Russia Tightens Control over the Armenian Energy Sector

After more than a year of negotiations, Russia has completed the acquisition of Armenia's power distribution network, tightening its grip on the Armenian energy sector. The Armenian government says the $73-million takeover will breathe new life into the Electricity Networks of Armenia (ENA). But government critics have denounced it as a further blow to the country's energy security.

The shares in ENA were formally transferred to an offshore-registered subsidiary of RAO Unified Energy Systems (UES), Russia's state-controlled power utility, at a September 26 ceremony in Yerevan, attended by senior Armenian officials and UES executives. The deal was formalized one year after the government in Yerevan announced and approved the Russians' decision to buy ENA from Midland Resources Holding, a British-registered firm that privatized the once loss-making network in 2002. [For background see the Eurasia Insight archive].

The Russian takeover of the Armenian power grid was first made public in June 2005, presented as a long-term "management contract" signed by UES and Midland. The World Bank and other Western donors questioned the legality of that deal, arguing that it was cut without the approval of Armenian regulatory authorities. But the donors acquiesced when UES and Midland decided afterwards to sign a formal acquisition agreement and follow relevant legal procedures.

It remains unclear why UES has taken so long to complete the purchase. Unconfirmed reports in the Armenian press suggested that the Russian energy giant, which has aggressively expanded its operations in former Soviet republics, had second thoughts about buying ENA after examining its books and discovering serious financial irregularities.

Officials in Yerevan maintain the deal strengthens the local energy sector by injecting badly needed capital investments in ENA. Andrei Rapoport, the UES vice-chairman, announced during the share transfer ceremony that the Russian company will invest $20 million in ENA over the next 12 months.

Critics, however, claim that Armenia's energy dependence on Russia has reached a critical level, posing a serious threat to the Caucasus state's sovereignty. According to Eduard Aghajanov, an economist critical of the government, ENA's sale all but completed the country's "energy colonization" by Moscow. "It is inadmissible to give everything to one state, especially in the area of energy," he told EurasiaNet. "Russia is now in a position to impose its will on us in both the economic and political spheres at any moment. We are tying a noose around our neck."

UES already owns a cascade of Armenian hydroelectric plants and manages the finances of the nuclear power station at Metsamor. Another state-run Russian energy giant, Gazprom, controls Armenia's largest thermal power plant, and is currently its sole supplier of natural gas. Russian gas is used for generating nearly 40 percent of the country's electricity, with another 40 percent coming from Metsamor.

ENA's sale was preceded by an equally controversial Russian-Armenian energy agreement that was announced last April following Gazprom's decision to double the price of its gas for all three South Caucasus states. Under the terms of that deal, Gazprom paid $250 million to take control of another incomplete thermal plant located in the town of Hrazdan in central Armenia. Most of the payment, $188 million, is to be made in the form of free-of-charge supplies of Russian gas. This means that the overall price of Russian fuel for Armenia will remain virtually unchanged until the end of 2008.

Defending the April deal, Armenian leaders argued that it also commits the Russians to spending at least $150 million on completing the Hrazdan facility in the next few years. "This agreement will only reinforce our energy security," Prime Minister Andranik Markarian said at the time.

The head of the World Bank office in Yerevan, Roger Robinson, likewise described the gas settlement as "very beneficial" for Armenia. Robinson made the point that there is "nothing fundamentally wrong" with Russian ownership of Armenian energy facilities. "The important thing is to have a very strong regulator that sets the rules and monitors the rules for the delivery of public utility services," he said.

Gazprom initially confirmed, but then denied reports that the deal will also give it ownership of an incomplete Armenian pipeline, which is scheduled to start pumping gas from neighboring Iran early next year. The Armenian government also denied this. Still, Russia's Prime-Tass news agency quoted Gazprom Deputy Chairman Aleksandr Ryazanov as saying on June 30 that the Russian monopoly is keen to control the pipeline, which was originally intended to reduce Armenia's dependence on Russian energy resources.

Moscow has already reportedly forced Yerevan to make sure that the pipeline's diameter is not large enough to allow Iran to re-export its gas to Georgia and possibly Eastern Europe. "We trampled on our national interests in favor of Russia just because it [Moscow] does not want to face any competition in the European gas market," complained Aghajanov.

There have been indications, though, that Yerevan and Tehran are considering building a second pipeline that would serve to deliver Iranian gas to third countries. "Naturally, when Iranian gas starts flowing into Armenia, perhaps it will be exported to other countries as well," the speaker of Iran's parliament, Gholamali Haddad-Adel, told reporters during a recent visit to Armenia.

Despite the potential for securing alternative gas supplies, President Robert Kocharian's administration seems increasingly convinced that Armenia's long-term energy security hinges on the construction of a new nuclear power plant in place of Metsamor's aging Soviet-era reactor. The reactor is expected to be shut down by 2016. Earlier this year, the Armenian parliament allowed the government to start searching for foreign private investors. The estimated construction cost of a new nuclear power plant is at least $1 billion.

The United States has already made it clear that it is less than enthusiastic about the idea. Tom Adams, a senior State Department official coordinating US aid to ex-Soviet states, argued during a May visit to Yerevan that Armenia's location in a seismically active zone prone to powerful earthquakes should be taken into consideration. "I think our view right now is that there are probably better alternatives to a second nuclear plant," Adams said without elaborating.