GAS DISASTER OF YEREVAN

A few years ago, an interesting article appeared in one of the glossy magazines on the classification of overhaul repairs. There was a definition of "European-quality repair in the barn", or in the deteriorating Khrushchevka-type apartment. There was also the following statement: “revolution has a beginning but has no end”. In other words, when the ceiling in the bathroom peels off, they first start to paint it. Then they plastered the tiles but destroyed it when trying to wipe it off. Now it must be completely changed, and therefore the installed equipment must be changed, pushing the family in a completely different situation when it is facing a “sudden repair”. But the family failed as it did not put enough effort and money to save the situation. And now they have to change something in the apartment regularly. This type of repair is called chronic, sluggish repair with exacerbation.

This definition fits perfectly with many diplomatic processes, including permanent bargaining between Armenia and Russia regarding the price of gas, where the parties either reach a short-term agreement, then move on to new discussions and persuasions. Armenia permanently promises to abandon Russian gas in favour of Turkmen or Iranian gas, officials in Yerevan periodically announce negotiations... but very soon everything turns to normal again.

What is it? Does ‘bad’ Russia use its threatening ‘gas-and-pipeline’ weapons to attack  ‘revolutionary’ Armenia?

In fact, everything is not that simple.

Unaffordable European dreams

First, Armenia pays very high price to acquire Russian gas. The current Armenian-Russian emotional gas talks, a promise to find other suppliers and agree on supplies with Turkmenistan and Iran, etc. do not really correlate with absolute figures. Thus, in 2015, Armenia paid $150 per 1,000 cubic meters, then Moscow decided to raise the price to $189, but after tearful persuasion of Yerevan, the price was dropped to $165...

Today in Yerevan they do not like to remember this, but at the beginning of the second decade of this century, even under Serzh Sargsyan, Armenia conducted “substantive” negotiations with the European Union on signing an association agreement with the EU. Then in Moscow, and quite rightly, by the way, they said: do you want to go to Europe? Perfectly. Then oil and gas will be delivered to Armenia at European prices. That is, without taking into account the benefits provided in Russia for participants in joint customs and economic projects with the Russian Federation.

This ‘very European price’ of oil and gas turned out to be unaffordable for Armenia given its difficult economic conditions. Yerevan had nothing to pay for hydrocarbons. First, European oil and gas prices would urge the authorities to raising tariffs for households, which clearly would lead to a social explosion. Secondly, the cheap gas supplied from Russia helped to create a certain sector of the economy in Armenia, which in this case would simply have lost its competitiveness. As a result, already in September 2013, just before the Vilnius summit of EU, Armenia had to publicly abandon its European integration plans and declare its entry into the EAEU. Euro dreams were too expensive. After all, Moscow supplies Yerevan with gas at domestic prices. In 2013, when Armenia joined the EAEU, experts calculated that zero customs duties on oil, gas and rough diamonds bring the Armenian budget an additional one billion dollars from the budget of Russia. And it is unlikely that anyone else will provide such gifts to Armenia and so generously subsidise its economy. It is worth recalling the famous expression of Galust Gulbenkian: “Oil businessmen are like cats: one can never understand whether they are fighting or making out when they cry.”

And here we need some details, as there is another unpleasant side of the issue. For the short period while Armenia was playing with European integration, a serious amount of debt for the supply of oil and gas from Russia formed in Yerevan. To pay off the debt, Armenia had to transfer its stake in gas networks to the ownership of Russian Gazprom. As a result, today its gas infrastructure is 100% owned by the Russian Federation, meaning that all issues related to the purchase and sales of gas are solved not in Yerevan, but in Moscow.

But even if this circumstance somehow magically disappears, Armenia is unlikely to be free in the gas sector.

In the grip of their own policy

Perhaps, it is worth remembering the ABC of gas policy again. No matter how trending the issue of ‘pipeline wars’ is, the supplier has every right to sell its gas at the price that it considers justifiable and profitable for itself. Unlike oil, there is no world price for gas. And if the offered conditions and prices do not suit a certain consumer, they can look for another supplier, build alternative pipelines, terminals for liquefied gas, etc.

