Eurasia Daily Monitor, DC
The Jamestown Foundation
Sept 21 2005
RUSSIAN ELECTRICITY GIANT CLOSE TO COMPLETING ARMENIAN POWER GRID
PURCHASE
By Emil Danielyan
Wednesday, September 21, 2005
Russia’s state-run power monopoly, Unified Energy Systems (UES), is
close to formalizing its effective purchase of Armenia’s electricity
grid, giving Moscow near total control over the Armenian energy
sector. The government in Yerevan indicated on September 15 that it
would green light a deal that has generated serious concern among
Armenia’s leading Western donors. The latter have for years opposed
Russian attempts to take over the Electricity Networks of Armenia
(ENA) but now appear to have come to terms with the change of
ownership.
UES has already been the de facto owner of ENA since announcing last
June a $73 million “management contract” with Midland Resources
Holding, a British-registered company that controversially privatized
ENA three years ago. UES initially claimed to have purchased the
Armenian utility, but later clarified that it paid the lump sum only
for the right to run ENA and use its profits. The Russians argued
that the deal therefore falls short of a formal acquisition, which
has to be approved by the Armenian authorities.
But it was obvious that Midland Resources now owns ENA only on paper.
The Armenian government remained suspiciously silent on the issue
until facing strong criticism from the World Bank and the U.S.
government’s Agency for International Development (USAID). The two
institutions, which have invested heavily in the decade-long reform
of the Armenian energy sector, warned that the lack of transparency
could force them to reconsider their further assistance to the
country.
Armenia’s Public Service Regulatory Commission, a supposedly
independent body, claimed to have investigated the legality of the
deal and found no evidence of wrongdoing. It argued in late August
that Midland did not have to seek government approval because it
remains the legal owner of ENA. However, the authorities apparently
concluded that having the Russians follow all legal rules and
formally buy the network would spare them greater trouble. The
calculation seems to have proved correct.
On September 8, Midland Resources submitted letters to the government
and the Regulatory Commission asking for permission to sell ENA
shares to an obscure UES subsidiary called Interenergo BV. The
Armenian cabinet granted the request in principle at a meeting on
September 15, which was chaired by President Robert Kocharian. A
government statement said the Energy Ministry was given three days to
clarify all details of the Russian takeover, notably “some issues
relating to obligations” of the new owner. The deal’s clearance now
seems a forgone conclusion.
Western donor agencies and governments are evidently resigned to this
development. The head of the World Bank office in Yerevan, Roger
Robinson, welcomed on September 13 the fact that the process is now
proceeding “in compliance with the law of Armenia.” “I am personally
pleased to see what I think are the rules now being followed,”
Robinson told journalists. “That’s what we asked everybody to do
anyway and that is exactly what has happened,” he added.
Yet the result of all this will be the tightening of Russia’s grip on
the Armenian energy sector. UES alone controls several big power
plants that account for 80% of Armenia’s electricity output. Armenian
Energy Minister Armen Movsisian publicly spoke out against the
Russian giant’s ownership of ENA last March, arguing that it would
run counter to a key goal of the energy sector reform: separation of
units generating, transmitting, and distributing electricity. The
structural change helped Armenia to end its crippling power shortages
of the 1990s and start exporting electricity to neighboring Georgia
and Iran.
But Robinson believes that there is nothing wrong with a single
company producing and distributing energy, saying that this is a
normal practice in Western countries like France. The important
thing, said the World Bank official, is not so much who owns the
power distribution networks as the existence of an independent state
regulator. “We have great confidence in the regulator here in
Armenia,” he said.
The Public Service Regulatory Commission (PSRC) was also praised by
USAID. “A transparent and robust decision-making process, managed by
a strong regulator, is key to protecting the interests of energy
consumers,” USAID said in a statement. “USAID is happy to continue
assistance to the PSRC and others to ensure the design and
implementation of such a process.”
However, the head of PSRC, Yerevan’s former presidentially appointed
mayor, Robert Nazarian, is known for anything but independence and
respect of law. In his capacity as Yerevan mayor, Nazarian had
personally sanctioned (usually at the orders of top Kocharian aides)
massive land allocations in the city center to businesses owned by
senior government officials and their cronies. Local investigative
journalists say the process contained enough material for writing a
textbook on government corruption in Armenia.
The Western donor agencies should be aware of this, but are clearly
unwilling or unable to stop UES expanding its presence in Armenia.
The Armenian and Russian governments may have well decided that
expansion. Observers note the fact that Movsisian voiced his
objections shortly before Russian President Vladimir Putin’s last
visit to Yerevan. Russian-Armenian cooperation on energy was
reportedly high on the agenda of Putin’s talks with Kocharian.
(Haykakan Zhamanak, September 16; Armenian government statement,
September 15; USAID statement, September 15; RFE/RL Armenia Report,
September 13)