BUSINESS & ECONOMICS PIPELINE PERKS FOR RUSSIA IN ARMENIA-IRAN ENERGY DEAL

Eurasianet
Samvel Martirosyan 12/21/04

Iran has moved closer to gaining a strategic foothold in Caucasian
energy markets with the start of work on a gas pipeline to Armenia
that has been heralded by Yerevan as bringing “definite changes in the
region.” The project has the potential to undercut Russia’s control
of Armenia’s energy supply, yet two new gas projects could act as
potential deal sweeteners for this longtime Armenian ally. Plans were
recently announced for an increase in Armenian orders for Russian
gas and a possible role in the Iranian pipeline project for Russian
energy giant Gazprom.

Construction on Armenia’s section of the 142-kilometer gas pipeline
began on November 30, with $30 million in costs for the 42-kilometer
strip from the Armenian border town of Agarak to Kajaran, south of
Yerevan, picked up by the Iranian Export and Development Bank. Upon
completion in late 2006, the pipeline will supply the tiny South
Caucasus state with 36 billion cubic meters of Iranian gas over the
next 20 years. Gas from Turkmenistan is also scheduled to be delivered
to Armenia via the pipeline.

At an official ceremony to mark the project’s debut, Armenian Deputy
Prime Minister Andranik Margarian stated that the pipeline, in the
works since 1992, would bring economic benefits to Armenia as well
as foster regional stability. “This project has been implemented
throughout Armenia’s political and economic sufferings,” Armenian
media reported Margarian as saying. “In Armenia’s years of hardship,
Iran has stretched out its hand to help us.”

Expanding Armenia’s energy sources is a critical goal for the
administration of President Robert Kocharian – for both economic and
political reasons. Chronic energy shortages contributed to much of
the country’s economic decline after the collapse of the Soviet Union,
and Armenia’s economic woes continue to attract the criticism of the
country’s opposition. Speaking to reporters about Armenia’s energy
deal with Iran, Kocharian commented during a December 2 visit by
Iranian Energy Minister Habibollah Bitaraf that “[w]e are ready to
do everything possible to support the current level of cooperation,”
according to the Russian news agency Interfax.

In exchange for the gas, Armenia will eventually deliver up to
1,000 megawatts of electricity to Iran with the construction of two
high-voltage power lines between the countries. Additional electricity
projects are also in the works. In 2005 or 2006 Armenia hopes to
start construction on two hydropower plants on the banks of the Arax
River between Armenia and Iran, according to Margarian.

Oil could reinforce Tehran’s ties with Yerevan still further. At a
December 4 meeting between Armenian Defense Minister Serzh Sarkisian
and Iran’s Armenian Ambassador Alirza Hagigian, plans were discussed
for construction of a 60-kilometer oil pipeline from the Iranian town
of Julfa to the Armenian border town of Meghri.

Geopolitics, though, rather than the attractions of the Armenian energy
market, appears to drive much of Iran’s push for partnership. With
American troops stationed in neighboring Afghanistan and Iraq and
Iran’s nuclear energy program under intense international scrutiny,
the country’s ruling clerics have taken steps to assure the outside
world that the Islamic Republic is a force for stability in the
region. Iranian President Mohammad Khatami’s September 2004 visit
to Armenia, a close US ally, reinforced that campaign with a “good
neighbor” message that “Iran is interested in peace and stability in
the South Caucasus.”

But in drawing closer to Iran, Yerevan has risked alienating another
longtime ally – Russia. Though Russian Deputy Prime Minister Boris
Alyoshin assured reporters in Yerevan earlier this year that the
pipeline deal with Iran would only provide additional business for
Russian-operated electricity stations in Armenia, the deal has been
scrutinized with some trepidation. The Russian company United Energy
Systems controls 40 percent of Armenia’s electricity generation
facilities, while heavy hitters Gazprom and Itera control 55 percent
of ArmRogazprom, currently Armenia’s sole natural gas supplier.

When the Iranian pipeline is complete, however, Armenia will no longer
need to depend solely on Russia for its natural gas needs. In Yerevan,
Kremlin concerns about the prospect of Armenia providing a conduit
for Iranian gas to Europe, a key Russian market, are widely believed
to have resulted in a reduction of the pipeline’s size to a width
too narrow for exports.

Yet Russian energy companies have not been idle in defending their
interests. The Russian news agency Interfax reported an unidentified
Armenian government source as saying on December 8 that Gazprom may
be invited to build and repair one part of the Armenian-Iranian gas
pipeline, between Kadjaran and Ararat, at a cost of $90 million. As
payment for its work, Gazprom would receive the No. 5 generating unit
at the Razdan power plant, Armeniaâ~@~Ys largest heating and power
plant, which supplies 20 percent of the countryâ~@~Ys electricity
needs. Armenian President Robert Kocharian had earlier dismissed
reports of such a deal.

Still other sweeteners are in the works. On December 11, ArmRogazprom
CEO and General Director Karen Karapetyan announced plans to increase
gas supplies to Armenia by roughly 31 percent during 2005 to some
1.6-1.7 billion cubic meters. A $27 million expansion of Armenia’s
gas pipeline from Russia is planned to handle the increased flow. “I
am convinced that the problem of Armenia’s energy security will be
solved soon,” the Russian news agency Novosti reported Karapetyan as
saying, “given the forthcoming opening of the alternative Iran-Armenia
gas pipeline.”

For now, the government line out of Yerevan is that what benefits Iran
benefits Russia. At a May 13-15 summit in Moscow with Russian President
Vladimir Putin, Kocharian took pains to stress that the pipeline deal
with Iran would not damage Russia’s own energy interests in Armenia
or result in a fall-off in Armenian orders for Russian gas. Gazprom,
Itera and United Energy Systems will all collect “major dividends from
the deal,” Kocharian said, Novosti reported. “They will benefit, too.”

Editor’s Note: Samvel Martirosyan is a Yerevan-based journalist and
political analyst.

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