RUSSIAN INVESTMENTS IN ARMENIA: THEIR ECONOMIC BACKGROUND AND POSSIBLE POLITICAL IMPACT
Haroutiun Khachatrian
Central Asia-Caucasus Analyst, DC
Dec 12 2006
The recent takeover of the Armenian telecom operator, ArmenTel, by the
Russian company Vympelcom, the possible passage of the Iran-Armenian
gas pipeline to a company controlled by Russia, and the possible
accession of Armenian railroads by Russian railroads renewed the
discussion about the role of Russia in the Armenian economy.
Pro-western politicians claim the excessive penetration of Russian
capital into Armenian economy will lead to the country’s dependence
on Russia, which, in turn, may have political consequences. However,
there is no indication that Russian investments in the Armenian
economy pursue goals other than making profit.
BACKGROUND: Russia is the largest source country of investments in the
economy of Armenia, (US$405 million between 1996 and 2005) which is
significant for this small country. As a result, a significant part
of the country’s economic assets are controlled by Russians, both
by the government and state-owned companies, and by private Russian
companies. The bulk of the former group of assets came from the 2002
debt-for-equity swap, whereby Armenia repaid its US$97 million dollar
debt to Russia accumulated during the crisis of 1990s.
The state-controlled Russian companies are especially strong in
the energy and power industry. In particular, more than half of
the electricity-producing capacities of Armenia are controlled by
Interengo, a subsidiary of RAO UES. Among this company’s assets in
Armenia are four blocks of the Hrazdan Thermal Power Plant (TPP), the
largest power plant in the country, and Armenia’s energy distribution
network. Another Russian state-controlled giant, Gazprom, owns 45%
of Armrosgazprom, Armenian gas network operator (with another 45%
belonging to the Armenian government and 10%, to another Russian-
and Gazprom-associated company, Itera).
Recently Gazprom declared its decision to increase its stake in
Armrosgazprom to 58 percent, by buying a new issue of shares. This
stake will be increased even more when the declared sale of the
fifth block of the Hrazdan TPP to Gazprom is completed. Among
non-governmental Russian companies, Vympelcom is by far the largest
single investor in Armenia, as it took 90 percent of the ArmenTel
shares of its previous owner, Greece OTE for some Euros 482 million
or US$616 million dollars, equivalent to more than 10 percent of
Armenia’s projected GDP this year. Another large private investor
is the Russian aluminum giant Rusal, which owns Armenal, a large
foil-producing factory. Rusal in recent years invested 80 million
dollars to modernize it.
The Russian leadership looks interested in activating this process,
as seen, in particular, from the statement by president Vladimir
Putin, who told his Armenian counterpart Robert Kocharyan on October
30 that he regretted that in recent years Russia "occupied a shameful
third place" among foreign investors in Armenia. Not surprisingly,
in recent years an increasing number of concerns have been expressed
in Armenia about "selling the country to Russians," or about Armenia
"becoming an appendix to Russia," etc. Concerns are expressed that the
penetration of Russian capital may keep Armenia far from approaching
the West, and that Armenia may fall out of the prevailing trend
for the South Caucasus region which is westward. The government,
of course, says this process is beneficial to Armenia. As for the
Armenian population, it is neutral if not positive, given the absence
of significant anti-Russian sentiments among Armenians.
IMPLICATIONS: The facts show that, at least for the time being, Russian
investments in Armenia have had a mostly positive impact with the
goals pursued appearing to be purely economic. Whereas in the 1990s,
there were cases of politically motivated competition among Russian
and western investors for Armenian assets, no such cases are known
to have taken place in the past six years. Moreover, Russian funds
have often been the only available investments in Armenian assets,
with no competitors. This was the case, in particular, with the fifth
block of the Hrazdan TPP, which was founded back in Soviet times but
has remained unfinished as the Armenian government failed to find
interested investors. Under the deal agreed in April 2006, Gazprom
not only pledged to invest US$150 million to finalize this block,
but also promised to keep gas prices stable at US$110 per 1000 cubic
meters for three years to come (meanwhile, most other CIS buyers will
pay twice as much in 2007). The political context of these investments,
if any, is not obvious.
On the one hand, the Russian government does not conceal its
interest in acquiring assets in Armenia, just as Is the case in other
countries. However, the real influence of the political factor in these
deals is mostly overestimated. The ArmenTel deal is good evidence,
as in this case, two out of the four companies participating in the
tender were Russian ones, and reportedly, the Armenian government
would prefer to see MTS, a company close to the Russian government,
as the winner. However, the tender was won by Vympelcom, whose largest
shareholder is Telenor of Norway. In addition, the Armenian government
used the sale as an opportunity to get rid of the ArmenTel monopoly
on many communication services, which strongly hindered development
of the IT and telecom sectors in Armenia.
Finally, it is not obvious that these deals will make Armenia even
more dependent of Russia than it already is. In fact, the opposite
may be true. For example, Armenia has long been dependent on supplies
of Russian gas, and this is, of course, a leverage of political
pressure. However, as Russia has spent money to acquire large energy
consuming assets in Armenia, it would be less inclined to stop gas
supplies to Armenia as that would harm its own economic interests as
well. As for the problem of ownership of the Iran-Armenia gas pipeline,
its value seems highly overestimated. This is a 40 km long pipeline
connecting the Iranian-Armenian border with Armenia’s existing gas
distribution network, owned by ArmRosgazprom. It cannot serve as
a transit route due to its small diameter, as Russia reportedly
purposefully prevented the construction of a larger pipeline. Even
if this fragment is given to Russia (in fact, to ArmRosgazprom,
a subsidiary of Gazprom, which works according to Armenian laws),
the valve of this pipeline is controlled by Iran rather than by
Russia. Aside from satisfaction that no Armenia does not transit
Iranian gas, it will not be great enhancement of Russia’s influence
in this sector.
CONCLUSIONS: For the time being and for an foreseeable future, the
large Russian investments look beneficial for the Armenian economy
and have no visible political impact in terms of Armenia’s attitude
to the West. They do not prevent Armenia from continuing advanced
market reforms and establishing closer ties with the USA and the EU,
in particular, through the recently signed Action Plan of Armenia in
the European Neighborhood Policy.
AUTHOR’S BIO: Haroutiun Khachatrian is an analyst on political and
economic issues based in Yerevan, Armenia.
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From: Emil Lazarian | Ararat NewsPress