Kommersant, Russia
March 24 2006

Weapons Used to Convince Armenia

// Russia compensates for its expensive natural gas with cheap arms
Friendship of the Nations

A week before Gazprom is set to increase the price of natural gas for
Armenia, Yerevan has announced significant progress in negotiations.
According to Armenian Defense Minister Serge Sarkisyan, the public
and industry will both receive gas at lower prices than stated
earlier. The price that left Yerevan gasping in horror at the end of
last year – $110 per 1000 cu. m. – has not changed. Kommersant has
learned that the difference lies in a plan proposed by Moscow to
provide a valuable bonus with its expensive gas – the latest Russian
weaponry at rock-bottom prices.
Gas for Property

Although here is only a week left until Russia and Armenia convert to
a new billing system for natural gas, the situation remains far from
clear. On Wednesday evening, Armenian Prime Minister Andranik
Margaryan announced that the price would not change. `The price of
$110 fixed in the bilateral agreement is final, and no change in it
is expected,’ he said, adding that they were still discussing
possible forms of compensation. That much had been known since the
beginning of the year, when Moscow and Yerevan began their search for
a mutually acceptable decision.

When deputy head of Gazprom Alexander Medvedev announced that the
price of gas that Russia will supply to the Transcaucasus will be
$110 per 1000 cu. m. in 2006, Moscow made it clear that that figure
was firm. Medvedev noted in particular that political alliances would
not play any role in the changing price. Moscow did, however, say
that it would consider forms of compensation for the raising price of
gas that would lighten the blow for Armenian consumers.

Moscow expressed interest in buying a large package of shares in
Armrosgazprom. Russia intended the proceeds from that sale to support
low gas prices for the domestic consumer. Russia also proposed buying
all five generating blocks of the Razdan electric plant and the
country’s entire gas transport system. Russian specialists estimated
the value of those objects at $140 million.

Those ideas came to naught thanks to Russia’s `sworn partner’ Iran.
Armenia is giving that country its gas pipeline and one of the Razdan
generating blocks. When the Islamic Republic found our about Russia’s
proposal, it was strongly opposed to it and threatened to undermine
the deal. Armenia was forced to give in to Iran’s ultimatum.

The Search for a Solution

Armenian President Robert Kocharyan visited Moscow in January. His
meetings with Russian President Vladimir Putin did not bring results
in gas negotiations, however. `Considering the strategic character of
our relationship with Russia, we were counting on settling the
question of the price of Russian gas more simply and without such
long negotiations,’ the Armenian president’s press secretary Viktor
Sogomonyan commented at the end of the president’s trip.

For the first time in Russian-Armenian relations, he almost made a
veiled threat to Russia. `What concerns us most in the developing
situation is that public opinion in Armenia can hardly be interpreted
as favorable to Russia. We are concerned that that mood may play a
role in the long-term perspective,’ Sogomonyan said.

After that, Armenian politicians formed two camps. Speaker of the
parliament Artur Bagdasaryan stated that, although he remains in
favor of the development of Armenian-Russian strategic relations, he
considered it necessary to `specify their framework.’ Deputy speaker
of parliament and Dashnaktsutyun Party leader Vagan Oganesyan noted
that the `empirically pro-Russian mood’ of the Armenian public would
take on a more pragmatic character after the rise in the price of
Russian gas.

The press began to opine that there was no need for Armenia to ask
continually for lenience from Russia. Yerevan, journalists said,
should look at the example of its neighbors Georgia and Azerbaijan,
which accepted the price hike silently. `At least that gives us the
freedom of political maneuvering,’ one publication noted.

The Armenian government tried not to go to extremes. Defense Minister
Sarkisyan rejected suggestions that the country begin demanding
rental payments for the Russian military base in Armenia. `The price
of Russian gas is in no way related to our security. The Russian
military base was located there at the request of the Armenian
government. It is one of the components of our security and we still
feel the need for that base,’ he said.

Russia made no concessions. In February, while visiting Switzerland,
Kocharyan stated that he still did not know what the price of Russian
gas for Armenia would be after April 1. He noted that negotiations
were continuing on `mechanisms of compensation’ that would reduce the
consequences of the price increase and `could function for two or
three years.’

While the negotiations were going on, the Armrosgazprom company, as
required by Armenian law, applied to the commission on public
utilities regulation to raise the domestic price for natural gas.
They said in the company that they had nothing else to do, since
there had a contract dated December 28, 2005, where it was clearly
written that the new price for gas would be $110. The commission
ruled that, beginning on April 10, the Armenian public would pay 90
drams (about $0.20) per cubic meter, up from 59 drams. Industrial
consumers would pay $146.51 per 1000 cu. m., up from $79.10.

Guns for Gas

Only late Wednesday evening did the Armenian public find out news
from the gas negotiations. `On the instructions of the president of
Armenia, I have sent a letter to the head of Gazprom Mr. Miller with
a number of proposals. On Friday, we received an answer from Miller.
Gazprom is prepared to sign documents before the end of April that
will make it possible for the Armenian public and industry to pay a
lower price than had been suggested earlier,’ Sarkisyan, one of
Armenia’s most influential politicians, stated. He expressed hope
that the rising price would not have a great impact on the public and
industry. He did not hide the fact Gazprom was not conceding on its
$110 price. Kommersant has learned the details of the scheme that is
to save the Russian-Armenian alliance.

According to information obtained by the newspaper, the saving
mechanism was worked out in Moscow. Yerevan will receive a bonus that
will be almost more valuable than the main product. Supplies of
modern Russian weaponry will be made to Armenia at reduced prices.
Part of the contracts will be completely free.

That mechanism is fully acceptable to Armenia. It will allow Yerevan
to use money set aside for armaments as compensation to hold gas
prices, if not at their previous levels, at levels close to the
previous ones. Russia is also expecting to benefit from the scheme.
According to Kommersant’s information, Kremlin analysts are
predicting that the appearance of a large quantity of modern weapons
in Armenia will pique the interest of Azerbaijan. Baku may try to
undermine the deal at first, but it will understand soon enough that
Moscow will stand up for its own interests and then it will make
similar purchases to remain on parity with Armenia. In Moscow, they
are already painting rosy pictures of the future of the military
industrial complex. The dangers of an arms race in such an unstable
region are not being mentioned.

by Ara Tatevosyan, Yerevan; Alexander Reutov