Power Play: Questions arise over Armenian Electricity Networks deal with Russian company

An investigation by the Public Services Regulatory Commission of Armenia has concluded that no laws were broken when, earlier this summer, the Armenian Electricity Networks engaged in transactions with a Russian holding company for a share of Armenia’s power grid.

Legality aside, however, the commission’s response is not enough to allay concerns by some that control of the republic’s energy supply is being placed in the hands of the Russians.

On June 23, the official website of the Russian (joint stock company) Unified Energy System State Holding (http://www.rao-ees.ru), reported that Russian Interenegrgo BV had purchased AEN’s shares from British Midland Resources Holding Ltd. Corporation, at a cost of $73 million.

Such a transaction would be in violation of Armenia’s agreement with British Midland, signed in 2002, in which the holding company must notify the Government of Armenia in advance of any negotiations involving more than 25 percent of shares.

News of the sale caused concern in Armenia, particularly among international donor organizations implementing assistance projects within Armenia’s energy system.

The first to react, in early July, was World Bank Director Roger Robinson, who expressed his dissatisfaction with the deal being not transparent.

“Electricity distribution networks are one of the largest and most profitable sectors of Armenia that has a strategic importance for every Armenian,” Robinson said. “I consider it necessary that a public announcement should be made about the ongoing events – transparently and officially.”

Robinson’s comments were followed by a statement from the United States Agency for International Aid in which USAID said that unless the matter were satisfactorily clarified, USAID would revise its aid package to Armenia.

After such tough statements, Inter RAO UES Deputy Director Mikhail Mantrov spoke in a press conference in Yerevan on July 24, giving explanations to the report published on the website.

“An agreement was signed on June 23 between the owner of AEN, Midland Resources, and “Interenergo BV”, and the latter will manage AEN for 99 years and will dispose of the whole profit received during the operation. However, in this case Midland Resources remains an unchanged owner of AEN’s shares,” Mantrov said during the press conference.

The $73 million, Mantrov said, is the amount paid by the Russians to gain managing rights.That is $33 million more than Midland paid three years ago for a 100 percent stake. According to Mantrov, such an overpayment was made for getting the right to purchase shares in the future.

On August 26, Deputy Chairman of the Public Services Regulatory Commission Nikolay Grigoryan told ArmeniaNow that AEN had acted properly according to the requirements of the license.

“According to the documents sent to us, the owner of the AEN is the same Midland Resources, the composition of the Board of Directors is unchanged, and the governor remains Eduard Shifrin,” Grigoryan said. “Bank accounts were not changed, which is also confirmed by the document presented from the central depositary.” The Armenian government still keeps silent about this expensive energy deal, saying that Midland has given no explanation so far to the government, although the Ministry of Energy turned to Midland with such a request.

According to Mantrov, the authorities were not informed because it is not mentioned in the agreement signed between the Government of Armenia and Midland Resources that state bodies are to be informed in advance only in case of getting the right to management.

The latest dealings aside, Russia already owns about 80 percent of Armenia’s electricity system. Of them are the Hrazdan thermal power plant, the Nuclear Power Plant, as well as the Sevan-Hrazdan hydro-power station cascade.

Russia also participates in the Iran-Armenia gas pipeline construction project, in particular, the Russian side plans to build the fifth unit of Hrazdan, which, as a compensation of the import of natural gas, will supply Armenian electricity to Iran.

The transfer of the right to manage AEN to the Russian holding formed an opinion among the public that there is no longer point in talking about the concept of the country’s energy security.

Stiopa Safaryan, Director of Research at the Armenian Center for National and International Studies says that the privatization of electricity distribution networks to one company already has a political direction.

“Electricity networks are the most important chain in the country’s energy system,” says Safarian. “Many can generate electricity, but electricity distribution networks have an opportunity to make a selection as to what price the electricity should be sold. And in this regard, it is a rather serious instrument of influencing the public.”

And according to Caucasus Media Institute Director and political analyst Alexander Iskandaryan, the June deal was predictable. According to him, politically, everything there is very clear.

“It was simply a variant of handing over electricity distribution networks to Russia. Legally, perhaps it will be impossible to prove, but politically it is so,” Iskandaryan told ArmeniaNow.

According to him, the dissatisfaction within a certain mass of the public regarding the transfer of AEN’s management to the Russian side has the following explanation:

“In Armenia, as well as other post-Soviet countries, there is a certain post-imperial complex. It is a complex of emotional defense of statehood,” says Iskandaryan. “If a part of shares of an industrial company of the republic is purchased by a German, British or American company, it is regarded as normal, however if the buyer is a Russian company, then it is considered that it is terribly dangerous, as Russia is Armenia’s former metropolis.”

“In all cases, the entrance of such countries to Armenia implies that they come for a reason, and Russia’s entrance into Armenia has enough reasons,” says Iskandaryan and adds: “They had promised that they would not give the electricity distribution networks to the Russians, but they seem to have given them.”

Safaryan also questions the motives behind the AEN deal with the Russian company.

Midland is a company registered in an offshore zone, but its manager is a Russian by nationality. According to some experts, to have greater guarantees the Russians want AEN to belong to a Russian state-owned enterprise.

Safarian says that the report on the website was published for a probe of responses, however certain experts contend that such a giant company would not place wrong information on its official website.

“In any case, even if there was no change of the owner, then RAO UES already enjoys all the rights of an owner, as it manages, owns and uses. To transfer management for a period of 99 years and dispose of the whole profit is in no way different from the rights of an ordinary owner,” Safaryan concludes.