Publication: Eurasia Daily Monitor Volume: 4 Issue: 163

A Russian financial-industrial group looks set to acquire an Indian-owned company that develops the bulk of Armenia’s gold reserves. The deal, if it goes through, will give a further boost to Russia’s already strong economic presence in the South Caucasus states resulting from not only its traditional geopolitical orientation but also the vested interests of Armenian leaders. The Armenian government has clearly been the driving force behind the takeover, having effectively forced Vedanta Resources, a mining conglomerate owned by Indian billionaire Aneel Agarwal, to sell the Ararat Gold Recovery Company (AGCR) earlier this year.

AGCR, which extracts and smelts ore from the country’s two largest gold deposits, was set up in 1998 as an Armenian-Canadian joint venture. The Indians purchased it in 2002, pledging to make large-scale capital investments and increase its production. They apparently have not fulfilled those pledges, with AGRC output steadily (and inexplicably) declining in recent years despite record-high world prices of gold. In 2005, the Yerevan government accused AGRC management of underreporting production and evading millions of dollars in taxes. The company managed to avoid hefty fines at the time, reaching a murky out-of-court settlement with the authorities.

But its fate was essentially sealed last January when Armenian prosecutors raided the AGRC offices in the southern town of Ararat, home to the company’s gold smelter. (Both the smelter and the AGRC mines at Meghradzor and Zod have stood idle since then.) Shortly afterwards Vedanta was accused of large-scale tax fraud and licensing and environmental violations. The prosecutors pressed the charges in early August, formally asking Armenia’s Economic Court to fine the company $22 million.

Top AGRC executives rejected the case as baseless, accusing the government of squeezing Vedanta out of the country. Still, the Indian tycoon apparently had no choice but to put up his Armenian subsidiary for sale. The Russian group Promyshlennye Investments promptly emerged as its most likely buyer, opening takeover talks with Vedanta early this summer. Reports in Armenian and Russian media have said that the two sides are close to reaching an agreement whereby AGRC will be sold to a Georgian subsidiary of Promyshlennye Investments for $86 million. A spokesman for the Russian company declined to confirm or refute those reports last week, saying only that the talks should be over by mid-September.

In the meantime, representatives of the Prosecutor-General’s Office failed to turn up for the first court hearing on the lawsuit against AGRC, which was due to take place on August 20. This was another indication that the main purpose of the fraud case was a change of the AGRC ownership and that the Armenian authorities will drop it should the would-be takeover materialize.

Incidentally, the authorities moved against Vedanta immediately after President Robert Kocharian’s January meeting in Sochi with his Russian counterpart, Vladimir Putin. Economic ties were reportedly high on the agenda of the talks. The two leaders met again in the Russian Black Sea city on August 23. In televised remarks, Putin noted “the truly allied character” of the Russian-Armenian relationship and welcomed the 70% surge in bilateral trade registered during the first half of this year. His spokesman, Sergei Prikhodko, was quoted by the Itar-Tass news agency as saying that Kocharian “highly rated Russian business interest in investing in his country.”

That interest has visibly grown in the past several years. Russian energy giants like Gazprom and Unified Energy Systems have won control over much of Armenia’s energy sector as a result of controversial swap agreements that allowed Yerevan to repay its debt to Moscow and avoid, until 2009, a rise in the price of Russian natural gas. In addition, a leading Russian mobile operator, Vimpelcom, bought the Armenian national telephone company, ArmenTel, from the Greek telecom giant OTE late last year. Another Russian telecom giant, MTS, is showing strong interest in Armenia’s largest mobile phone network, currently owned by Lebanese investors.

The Russians are now keen to extend their presence to other sectors of the Armenian economy, notably mining. The purchase of AGRC would be a major addition to their Armenian holdings. Its largest Zod deposit, located in eastern Armenia, contains an estimated 80 tons of gold. According to Armenian press reports, Russian companies may also soon get hold of the country’s two cement plants, owned by wealthy businessmen close to Kocharian and his most influential lieutenant, Prime Minister Serge Sarkisian.

Kocharian and Sarkisian continue to ignore the serious concerns about Armenia’s growing economic dependence on Russia expressed by opposition politicians and independent observers. The two men have heavily relied on the Kremlin in dealing with their political opponents throughout their nearly decade-long joint rule. They have clearly been willing to pay any price for continued Russian support, be it economic assets or a particular foreign policy orientation. That support will be essential for the success of Sarkisian’s plans to succeed Kocharian in a presidential election due early next year.

Kocharian is also seeking Moscow’s backing for securing his own political future. What he wants to do after completing a second and final term in office is less certain, though. The Yerevan daily Haykakan Zhamanak claimed on August 14 that he is lobbying the Kremlin to merge all Russian-controlled Armenian enterprises into a single consortium and appoint him as its chief executive.

(Hayk, August 30; Zhamanak Yerevan; August 29; RFE/RL Armenia Report, August 28, August 2; Itar-Tass, August 23; Haykakan Zhamanak, August 14)