Publication: Eurasia Daily Monitor Volume: 2 Issue: 46

While a proposal to sell Georgian gas trunk lines to the Russian gas giant Gazprom remains on Tbilisi’s agenda, the Georgian government has made a different move that would increase Russian control over the Georgian electricity system.

On March 5, Georgian Prime Minister Zurab Nogaideli and Andrei Rappoport, Deputy Chief Executive of Russia’s Unified Energy System (UES), announced that the Georgian government and UES will sign a new, five-year cooperation agreement that allows for the potential transfer of Georgia’s power distribution grids to UES management. The statement came after the two men concluded negotiations on a wide range of issues, including the establishment of a new market model in the Georgian energy sector and additional electricity imports from Russia while the Enguri hydropower plant undergoes renovation. Nogaideli emphasized that the sides “reached full understanding on many issues.” He also confirmed that Russian companies had been invited to take part in the current, second stage of Georgian energy sector reforms. Rappoport reaffirmed that UES was interested in Georgia’s power distribution grids. The bilateral agreement will be signed in June.

On March 2, the Georgian government unveiled its plan to set up a new energy company consisting of several power stations and the United Distribution Company (UDC), a group of regional power distribution companies across Georgia. Some analysts have already labeled the anticipated changes in the energy sector as “almost revolutionary,” because they will merge power generation and distribution facilities and abandon the ineffective energy wholesale market. This surprise statement came on the heels of renewed UES interest in setting up such a company in Georgia. The government, however, claimed that the deal, if implemented, would not make the Russians — or the Americans — owners of the new company.

UDC was not scheduled for privatization for another two years. The American firm PA Consulting, a contractor of the U.S. Agency for International Development that has managed UDC since 2003, learned about the government decision from the media and believes that it is too early to privatize a strategic company like UDC.

Georgian State Minister for Economic Reforms and Infrastructure Kakha Bendukidze, said to be the mastermind of the new energy reform plan, told a briefing that the Georgian government “should not worry about who is going to be upset.” Bendukidze said that his priority for the moment is to supply electricity to people, not to protect the interests of individual companies. Indeed, the recent, persistent blackouts across Georgia have sparked protests. He added that Georgia would offer energy-sector assets to all investors. Georgian media outlets suggested that Ukrainian, Austrian, and Georgian firms might become investors.

Bendukidze confirmed that UES would be interested in taking control of UDC, which would effectively make it the only electricity supplier in Georgia. However, Georgian President Mikheil Saakashvili has already told UES CEO Anatoly Chubais that UDC will not be sold to the Russians.

Nika Gilauri, Georgian minister for fuel and energy, attempted to soften Bendukidze’s bluntness. He said there was only “an initial discussion of this privatization model.” According to Gilauri, the government will invite parties to declare their interest in two weeks, and the process should be completed by summer.

Miron Pirtskhelani, head of the Association of Georgian Energy Workers, claims that the energy deficit in Georgia is largely artificial. He says that there are officials in the Georgian government who want to profit from the energy chaos in the country. He claims that the Georgian energy sector has little to show for the $500 million in foreign credits received to revamp infrastructure facilities, because most of the funds have been misappropriated.

Pirtskhelani further charged that the foreign companies managing Georgian energy distribution units, such as Russia’s RAO-ES-Telasi, the American firm PA Consulting, and British-Spanish Iberdrola, have done little to improve the national energy situation. Gilauri confirmed the misappropriation of funds and requested an investigation.

Gilauri also said that the mandatory three-month closure of the Enguri plant would create a national energy deficit of 600 megawatts, which will be covered by imports. Therefore, Georgia’s energy dependence from Russia will increase in the short run. Today UES owns 75% of the Tbilisi power distribution grid. In total, UES controls 20% of energy generation and 35% of power distribution of Georgia. “Of course, it’s not politically favorable for us when our key energy units are controlled by Russia,” said Roman Gotsiridze, chair of the Georgian parliament’s Finance and Budget Committee.

Some Georgian analysts are trying to justify the government’s “pro-Russia” economic policy with the need to keep a sound balance between Russia and the West. Some even argue that the West approved this policy. Meanwhile, there are allegations that officials connected to Georgia’s late prime minister Zurab Zhvania are the principal lobbyists for Russian economic interests in Georgia, and some analysts even link Zhvania’s sudden death with these interests. The coming months should better clarify the Saakashvili government’s actual energy plans.

(BBC Monitoring Global Newsline March 3-7; Kavkasia-Press, March 5; Imedi TV, March 2; Alia, March 3; Sovershenno Sekretno, March; Akhali Versia, February 27; Regnum, December 31, 2004)