RUSSIA MAY SCORE FINAL COUP IN ENERGY BATTLE
Alexandros Petersen

The Moscow Times
July 15 2009
Russia

The European Union is touting its deal with Turkey on Monday to realize
the Nabucco natural gas pipeline project as a major coup in the quest
for alternative energy routes that bypass Russia. The project’s major
transit country, Turkey, may have been brought on board, but Ankara’s
other energy interests in the Caucasus may still stand in the way of
securing producer countries, namely Azerbaijan, for the project.

Among other decisions, Ankara’s move to open its border with Armenia
— closed due to the Nagorno-Karabakh conflict — angered its vital
Nabucco partners in Baku. Although Turkish President Abdulla Gul and
Prime Minister Tayyip Erdogan have stepped back from any concrete
process for the moment, the idea of an open border with Armenia
resonates in Turkey. This is because there are significant interests in
the normalization of relations. Not only would underdeveloped eastern
Turkey see a trade boom, but Ankara has its eyes on energy projects
in Armenia that could potentially feed Turkey’s growing consumption.

Much has been made of the EU’s "Southern Corridor," but little
attention has been paid to Russia’s energy interests in the
Caucasus. BP may be a major energy presence in Azerbaijan and Georgia,
but Russian state-backed concerns have a vice grip on Armenia’s energy
sector. Until now, this control was not particularly strategic,
except for making Armenia’s potential future regional integration
difficult. But that picture could be set to change.

Armenia’s Metsamor nuclear power plant is by most authoritative
accounts the least safe reactor in operation worldwide. Both Moscow
and Ankara have their sights set on the construction of a new plant
that could not only guarantee Armenia ample electricity but would
also allow for export to neighboring countries. Most important,
the way in which a new plant would be put in place could virtually
ensure Russian control of those exports — and thus greater leverage
over Turkey and potentially Iran and Georgia.

In return for Moscow’s cancellation of $40 million in debt, Armenia
granted Moscow control of the Metsamor plant, which provides about
40 percent of Armenia’s electricity. The government has holdings in
three other power stations as well: the Sevan-Hrazdan hydropower
plant, the Hrazdan thermal power station and the Armenian Nuclear
Electric Plant. These facilities generate about 75 percent of the
country’s electricity, and with the purchase of Midland Resources’
80 percent stake in the country’s distribution network, Russia can
directly control or leverage the entire Armenian power sector.

Rosatom is set to build Metsamor’s replacement with a projected
capacity of 1,000 to 1,200 megawatts, which is twice that of the
current plant. Armenian officials have said the new reactor could
allow for the export of 6 billion kilowatt hours annually, roughly
equivalent to Armenia’s entire consumption last year.

In a Gazprom-brokered deal, Armenia is already set to supply Iran
with electricity in exchange for the gas supplied by Iran in the
Iran-Armenia Natural Gas Pipeline. During an April phone conversation,
Gul and Armenian President Serzh Sargsyan reportedly agreed to
electricity exports to eastern Turkey of 1.5 billion kilowatt hours
annually. The process is stalled at the moment reportedly due to
"technical difficulties" on the Turkish side of the border. Armenia’s
energy relationships with either of its major neighbors, however,
cannot be expanded without Russia giving the green light and
support. The vast majority of the income generated from Armenian
electricity exports would go directly to Russian government coffers.

The control is set to expand. Rosatom is particularly interested in
developing Armenia’s uranium fields in its southern Sunik region,
estimated at between 25,000 and 100,000 metric tons. Rosatom’s
Atompredmedzoloto, the world’s second-largest uranium mining company,
and Armenia’s Environment Ministry have set up the Armenian-Russian
Mining Company to begin development as part of a 50-50 joint
enterprise. Production could begin as early as next year and any
uranium exports would be handled by Russian firms.

In comparison to Russia’s uranium fields in Eastern Siberia, Armenia’s
deposits are easily extracted and could form part of Moscow’s
plans to corner the nuclear fuel market now that nuclear power plant
construction is once again popular. One cubic centimeter of uranium is
equivalent to 60,000 cubic meters of natural gas. Unlike natural gas,
the nuclear fuel is also easy and inexpensive to transport because
it is highly compressed.

While Brussels and Washington have sought to emulate the famed
Baku-Tbilisi-Ceyhan pipeline project in linking Nabucco — and thus
Western countries and companies — to the energy infrastructure and
economies of Azerbaijan and Georgia, they have almost completely
ignored Moscow’s increasing control over Armenia. Conventional
wisdom holds that the key energy country in the Caucasus is
Azerbaijan, considering its rich Caspian oil and gas resources,
and that Georgia is just as strategically important as the needle’s
eye through which those resources can reach world markets without
Russian or Iranian interference. Partly due to the Nagorno-Karabakh
conflict, Armenia never entered the Western-oriented energy export
picture. Paradoxically, the main EU and U.S. role in Armenia’s energy
sector has been aid for financing and technical support to ensure the
safety of the ailing Metsamor reactor and a $2 million feasibility
study for the new plant.

But Russian plans for the replacement facility and electricity export
to Turkey, Iran and potentially Georgia put Western assumptions
into question. In negotiations over Nabucco, Turkey proved to be an
uncertain actor, particularly as Ankara’s relationship with Moscow
blossomed in contrast to fading hopes of EU membership. Russian control
over electricity exports to underdeveloped and electorally important
eastern Turkey will only add to the uncertainty about Turkey’s Western
orientation. With the Iran-Armenia Natural Gas Pipeline and Russia’s
gas export pipeline to Yerevan, Moscow has already carved out a
North-South energy corridor perpendicular to its Western-oriented
East-West counterpart. This link is set to broaden should Armenia
begin to export electricity to Iran with Russian support.

Conventional wisdom in Brussels and Washington also holds that
Armenia’s international isolation is in no small part due to its
allowing Russian government-run concerns to take over its energy
sector. This may mean that Armenia is isolated from Western-oriented
projects, but it does not necessarily mean that Yerevan will not
become a regional electricity hub or not extend Moscow’s influence
in the greater Black Sea-Caspian area. This could be coupled with a
Russian-dominated role as an international nuclear fuel source. It
is important to note that realistic estimates point to the Nabucco
project being completed at around the same time Metsamor’s replacement
will come online. Western energy gains in the Caucasus may well be
accompanied by a Russian energy coup.

Alexandros Petersen is Dinu Patriciu fellow for trans-Atlantic energy
security and associate director of the Eurasia Energy Center at the
Atlantic Council in Washington.