ARMENIA CEDES MORE ENERGY ASSETS FOR CHEAPER RUSSIAN GAS
Emil Danielyan

EurasiaNet, NY
April 10 2006

Armenia’s leadership has controversially agreed to hand over more
state energy assets to Russia in return for avoiding a doubling
of the price of Russian natural gas in the near future. Gazprom,
Russia’s state-run gas giant, is now set to assume control of a major
Armenian power plant, and may also obtain a controlling share of a
planned Armenian-Iranian gas pipeline.

Gazprom representatives announced both deals April 6 after four
months of confidential negotiations between the Armenian and Russian
governments. Armenian leaders, however, have only confirmed the power
plant transfer. On April 7, Armenian Energy Minister Armen Movsisian
asserted that pipeline rights could not be transferred, citing the
fact that construction on the energy route had not yet been completed.

If both deals go through as envisioned, the deals would give Moscow
a stranglehold on the Armenian energy sector, raising questions about
Yerevan’s recent pledges to ease its economic dependence on Russia.

Indeed, the chief strategic reason used initially by Armenian leaders
to justify construction of the Iran-Armenia pipeline was that it
would break Russia’s gas-supply monopoly.

The Armenian-Russian transfer talks were triggered by Gazprom’s late
2005 decision to drastically raise the price of gas exports to several
ex-Soviet states, including Armenia. [For background see the Eurasia
Insight archive]. Gazprom said it would charge Armenian customers
$110 per thousand cubic meters, up from the existing price of $56
per thousand cubic meters. Russian gas generates nearly 40 percent of
Armenia’s electricity and is also the main source of winter heating
for hundreds of thousands of Armenian households. Not surprisingly,
Armenian authorities scrambled to get the Russians to reconsider the
measure. Armenian President Robert Kocharian traveled to Russia twice
in less than two months to discuss the matter with Russian leader
Vladimir Putin.

Gazprom representatives made it clear that the gas price hike would
be scaled back only if the Armenian government ceded more of its key
energy assets. [For background see the Eurasia Insight archive]. When
Armenian Prime Minister Andranik Markarian publicly ruled out such
a possibility in January, the price hike seemed inevitable. And on
March 10, Armenian state regulators allowed the Armenian national
gas operator to raise the retail price of gas by 52 percent for
households and 80 for industrial consumers. [For background see the
Eurasia Insight archive]. The subsequent Russian-Armenian agreement
thus came as a surprise.

According to an Armenian government statement, Gazprom will be granted
ownership of the large, but incomplete gas-fired power plant located
in the central town of Hrazdan in exchange for supplying Armenia with
almost $189 million worth of gas free of charge. Gazprom would also
pay an additional $60 million in cash, and would pledge to invest at
least $150 million to complete construction of the plant.

“This proposal [by the Russian side], which has been discussed for
so long, is quite attractive in both economic and energy terms,
and we could not have turned it down,” Movsisian told reporters.

Defending the controversial deal, Kocharian and Movsisian emphasized
the fact that Armenian families will be paying 65 drams (14 U.S.

cents) per cubic meter of gas, instead of the planned 90 drams,
until the end of 2008. Kocharian also suggested that the deal would
stimulate Armenia’s economy.

Attention now is centering on the pipeline issue. In its initial
April 6 statement, Gazprom said it would enjoy control of the
Iran-Armenia gas pipeline, which is expected to begin operation in
early 2007. When Armenian officials denied this, Gazprom promptly
edited its statement. The amended version contains no references to
the pipeline in question, speaking instead of unspecified “facilities
of Armenia’s gas sphere.”

Still, Russian media outlets consider Gazprom’s takeover of the
Iran-Armenia gas pipeline to be an accomplished fact. The Kommersant
daily wrote on April 7 that Gazprom will now make sure that Iran
does not re-export its gas to Georgia and possibly other ex-Soviet
countries via Armenia.

In a further blow to Tehran, the Armenian government has reneged on its
pledge, reaffirmed by Movsisian as recently as last December, to let a
state-owned Iranian company complete the Hrazdan plant. The government
was due to repay the large-scale Iranian investments with electricity
to be generated at the facility. It presented the arrangement as proof
of its stated efforts to diversify Armenia’s sources of energy. Russian
energy companies already own the country’s largest thermal power plant,
also located in Hrazdan, several hydro-electric plants, as well as
its natural gas and electricity distribution networks. In addition,
Russia manages the finances at the Metsamor nuclear power station.

Armenian opposition leaders and independent observers say the
settlement of the Russian-Armenian gas dispute will make Armenia even
more dependent on Russia, both politically and economically. “This
deal will accelerate the process of Armenia’s transformation into
a Russian province,” Smbat Ayvazian of the pro-Western opposition
Hanrapetutiun (Republic) party charged in a newspaper interview.

Kocharian, however, brushed aside such criticism in weekend televised
remarks, arguing, among other things, that Western energy giants
continue to show little interest in the Armenian energy sector. “I
don’t know of any European or American proposals on our energy that
we have turned down,” he said.

Kocharian’s decision to essentially accept the terms offered by the
Russians was all the more unexpected given an unprecedented amount of
anti-Russian rhetoric publicly voiced by politicians and especially
the TV stations loyal to him earlier this year. They were particularly
angered by the fact that Armenia, one of Russia’s staunchest ex-Soviet
allies, is to pay the same price for Russian gas as neighboring
pro-Western Georgia. The Armenian leader is widely believed to have
orchestrated this PR campaign as part of his negotiating tactic. His
spokesman Victor Soghomonian pointed to growing anti-Russian sentiment
in Armenia on January 24, saying that “it is the Russian side that
has to think about doing something about that.”

Armenia’s “energy security,” meanwhile, appears to have been a high
priority for the United States of late. US Assistant Secretary of
State Daniel Fried and his deputy Matthew Bryza focused on the issue
during separate visits to Yerevan in early March. While stressing the
importance of diversifying the landlocked country’s energy supplies,
both men publicly expressed US unease over Armenian-Iranian energy
cooperation. Washington is therefore not necessarily unhappy with
the Kocharian administration’s deal with Gazprom. As Bryza put it,
“Armenia has a long and positive experience working with Russian gas
suppliers and that needs to continue.”

Editor’s Note: Emil Danielyan is a Yerevan-based journalist and
political analyst.