Even if we the gas sector of Armenia was not wholly owned by Russia, Yerevan would not have a chance to take advantage of alternative projects. The Ukrainian version with reverse gas supplies does not work here, since there are no transit pipelines in Armenia. The country can search for an alternative provider, which official Armenian authorities are doing vigorously. But…

Before the collapse of the USSR, Armenia received gas from Azerbaijan. Natural gas from Azerbaijan would heat the apartments of Yerevan residents supplied to many other plants and enterprises in Armenia. The most convenient way from the Caspian Sea to Turkey and to European markets passes right through the territory of Armenia. But now, having unleashed aggression against Azerbaijan, making claims on Karabakh and continuing to occupy 20% of the Azerbaijani territory, Armenia, for obvious reasons, closed for itself even theoretical access to the Azerbaijani gas. Azerbaijan supplies the same gas to Georgia and Turkey, and from there to the markets of Southern Europe. Moreover, despite the occupation and humanitarian catastrophe with a million refugees, Azerbaijan was able not only to bring its main export products of oil and gas to the world market, but also to form a new pipeline infrastructure in the region. Export pipes for oil and gas, Baku-Tbilisi-Ceyhan and the Southern Gas Corridor pass through the territory of Georgia, which now receives Azerbaijani gas at preferential prices. Now Armenia completely depends on the only Russian pipe delivering natural gas to the country through the territory of Georgia.

Yerevan may purchase gas from Turkmenistan but in reality it must still be delivered to Armenia. Russian pipeline system is not suitable for this. Moreover, Ashgabat cannot agree with Moscow on pumping its gas to Europe. It is not worth complicating the issue with the plans of ‘rescue’ of Armenia with natural gas.

It is theoretically possible to lay a pipeline through Iran. But this is very expensive and the gas market of small Armenia with rapidly decreasing population will not pay for such a project. On the other hand, entering European markets through Iran is risky. Political situation around Iran is heating up. It is no coincidence that Turkmenistan intends to join the Southern Gas Corridor led by Azerbaijan.

Iran is located south of Armenia and possesses huge gas reserves. But Iranians need infrastructure to deliver gas to the Armenian market. Available resources are enough only to provide gas to a small power plant, where the generated energy is divided in half between Armenia and Iran, and substitute gas supply in the event of force majeure. Creating a full-fledged infrastructure for gas supplies to Armenia is too expensive a project for which neither Armenia nor Iran has money. It would make sense economically to build an additional pipeline if Iran had a chance to enter the world gas market through Armenia. But, considering the American sanctions, Iran is not going to get benefit from such projects. Secondly, where the pipeline will go further? Armenia borders with Iran, Azerbaijan, Turkey and Georgia. It is at war with Azerbaijan. The border with Turkey is closed, and no one knows when it reopens. Further from Armenia, the pipe can only be led to Georgia. But the Georgian market is occupied by Azerbaijani gas. Moreover, the Azerbaijani export line also passes through Georgia. Iran would be tempted to join it, but the ‘Armenian link’ does not create the best background for this. In other words, Iran will try to get around Armenia as well.

Reverse supplies? But no transit pipelines pass through Armenia. As for the growing popularity of LNG technologies, gas tankers and gas terminals, there is a problem here as well. Armenia has no access to the sea. Its tiny market will not pay for such an expensive project. Georgia is unlikely to participate in such projects and jeopardize its partnership with Azerbaijan and Turkey. The only option is to rely on the mercy of Moscow and pray to the Almighty so that Moscow does not stop subsidising the Armenian economy at the expense of preferential gas prices.

Obviously, Armenia tried very hard to end up in such dense gas isolation as a result of its aggressive policy, despite its neighbourhood with the largest gas supplier of the Caucasus (Azerbaijan), which also controls the best ‘geographical’ route for a potential export pipeline. The ongoing gas disaster in Armenia originates in Karabakh.