ARMENIA’S GIVEAWAYS TO RUSSIA: FROM PROPERTY-FOR-DEBT TO PROPERTY-FOR-GAS
By Vladimir Socor

Eurasia Daily Monitor, DC
April 19 2006

Armenian critics describe the government’s new agreement with Russia,
giving up infrastructure property for moderately priced gas, as the
equivalent of giving up the family’s milch cow — or at least selling
the cow for the price of milk.

The preliminary Armenian-Russian sale-and-purchase agreement, first
announced on April 6, was not signed as scheduled on April 14 — an
indication that the bargaining continues over some details. It also
appears that Moscow and Yerevan need a decent interval to condition —
if not convince — Armenia’s population to accept the terms of the
energy agreement and, more broadly, the changing nature of Armenia’s
relationship with Russia from partnership of choice to servitude
without a choice.

According to Gazprom announcements and Armenian officials’ statements
from April 6 to date, the 25-year agreement includes the following
elements:

1) Gazprom will charge $110 per one thousand cubic meters of gas
supplied to Armenia from April 1, 2006, through January 1, 2009. The
price will be subject to negotiation from 2009 onward. Armenia had
paid $54 to $56 per one thousand cubic meters until 2005, and it
will sell assets to Russia in 2006 in order to be able buy the gas at
double the old price. However, the price of gas delivered to Armenian
consumers will rise only slightly, because the government will use
the proceeds from the asset sale to Russia in order to subsidize the
domestic gas sales.

2) The joint ArmRosGaz company is taking over the fifth power bloc of
the Hrazdan gas-fired power plant and unifying it with the four old
blocs, which are already controlled by Russia’s Unified Energy Systems
(UES), under a single management system. Hrazdan’s unfinished fifth
bloc was slated to become Armenia’s largest and most modern power
generating unit. Gazprom is to pay $249 million for Hrazdan-5 in
three annual tranches from 2006 to 2008.

Of this amount, $189 million will be nominally transferred to Armenia’s
government, which will use the funds to subsidize moderately priced
gas supplies to Armenian consumers. Significantly, those funds
are earmarked for ArmRosGaz to ensure its profitability — i.e.,
they are to revert to Gazprom, which is the dominant stakeholder in
ArmRosGaz. Curiously, the remaining $60 million is to be transferred
in cash into the Armenian Defense Ministry’s extra-budgetary account.

3) ArmRosGaz is to take over the Iran-Armenia gas pipeline. It shall
acquire Armenia’s ownership title to that pipeline’s first section,
Meghri-Kajaran (40 kilometers), which is due for completion before the
end of 2006; and will become the general contractor for construction of
the pipeline’s second section, Kajaran-Yerevan (197 kilometers). Thus,
Gazprom will be in a position to dictate the terms of Armenia’s access
to Iranian supplies or prevent Armenia from diversifying its supply
sources altogether. Meanwhile, Russia uses Turkmen gas for deliveries
to Armenia, and Iran had similarly planned to supply Armenia with
gas from Turkmenistan.

4) Gazprom’s existing, 45% stake in ArmRosGaz shall increase to a
veto-proof majority, between 75% and 82%, by adding Gazprom’s stake
in the Hrazdan-5 power bloc. The Russian company is to invest $140
million in the completion of Hrazdan-5. Gazprom’s offshoot Itera
holds another 10% stake in ArmRosGaz.

Construction of the Hrazdan-5 power bloc was being completed by Iran’s
Sanir company under a 2005 investment agreement. Iran made available
to Armenia a $150 million soft loan for completing Hrazdan-5 and a $90
million investment for building an electricity transmission line from
Hrazdan to Iran. Armenia was to repay the loan by supplying electricity
from Hrazdan, using Iran-supplied gas to produce that electricity. The
project envisaged annual profits of $100 million for Armenia, which
would have retained ownership of Hrazdan-5 and covered more than 40%
of the country’s electricity requirement from this project.

Russia already owns Hrazdan’s first four power blocs and some smaller
hydropower plants, as well as Armenia’s electricity distribution grid
(all under Unified Energy Systems) and controls the gas distribution
network (through ArmRosGaz), as well as exercising financial management
of the admittedly obsolete Metsamor nuclear power plant.

The transfers of Hrazdan-5 and control over the Iran-Armenia pipeline
will deliver Armenia’s energy sector totally in Russia’s hands.

(Noyan Tapan, Mediamax, Arminfo, Interfax, April 7-17; see EDM,
January 17, 20, April 6)