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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 announcedthat 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.

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’.

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.