Eurasia Daily Monitor, DC
Jamestown Foundation
July 21 2005

RUSSIAN TAKEOVER OF ARMENIAN POWER GRID PROMPTS CONCERN
By Emil Danielyan

Thursday, July 21, 2005

Armenia is under fire from the United States and other Western donors
over the legally questionable transfer of its electricity
distribution network to Russia’s Unified Energy Systems (UES). The
deal could have far-reaching repercussions for the country’s economic
independence and hamper continued Western assistance to its
government.

UES announced on June 30 that one of its obscure subsidiaries had
paid $73 million to buy the Electricity Networks of Armenia (ENA)
from Midland Resources Holding, a British-registered firm that
privatized the utility three years ago. The move followed months of
speculation that the state-owned Russian conglomerate was close to
getting hold of ENA. ENA denied the information, insisting that its
parent company signed only a management contract with the Russians.

UES issued a similar “retraction” on July 13, saying through a
spokeswoman that it will manage, not own, the Armenian power grids.
However, the UES website still carries a short appendix to the
company’s annual financial report which states that Interenergo
“acquired 100 percent of shares” in ENA last month. Under the terms
of ENA’s 2002 privatization, Midland Resources needs the Armenian
government’s permission to transfer the ownership or management of
the utility to another foreign investor. Midland Resources, owned by
a Russian-born Canadian businessman, has not officially asked the
government for such permission. Not that it is pressed to do so by
the latter.

The Armenian authorities’ obvious reluctance to deal with the issue
has drawn strong criticism from the World Bank. The head of the
bank’s Yerevan office, Roger Robinson, said on July 13 that the lack
of transparency in the process raises serious questions about the
rule of law in Armenia. Robinson also dismissed as a “joke” claims
that UES paid a lump sum for the right to run the Armenian utility.
“When you have a management contract you normally pay somebody to
manage something,” he said. “It seems in this case there is something
all the way around.”

In an extraordinary statement on July 19, the U.S. government’s
Agency for International Development (USAID) likewise said the
Russian takeover of ENA occurred “without following important
Armenian government regulations.” USAID also said that it is
“reviewing” its assistance projects in Armenia pending official
explanations from its government.

Western donors, who have heavily financed the decade-long reform of
the Armenian energy sector, have reason to be concerned about ENA’s
fate. The reform not only ended Armenia’s severe energy crisis of the
early and mid-1990s but also turned the tiny landlocked country into
a leading regional exporter of electricity. One of its key components
has been the separation of facilities generating, transmitting, and
distributing electricity.

UES already owns Armenia’s largest thermal power plant and several
hydroelectric plants and manages the finances of the Metsamor nuclear
station as a result of controversial swap agreements that settled
Yerevan’s debts to Moscow. Those facilities together account for over
80% of Armenian electricity production. ENA’s takeover will give the
Russians almost 100% control over Armenia’s energy sector. The West
is also clearly worried about the political implications of this
dependence.

As recently as March 3 Armenian Energy Minister Armen Movsisian
publicly spoke out against selling the power distribution network to
UES, arguing that the Russian giant should not monopolize the sector.
The issue is thought to have been high on the agenda of Russian
President Vladimir Putin’s visit to Yerevan that took place three
weeks later. Whether or not Putin and his Armenian counterpart,
Robert Kocharian, cut any deals at the time is still unknown.

“Hardly anyone doubts that Midland Resources has sold the Electricity
Networks of Armenia,” the Yerevan daily Haykakan Zhamanak commented
on July 9. “That they sold it with the unpublicized blessing of our
government is also beyond doubt.”

Another paper, Golos Armenii, on July 16 quoted a former
parliamentarian with business interests in Russia, Taron Sahakian, as
saying that the UES management offered him last year to act as an
intermediary in its efforts to buy ENA. Sahakian claimed that the
Russians expected him to “resort to actions escalating the political
situation” in Armenia in case their bid for ENA met with serious
resistance.

Dealings with Russia are one of the least transparent areas of
governance in Armenia and the exclusive domain of Kocharian and his
chief lieutenant, Defense Minister Serge Sarkisian. Decisions crucial
for Armenia, notably the equities-for-debt agreements, usually come
as a result of the two men’s frequent trips to Moscow. Armenia’s
cabinet of ministers and parliament have little say in Russia-related
decision making.

The ENA affair illustrates that, for all its efforts to forge closer
links with the United States and Europe, the Kocharian-Sarkisian duo
still rarely defies the Kremlin on major issues. Armenia and Russia,
for example, were the only members of the Council of Europe that
accepted the outcome of Ukraine’s fraudulent presidential election in
November 2004.

Such decisions put Yerevan at odds with not only Western donors.
Kocharian’s regime bowed to Russian pressure to ensure that an
Iran-Armenia natural gas pipeline, which is currently under
construction, has a small diameter. This will almost certainly
prevent the pipeline’s extension to Georgia and other countries
dependent on Russian gas, denying Armenia potential revenues from
transit fees.

Local observers say Armenia is paying too heavy a price for its
“strategic partnership” with Russia. “There are both Armenian and
Russian fairy tales about the younger, stupid brother,” Ara Galoyan
of 168 Zham observed tartly. “But only in Russian fairly tales does
the stupid brother always emerge as a winner.”

(Statement by USAID, July 19; Haykakan Zhamanak, July 20, July 9;
Golos Armenii, July 16; RFE/RL Armenia Report, July 13; 168 Zham,
July 7-13)