In mid-July, Armenia signed a pact to eliminate $98 million of its most expensive debt by turning over five state-owned businesses to Russia. The deal, known as an "assets-for-debt" swap, has been brewing since Russian President Vladimir Putin and Armenian President Robert Kocharyan called for it in the fall of 2001. It signals the end of especially burdensome interest payments, at commercial rather than preferential rates, that Armenia had to pay to Russia. It also heralds a new economic reality in the Caucasus, which will make Russia a more active economic player.
The July 17 deal's blend of economic and strategic importance emerged in the signatures of the co-chairman of the Armenian-Russian intergovernmental cooperation commission, Armenian Defense Minister Serzh Sarkisyan and Russian Industry and Science Minister Ilya Klebanov. Under the swap, Russia will forgive Armenia's debt by January 1 in exchange for taking over five Armenian state-owned businesses. Beyond its nuts and bolts, this pact brings several implications. First, Armenia will escape the toughest burden of its external debt. Though its obligation to Russia is only $98 million of roughly $900 million in external debt, Armenia finds Russian interest especially hard to pay. Most lenders to landlocked, impoverished Armenia charge low-interest rates, via international institutions like the World Bank. Russia charged commercial rates. Losing this debt burden helps Armenia retain cash, although some opposition politicians claim the government could find other ways to repay the debt rather than exchanging it for the country's strategic assets.
That criticism highlights the swap's economic importance to Russia. The Moscow-based Vedomosti newspaper quotes an unnamed Russian official as saying that Moscow takes relief from the deal, since it eliminates the risk that Armenia might follow several other former Soviet republics in defaulting on its debt. The deal also makes Russia, a strategic ally rather than a capricious private financier, an investor and prominent economic player in the region. More important, the nature of Russia's investment boosts Armenia's technology sector. The governments of the two countries still have to determine (and parliaments still have to ratify) the specific companies in the swap. But the transfer will probably include the Hrazdan thermal plant, a modern robot-producing factory named Mars, and two or three research institutes which once served the USSR's military-industrial complex. Klebanov told reporters that Russia would turn over to the power plant to its Unified Energy System. Russia also figures to quickly rehabilitate the other facilities to enlist them in the modernization of its military. In so doing, it will probably give a boost to Armenia's long-standing efforts to revitalize its electronics sector.
The Hrazdan thermal power plant illustrates how Russian investment can promote Armenian security. The plant can produce up to 40 percent of Armenia's electricity. When a Russian state-sponsored entity takes it over, Russia will be supporting a major consumer of Armenian gas and a major supplier of Armenian power. In this role, Russia seems less likely to remain passive with regard to Armenian problems. For example, up to now Russia and Armenia have been competitors in terms of exporting electricity to Georgia and to eastern Turkey. When Russia becomes a power producer in Armenia, this competition will probably diminish or end. According to Sergey Shakariants, an analyst with the Armenian Center for National and International Studies, Russia may even stop opposing the privatization of the energy distribution networks of Armenia or the construction of the Iran-Armenia gas pipeline. Since energy networks would consume what the Hradzan plant supplies and since a gas pipeline could bring the plant cheap electricity, Russia's stance on these issues figures to become more subtle.
Finally, the deal implies that Russia will enhance its broad political and strategic investment in Armenia by taking a meaningful stake in Armenia's economy. According to the Yerevan-based Noyan Tapan news agency, during the signing ceremony Klebanov said that the interest of Russian business in Armenia's economy will grow and in the future the intergovernmental commission is going to consider several new projects having nothing to do with the debt but connected with sizable investments by Russian businesses in Armenia. This attitude will deepen Russia's influence in and commitment to the Caucasus, at a moment when private and other international investors are shying away from the region.
Editor's note:
Haroutiun Khachatrian is a Yerevan-based writer specializing in economic and political affairs.
