ARMENIAN DANCES TO RUSSIA'S TUNE

Until recently, Armenia, one of Russia's closest allies in the CIS, was receiving Russian gas at 56 dollars per 1,000 cubic meters. Time introduced its corrections and the price shot up to 110 dollars. Robert Kocharyan's government was understandably upset by the price hike and in late 2005 many Armenian politicians started talking about a shift to market relations in "other spheres" as well. The implication was the lease of the 102nd Russian military unit in Gyumri. Armenian Parliament Speaker Artur Bagdasaryan immediately suggested that if Yerevan fails to agree an acceptable gas price with Moscow, it should demand payment for the deployment of the Russian military base in Armenia. Foreign Minister Vardan Oskanyan even expressed doubt that "the decision to raise gas tariffs was guided by economic interests". According to him, "we cannot allow this course of action by Russia to have political implications for Armenia, Russia and the region at large". The Armenian foreign minister expressed the hope that talks would end in the best decision possible, which would not harm Armenian-Russian relations.

More dividends for GazProm

However, nothing extraordinary has happened. In response, Moscow suggested that Yerevan cover the difference between the old and the new gas price by an interest-free loan in the amount of 88 million dollars, but Armenia was not interested. Then the Kremlin demanded that Yerevan either buy gas at the new price (110 dollars per 1,000 cubic meters instead of the current 54 dollars) or transfer Armenia's entire gas transit infrastructure and the fifth energy block of the Razdan thermal power station to Russia. At first, the Armenian side thought the suggestions were "unacceptable", but in April 2006 GazProm announced that it had signed a 25-year agreement with the Armenian government which would define "strategic principles of cooperation in gas and energy projects on the territory of Armenia". Most importantly, the document established the price of natural gas for Armenia at 110 dollars until 2009. This was followed by Armenian Energy Minister Armen Movsisyan saying that the price of 110 dollars until 2009 was "a good transaction".

It would appear that the gas issue is no longer problematic for Yerevan, especially because of the following explanation by GazProm: "We have rejected the mechanism of calculating the price using the European formula (whereby the price of gas depends on oil prices in world markets) mainly due to the localized nature of the Armenian market". In the meantime, the deal proved rather costly for Armenia. It has agreed to sell the incomplete fifth energy block of the Razdan thermal power station to Russia for 248.8 million dollars. By doing this, Yerevan allegedly compensated for the price hike to consumers and channelled most of the amount, 188 million dollars, in this direction. In early 2006, the Armenian government promised to retain ownership of the energy block. In fact, Iranian specialists were hired in an effort to complete the construction. However, Yerevan changed its mind and suggested that the Iranians forget about Razdan-5 and, instead, focus on another project - the Megri hydro power station. The other energy blocks of the Razdan power station are already owned by Russia because they were handed over as part of a debt clearance transaction in 2003.

GazProm has also received a 40-km section of the Iran-Armenia gas pipeline which is under construction. This section of the pipeline (from the border town of Megri to Kadzharan) was being built by Iranian Sanir, while ArmRosGazprom acted as a subcontractor.

GazProm has also assumed ownership of a project for the construction of the 197-km second section of this pipeline. Moreover, it was rumoured that Armenia would sell Russia 45 per cent of shares in the Iran-Armenia gas pipeline and that in the future the pipeline would be conceded to the "northern neighbour" completely. And although Yerevan denied this possibility in 2006, it is now clear that GazProm's dreams are about to come true. First of all, the share of GazProm in the ArmRosGazprom JV, which buys Russian gas at the Armenian border, may rise to 75-80 per cent (at present, GazProm owns 57.6 per cent of ArmRosGazprom, the Armenian government 32.4 per cent and Itera 10 per cent). Secondly, Russian influence is also preconditioned by the fact that the first 40-km section of the Iran-Armenia gas pipeline from Megri to Kadzharan has already been built. On 19 March, natural gas from Iran started flowing into Armenia through this line. An official ceremony on this occasion was attended by the presidents and prime ministers of the two countries. Therefore, Armenia can receive 450 million cubic meters of gas a year through this section of the gas pipeline until 2008. In the future, as the throughput capacity of the gas pipeline from Kadzharan to Ararat increases, Iranian gas supplies may increase to 2.3 billion cubic metres a year.

