Georgia Signs Unfavorable New Natural Gas Transit Deal With Russia

Following months of negotiations, on January 11, Russia and Georgia finally concluded a deal over the transit of Russian natural gas to Armenia via Georgia. According to the new, two-year-long contract, Russia plans to deliver 2.0–2.2 billion cubic meters (bcm) of gas to Armenia within this time period. For the transit fee, Moscow will continue to pay Tbilisi according to the existing commodity scheme, giving to Georgia a portion of the transported gas. However, this will last only for one year. As of the second year, Russia will switch to monetary payments. Moreover, if Georgia ever needs additional gas supplies, Moscow will sell it to Tbilisi at a discounted rate of $185 per thousand cubic meters, instead of $215, as was the case in 2016 (Panarmenian.net, January 14, 2017).

Both, Moscow and Tbilisi hailed the long-awaited new contract. Georgian Energy Minister Kakha Kaladze portrayed the agreement as a winning solution for his country, allowing Georgia to buy Russian gas for $30 less while achieving for Tbilisi one of the highest transit fees in Europe (Vestnik Kavkaza, January 11). At the same time, Gazprom Export LLC Director General Elena Burmistrova stated that the company offered mutually beneficial conditions, providing Georgia with “guaranteed income flow […] and the security of gas supply” (Civil Georgia, January 17).

However, the agreement, which is yet to be signed, raises a number of concerns and questions. First of all, it is not entirely clear why Georgia agreed to switch from a commodity payment scheme to monetary payments starting in the second year of the new contract. A commodity scheme certainly benefits Tbilisi more, as it is immune to price fluctuations and currency devaluations. In fact, retaining commodity payments was Tbilisi’s preference and hence, the bone of contention during this dragged-out negotiation process. So, why did Tbilisi give in eventually? Did Russia somehow coerce the Georgian government into an agreement? If so, what exactly did Moscow do? And what did Tbilisi receive in exchange for the compromise? So far, there are no answers to these questions.

Moreover, it is not yet known what percentage of transported natural gas Georgia will obtain as a transit fee. According to the previous agreement, Tbilisi was receiving 10 percent of Armenia-bound Russian gas (Agenda.ge, January 11). Furthermore, after switching to monetary payments from the second year of the contract, it is unclear what sum Georgia will receive. The Georgian government has been particularly tight-lipped on both of these issues.

Long- and short-term political and geopolitical implications of the Georgian-Russian agreement are also a matter of concern. Various Georgian opposition parties as well as non-governmental organizations already expressed their concern about the new gas contract, calling it “politically dangerous” (Civil Georgia, January 17). For an outside observer, this transit agreement, which will last only for two years, may not seem like a serious cause for anxiety. However, one needs to see this deal in a wider geopolitical context. As demand for Russian energy supplies in Europe continues to fall, Moscow is seeking new markets in its backyard to keep its export channels open (see EDM, April 22, 2016; January 20, 2016). Naturally, its satellite Armenia, which does not have its own natural gas resources, is a perfect place to sell Russian energy supplies. Back in 2013, Gazprom signed a contract with Gazprom Armenia (a wholly-owned subsidiary of Gazprom) to supply it with up to 2.5 billion cubic meters of natural gas annually in 2014–2018 (Gazprom.com, October 25, 2016).

However, Moscow would not be able to establish itself as Armenia’s key energy supplier without the participation of the Georgian government, as Georgia remains the only land link across which Moscow can transport gas to its client state in the South Caucasus. Hence, the Georgian government—willingly or by default—is helping Moscow entrench itself as a key energy player in the region.

Moreover, Russia is trying hard to return to the Georgian energy market: and as the January 11 agreement showed, it is gradually succeeding. Taking into consideration Russia’s lengthy record as a highly unreliable energy supplier to Georgia, as well as to the rest of Europe (see EDM, October 21, 2015), it is not clear why the Georgian government would even entertain the idea of further energy cooperation with Moscow. Russia has repeatedly demonstrated that it can and will use its position as an energy supplier to blackmail countries to secure Moscow’s political (and geopolitical) goals. That is why deals such as this recent Russian-Georgian gas agreement, contains long-term political risks for both Tbilisi and Yerevan as it helps Russia consolidate its power as a major energy player in South Caucasus.

Another question is why Tbilisi, given Georgia’s strong position as a transit country, would so easily grant Moscow natural gas transportation rights without even attempting to attain at least some concessions from Moscow regarding the Russian-occupied Georgian regions of Abkhazia and South Ossetia. With 20 percent of Georgia’s sovereign territory still under Russian occupation, it seems politically irrational and self-defeating for Tbilisi not to include this issue in every potential deal with Moscow.

Overall, Tbilisi appears to have reached another unfavorable deal with Moscow, which further entrenches Russia as a major regional energy player and jeopardizes Georgia’s long-term energy security and geopolitical stability. Given the current Georgian government’s record in its dealings with Moscow, it is more likely that Russia will score new similar victories in the following several years. With each passing year, it will become harder for Tbilisi to undo and reverse any damage caused by these types of self-defeating deals.