IMPLICATIONS: It was evident that Russia had no clear strategy last year when initiating the transfer to “market prices” for gas sold to former Soviet countries. Whereas Ukraine and Georgia were informed about the future rise in the price in August, Armenia was sure that it would get the gas at the same price as before (54 dollars per 1000 cubic meters). Only in late November did Gazprom declare that the price for Armenia was to be raised as well, thus causing shock for Russia’s strategic partner (the budget of Armenia for the year 2006 was already adopted then). Due to subsequent urgent top level negotiations, the previous gas price was left unchanged until April 2006, and talks are underway as for what the exact price for Armenia may be (110 dollars, as for Georgia and Azerbaijan, or somewhat lower). According to latest reports, a final agreement may be reached by mid-February. As Armenia recovered after the deep energy crisis of the early 1990s, its economy has become much less energy-consuming than before. In 2005, it regained the level of GDP of the last years of the Soviet rule, while consuming less than half the amount of electricity and around a third of the gas it consumed in the 1980s (moreover, Armenia also exports electricity to Georgia). Given the relatively low share of TPPs in the power balance of the country, Armenia can easily withstand the shock caused by the gas price rise. In the worst scenario, if the Russian gas price is set at 110 dollars per 1000 cubic meters, the gas price for the final consumers may increase by around 20-25 percent, and electricity tariffs may rise 10-15 percent. In this case, a spike of inflation of 5-7 percent at most (in recent years, inflation was below 3% a year) could occur. Moreover, the government can easily compensate this rise at the initial stages to make the shock lower. As Russia is not only a gas supplier, but also has large gas consuming assets in Armenia, the possible loss in the profit margin of these plants should also be taken into account. This is first of all important for the Hrazdan TPP. The four blocks owned by Russia are obsolete and may become fully uncompetitive when new TPP capacities are ready in 2007-2008. For these reasons, Armenia has declined Russian proposals to pass additional assets to Russia in exchange for keeping gas price unchanged. According to media reports, these proposals concerned the Hrazdan fifth block, the cascade of HHPs on the Vorotan river in the South of the country, the state’s share in Armrosgazprom, and the Iran-Armenian gas pipeline. Armenia also has declined Russia’s proposal of a commercial loan (similar to the one proposed for Ukraine). The discussion about gas prices has yielded another consequence, of political nature. Numerous Armenian politicians expressed disappointment with the Russia’s policy towards Armenia, saying that Armenia, which is Russia’s only military and political ally in the South Caucasus, should be given some privileges in the politically motivated policy of raising gas prices. Many of them, including those known as having pro-Russian sympathies, argued that Armenia needs to change its orientation to the West. The top leadership of the country does not share this opinion, however, saying that the strategic partnership is not determined by the gas price. At the same time, they also say that the terms of the Armenian-Russian strategic partnership may be revised, “to make its boundaries more precise”.
CONCLUSIONS: Russia is obviously trying to acquire additional energy assts in Armenia using gas price as a leverage. Armenia, on the other hand, tries to avoid putting new strategic assets under the Russian control. On the other hand, the shock caused in Armenia by a possible rise in the gas price is most frequently overestimated in media, and Armenia can handle it with relatively limited loss. Instead, a rise in the gas price will surely make the Armenian population and political elite less pro-Russian, and the Hrazdan TPP, owned by Russia, less competitive in the near future. Armenia’s policy will prevent Russia from gaining full control on the Armenia energy sector, first of all, due to Iran’s penetration of the market.
AUTHOR’S BIO: Haroutiun Khachatrian is an analyst on political and economic issues based in Yerevan, Armenia.