The impossible is possible 

It is not known yet when the right to operate the gas pipeline will be handed over to ArmRosGazprom. But it is already beyond doubt that Russia will be in charge of the pipeline despite the statement by the leader of the Democratic Way party, Manuk Gasparyan, made in Yerevan on 20 March. "Back on 6 April 2006, Regnum News Agency circulated a report that the Armenian and Russian sides have reached agreement on the handover of the gas pipeline to Russia. The Armenian authorities subsequently hushed up the issue, saying that the pipeline could not be sold before it was built. Meanwhile, the official opening of the gas pipeline was held yesterday, and its hasty opening was speeded up due to pressure on the part of Russia," the MP said and added that he has "nothing against selling the gas pipeline to a private company, but was opposed to handing it over to a foreign state". He indicated that the sale of the gas pipeline represented a betrayal of national interests "because the Iran-Armenia gas pipeline could boost the country's energy security and reduce dependence on Russia" (Regum). The MP also believes that the sale of the gas pipeline should have been agreed and approved by parliament. But considering the previous experience when GazProm received the 5th block of Razdan thermal power station, the Sevan-Razdan cascade of the hydro power station and some other Armenian enterprises, this is highly unlikely to happen.

At present, the ArmRosGazprom Closed Joint Stock Company is engaged in operations to increase the throughput capacity of the new gas line. Iranian gas will be supplied to the republic from the largest gas field in the region, Southern Pars, which is also being developed with the participation of GazProm.

It is worth noting that Armenia, which is for objective reasons not part of the Azerbaijan-Turkey infrastructure alliance through the territory of Georgia, has had to develop alternative directions, such as Iran. In fact, Armenia has always seen the Iranian gas pipeline as an alternative to Russian supplies, especially since the transit gas pipeline through which Armenia is receiving Russian gas via Georgia is currently in a deplorable technical condition and requires major overhaul. Most importantly, Yerevan did not and does not have guaranteed and uninterrupted supplies from this direction. In the early 1990s, when Georgia was unstable and the war in Karabakh was in full swing, the gas pipeline was blown up more than 30 times. There is another important factor. With the new "pipe" Armenia, as Russia's strategic ally, has the opportunity to diversify gas imports by reducing its dependence on supplies through Georgia with which Russia may encounter problems over transit issues. 

So what do we see as a conclusion? We see that, de facto, Armenia's cooperation with Iran will be patronized by Russia and Russian GazProm.

It is not too difficult to understand what made Armenia agree to the deal with GazProm which is clearly unprofitable in terms of the diversification of supplies. The issue goes far beyond politics. Armenia has taken this step because of the shortage of funds in its state budget for investment in the construction of the Iranian gas pipeline and payment for the appreciating Russian gas. Another factor is the uncertainty over Iran, which does not rule out force-majeure developments in the region.

One thing is obvious: in an effort to resolve crucial state issues, such as the security of strategic infrastructure and energy security, Armenia has positioned itself in almost complete dependence on Russian interests. This is confirmed by Armenian political analysts. The chairperson of the Social-Democratic Party Gnchak (Bell), Lyudmila Sarkisyan, has indicated that the implementation of the project has not led to a more active role of Armenia in the region, but has become the subject of an agreement between Russia and Iran. She believes that Armenia must take resolute steps to reduce the country's energy dependence on Russia. 

In fact on 19 March, when Iranian gas from the south entered Armenia, Caspian gas from the east crossed the Georgian border. Many Armenian pundits have interpreted these developments as a "phenomenon of perpendicular competition" between centres of power and their regional allies in the energy and transport communication spheres. Let's put it this way: this has nothing to do with competition. Moreover, analysts emphasize that the future of gas supplies from Iran largely depends on US-Iranian relations.

It is obvious today that the power of the ubiquitous GazProm in Armenia has cancelled plans to extend the Iran-Armenia gas pipeline into Georgia and further into Europe where Iranian gas could compete with Russian. When the "pipe" was being designed, it was said that Armenia itself consumes around 2 billion cubic meters of gas a year and that such projects are meant for the transit of "blue fuel" to other countries. Namely, the option of building a sub-sea pipeline through the Black Sea from the Georgian port of Supsa to Crimean Feodosiya and then by land across Ukraine was considered quite seriously. True, Iranian gas supplies to Ukraine are still being discussed, but there are no agreements or plans yet, while the small diameter (720 mm) of the pipe on the Armenian section of the Iran-Armenia gas pipeline will not allow the transit of large volumes of gas.

Meanwhile, Iranian gas will end up in Europe, not through Armenia, but through the territory of Turkey. So, Armenia has failed to become a transit country and an important player on the region's energy map with this project.