issue. The Russians have reportedly proposed Armenia shut the case down in return for additional investments. They have also suggested conducting a new independent audit of SCR.

However, according to RTVI, these negotiations have proven fruitless and Moscow is now seriously considering terminating the contract with Armenia. 

Russia’s Deputy Minister of Transportation, Vladimir Tokarev, told RTVI that ‘Armenia has created a situation in which the SCR cannot work properly, unfounded accusations have been brought forward and no guarantees have been given’.

The press service of Russia’s Transportation Ministry told the TASS news agency that the Russian side was considering all options, including early termination of the concession agreement.

Armenia’s Ministry of Territorial Administration and Infrastructure told Kommersant that talks on carrying out the obligations stipulated in the concession agreement were still in process. 

Armenia’s Ambassador to Russia, Vardan Toghanyan, in turn, told TASS that the Government did not plan to terminate the agreement and, on the contrary, that the Armenian Government aimed to develop more investment projects with Russian Railways.  

South Caucasus Railway has also declined to comment on inquiries by Russian media. However, an anonymous source told Kommersant that the company is still carrying out operations.

Pashinyan remarked on the criminal investigation during a briefing in Vanadzor in early September, stating that certain legal processes regarding the SCR were taking place and that the Armenian Government aimed to protect its interests. He said that if anyone was criminally responsible they would be held accountable. 

He went on to say that and there was no need to turn this into a ‘tragedy’.

A major operation

When state-owned Russian Railways attained full rights to Armenia’s railway system through a 30-year concession agreement with the Armenian Government in 2008, it was considered a major investment in the country’s economy.

For this purpose, the South Caucasus Railway was created, a wholly-owned subsidiary of Russian Railways. For the past 11 years, SCR has been operating Armenia’s railways as well as implementing several projects aimed at developing the country’s railway infrastructure. 

Currently, SCR is one of the largest employers in the country with 3,000 employees and is a major taxpayer having paid $70 million in taxes over its 11 years of operation.

In 2013, Armenia also awarded a concession agreement to the Dubai-based Rasia FZE for the design, financing, and construction of a new railway linking Armenia with Iran for an operating period of 30 years.

The operating partner for the Southern Armenia Railway (also known as the Armenia-Iran Railway) is also Russian Railways.