Armenia Cedes More Energy Assets For Cheaper Russian Gas

Armenia's leadership has controversially agreed to hand over more state energy assets to Russia in return for avoiding a doubling of the price of Russian natural gas in the near future. Gazprom, Russia's state-run gas giant, is now set to assume control of a major Armenian power plant, and may also obtain a controlling share of a planned Armenian-Iranian gas pipeline.

Gazprom representatives announced both deals April 6 after four months of confidential negotiations between the Armenian and Russian governments. Armenian leaders, however, have only confirmed the power plant transfer. On April 7, Armenian Energy Minister Armen Movsisian asserted that pipeline rights could not be transferred, citing the fact that construction on the energy route had not yet been completed.

If both deals go through as envisioned, the deals would give Moscow a stranglehold on the Armenian energy sector, raising questions about Yerevan's recent pledges to ease its economic dependence on Russia. Indeed, the chief strategic reason used initially by Armenian leaders to justify construction of the Iran-Armenia pipeline was that it would break Russia's gas-supply monopoly.

The Armenian-Russian transfer talks were triggered by Gazprom's late 2005 decision to drastically raise the price of gas exports to several ex-Soviet states, including Armenia. [For background see the Eurasia Insight archive]. Gazprom said it would charge Armenian customers $110 per thousand cubic meters, up from the existing price of $56 per thousand cubic meters. Russian gas generates nearly 40 percent of Armenia's electricity and is also the main source of winter heating for hundreds of thousands of Armenian households. Not surprisingly, Armenian authorities scrambled to get the Russians to reconsider the measure. Armenian President Robert Kocharian traveled to Russia twice in less than two months to discuss the matter with Russian leader Vladimir Putin.

Gazprom representatives made it clear that the gas price hike would be scaled back only if the Armenian government ceded more of its key energy assets. [For background see the Eurasia Insight archive]. When Armenian Prime Minister Andranik Markarian publicly ruled out such a possibility in January, the price hike seemed inevitable. And on March 10, Armenian state regulators allowed the Armenian national gas operator to raise the retail price of gas by 52 percent for households and 80 for industrial consumers. [For background see the Eurasia Insight archive]. The subsequent Russian-Armenian agreement thus came as a surprise.

According to an Armenian government statement, Gazprom will be granted ownership of the large, but incomplete gas-fired power plant located in the central town of Hrazdan in exchange for supplying Armenia with almost $189 million worth of gas free of charge. Gazprom would also pay an additional $60 million in cash, and would pledge to invest at least $150 million to complete construction of the plant. "This proposal [by the Russian side], which has been discussed for so long, is quite attractive in both economic and energy terms, and we could not have turned it down," Movsisian told reporters.

Defending the controversial deal, Kocharian and Movsisian emphasized the fact that Armenian families will be paying 65 drams (14 U.S. cents) per cubic meter of gas, instead of the planned 90 drams, until the end of 2008. Kocharian also suggested that the deal would stimulate Armenia's economy.

Attention now is centering on the pipeline issue. In its initial April 6 statement, Gazprom said it would enjoy control of the Iran-Armenia gas pipeline, which is expected to begin operation in early 2007. When Armenian officials denied this, Gazprom promptly edited its statement. The amended version contains no references to the pipeline in question, speaking instead of unspecified "facilities of Armenia's gas sphere."

Still, Russian media outlets consider Gazprom's takeover of the Iran-Armenia gas pipeline to be an accomplished fact. The Kommersant daily wrote on April 7 that Gazprom will now make sure that Iran does not re-export its gas to Georgia and possibly other ex-Soviet countries via Armenia.

In a further blow to Tehran, the Armenian government has reneged on its pledge, reaffirmed by Movsisian as recently as last December, to let a state-owned Iranian company complete the Hrazdan plant. The government was due to repay the large-scale Iranian investments with electricity to be generated at the facility. It presented the arrangement as proof of its stated efforts to diversify Armenia's sources of energy. Russian energy companies already own the country's largest thermal power plant, also located in Hrazdan, several hydro-electric plants, as well as its natural gas and electricity distribution networks. In addition, Russia manages the finances at the Metsamor nuclear power station.

Armenian opposition leaders and independent observers say the settlement of the Russian-Armenian gas dispute will make Armenia even more dependent on Russia, both politically and economically. "This deal will accelerate the process of Armenia's transformation into a Russian province," Smbat Ayvazian of the pro-Western opposition Hanrapetutiun (Republic) party charged in a newspaper interview.

Kocharian, however, brushed aside such criticism in weekend televised remarks, arguing, among other things, that Western energy giants continue to show little interest in the Armenian energy sector. "I don't know of any European or American proposals on our energy that we have turned down," he said.

Kocharian's decision to essentially accept the terms offered by the Russians was all the more unexpected given an unprecedented amount of anti-Russian rhetoric publicly voiced by politicians and especially the TV stations loyal to him earlier this year. They were particularly angered by the fact that Armenia, one of Russia's staunchest ex-Soviet allies, is to pay the same price for Russian gas as neighboring pro-Western Georgia. The Armenian leader is widely believed to have orchestrated this PR campaign as part of his negotiating tactic. His spokesman Victor Soghomonian pointed to growing anti-Russian sentiment in Armenia on January 24, saying that "it is the Russian side that has to think about doing something about that."

Armenia's "energy security," meanwhile, appears to have been a high priority for the United States of late. US Assistant Secretary of State Daniel Fried and his deputy Matthew Bryza focused on the issue during separate visits to Yerevan in early March. While stressing the importance of diversifying the landlocked country's energy supplies, both men publicly expressed US unease over Armenian-Iranian energy cooperation. Washington is therefore not necessarily unhappy with the Kocharian administration's deal with Gazprom. As Bryza put it, "Armenia has a long and positive experience working with Russian gas suppliers and that needs to continue."