Institute for War & Peace Reporting
Sept 9 2005

ARMENIA: THE POWER OF RUMOUR

Confusion over whether the Russians had bought or just leased
Armenia’s electricity company adds to underlying fears about losing
strategic assets.

By Naira Melkumian in Erevan

A deal under which Armenia’s electricity grid could be sold to a
Russian-owned energy giant has led to an outcry from opposition
politicians who are worried about who controls the country’s
strategic assets.

Under a deal signed in June, the Russian electricity firm United
Energy Systems, UES, has agreed to run the power network in Armenia
on behalf of the Canadian-owned and British-registered company
Midland Resources Holdings Ltd, which acquired 100 per cent of
Electricity Networks of Armenia, AEN, in a privatisation deal in
2002.

Midland Resources has made it clear in remarks emailed to IWPR that
it retains ownership of AEN, but that in the long term it would like
to sell it to UES.

In Armenia, initial reports about the nature of the deal were
contradictory, and as rumours of an immediate Russian takeover
started circulating, the government appeared not to know about the
long-term goal of transferring shares in the national power company
to UES.

The first news reports said simply – and accurately – that
Interenergo, part of the UES group, was to manage AEN, under a
99-year lease from Midland Resources.

Neither the energy ministry nor the regulatory body for the public
sector in Armenia appear to have been informed of the move, because
technically there was no requirement for this.

AEN told IWPR that it was under no obligation to tell the government.

`We are only obliged to notify the government if we sell shares in
the company. This was a management transfer and not a sale of shares.
That is why we did not inform the government,’ AEN press officer
Margarita Grigorian told IWPR.

Even at this point, critics of the Armenian government were put on
the alert.

`Any fool can see that handing over management of a company for 99
years means only one thing – the [future] sale of the company,’ said
Aram Sargsian, a member of parliament who heads the Democratic Party.

Sargsian said the AEN deal would make Armenia even more dependent on
Russia. He noted that UES’s company holdings already accounted for 75
to 80 per cent of Armenia’s energy production – and now it was
seeking control of distribution as well.

`It’s patently obvious. Whoever controls the switch controls the
country,’ he said.

The issue became confused after people began reading UES’s annual
financial report for 2004 (dated June 28), saying that in June 2005,
Interenergo had acquired 100 per cent of AEN’s shares for 73 million
US dollars.

The reported sale of a key national asset stoked concerns in Armenia,
fuelled by the government’s resolute silence.

Eduard Aghajanov, an economist at Armat, a political science
institute in Yerevan, said any sale of AEN to a foreign company was
contrary to national strategic interests.

`The owner of the power grid will dictate his terms to both producer
and consumer, and that is an unacceptable situation,’ Aghajanov told
IWPR.

Victor Dallakian, of the opposition Justice faction, went further,
warning that `Armenia will be under the threat of energy terror’.

International institutions were perturbed at the lack of clear
signals from the Armenian government about what was going on.

Roger Robinson of the World Bank’s Armenia mission told a press
conference on July 8 that he considered `the regular provision of
transparent and official information on events concerning this sphere
[electricity distribution] very important’.

This week, Robinson told IWPR that those remarks were intended to
`press the red alarm button to alert people, especially the
government, that the due process of law should be observed’.

He believes his strategy paid off, `That press conference really
galvanised a lot of people.’

On July 18, the United States government’s development agency USAID
followed suit with a press release expressing concern `that a
transfer of the ownership of AEN may have taken place without
following important Armenian government regulations which exist to
protect Armenian consumers’. USAID said it `would review its
assistance portfolio to Armenia in light of any revised AEN ownership
or lack of due process in changing that ownership agreement’.

On July 25, Mikhail Mantrov, the deputy director of UES subsidiary,
Inter RAO UES, which owns Interenergo, retracted the group’s earlier
statement and corrected the record, telling a press conference that
AEN was the subject of a management transfer rather than a purchase.
Midland issued a statement on July 20 confirming that it remained
AEN’s owner.

After talking to the companies involved, Armenia’s Public Sector
Regulatory Commission concluded on August 22 that all of AEN’s shares
did indeed remain with Midland Resources.

This week, Midland Resources president Alex Shnaider told IWPR by
email that the company did hope to sell AEN to the Russian firm
eventually, once all the legal requirements had been met. He insisted
that his firm had been punctilious in meeting its obligations to the
Armenian government.

`The aim of the transaction is to sell 100 per cent of Midland’s
shares in AEN to RAO [UES],’ he said. `The deal is divided into two
stages. First, in order to prepare for the transaction, both parties
will study the company’s assets and create joint management
provisions for the company in consultation with the Armenian
government. During this stage, Midland will remain the sole owner of
AEN’s shares.

`The second stage of the transaction will involve the transfer of the
shares. This can only occur following approval from the government,
as outlined in the initial contract between Midland and the
government of the Republic of Armenia.’

Shnaider said was not aware of any unresolved issues with the
Armenian government and he did not feel there were any solid grounds
for further inquiries. `To the best of our knowledge, the
declarations made by UES and Midland have fully satisfied the
government commission. Midland always fulfils its contractual
obligations and has fully complied with the laws of the Republic of
Armenia,’ he told IWPR.

The deal is worth a total sum of `upwards of 70 million dollars’, he
added.

The government has instructed its legal experts to check the nature
of the transfer of AEN’s management to UES.

`We want to study the contract, comprehend the deal that’s taken
place, and compare what’s happening with what was set out in the deal
the Armenian government signed with Midland resources in 2002,’
Deputy Energy Minister Areg Galstian told IWPR

`Until then [completion of the study], we will refrain from drawing
any conclusions.’

But the public perception that the government failed to reveal what
it did – or did not – know about the deal has laid it open to
accusations of lack of transparency.

`Since independence, almost all the [privatisation] deals done in
this country have taken place under a veil of secrecy… This is no
exception,’ said opposition deputy Sargsian.

Repeated requests by IWPR to government spokespersons to comment on
the deal have not resulted in any further clarifications, or even in
an official acknowledgement that Midland’s ultimate goal is to sell
its AEN shares to UES.

In Yerevan, World Bank representative Robinson said he had still
received no official confirmation that AEN was to be sold to the
Russian energy group.

But he said he was less concerned about the potential buyer being
Russian-owned than about ensuring the Armenian government is
satisfied that the purchaser possesses the right energy-industry
expertise, has sound financial management and will act with
integrity.

If the government adheres to its own procedures on these matters, and
to the international rules on transparency, Robinson sees no obstacle
to the World Bank continuing its current programme in Armenia.

In political circles, the issue of Russian control over key Armenian
assets is likely to rumble on. Government allies like Vahan
Hovhannisian, the deputy speaker of parliament, argue that because
the two countries are allies, `there is no threat to our national
security’ from UES’s engagement in Armenia’s power industry.

But opposition parties are unlikely to pass up the chance to attack
the government the moment the Russians open negotiations on acquiring
AEN.

Naira Melkumian is an independent journalist in Yerevan.