Russia Tightens Grip on Armenian Energy Sector

Russia has enhanced its already dominant role in Armenia's energy sector by buying the country's electricity grid after years of behind-the-scene maneuvering. The Armenian government gave the green light recently to the formal takeover of the Electricity Networks of Armenia (ENA) utility by a subsidiary of Unified Energy Systems (UES), the state-controlled Russian power monopoly.

UES and other Russian energy firms already own or manage several major power plants that account for as much as 80 percent of Armenia's electricity production. In addition, they are the sole suppliers of the country's main energy resources: natural gas and nuclear fuel.

The Armenian government's decision followed a request submitted by Midland Resources Holding, a British-registered company that privatized the Armenian power utility three years ago. Under its contractual obligations, Midland could not resell ENA to another foreign investor without official consent. When the government announced its approval of the sale on September 23, Energy Minister Armen Movsisian suggested that Yerevan was swayed by the Russian company's pledge to assume Midland's commitments to make substantial capital investments in the Soviet-era network.

"With this decision, the government legalized a deal between a buyer and a seller that was effectively struck long ago," commented the Yerevan daily Hayots Ashkhar.

UES had been the de facto owner of ENA since June 2005, when it signed a controversial "management contract" with Midland. The Russian giant, acting through one of its offshore subsidiaries called Interenergo BV, paid $73 million for the right to manage the utility and receive its profits. Both the World Bank and the US Agency for International Development challenged the legality of the deal, arguing that the Armenian government, suspiciously silent on the issue, had not been officially notified of the agreement's signature beforehand.

UES and Midland countered that they did not need a government approval for their agreement because it fell short of a formal acquisition. Still, the two companies eventually decided to formalize ENA's sale to the Russians and go through relevant legal procedures. The move was welcomed by the World Bank and USAID. "I am pleased to see that the rules are now being followed," the head of the bank's Yerevan office, Roger Robinson, told reporters on September 13.

However, critics of the President Robert Kocharian's administration remain concerned about the Russian takeover of ENA, saying that it could render Armenia even more dependent on Russia, its main political and military ally. [For background see the Eurasia Insight archive]. They also fear that Moscow may now completely monopolize Armenia's energy sector and nullify the results of sweeping reforms undertaken over the past decade. These measures allowed Armenia to not only end the severe power shortages of the 1990s, but also to develop an electricity surplus, enabling Armenia to export electricity to neighboring Georgia and Iran. A key component of that reform effort has been the structural separation of the facilities that generate, transmit and distribute electricity.

In 2003, UES was granted ownership of several Armenian hydro-electric plants and the nuclear power station at Metsamor in return for repaying the latter's $40 million debt to Russian nuclear fuel suppliers. Armenia's largest thermal power plant, located in the central town of Hrazdan, was also handed over to Russia in 2002 as a result of a similar equities-for-debt swap. [For background see the Eurasia Insight archive].

Movsisian insisted that this fact will have little bearing on ENA's operations. The energy sector, he argued, is tightly regulated by Armenia's Public Service Regulatory Commission (PSRC), a supposedly independent body that sets utility tariffs. UES Deputy Chairman Andrei Rappoport made a similar point in a September 20 interview with the Russian Regnum news agency. "The fact is that the most important member in this market is the commission on regulating public services," Rappoport said. "It regulates the state policy on setting tariffs for each actor of the market, on issuing licenses on their activity, confirming and coordinating contracts."

Western donors seem to agree with this line of reasoning. "The very important thing in a utility is the strength of the regulator," said the World Bank's Robinson. "We have great confidence in the regulator here in Armenia."

Russia, however, faces growing competition in Armenia's energy market from the country's southern neighbor, Iran. After months of deliberations, the Armenian leadership has decided to accept Iran's proposal to complete the construction of another large thermal power plant in Hrazdan. Officials say a state-run Iranian company will invest $150 million in the plant. In exchange for finishing construction of the plant, the facility's electricity will be delivered to Iran, as a payment-in-kind. The facility will be powered by Iranian natural gas that will be pumped to Armenia through a pipeline currently under construction. [For additional information see the Eurasia Insight archive].

Yerevan has reportedly faced strong pressure from Moscow to accept an alternative proposal from UES and Russia's GazProm gas monopoly for completing the construction of this plant. Rappoport admitted that there has been a "certain rivalry on this issue" between Moscow and Tehran.

Further competition could come in the form of a $150 million reconstruction of an old thermal power plant in Yerevan, financed by the Japan Bank for International Cooperation. Armenian officials say the electricity produced at the modernized facility will be twice as cheap as that of the Russian-owned Hrazdan plant. Only time will tell if this is enough of a competitive edge for the new owner of the Armenian power grid.