KARABAKH CONFLICT MADE YEREVAN STRIKE GAS DEAL WITH RUSSIA – ARMENIAN AGENCY

Mediamax news agency, Yerevan
10 Apr 06

The Armenian government had little choice when it decided to sell
important energy sector assets to Russia, Armenian news agency
has reported. After listing several drawbacks of the deal on the
purchase of Russian gas, the agency went on to say that Armenia has
only two potential suppliers of gas and the ongoing controversy
over Iran’s nuclear programme makes Russia seem a more reliable
partner. The situation is unlikely to change because the Nagornyy
Karabakh conflict means that the Armenian borders with Turkey and
Azerbaijan will remain closed, the report said. The following is
the text of report in English by Armenian news agency Mediamax;
subheadings have been inserted editorially:

The “compensatory mechanisms” called to soften the consequences of gas
price increase for Armenia have been eventually revealed. On April
6, Gazprom issued a press release saying the company has signed a
“long-term agreement with the government of Armenia for 25 years
setting out strategic principles of cooperation”.

Gazprom announced that in accordance with the signed agreement,
ArmRosGazprom (the Russian giant owns 45% share of ArmRosGazprom) is
going to buy the fifth unfinished unit of Razdan Thermal Power plant
(Razdan-5) and the first, 40 kilometre-long section of Iran-Armenia
gas pipeline from the Armenian government. In accordance with the
agreement, ArmRosGazprom takes commitment to rebuild and modernize
Razdan-5. “After the conclusion of the deal Gazprom becomes the owner
the major part of ArmRosGazprom’s share,” the press release said.

The gas price for Armenia fixed in the Armenian-Russian agreement
remains 110 dollars per 1,000 cu.m. till 1 January 2009.

On April 6, the government of Armenia issued a press release informing
that Razdan-5 will be sold for 248.8m dollars. The sum will be paid
off according to the following schedule: 58.8m dollars in 2006,
70m dollars in 2007 and 120m dollars in 2008. Besides, Gazprom will
invest 140m dollars in the modernization of Razdan-5. Thus, the deal
might finally total nearly 400m dollars.

The official report of the Armenian government said nothing about
selling the section of Iran-Armenia gas pipeline. As Mediamax learned
from its sources in one of the biggest Russian newspapers, 2 hours
after the first press release Gazprom asked the media not to use it
and wait for the new one. As our sources reported, Gazprom’s press
service explained this decision by the dissatisfaction of the Armenian
government with the content of the press release.

Some time later, Gazprom placed a new version of the press release on
its web site not mentioning the Iran-Armenia pipeline. Gazprom would
hardly announce about buying the part of the pipeline “by a mistake”
or without sufficient reasons. Almost certainly, the parties agreed
not to unveil this part of the deal, but the agreement was breached
for some technical reasons. The sources of the Russian Vedomosti
newspaper in Gazprom claim the agreement on buying the pipeline
“has been reached but is not formulated yet”.

We would like to dwell on the main advantages and disadvantages of
the deal. Let’s recall, that still this January, commenting on the
reports of Russian media about Yerevan’s readiness to sell Razdan-5
and the stocks of Iran-Armenia pipeline, spokesman for the Armenian
president described them as “inconsistent with reality”. Sources in
the Armenian government declared then that the Russian side’s proposal
on handing over these two facilities “was and is unacceptable”.

Advantages

The fundamental and, probably, the only advantage is that the Armenian
population will be guaranteed from gas price fluctuations within the
coming three years. Most of the money gained from selling Razdan-5 will
be paid to ArmRosGazprom as a subsidy to cover the difference between
the old (54 dollars for 1,000 cu.m.) and the new (110 dollars for 1,000
cu.m.) prices. That means that the increase in gas prices for ordinary
Armenian consumers is insignificant: they are going to pay 65 drams for
one cubic meter instead of the previous 58. For industrial consumers
the growth is also very insignificant. Taking this into consideration,
the Armenian population will hardly dislike the decision taken by
the Armenian authorities to sell strategically important facilities,
as its majority lives under difficult social conditions and any
rise in prices would throw them into poverty. Moreover, the deal
suggests that in the coming three years the price for electricity,
which is too high in Armenia as compared to other countries on the
post Soviet space, also remains unchanged.

Considering the problem from the point of view of Armenian authorities’
interests, the deal makes them more confident ahead of the 2007
parliamentary and 2008 presidential elections, since a rise in gas
and electricity prices would provoke a total growth of prices which
would be extremely inauspicious on the eve of the elections.

Disadvantages

Let us be bold enough to assume that the basic disadvantage bears
a psychological character. In spite of the statements voiced
early this year about the need to reconsider the Armenian-Russian
energy cooperation, Russia became the owner of other Armenian energy
assets. The Razdan thermal power plant (without the unfinished fifth
unit) and four other enterprises were handed over to the Russian side
in 2003 to pay off Armenia’s 93m dollars debt to this country. The
manager of the plant is the subsidiary of RAO UES Company (United
Energy Systems of Russia) – “INTER RAO UES”, which also owns 100%
share of “Electricity Network of Armenia” grid and Sevan-Razdan
hydroelectric power station cascade, as well as manages the financial
flows of the Armenian nuclear power plant. Thus, Russia owns almost
all Armenian energy.

