EurasiaNet Eurasia Insight - Russian Moves in Caucasus Energy and Power Sectors Could Have Geopoltical Impact

EURASIA INSIGHT

RUSSIAN MOVES IN CAUCASUS ENERGY AND POWER SECTORS COULD HAVE GEOPOLTICAL IMPACT
Haroutiun Khachatrian 9/25/03

An acquisition binge has put a Russian company in position to dominate potential Caucasus power exports. At the same time, the business moves can enhance the Kremlin’s ability to project its political power in the region.

The Russian expansion into the Caucasus, led by the state-controlled electric company RAO Unified Energy Systems (UES), has accelerated in recent months. Of late, the chief acquisition target has been Armenia. Two recent debt-for-equity swaps left nearly a 50 percent stake in Armenia’s electricity generation capacity in Russian hands. Among the entities now under Russian corporate control are the 1100-megawatt Hrazdan thermal power plant and six hydropower stations, totaling 556 megawatts, on the so-called Sevan-Hrazdan cascade.

In addition, the Armenian government formally approved a deal on September 17 that will allow Russia’s UES to act as the "financial manager" of the Medzamor nuclear power plant. The five-year agreement stipulates that Armenia remains the titular owner of the nuclear facility, responsible for maintaining a safe operating environment at the plant.

Russian concerns have also made a high-profile push into Georgia. UES obtained a controlling interest in the operation of Georiga’s power grid in August, while also purchasing a majority share in the power-generating joint venture AES Silk Road. [For background see the Eurasia Insight archive]. Those deals give the Russian electric giant virtual control over Georgia’s domestic power market. Last May, Gazprom, the Russian gas conglomerate, established a dominant position in Georgia’s energy distribution infrastructure by concluding a partnership agreement with the Georgian government.

Observers believe the next step for Russian companies could be into the Armenian energy market. Gazprom and ITERA, another Russian company, hold key stakes in Armenia’s gas distribution company. Russia’s new weight in Armenian electric generation could lead to broader control in the Armenian gas sector.

Underpinning the recent burst of activity is a clearly stated desire by Russian concerns to boost regional power and energy exports. Anatoly Chubais -- the UES chief who gained fame as Russian privatization supremo under former president Boris Yeltsin -- has stated that his company aims to make inroads into the underserved markets of eastern Turkey. Experts generally agree that Armenia has sufficient generation capacity to export electricity. However, Armenia is unable to export power to Turkey directly given the lack of full diplomatic relations. [For background see the Eurasia Insight archive]. Any Armenian power exports would thus have to flow through Georgia.

If Chubais’ scenario plays out, a UES move into Turkey could benefit Gazprom, giving the conglomerate potentially increased leverage in future negotiations with the Turkish government over gas deliveries via the Blue Stream pipeline.

In the broader scheme of Caspian Basin energy exports, the recent Russian moves in the Caucasus could help Moscow frustrate the US-backed Baku-Tbilisi-Ceyhan (BTC) pipeline from fulfilling its economic potential. [For background see the Eurasia Insight archive]. Russia has long opposed BTC, largely because it would circumvent Russia’s oil and gas pipeline network. [For additional information see the Eurasia Insight archive].

Beyond the potential economic advantages gained by Russian companies, some officials and experts in both Armenia and Georgia have expressed alarm about the political impact of the deals. Indeed, some question whether the recent Russian acquisitions in the Caucasus were based more on political factors than on purely economic grounds.

In Tbilisi, the sense of concern is perhaps greatest, given the tension that has marked Georgian-Russian relations of late. [For background see the Eurasia Insight archive]. President Eduard Shevardnadze has generally welcomed the Russian acquisitions in Georgia. But his political opponents say the president’s position is a reflection of his political desperation, as his supporters face an uphill struggle to retain control of the Georgian parliament in elections scheduled for November 2. [For additional information see the Eurasia Insight archives].

Separately, some observers now worry that Russian companies are eyeing Georgian telecom assets for takeover. The Russian newspaper Nezavisimaya Gazeta recently quoted Roman Gotsiridze the head of the Georgian Parliament’s budget committee, as stating that Russia sought control of Georgia’s strategic infrastructure. Moscow’s overall aim, Gotsiridze indicated, was to restore is geopolitical dominance over Georgia. "This time {Russia is] using banks rather than tanks," he said.

While Armenia has historically enjoyed a special relationship with Russia, some Armenian political observers have voiced similar concerns that their country’s sovereignty is potentially jeopardized. A September 19 editorial in Aykakan Zhamanik, an independent newspaper founded by the opposition Democratic Homeland party, asserted that UES operates outside international corporate standards. "A great part of its activities are a Russian state secret," the editorial said.

Editor�s Note: Haroutiun Khachatrian is a Yerevan-based writer specializing in economic and political affairs.

The Central Eurasia Project aims, through its website, meetings, papers, and grants, to foster a more informed debate about the social, political and economic developments of the Caucasus and Central Asia. It is a program of the Open Society Institute-New York. The Open Society Institute-New York is a private operating and grantmaking foundation that promotes the development of open societies around the world by supporting educational, social, and legal reform, and by encouraging alternative approaches to complex and controversial issues.

The views expressed in this publication do not necessarily represent the position of the Open Society Institute and are the sole responsibility of the author or authors.