Publication: Eurasia Daily Monitor Volume: 2 Issue: 175

Russia’s state-run power monopoly, Unified Energy Systems (UES), is close to formalizing its effective purchase of Armenia’s electricity grid, giving Moscow near total control over the Armenian energy sector. The government in Yerevan indicated on September 15 that it would green light a deal that has generated serious concern among Armenia’s leading Western donors. The latter have for years opposed Russian attempts to take over the Electricity Networks of Armenia (ENA) but now appear to have come to terms with the change of ownership.

UES has already been the de facto owner of ENA since announcing last June a $73 million “management contract” with Midland Resources Holding, a British-registered company that controversially privatized ENA three years ago. UES initially claimed to have purchased the Armenian utility, but later clarified that it paid the lump sum only for the right to run ENA and use its profits. The Russians argued that the deal therefore falls short of a formal acquisition, which has to be approved by the Armenian authorities.

But it was obvious that Midland Resources now owns ENA only on paper. The Armenian government remained suspiciously silent on the issue until facing strong criticism from the World Bank and the U.S. government’s Agency for International Development (USAID). The two institutions, which have invested heavily in the decade-long reform of the Armenian energy sector, warned that the lack of transparency could force them to reconsider their further assistance to the country.

Armenia’s Public Service Regulatory Commission, a supposedly independent body, claimed to have investigated the legality of the deal and found no evidence of wrongdoing. It argued in late August that Midland did not have to seek government approval because it remains the legal owner of ENA. However, the authorities apparently concluded that having the Russians follow all legal rules and formally buy the network would spare them greater trouble. The calculation seems to have proved correct.

On September 8, Midland Resources submitted letters to the government and the Regulatory Commission asking for permission to sell ENA shares to an obscure UES subsidiary called Interenergo BV. The Armenian cabinet granted the request in principle at a meeting on September 15, which was chaired by President Robert Kocharian. A government statement said the Energy Ministry was given three days to clarify all details of the Russian takeover, notably “some issues relating to obligations” of the new owner. The deal’s clearance now seems a forgone conclusion.

Western donor agencies and governments are evidently resigned to this development. The head of the World Bank office in Yerevan, Roger Robinson, welcomed on September 13 the fact that the process is now proceeding “in compliance with the law of Armenia.” “I am personally pleased to see what I think are the rules now being followed,” Robinson told journalists. “That’s what we asked everybody to do anyway and that is exactly what has happened,” he added.

Yet the result of all this will be the tightening of Russia’s grip on the Armenian energy sector. UES alone controls several big power plants that account for 80% of Armenia’s electricity output. Armenian Energy Minister Armen Movsisian publicly spoke out against the Russian giant’s ownership of ENA last March, arguing that it would run counter to a key goal of the energy sector reform: separation of units generating, transmitting, and distributing electricity. The structural change helped Armenia to end its crippling power shortages of the 1990s and start exporting electricity to neighboring Georgia and Iran.

But Robinson believes that there is nothing wrong with a single company producing and distributing energy, saying that this is a normal practice in Western countries like France. The important thing, said the World Bank official, is not so much who owns the power distribution networks as the existence of an independent state regulator. “We have great confidence in the regulator here in Armenia,” he said.

The Public Service Regulatory Commission (PSRC) was also praised by USAID. “A transparent and robust decision-making process, managed by a strong regulator, is key to protecting the interests of energy consumers,” USAID said in a statement. “USAID is happy to continue assistance to the PSRC and others to ensure the design and implementation of such a process.”

However, the head of PSRC, Yerevan’s former presidentially appointed mayor, Robert Nazarian, is known for anything but independence and respect of law. In his capacity as Yerevan mayor, Nazarian had personally sanctioned (usually at the orders of top Kocharian aides) massive land allocations in the city center to businesses owned by senior government officials and their cronies. Local investigative journalists say the process contained enough material for writing a textbook on government corruption in Armenia.

The Western donor agencies should be aware of this, but are clearly unwilling or unable to stop UES expanding its presence in Armenia. The Armenian and Russian governments may have well decided that expansion. Observers note the fact that Movsisian voiced his objections shortly before Russian President Vladimir Putin’s last visit to Yerevan. Russian-Armenian cooperation on energy was reportedly high on the agenda of Putin’s talks with Kocharian.

(Haykakan Zhamanak, September 16; Armenian government statement, September 15; USAID statement, September 15; RFE/RL Armenia Report, September 13)