Publication: Eurasia Daily Monitor Volume: 2 Issue: 141

Armenia is under fire from the United States and other Western donors over the legally questionable transfer of its electricity distribution network to Russia’s Unified Energy Systems (UES). The deal could have far-reaching repercussions for the country’s economic independence and hamper continued Western assistance to its government.

UES announced on June 30 that one of its obscure subsidiaries had paid $73 million to buy the Electricity Networks of Armenia (ENA) from Midland Resources Holding, a British-registered firm that privatized the utility three years ago. The move followed months of speculation that the state-owned Russian conglomerate was close to getting hold of ENA. ENA denied the information, insisting that its parent company signed only a management contract with the Russians.

UES issued a similar “retraction” on July 13, saying through a spokeswoman that it will manage, not own, the Armenian power grids. However, the UES website still carries a short appendix to the company’s annual financial report which states that Interenergo “acquired 100 percent of shares” in ENA last month. Under the terms of ENA’s 2002 privatization, Midland Resources needs the Armenian government’s permission to transfer the ownership or management of the utility to another foreign investor. Midland Resources, owned by a Russian-born Canadian businessman, has not officially asked the government for such permission. Not that it is pressed to do so by the latter.

The Armenian authorities’ obvious reluctance to deal with the issue has drawn strong criticism from the World Bank. The head of the bank’s Yerevan office, Roger Robinson, said on July 13 that the lack of transparency in the process raises serious questions about the rule of law in Armenia. Robinson also dismissed as a “joke” claims that UES paid a lump sum for the right to run the Armenian utility. “When you have a management contract you normally pay somebody to manage something,” he said. “It seems in this case there is something all the way around.”

In an extraordinary statement on July 19, the U.S. government’s Agency for International Development (USAID) likewise said the Russian takeover of ENA occurred “without following important Armenian government regulations.” USAID also said that it is “reviewing” its assistance projects in Armenia pending official explanations from its government.

Western donors, who have heavily financed the decade-long reform of the Armenian energy sector, have reason to be concerned about ENA’s fate. The reform not only ended Armenia’s severe energy crisis of the early and mid-1990s but also turned the tiny landlocked country into a leading regional exporter of electricity. One of its key components has been the separation of facilities generating, transmitting, and distributing electricity.

UES already owns Armenia’s largest thermal power plant and several hydroelectric plants and manages the finances of the Metsamor nuclear station as a result of controversial swap agreements that settled Yerevan’s debts to Moscow. Those facilities together account for over 80% of Armenian electricity production. ENA’s takeover will give the Russians almost 100% control over Armenia’s energy sector. The West is also clearly worried about the political implications of this dependence.

As recently as March 3 Armenian Energy Minister Armen Movsisian publicly spoke out against selling the power distribution network to UES, arguing that the Russian giant should not monopolize the sector. The issue is thought to have been high on the agenda of Russian President Vladimir Putin’s visit to Yerevan that took place three weeks later. Whether or not Putin and his Armenian counterpart, Robert Kocharian, cut any deals at the time is still unknown.

“Hardly anyone doubts that Midland Resources has sold the Electricity Networks of Armenia,” the Yerevan daily Haykakan Zhamanak commented on July 9. “That they sold it with the unpublicized blessing of our government is also beyond doubt.”

Another paper, Golos Armenii, on July 16 quoted a former parliamentarian with business interests in Russia, Taron Sahakian, as saying that the UES management offered him last year to act as an intermediary in its efforts to buy ENA. Sahakian claimed that the Russians expected him to “resort to actions escalating the political situation” in Armenia in case their bid for ENA met with serious resistance.

Dealings with Russia are one of the least transparent areas of governance in Armenia and the exclusive domain of Kocharian and his chief lieutenant, Defense Minister Serge Sarkisian. Decisions crucial for Armenia, notably the equities-for-debt agreements, usually come as a result of the two men’s frequent trips to Moscow. Armenia’s cabinet of ministers and parliament have little say in Russia-related decision making.

The ENA affair illustrates that, for all its efforts to forge closer links with the United States and Europe, the Kocharian-Sarkisian duo still rarely defies the Kremlin on major issues. Armenia and Russia, for example, were the only members of the Council of Europe that accepted the outcome of Ukraine’s fraudulent presidential election in November 2004.

Such decisions put Yerevan at odds with not only Western donors. Kocharian’s regime bowed to Russian pressure to ensure that an Iran-Armenia natural gas pipeline, which is currently under construction, has a small diameter. This will almost certainly prevent the pipeline’s extension to Georgia and other countries dependent on Russian gas, denying Armenia potential revenues from transit fees.

Local observers say Armenia is paying too heavy a price for its “strategic partnership” with Russia. “There are both Armenian and Russian fairy tales about the younger, stupid brother,” Ara Galoyan of 168 Zham observed tartly. “But only in Russian fairly tales does the stupid brother always emerge as a winner.”

(Statement by USAID, July 19; Haykakan Zhamanak, July 20, July 9; Golos Armenii, July 16; RFE/RL Armenia Report, July 13; 168 Zham, July 7-13)