Publication: Eurasia Daily Monitor Volume: 3 Issue: 76

Armenian critics describe the government’s new agreement with Russia, giving up infrastructure property for moderately priced gas, as the equivalent of giving up the family’s milch cow — or at least selling the cow for the price of milk.

The preliminary Armenian-Russian sale-and-purchase agreement, first announced on April 6, was not signed as scheduled on April 14 — an indication that the bargaining continues over some details. It also appears that Moscow and Yerevan need a decent interval to condition — if not convince — Armenia’s population to accept the terms of the energy agreement and, more broadly, the changing nature of Armenia’s relationship with Russia from partnership of choice to servitude without a choice.

According to Gazprom announcements and Armenian officials’ statements from April 6 to date, the 25-year agreement includes the following elements:

1) Gazprom will charge $110 per one thousand cubic meters of gas supplied to Armenia from April 1, 2006, through January 1, 2009. The price will be subject to negotiation from 2009 onward. Armenia had paid $54 to $56 per one thousand cubic meters until 2005, and it will sell assets to Russia in 2006 in order to be able buy the gas at double the old price. However, the price of gas delivered to Armenian consumers will rise only slightly, because the government will use the proceeds from the asset sale to Russia in order to subsidize the domestic gas sales.

2) The joint ArmRosGaz company is taking over the fifth power bloc of the Hrazdan gas-fired power plant and unifying it with the four old blocs, which are already controlled by Russia’s Unified Energy Systems (UES), under a single management system. Hrazdan’s unfinished fifth bloc was slated to become Armenia’s largest and most modern power generating unit. Gazprom is to pay $249 million for Hrazdan-5 in three annual tranches from 2006 to 2008.

Of this amount, $189 million will be nominally transferred to Armenia’s government, which will use the funds to subsidize moderately priced gas supplies to Armenian consumers. Significantly, those funds are earmarked for ArmRosGaz to ensure its profitability — i.e., they are to revert to Gazprom, which is the dominant stakeholder in ArmRosGaz. Curiously, the remaining $60 million is to be transferred in cash into the Armenian Defense Ministry’s extra-budgetary account.

3) ArmRosGaz is to take over the Iran-Armenia gas pipeline. It shall acquire Armenia’s ownership title to that pipeline’s first section, Meghri-Kajaran (40 kilometers), which is due for completion before the end of 2006; and will become the general contractor for construction of the pipeline’s second section, Kajaran-Yerevan (197 kilometers). Thus, Gazprom will be in a position to dictate the terms of Armenia’s access to Iranian supplies or prevent Armenia from diversifying its supply sources altogether. Meanwhile, Russia uses Turkmen gas for deliveries to Armenia, and Iran had similarly planned to supply Armenia with gas from Turkmenistan.

4) Gazprom’s existing, 45% stake in ArmRosGaz shall increase to a veto-proof majority, between 75% and 82%, by adding Gazprom’s stake in the Hrazdan-5 power bloc. The Russian company is to invest $140 million in the completion of Hrazdan-5. Gazprom’s offshoot Itera holds another 10% stake in ArmRosGaz.

Construction of the Hrazdan-5 power bloc was being completed by Iran’s Sanir company under a 2005 investment agreement. Iran made available to Armenia a $150 million soft loan for completing Hrazdan-5 and a $90 million investment for building an electricity transmission line from Hrazdan to Iran. Armenia was to repay the loan by supplying electricity from Hrazdan, using Iran-supplied gas to produce that electricity. The project envisaged annual profits of $100 million for Armenia, which would have retained ownership of Hrazdan-5 and covered more than 40% of the country’s electricity requirement from this project.

Russia already owns Hrazdan’s first four power blocs and some smaller hydropower plants, as well as Armenia’s electricity distribution grid (all under Unified Energy Systems) and controls the gas distribution network (through ArmRosGaz), as well as exercising financial management of the admittedly obsolete Metsamor nuclear power plant. The transfers of Hrazdan-5 and control over the Iran-Armenia pipeline will deliver Armenia’s energy sector totally in Russia’s hands.

(Noyan Tapan, Mediamax, Arminfo, Interfax, April 7-17; see EDM, January 17, 20, April 6)