POWERED BY RUSSIA
by Emil Danielyan

Transitions on Line, Czech Rep
Sept 29 2005

Russia tights its grip on Armenia’s energy sector by buying the
country’s national electricity grid. From EurasiaNet.

Russia has enhanced its already dominant role in Armenia’s energy
sector by buying the country’s electricity grid after years of
behind-the-scene maneuvering. The Armenian government gave the green
light recently to the formal takeover of the Electricity Networks
of Armenia (ENA) utility by a subsidiary of Unified Energy Systems
(UES), the state-controlled Russian power monopoly.

UES and other Russian energy firms already own or manage several
major power plants that account for as much as 80 percent of Armenia’s
electricity production. In addition, they are the sole suppliers of
the country’s main energy resources: natural gas and nuclear fuel.

The Armenian government’s decision followed a request submitted by
Midland Resources Holding, a British-registered company that privatized
the Armenian power utility three years ago. Under its contractual
obligations, Midland could not resell ENA to another foreign investor
without official consent. When the government announced its approval
of the sale on 23 September, Energy Minister Armen Movsisian suggested
that Yerevan was swayed by the Russian company’s pledge to assume
Midland’s commitments to make substantial capital investments in the
Soviet-era network.

“With this decision, the government legalized a deal between a buyer
and a seller that was effectively struck long ago,” commented the
Yerevan daily Hayots Ashkhar.

UES had been the de facto owner of ENA since June 2005, when it signed
a controversial “management contract” with Midland. The Russian giant,
acting through one of its offshore subsidiaries called Interenergo BV,
paid $73 million for the right to manage the utility and receive its
profits. Both the World Bank and the U.S. Agency for International
Development challenged the legality of the deal, arguing that the
Armenian government, suspiciously silent on the issue, had not been
officially notified of the agreement’s signature beforehand.

UES and Midland countered that they did not need a government
approval for their agreement because it fell short of a formal
acquisition. Still, the two companies eventually decided to formalize
ENA’s sale to the Russians and go through relevant legal procedures.

The move was welcomed by the World Bank and USAID. “I am pleased to
see that the rules are now being followed,” the head of the bank’s
Yerevan office, Roger Robinson, told reporters on 13 September.

However, critics of the President Robert Kocharian’s administration
remain concerned about the Russian takeover of ENA, saying that it
could render Armenia even more dependent on Russia, its main political
and military ally. They also fear that Moscow may now completely
monopolize Armenia’s energy sector and nullify the results of sweeping
reforms undertaken over the past decade. These measures allowed Armenia
to not only end the severe power shortages of the 1990s, but also to
develop an electricity surplus, enabling Armenia to export electricity
to neighboring Georgia and Iran. A key component of that reform effort
has been the structural separation of the facilities that generate,
transmit and distribute electricity.

In 2003, UES was granted ownership of several Armenian hydro-electric
plants and the nuclear power station at Metsamor in return for
repaying the latter’s $40 million debt to Russian nuclear fuel
suppliers. Armenia’s largest thermal power plant, located in the
central town of Hrazdan, was also handed over to Russia in 2002 as
a result of a similar debt-for-equity swap.

Movsisian insisted that this fact will have little bearing on ENA’s
operations. The energy sector, he argued, is tightly regulated by
Armenia’s Public Service Regulatory Commission (PSRC), a supposedly
independent body that sets utility tariffs. UES Deputy Chairman Andrei
Rappoport made a similar point in a 20 September interview with the
Russian news agency Regnum. “The fact is that the most important member
in this market is the commission on regulating public services,”
Rappoport said. “It regulates the state policy on setting tariffs
for each actor of the market, on issuing licenses on their activity,
confirming and coordinating contracts.”

Western donors seem to agree with this line of reasoning. “The very
important thing in a utility is the strength of the regulator,” said
the World Bank’s Robinson. “We have great confidence in the regulator
here in Armenia.”

Russia, however, faces growing competition in Armenia’s energy
market from the country’s southern neighbor, Iran. After months of
deliberations, the Armenian leadership has decided to accept Iran’s
proposal to complete the construction of another large thermal power
plant in Hrazdan. Officials say a state-run Iranian company will invest
$150 million in the plant. In exchange for finishing construction of
the plant, the facility’s electricity will be delivered to Iran, as
a payment-in-kind. The facility will be powered by Iranian natural
gas that will be pumped to Armenia through a pipeline currently
under construction.

Yerevan has reportedly faced strong pressure from Moscow to accept
an alternative proposal from UES and Russia’s GazProm gas monopoly
for completing the construction of this plant. Rappoport admitted
that there has been a “certain rivalry on this issue” between Moscow
and Tehran.

Further competition could come in the form of a $150 million
reconstruction of an old thermal power plant in Yerevan, financed by
the Japan Bank for International Cooperation. Armenian officials say
the electricity produced at the modernized facility will be twice
as cheap as that of the Russian-owned Hrazdan plant. Only time will
tell if this is enough of a competitive edge for the new owner of
the Armenian power grid.