Armenia: Answers Demanded on UES Energy Deal

Uncertainty surrounds a reported deal with Russia's Unified Energy Systems that would grant the company ownership of Armenia's main electricity company. After stating several months ago that it had purchased the utility, the Russian energy giant on July 13 reversed itself, claiming that it had only secured a management contract. The transaction, shrouded in secrecy, has already sparked strong criticism from one international financial organization, which faults the Armenian government for refusing to answer questions on the topic.

On June 30, the Russian energy giant Unified Energy Systems (UES) announced that Interenergo, an offshore subsidiary of UES, had purchased 100 percent of the shares of Armenian Electricity Network (AEN) for $73 million. One of Armenia's most successful companies, AEN had been (and may still be) owned by the British-registered firm Midland Resources Holding, Ltd. In 2004, AEN ranked as Armenia's fourth-largest corporate taxpayer, according to the Armenian-European Policy and Legal Advice Center, and earned revenues of some 70.67 million drams (about $106.6 million).

If the AEN purchase by UES is confirmed, Russian companies would be poised to take full control of Armenia's energy industry following more than two years of steady expansion. In 2003, within the framework of Armenia's assets-for-debt program with Moscow, the Hrazdan thermal power plant, the largest such plant in Armenia, was transferred to Russia for $31 million. [For additional information see the Eurasia Insight archive]. UES also was named "financial manager" of the Armenian nuclear power plant Metsamor. To pay for the delivery of nuclear fuel to Metsamor, the Sevan-Hrazdan hydroelectric power station cascade was transferred to Russia in 2003. The same year, GazProm, the Russian energy conglomerate, became the chief supplier of natural gas to Armenia. The company also holds 45 per cent of shares of "ArmRusGasProm," which holds a monopoly on distribution of natural gas in Armenia.

Under existing legislation, the sale of one-quarter or more of AEN shares requires the approval of the government and the Commission on Regulation of Public Services. The Armenian government has declined all comment on the issue.

Controversy over the possible sale continues to build. Radio Free Europe/Radio Liberty quoted a UES spokesperson as saying that Interenergo was only "the beneficiary of a management contract" that would give the Russian energy company day-to-day control of AEN, rather than owning the Armenian firm outright. Information in the company's annual report that UES had purchased AEN was not correct and has been removed from the UES website, the company spokesperson said.

In a July 11 statement, an AEN spokesperson, who requested not to be named, told EurasiaNet that the company's shares had not been transferred to Interenergo management. The spokesperson denied that a sale had occurred, and stated that he was not authorized to release information about the size of the deal.

With no ready explanations from the government, the patience of one international financial organization appears to be running thin. In a July 8 press conference, Roger Robinson, chief of the World Bank's Armenia mission, said that the organization, Armenia's largest creditor, is dissatisfied with the government's failure to provide information about the deal. "The electricity distribution networks are one of the largest and [most] profitable spheres that is of a great strategic value for each Armenian, and I consider the regular provision of transparent and official information on events concerning this sphere as very important," Robinson said. On July 13, PanArmenian.Net reported Robinson as saying that he would meet with members of the government if the situation was not rectified "within several days."

Reports about AEN's sale first appeared in February 2005, when the Yerevan-based newspaper Haykakan Zhamanak reported that a deal had been brokered whereby UES would purchase the company for $80 million. Midland Resources Holding has held AEN since 2002 when it won a privatization tender for the then state-owned utility for $40 million.

Reaction to the report was swift. On February 22, UES Chief Executive Officer Anatoly Chubais confirmed that an offer had been made, but stressed that "[a]ny decision is possible only . . . when it is coordinated with the Armenian leadership," the Russian news agency RIA Novosti reported. It is not known, however, whether those consultations ever occurred and, if so, with whom.

"It is clear that the situation is not [the] best," Robinson said. "The Armenian government and the Commission on Regulation of Public Services must explain to the nation and to me what is going on."

One political analyst believes that the reason for the government's silence is political. "In April and May of the current year, the leadership of Armenia was seriously concerned about the possibility of revolution in the country and saw the only way out in the support from the outside. That's why Yerevan was encouraging Vladimir Putin's [March 24-25] visit to Armenia," said Stepan Safarian, research coordinator at The Armenian Center for National and International Studies in Yerevan. The fact that news of RAO UES' interest in purchasing AEN immediately followed Putin's visit led Safarian to conclude that "[t]he transfer of shares was the price that Armenia paid for Putin's visit."

Chubais, the UES chief, enjoys close ties with the Kremlin and has made no secret of his desire for expansion in the South Caucasus and Turkish energy markets. [For background see the Eurasia Insight archive]. The company also controls Georgia's electrical power grid. [For background see the Eurasia Insight archive].

A representative of the ruling party coalition says that any deal with UES would have more to do with economics than politics. "After the privatization of the Armenian Electricity Network, some conversations about the possible resale of the company have periodically [taken place]. Naturally, the state is interested in making the possible deal the most profitable for Armenia," said Galust Sahakian, leader of the Republican Party parliamentary faction, a member of Armenia's ruling coalition. "I'd sound rather strict, but we would not like the Electricity Network to be sold to, for example, a Turkish company."

Sahakian also claimed that the AEN deal remains in the negotiations stage, with nothing finalized to date. "I am a politician and I would have information if the sale of the company took place," he said.