RUSSIA TIGHTENS CONTROL OVER THE ARMENIAN ENERGY SECTOR
Emil Danielyan

EurasiaNet, NY
Oct 17 2006

After more than a year of negotiations, Russia has completed the
acquisition of Armenia’s power distribution network, tightening its
grip on the Armenian energy sector. The Armenian government says
the $73-million takeover will breathe new life into the Electricity
Networks of Armenia (ENA). But government critics have denounced it
as a further blow to the country’s energy security.

The shares in ENA were formally transferred to an offshore-registered
subsidiary of RAO Unified Energy Systems (UES), Russia’s
state-controlled power utility, at a September 26 ceremony in Yerevan,
attended by senior Armenian officials and UES executives.

The deal was formalized one year after the government in Yerevan
announced and approved the Russians’ decision to buy ENA from Midland
Resources Holding, a British-registered firm that privatized the
once loss-making network in 2002. [For background see the Eurasia
Insight archive].

The Russian takeover of the Armenian power grid was first made public
in June 2005, presented as a long-term "management contract" signed
by UES and Midland. The World Bank and other Western donors questioned
the legality of that deal, arguing that it was cut without the approval
of Armenian regulatory authorities. But the donors acquiesced when UES
and Midland decided afterwards to sign a formal acquisition agreement
and follow relevant legal procedures.

It remains unclear why UES has taken so long to complete the
purchase. Unconfirmed reports in the Armenian press suggested that the
Russian energy giant, which has aggressively expanded its operations
in former Soviet republics, had second thoughts about buying ENA after
examining its books and discovering serious financial irregularities.

Officials in Yerevan maintain the deal strengthens the local energy
sector by injecting badly needed capital investments in ENA. Andrei
Rapoport, the UES vice-chairman, announced during the share transfer
ceremony that the Russian company will invest $20 million in ENA over
the next 12 months.

Critics, however, claim that Armenia’s energy dependence on Russia
has reached a critical level, posing a serious threat to the
Caucasus state’s sovereignty. According to Eduard Aghajanov, an
economist critical of the government, ENA’s sale all but completed
the country’s "energy colonization" by Moscow. "It is inadmissible
to give everything to one state, especially in the area of energy,"
he told EurasiaNet. "Russia is now in a position to impose its will
on us in both the economic and political spheres at any moment. We
are tying a noose around our neck."

UES already owns a cascade of Armenian hydroelectric plants and
manages the finances of the nuclear power station at Metsamor.

Another state-run Russian energy giant, Gazprom, controls Armenia’s
largest thermal power plant, and is currently its sole supplier of
natural gas. Russian gas is used for generating nearly 40 percent
of the country’s electricity, with another 40 percent coming from
Metsamor.

ENA’s sale was preceded by an equally controversial Russian-Armenian
energy agreement that was announced last April following Gazprom’s
decision to double the price of its gas for all three South Caucasus
states. Under the terms of that deal, Gazprom paid $250 million to
take control of another incomplete thermal plant located in the town
of Hrazdan in central Armenia. Most of the payment, $188 million,
is to be made in the form of free-of-charge supplies of Russian gas.

This means that the overall price of Russian fuel for Armenia will
remain virtually unchanged until the end of 2008.

Defending the April deal, Armenian leaders argued that it also commits
the Russians to spending at least $150 million on completing the
Hrazdan facility in the next few years. "This agreement will only
reinforce our energy security," Prime Minister Andranik Markarian
said at the time.

The head of the World Bank office in Yerevan, Roger Robinson, likewise
described the gas settlement as "very beneficial" for Armenia. Robinson
made the point that there is "nothing fundamentally wrong" with Russian
ownership of Armenian energy facilities. "The important thing is to
have a very strong regulator that sets the rules and monitors the
rules for the delivery of public utility services," he said.

Gazprom initially confirmed, but then denied reports that the deal
will also give it ownership of an incomplete Armenian pipeline,
which is scheduled to start pumping gas from neighboring Iran early
next year. The Armenian government also denied this. Still, Russia’s
Prime-Tass news agency quoted Gazprom Deputy Chairman Aleksandr
Ryazanov as saying on June 30 that the Russian monopoly is keen
to control the pipeline, which was originally intended to reduce
Armenia’s dependence on Russian energy resources.

Moscow has already reportedly forced Yerevan to make sure that the
pipeline’s diameter is not large enough to allow Iran to re-export
its gas to Georgia and possibly Eastern Europe. "We trampled on
our national interests in favor of Russia just because it [Moscow]
does not want to face any competition in the European gas market,"
complained Aghajanov.

There have been indications, though, that Yerevan and Tehran are
considering building a second pipeline that would serve to deliver
Iranian gas to third countries. "Naturally, when Iranian gas starts
flowing into Armenia, perhaps it will be exported to other countries
as well," the speaker of Iran’s parliament, Gholamali Haddad-Adel,
told reporters during a recent visit to Armenia.

Despite the potential for securing alternative gas supplies, President
Robert Kocharian’s administration seems increasingly convinced that
Armenia’s long-term energy security hinges on the construction of
a new nuclear power plant in place of Metsamor’s aging Soviet-era
reactor. The reactor is expected to be shut down by 2016. Earlier
this year, the Armenian parliament allowed the government to start
searching for foreign private investors. The estimated construction
cost of a new nuclear power plant is at least $1 billion.

The United States has already made it clear that it is less than
enthusiastic about the idea. Tom Adams, a senior State Department
official coordinating US aid to ex-Soviet states, argued during a May
visit to Yerevan that Armenia’s location in a seismically active zone
prone to powerful earthquakes should be taken into consideration. "I
think our view right now is that there are probably better alternatives
to a second nuclear plant," Adams said without elaborating.

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