Rubles for Resources: Top Russian investments exploit Armenia and energy

According to official government information, Russia’s investment in independent Armenia reached $407 million late last year.

It is not so much the total that has drawn economists’ attention, but the sharp increase of business investment in the most recent three or four years. In 2004 and 2005, for example, Russian investment in Armenia exceeded $100 million – one fourth of their 14-year post-Soviet economic involvement.

While control of Armentel telecommunication has kept the Greeks at or near the top of Armenia’s foreign-based investors, Gnel Mayilian, head of the Ministry of Trade and Economic Development’s department for investment policy and market infrastructure development, says Russia has the greatest importance for Armenia in terms of the effectiveness of investments.

“The Russian market for us has always been distinguished by investment programs carried out by them in our country. It is obvious that such investments have a considerable impact on Armenia’s economic growth,” explains Mayilian. “But we must also point out that Russian organizations making investment deals in Armenia are also able to ensure the protection of their interests as a result of the liberalized market conditions here.”

As of January 2005, the most recent available statistics, there were 689 companies with Russian capital investment registered in Armenia. The establishment of such businesses in Armenia is encouraged at the level of state policy, but also by the existence of bilateral legal agreements.

“Our countries are interested in having a stable situation in the Caucasus and, therefore, in the formation of an atmosphere of confidence that contributes to sustainable development in the social and economic spheres,” Russian President Vladimir Putin said during his visit to Armenia last year.

In 2001, the governments of Armenia and Russia signed an agreement “On Mutual Encouragement and Protection of Investments”, which was ratified in 2005. Besides this agreement, there are more than 10 interstate and intergovernmental resolutions on trade and economy between the two countries. Some 160 interstate and intergovernmental resolutions between the two, make Russia Armenia’s No. 1 trade partner.

Igor Levitin, Russia’s Minister of Transport, and co-chairman of the Russian-Armenian Intergovernmental Commission on Economic Cooperation, says Russia-Armenia free-trade agreements are constantly being improved. The most effective investment deal of recent years is considered to be the sale of the aluminum producing Armenal enterprise to the Russian company RusAl, a deal which resulted in a $100 million investment.

Before the Armenal deal, which was agreed upon in 2000, with production commencing last year, the biggest slice of the Russian-Armenian pie belonged to the Russian natural gas company, Gazprom.

In 1997, ArmRosGazprom (ARG) was created. Russia’s Gazprom and the Armenian Government each hold a 45 percent stake with the remaining 10 percent owned by a Canadian exploration and petroleum industry corporation. According to the Ministry of Trade, ARG has invested about $60 million in the improvement and development of gas supplies in Armenia.

ARG, which is the only importer of gas to Armenia (via Georgia) is one of the republic’s largest companies with about 5,000 employees. Last year, it imported 1.685 billion cubic meters of gas, an increase of some 350,000 cubic meters over 2004.

As of January 1, 2006, ARG had 360,634 subscribers, an increase of 100,000 in the past 12 months. In Soviet times, Armenia had 485,585 gas subscribers, but the energy and economic crises of the early 1990s eliminated this market as gas supplies dried up and residents switched to electricity.

In just the past three years, however, ARG has restored service to 74.3 percent of former customers in 41 cities and towns as well as 316 rural communities. Shushan Sardarian, the head of ARG’s press service, says that consumption of natural gas rose 24.2 percent in 2005, compared with 2004.

According to Karen Karapetian, ARG’s chief executive, the company plans to invest $15 million in Armenian energy and are also participating in construction of the Armenian section of the pipeline carrying gas supplies from Iran.

He says that ARG has emerged out of the red to become a profitable company, thanks to some complex restructuring carried out between 2003 and 2005. “The company finished 2004 in profit. ARG in principle has reached a turning point and is now in a stable position with the opportunity for regular profits and improvement day by day,” Karapetian says.

Those profits will first be used to make good some 10 billion drams ($22.25 million) in infrastructure damage – primarily the replacement of worn-out pipe – incurred before 2003, and in repaying the large-scale investment made since 1997.

As with other utility services in post-Soviet Armenia, part of ARG’s success will depend on its ability to enforce user payment, and to curtail the common practice of “pirated” gas by which residents get around regulations by installing their own delivery links.

Even so, ARG estimates that it will be the country’s number one taxpayer by 2007.

Not only Armenia’s gas supplies but also its electricity generation is under Russian control. The sale of the Armenian Electricity Network (AEN) by Midland Resources Ltd to the Russian Inter RAO UES company for $75 million last year caused considerable controversy.

Midland Resources bought the network in a privatization in 2002 that specified that the purchaser had to obtain approval from the Armenian government before any future sale. However, the transfer to Inter RAO UES appeared to take place without official approval, sparking protests from the World Bank representative in Armenia.

At first, Midland Resources and the Russian buyer claimed that no sale was involved, but only the agreement of a management contract, lasting 99 years. Later, official approval was given for the formal sale of the entity.

Inter RAO UES, which is chaired by Anatoly Chubais, a former senior Russian government minister responsible for privatizations, was established in 1997. It acts as an electricity export-import company both in Russia and abroad, particularly in the former Soviet states.

According to AEN’s information service, while the new owner is expanding its market, AEN is also making major investments to improve the whole system (though it declined to be specific). Work on re-equipping its regional plants is also aimed at facilitating the development of large-scale business in Armenia.

The copper-smelting plant in the town of Alaverdi in Lori region was re-started by the Manes-Valex company following a privatization and renamed ACP (Armenian Copper Program). ACP is headed by the Moscow-based Armenian businessman Valeri Mezhlumian, who took control of the plant in 1997.

In early 2000, after 11 years of standing idle, the plant began once again to produce copper. In the 1980s, it turned out 40,000 tons of pure copper annually and was a major money-maker for the USSR. Production stopped after Armenia’s independence, and over the years the plant was almost totally plundered of anything valuable.

“Currently, the plant produces a quarter of its former output, but we still have a lot of room for improvement. In a few years, we plan to create an additional 2,000 jobs. Soon we will start cooperation mainly with European countries,” says Andranik Ghambarian, ACP’s head of general operations in Alaverdi.

Today, ACP is engaged in the exploration, development, excavation and extraction of natural resources involving minerals and metals. The company has invested $7 million so far and currently has a production capacity of about 10,000 tons of copper a year.

ACP has obtained licenses to develop two major mines in Armenia and to explore six others. It believes that $6.6 million of investments already made in the Alaverdi mine will make it possible to extract 65,000 tons of copper a year.

The Ministry of Trade’s Mayilian says investments in the plant are particularly well made. “It is a company that independently solves its financial problems and also attracts investment credit,” she says.

The Ministry also praises the level of investment in the chemical plant in Vanadzor, Lori region, Armenia’s third largest city. The Russian Zakneftegazstroy-Prometey company, which is led by Armenian Senik Gevorkian, bought the chemical complex in 1998, including its associated fiber plant and thermal power station.

Its investments totaled $20 million so far, mostly on re-equipping the plant to modern standards so that production could resume last year. Many of its products are exported to Russia, boosting Armenia’s trade volumes.