The price for Russian gas fixed for three years is a three-year
guarantee of Armenia’s loyalty to Moscow. The Kremlin has acquired
a new lever to exert pressure on Armenia – if Moscow doesn’t like
Yerevan’s policy, the signed agreement may be repudiated at any time
and Moscow may argue this decision by “changes on the world market”.

Iran will not be happy to learn about the decision to sell Razdan-5
and some part of Iran-Armenia gas pipeline, though it’s hard to
believe that Yerevan took it without relevant consultations with
Iran. Until most recent, it was almost resolved that Iran will
modernize Razdan-5. Tehran was supposed to allocate a 150m-dollar
credit to Armenia and receive the money back through electricity
produced from the Iranian gas at Razdan-5.

According to our sources in the Armenian Foreign Ministry, Tehran
nervously reacted on January reports about Armenia’s decision to
sell Razdan-5 and part of stocks of the pipeline to Russia. Armenian
diplomats took a lot of efforts at that time to calm down their
southern neighbour.

It’s strange, however, what new arguments Yerevan found for Tehran and
how persuasive they were. Besides, in the light of recent developments
around Iran’s nuclear program, Tehran too suspiciously reacts to any
external irritants. This, consequently, may affect Armenian-Iranian
relations.

The deal will, most likely, arouse disappointment in Washington as
well, as the latter has recently shown keen interest in the provision
of Armenia’s energy security. This was one of the most important
US Assistant Secretary of State for European and Eurasian Affairs
Daniel Fried and US Deputy Assistant Secretary of State for European
and Eurasian Affairs Matthew Bryza focused on during their talks in
Yerevan this March.

Speaking at a news conference in Yerevan, Bryza said, “Armenia has a
huge experience of a positive cooperation with Russian gas suppliers,
which should be certainly continued”. However, he hardly meant the
news deal between Yerevan and Moscow.

We are not quite sure that Russia will completely fulfil its
obligations envisaged by the agreement in due time. 3 years ago,
5 enterprises were handed over to Russia to pay off Armenia’s
debt. Russia was obliged to modernize them and ensure orders. Only
Razdan Thermal Power plant is normally functioning today. As for
the rest of enterprises, they have received neither investments,
nor orders yet.

Realties

The list of disadvantages could be continued. It should be noted
that these assessments are emotional, whereas the politics is the
“science of the possible”. We have frequently reported that Armenia
possesses limited possibilities to provide its energy security.

Armenia possesses no finances to modernize the Razdan-5. (The capacity
of this unit after the modernization is expected to equal the capacity
of the Armenian nuclear power plant, which provides 40 per cent of
the republic’s electricity). Two countries – Iran and Russia – are
striving to modernize the plant. It’s difficult to say which variant
is more preferable given such a small choice.

Speaking about gas supplies to Armenia, in this respect Yerevan
doesn’t have choice either and the only possible suppliers are the
same countries – Iran and Russia. If Iran-Armenia pipeline were for
transit it would certainly change the regional situation. But it
should be finally admitted that the transit of Iranian gas through
the territory of Armenia to Ukraine and further to Europe is a myth,
at least in the foreseeable perspective. This myth has been emerging
and then disappearing in recent 10 years. The potential seller – Iran –
and the potential buyers – Georgia, Ukraine and European countries are
not interested in the talks and no one expresses hypothetical readiness
to finance this multi-billion project. It seems, Armenia became tired
of keeping the myth about the possibility to build a transit pipeline.

Judging from a conceptual point of view, are there reasons to believe
that Iran is a more reliable energy supplier than Russia? The growing
tensions over Iran’s nuclear program might entail harsh economic
sanctions, which will make any economic cooperation with Tehran
almost impossible.

Last week, Armenian Foreign Minister Vardan Oskanyan said “Armenia
is going to become part of the new Euro-Atlantic vision for energy
security provision,” noting that “the USA and the European Union are
working on it”. According to him, the work on the new conception
of energy security provision means “new nuclear power plants, the
construction of the Trans-Caspian gas pipeline, and Armenia is greatly
interested in all these discussions.”

The construction of a new nuclear power plant in Armenia (which arouses
USA’s interest) is a long and expensive project. Under favourable
circumstances it will be realized not earlier than in 8-10 years. The
Trans-Caspian gas pipeline Vardan Oskanyan spoke about is another
expensive and ambitious project. Even if we suppose that it will be
realized in the shortest possible time, the perspective of Armenia’s
involvement in it looks doubtful – if Yerevan and Baku fail to resolve
the Nagornyy Karabakh conflict by that time, Azerbaijan will do its
best to exclude Armenia from this project.

Now we are drawing near to the key conclusion – the full provision
of Armenia’s energy security and independence is impossible without
resolution of regional conflicts, the Nagornyy Karabakh conflict
in particular. Armenia’s borders with Azerbaijan and Turkey will
remain closed without resolution of the conflict and Armenia
will have restricted possibilities to withstand Russia and Iran’s
pressure. This is the reality. It would be at least wrong not to take
it into consideration analysing the latest Armenian-Russian deal. On
the other hand, there is an impression that the unsettled conflict
already became a justification for these or those controversial steps.