Moscow (Igor Tomberg, M.Sc. [Economics], leading researcher at the Economics Institute of the Russian Academy of Sciences, for RIA Novosti).
Last summer, Russia's gas monopoly Gazprom announced a gas price increase for all former Soviet republics, including Armenia. Without doubt, this decision was not at all welcome. As a result, the gas issue has been elevated to the governmental level: in November, Russia's Prime Minister Mikhail Fradkov discussed it with Ukraine and Georgia. Armenia's turn came in early December, when Mikhail Fradkov paid a visit to Yerevan. The official visit's purpose was the closing of Russia's Year in Armenia. However, key items on the agenda were negotiations with Armenia's President Robert Kacharyan and Prime Minister Andranik Markaryan during which the Russian Prime Minister was attempting to reach an understanding with the Armenian side concerning the rise in Russian gas prices.
Beginning next year, Russia is planning to raise the price of Russian gas supplies to Armenia from $56 to $110 per 1,000 cubic meters of gas. Gazprom has been selling gas to the former Soviet republics at below market prices since 1991.
"We are striving to build civilized relations with our partners, and this is well known," the Russian Prime Minister said. "Cooperation in this area must meet Russia's and Armenia's interests and comply with international practices...There is no room for confrontation and insolvable issues with regard to higher gas prices and strategic partnership," Russia's Prime Minister stressed.
It is not by chance that Mikhail Fradkov mentioned strategic partnership. Traditionally good political relations between Russia and Armenia are based on a solid economic foundation: a large majority of Armenian companies are owned by Russian companies. ZAO ArmRosGazprom, Armenia's gas monopoly, is 45% controlled by Gazprom and 10% by the Russian gas company Itera. United Energy Systems (RAO UES) of Russia owns four out of the five power plants at the Razdan thermal power station supplying Armenia and its two neighbors - Iran and Georgia - with electricity. This station was transferred to Russia in 2002 together with some other Armenian enterprises towards repayment of Armenia's state debt to Russia amounting to $93 million. Being a major Russian gas consumer, the station will also be affected by higher gas prices.
Subsequently, the inevitable rise in electricity tariffs will also affect Armenal, the Yerevan aluminium plant which is 100%-owned by OAO Russian Aluminium (RUSAL). On December 3, Mikhail Fradkov and Robert Kacharyan attended the ceremony of commissioning the plant after its modernization which cost RUSAL as much as $70 million.
Thus far, Armenia has been receiving only Russian gas going in transit via Georgia. According to the data of Karen Karapetyan, ArmRosGazprom's general director, 1.7 billion cu m of Russian gas will be supplied to Armenia this year, up from the 2004 figure of 1.33 billion cu m. However, Armenia still suffers from gas shortages. This year, it signed a 20-year agreement with Iran on the construction of a pipeline for gas supplies to the Razdan thermal power station. It is to be commissioned in 2007. In return, Armenia will have to supply Iran with electricity (3 kwh of electricity per each cubic meter of gas).
Using its control over ArmRosGazprom, Gazprom is trying not only to raise gas prices but also limit Iran's gas supplies to Armenia to the needs of the Razdan thermal power plant alone. Meanwhile, RAO UES claims ownership of the fifth power unit at the Razdan power station which is still under construction and belongs to Armenia so far.
It is clear now that the development of many strategic enterprises in Armenia depends on Russian gas prices.
In his attempts to achieve an understanding at the negotiating table, Mikhail Fradkov admitted that he was looking for a comprehensive solution to the gas problem. The sides discussed not only gas prices but also the future owner of the Razdan station. The Russian Prime Minister said that he hoped to "reach agreement on gas prices this December."
The Kommersant newspaper reported that Russia may grant a government loan to Armenia to compensate for higher gas prices. However, during the visit, the sides failed to agree on the size of the loan and even reach a principal agreement on the loan and ways of repaying it.
Despite the politicians' optimistic reports on the results of their visit to Yerevan, the doubling of gas prices could not but create a rift in the relations between the two countries, which has been gradually widening of late. Russia has not always been acting as an assiduous owner of the Armenian assets received in compensation for the country's debts. In other words, the sides had to seriously discuss prospects for "starting up" Armenian enterprises with Russia's help. One of the problems concerns the use of Russia's defense industry capacities in Armenia: the production of military hardware in another country is a delicate issue. However, a solution can be found. The Prime Ministers signed an agreement on mutual protection of intellectual products resulting from joint military-technical research.
This is all the more topical now as a steep rise in gas prices can provoke stronger negative attitudes towards Russia. In his recent interview to the Rossiiskaya Gazeta, Ara Abramyan, president of the World Armenian Congress and the Russian Armenians' Union, said the following: "The Republic is orienting itself more towards Brussels and especially towards Washington. Other power centers are appearing in the region. They exert their cultural influence [on the republic], set up their universities, educational centers and network structures. They invade the republic's economy and socio-cultural life. Suffice it to say that the gas pipeline to Armenia is being built now not by Russia or even the United States but by Iran. The construction of one more power unit at the Razdan thermal power plant will most probably go to Iran by tender. This means that in the near future Armenia will not depend as much on Russian hydrocarbon supplies. Note that in some sectors Russia's presence in Armenia is negligible now."
Surely, it is good that Moscow has finally realized that the policy of subsidizing Russia's CIS neighbors by cheap energy resources is unviable. The transition to world prices in Russia's relations with Ukraine, Moldova, the Baltic and Caucasian countries will give Russia about $3.5 bln. Gazprom loses as much from its forced "gas patronage." Moreover, in conditions of falling gas production and Gazprom's growing debts, the sale of gas at a price below production cost is suicidal. Maybe for this reason the Russian prime minister, giving its due to the two countries' strategic partnership, said to his Armenian counterpart that "partnership is one thing and gas is another."
