ARMENIAN ENTERPRISES TO BE HANDED OVER TO RUSSIA FOR DEBT.

On December 29 in Yerevan, Defense Minister Serge Sarkisian and Russia’s Deputy Prime Minister Ilya Klebanov finalized the first list of Armenian enterprises to be handed over to Russia, as part of a debt settlement scheme. The list includes the Hrazdan thermal power plant–Armenia’s largest–as well as the Mars electronics plant in Yerevan and three research-and-production enterprises: for mathematical machines, for the study of materials, and for automated control systems, these being former Soviet military-industrial plants. Signatures on the sale-and-purchase agreements for each of these enterprises are expected in the first quarter of 2002.

Negotiations continue on the fate of Armenia’s four electricity distribution networks. The Armenian government wants either to keep the network out of the debt-settlement scheme with Russia, or–if it must—to swap them on advantageous terms against debt. The Russians, for their part, would like to acquire the dilapidated networks for a song.

In essence, the Russian side has its eyes set on Armenian enterprises with some residual sale value for potential Western investors, whereas the Armenian side prefers to turn over to Russia those Soviet-era assets that no Western investor would consider acquiring. Therein lies the main issue in the negotiations. Russia is playing a strong hand because Armenia is failing to attract Western investments in its decaying, corruption-plagued industry. Thus, both tenders for the electricity distribution networks’ privatization failed to elicit any bids from anywhere, after Russian bidders had been excluded at Western insistence for valid economic and technical considerations.

The International Monetary Fund and World Bank do not oppose the handover of these Armenian assets, the value of which diminishes with the passage of time and in the absence of Western investor interest. IMF and WB representatives in Yerevan now consider the handover to Russia of those assets–less the electricity networks–as preferable on balance, if only because it would reduce the country’s overall external indebtedness. These and other Western representatives in Yerevan, however, are concerned by the fact that it is the Russian government, not private firms, who are about to acquire these Armenian assets. That will deal another setback to privatization in Armenia.

Armenia’s outstanding debt to Russia amounts to US$98 million, a heavy burden on the country’s small economy and deficit-plagued budget. The 2002 budget, just adopted in its final version by the parliament, with a built-in deficit of 2.8 percent of the anticipated gross domestic product, has set aside US$16 million for this year’s debt service to Russia. Armenian officials now hope that the sale of those industrial assets would permit reallocating the debt service funds to pressing domestic needs.

Yet international politics and geopolitics loom large in the backdrop to this process. It has become commonplace for both Russian and Armenian officials from the presidents on down to declare that the bilateral political and military relations are far ahead of the economic relations, and that the two countries’ alliance cannot for long be sustained without economic underpinnings.

In Yerevan, Klebanov termed the December 29 documents “a breakthrough, the first real and serious move toward Russian-Armenian economic integration in these last ten years. He said that “[i]t is well and good to speak of problem-free political relations and full mutual understanding. But, if we don’t proceed to economic integration, the political understanding may ultimately evaporate, and Armenia might develop such political understanding with those willing to intensively develop Armenia’s economy. We consider that this should be done by Russia.”

Declarations such as Klebanov’s leave open, however, the issue of Russia’s political will or lack thereof to subsidize its last remaining ally in the South Caucasus. President Vladimir Putin stated last September in Yerevan and in December in Moscow that Russia’s decisions on relations with Armenia–as with other CIS countries–would be guided by “pragmatism.” That formula can be read either way: as insistence on depoliticized, commercial terms in bilateral economic transactions, or on the contrary as a willingness to forego economic gain in return for geopolitical advantages.

It was Putin who proposed this debt-for-equity swap during his September 2000 visit to Yerevan. President Robert Kocharian and Russia’s Prime Minister Mikhail Klebanov agreed in December 2000 in Moscow to accelerate the transaction. In Moscow last month, Parliament Chairman Armen Khachatrian urged almost pleadingly that “Russia’s military presence in Armenia should be backed by an economic presence” (Noyan-Tapan, December 10, 2001).

On the Armenian side it is Serge Sarkisian, a general, who handles all aspects of relations with Russia. A close ally of Kocharian–and, like him, a Karabakh native–Sarkisian looks not like the second most powerful Armenian official, but rather like the president’s equal in terms of official and unofficial clout. He holds concurrently the posts of defense minister and Secretary of the National Security Council, handling all the key issues of military, internal security policies, diplomacy, and foreign economic relations. Sarkisian also personally controls all aspects of relations with Russia, a situation that reflects the predominantly military content of those relations. On the economic front, too, the first batch of five enterprises to be handed over to Russia include four military-related enterprises (Noyan-Tapan, Arminfo, Mediamax, Haikakan Zhamanak, RossBusinessConsulting, Interfax, December 28-30, 2001).

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