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Armenian Government Must Choose Between Energy Diversification and Loyalty to Russia

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In mid-June, the CEO of Russia’s gas monopolist Gazprom, Alexei Miller, paid a spontaneous visit to Yerevan, where he met with Armenia’s Prime Minister Karen Karapetyan. Official information about the meeting is rather scarce. Besides mutually exchanged compliments, reports mention plans for the exploitation of the fifth unit of the Hrazdan thermal power plant and the underground natural gas storage site in Abovyan (Armradio.am, June 16). The construction of Hrazdan’s fifth unit originally began in 1993. But in 2006, the half-built unit was sold by the Armenian government to Gazprom’s subsidiary ArmRosGazprom. After construction was completed, the unit has been able to produce up to 480 megawatts (MW) of power (News.am, December 2, 2013). It has been in limited use since then, producing electricity supplied to Iran in exchange for natural gas. The underground gas storage site in Abovyan, built during the Soviet era and capable of holding around 140 million cubic meters of natural gas (Armenpress.am, November 2, 2010), was transferred to ArmRosGazprom in 2012 (Armenpress.am, December 26, 2012).

Earlier this year, the Armenian Ministry of Energy announced that some parts of the construction of a 400 kilovolt (kV) power transmission line between Armenia and Iran were already built (Aravot, February 8). In turn, Foreign Minister Eduard Nalbandyan told his colleagues from the Visegrad Four states (Poland, the Czech Republic, Slovakia and Hungary), in April, that the European Union’s support for the construction of a power transmission line between Armenia and Georgia had been received (News.am, April 12). Plans to expand the transmission capacities between Armenia and its neighbors and to develop interconnections between Iranian, Armenian, Georgian and Russian electric grids were announced in 2015 (see EDM, January 4, 2016).

Meanwhile, there could be another important reason for Miller’s sudden visit to the Armenian capital a couple weeks ago. Prime Minister Karapetyan, a former Gazprom employee, might feel obliged to report some news to his former boss and to give assurances about Yerevan’s further loyalty to Moscow and Gazprom’s commercial interests.

In May, a conference on renewable energy organized by Contour Global—the owner of the Vorotan complex of hydroelectric power stations and the largest non-Russian investor in Armenia—took place in Yerevan with the support of the United States embassy. Representatives of several US companies, including Caterpillar and General Electric, participated in the conference. US Ambassador Richard M. Mills summarized that a technical possibility to increase the amounts of electricity transmission with Georgia and Iran, together with guarantees of unhindered economic competition and equal treatment for investors would open a perspective for US investments of up to $8 billion, primarily in solar and hydroelectric energy. Afterward, Ambassador Mills reiterated his statement on several occasions, including in a newspaper interview (168 Zham, June 14). Considering the country’s current investment-related risks, Armenia has the worst business climate in Europe and Central Asia, according to a World Bank report, which particularly mentions cronyism, arbitrary treatment and unequal competition as major impediments (Lragir.am, June 18).

Characteristically, the state-owned Armenpress news agency and other government-controlled media outlets did not report on Ambassador Mills’s statements. Armenian officials might not like to overtly refuse an obviously beneficial proposal; yet, they are acting as if they remain reluctant to implement a policy that would be a serious blow to Gazprom’s expansion plans and, more generally, to Russian interests. A major investment in energy production not dependent on fossil fuels would likely reduce domestic demand for natural gas. Armenia’s Metsamor Nuclear Power Plant, which covers nearly 40 percent of the country’s electricity generation, sells power to the distribution network for 5.73 dram (about 1.2 cents) per kilowatt-hour (kWh) (News.am, April 29, 2015). The cost of production at hydropower plants is nearly 8 dram per kWh; while the cost of production at thermal plants is 35 dram. The customer fee is calculated on the basis of the average cost of production (Lragir.am, June 22). However, since all Armenian gas and electricity distribution networks, as well as the Hrazdan thermal power plant, belong to Russian companies, Moscow has been promoting the operation of the thermal plant, which also means larger volumes of gas imports, and higher costs to Armenian consumers.

While government representatives and government-controlled media have been ignoring the possibility of Armenia attracting large-scale foreign investment from beyond Russia, several independent publications about this issue have appeared in the meantime. They contain harsh criticism of the Armenian government’s and of Russia’s policies. One such article emphasizes that since his appointment to the post of prime minister, in September 2016, Karapetyan has not visited any country outside the Moscow-led Eurasian Economic Union (EEU). In particular, he has refused an invitation to visit the World Economic Forum in Davos, Switzerland. The article also refers to Gazprom’s and Rosneft’s monopolies (currently Armenian importers of motor and jet fuel can buy only from Rosneft). Moreover, it identifies Moscow-imposed impediments against Armenia importing more gas from Iran or providing transit from Iran to Georgia and, via the Black Sea, to Europe. Finally, it makes a comparison with the post-war situation, when the Soviet Union forbade Eastern European countries from using the opportunity offered by the Marshall Plan, and it ridicules Russia’s economic and technological backwardness in comparison with the West. The article was soon deleted from the website of Aravot daily, perhaps because of its vitriolic tone; but by then, it had already been published in the print version. The Armenian Institute of International and Security Affairs also republished the piece on its website (Aiisa.am, June 14).

In a separate article, the head of the Yerevan-based Center for European Studies, Arthur Ghazinyan, also noted that a diversification of Armenia’s energy supply would be against Russia’s interests. Speaking with Aravot, he stated that Russian “investments” in the energy sphere have resulted from successive Armenian cabinets’ policies of continually yielding the country’s ability to make sovereign decisions in favor of Russia’s interests (Aravot.am, June 22).

Already after Miller’s visit to Yerevan, French Ambassador Jean-François Charpentier made a statement about French companies’ desire to possibly invest in Armenia’s energy sphere; specific business proposals were forthcoming, he noted (Lragir.am, June 22). The liberalization of the energy market and a general improvement of the business climate would certainly be in Armenia’s national interest. Such measures, in addition to expected economic benefits, would improve the country’s energy security and the security situation in general, reducing Moscow’s influence on Yerevan’s decision-making. However, the government’s attitude invites more skepticism than hope.

By: Armen Grigoryan

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