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  • Armenia: Answers demanded on UES energy deal

    EurasiaNet Organization
    July 14 2005

    ARMENIA: ANSWERS DEMANDED ON UES ENERGY DEAL
    Samvel Martirosyan 7/14/05


    Uncertainty surrounds a reported deal with Russia's Unified Energy
    Systems that would grant the company ownership of Armenia's main
    electricity company. After stating several months ago that it had
    purchased the utility, the Russian energy giant on July 13 reversed
    itself, claiming that it had only secured a management contract. The
    transaction, shrouded in secrecy, has already sparked strong
    criticism from one international financial organization, which faults
    the Armenian government for refusing to answer questions on the
    topic.

    On June 30, the Russian energy giant Unified Energy Systems (UES)
    announced that Interenergo, an offshore subsidiary of UES, had
    purchased 100 percent of the shares of Armenian Electricity Network
    (AEN) for $73 million. One of Armenia's most successful companies,
    AEN had been (and may still be) owned by the British-registered firm
    Midland Resources Holding, Ltd. In 2004, AEN ranked as Armenia's
    fourth-largest corporate taxpayer, according to the Armenian-European
    Policy and Legal Advice Center, and earned revenues of some 70.67
    million drams (about $106.6 million).

    If the AEN purchase by UES is confirmed, Russian companies would be
    poised to take full control of Armenia's energy industry following
    more than two years of steady expansion. In 2003, within the
    framework of Armenia's assets-for-debt program with Moscow, the
    Hrazdan thermal power plant, the largest such plant in Armenia, was
    transferred to Russia for $31 million. [For additional information
    see the Eurasia Insight archive]. UES also was named "financial
    manager" of the Armenian nuclear power plant Metsamor. To pay for the
    delivery of nuclear fuel to Metsamor, the Sevan-Hrazdan hydroelectric
    power station cascade was transferred to Russia in 2003. The same
    year, GazProm, the Russian energy conglomerate, became the chief
    supplier of natural gas to Armenia. The company also holds 45 per
    cent of shares of "ArmRusGasProm," which holds a monopoly on
    distribution of natural gas in Armenia.

    Under existing legislation, the sale of one-quarter or more of AEN
    shares requires the approval of the government and the Commission on
    Regulation of Public Services. The Armenian government has declined
    all comment on the issue.

    Controversy over the possible sale continues to build. Radio Free
    Europe/Radio Liberty quoted a UES spokesperson as saying that
    Interenergo was only "the beneficiary of a management contract" that
    would give the Russian energy company day-to-day control of AEN,
    rather than owning the Armenian firm outright. Information in the
    company's annual report that UES had purchased AEN was not correct
    and has been removed from the UES website, the company spokesperson
    said.

    In a July 11 statement, an AEN spokesperson, who requested not to be
    named, told EurasiaNet that the company's shares had not been
    transferred to Interenergo management. The spokesperson denied that a
    sale had occurred, and stated that he was not authorized to release
    information about the size of the deal.

    With no ready explanations from the government, the patience of one
    international financial organization appears to be running thin. In a
    July 8 press conference, Roger Robinson, chief of the World Bank's
    Armenia mission, said that the organization, Armenia's largest
    creditor, is dissatisfied with the government's failure to provide
    information about the deal. "The electricity distribution networks
    are one of the largest and [most] profitable spheres that is of a
    great strategic value for each Armenian, and I consider the regular
    provision of transparent and official information on events
    concerning this sphere as very important," Robinson said. On July 13,
    PanArmenian.Net reported Robinson as saying that he would meet with
    members of the government if the situation was not rectified "within
    several days."

    Reports about AEN's sale first appeared in February 2005, when the
    Yerevan-based newspaper Haykakan Zhamanak reported that a deal had
    been brokered whereby UES would purchase the company for $80 million.
    Midland Resources Holding has held AEN since 2002 when it won a
    privatization tender for the then state-owned utility for $40
    million.

    Reaction to the report was swift. On February 22, UES Chief Executive
    Officer Anatoly Chubais confirmed that an offer had been made, but
    stressed that "[a]ny decision is possible only . . . when it is
    coordinated with the Armenian leadership," the Russian news agency
    RIA Novosti reported. It is not known, however, whether those
    consultations ever occurred and, if so, with whom.

    "It is clear that the situation is not [the] best," Robinson said.
    "The Armenian government and the Commission on Regulation of Public
    Services must explain to the nation and to me what is going on."

    One political analyst believes that the reason for the government's
    silence is political. "In April and May of the current year, the
    leadership of Armenia was seriously concerned about the possibility
    of revolution in the country and saw the only way out in the support
    from the outside. That's why Yerevan was encouraging Vladimir Putin's
    [March 24-25] visit to Armenia," said Stepan Safarian, research
    coordinator at The Armenian Center for National and International
    Studies in Yerevan. The fact that news of RAO UES' interest in
    purchasing AEN immediately followed Putin's visit led Safarian to
    conclude that "[t]he transfer of shares was the price that Armenia
    paid for Putin's visit."

    Chubais, the UES chief, enjoys close ties with the Kremlin and has
    made no secret of his desire for expansion in the South Caucasus and
    Turkish energy markets. [For background see the Eurasia Insight
    archive]. The company also controls Georgia's electrical power grid.
    [For background see the Eurasia Insight archive].

    A representative of the ruling party coalition says that any deal
    with UES would have more to do with economics than politics. "After
    the privatization of the Armenian Electricity Network, some
    conversations about the possible resale of the company have
    periodically [taken place]. Naturally, the state is interested in
    making the possible deal the most profitable for Armenia," said
    Galust Sahakian, leader of the Republican Party parliamentary
    faction, a member of Armenia's ruling coalition. "I'd sound rather
    strict, but we would not like the Electricity Network to be sold to,
    for example, a Turkish company."

    Sahakian also claimed that the AEN deal remains in the negotiations
    stage, with nothing finalized to date. "I am a politician and I would
    have information if the sale of the company took place," he said.


    Editor's Note: Samvel Martirosyan is a Yerevan-based journalist and
    political analyst.
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