Top Russian investments exploit Armenia and energy - 2007

Rubles for Resources: Top Russian investments exploit Armenia and energy

By Arpi Harutyunyan, ArmeniaNow reporter

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. {ai151402.jpg|right}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.

Source: http://armenianow.com/?action=printa...e251abd3104734


Armenia in Russia's Embrace


By Kim Iskyan, The Moscow Times

Armenia is one of a small and dwindling number of former Soviet republics that assuages, rather than aggravates, Russia's hurt ego in what used to be its geopolitical backyard. While the special relationship between Russia and Armenia is hardly new, its increasing intensity holds important implications for the smaller country's future, as well as for the balance of power in the Caucasus and throughout what remains of Russia's old sphere of influence. Goodwill between Armenia and Russia has deep historical roots and is sustained by Russia's recent role as Armenia's protector. Russia is the ace up Armenia's sleeve against feared aggression by Turkey, Armenia's historical enemy, and as a deterrent to a renewal of the war between Armenia and Azerbaijan over the disputed enclave of Nagorny Karabakh (during which Russia supplied critical military assistance to Armenia). As a consequence of the war, both Turkey and Azerbaijan blockade their borders with Armenia. Armenia plays eager host to a few Russian bases and a few thousand Russian troops, who patrol Armenia's borders with Turkey and Iran. During the Georgian political crisis in November 2003, the Russian and Armenian defense ministers signed agreements deepening their military cooperation, and, a few days later, then Russian Foreign Minister Igor Ivanov called Armenia "Russia's only ally in the south."

Indeed, Georgia appears increasingly determined to remove itself from the Russian orbit, particularly after the recent crisis in Adzharia. And Russian relations with Azerbaijan, never particularly warm, remain dominated by oil concerns. Armenia is one of the relatively few former Soviet republics where Russian troops are welcomed and where they don't have to rub shoulders with the U.S. military, such as in Georgia or Kyrgyzstan. On another front, Russia has staged what appears to be a benign takeover of a number of Armenia's economic arteries. Virtually the entire Armenian energy sector is under Russian control, following the transfer last year of the management of Armenia's critical nuclear power plant, and six hydroelectric plants, to UES as part of a broad equity-for-debt deal. Armenia receives its natural gas from Russia via Armrusgazprom, which is 45 percent owned by Gazprom. Rostelecom is a possible buyer of Armenia's telephone monopoly. Russian financial institutions, often under ethnic Armenian management, are slowly moving into Armenia's banking and insurance sectors. And with Russia one of Armenia's largest trade partners, the health of the Armenian economy is closely linked to that of Russia's, as the slowdown following the 1998 financial crisis demonstrated.

Russia is the gray cardinal of the Armenian political scene, in contrast to the meager influence it exerts on domestic politics in most other CIS countries, with the exception of Georgia, Moldova and Belarus. Prior to Armenia's February 2003 presidential election, President Robert Kocharyan made a pilgrimage to Moscow to receive the blessing of President Vladimir Putin; some analysts viewed the transfer of Armenia's energy assets to Russia as a quid pro quo for Putin's continued support. Indeed, the Armenian government is highly vulnerable to any disruption -- inadvertent or otherwise -- of the flow of energy resources from Russia, and works hard to stay in the good graces of the Kremlin. The close links between powerful members of the Armenian diaspora in Russia and Putin spurred rumors recently that Putin, now freed from the distraction of getting re-elected, might become more involved in Armenia's domestic political scene to solidify Russia's position in Armenia. In the meantime, Kocharyan seems to be taking a page out of Putin's handbook on authoritarianism, tightening the state's grip on the media, stifling dissent and otherwise trying to limit the scope for the evolution of a credible opposition.

Armenia's official foreign policy is to foster amicable relations without picking favorites -- a rational policy for a small, isolated nation flanked by unfriendly neighbors in an unstable region. Armenia leverages the political clout of the Armenian diaspora in the United States and, to a lesser degree, the European Union, to win governmental aid and assistance. It also hedges its military bets by participating in NATO Partnership for Peace exercises and lending quiet support to the American war on terror. U.S. and EU concerns in the region are focused on the politics of oil and pipelines in Azerbaijan and the Caspian area more generally -- with changes in Georgia now also jockeying for the limited attention that the West allots to the Caucasus. Meanwhile, efforts to deepen relations with southern neighbor Iran (such as through the construction of a natural gas pipeline) receive frosty glares from the West and a mixed reception from Russia. Russia is home to roughly 1.8 million Armenians -- compared with the official, and inflated, figure of 3.2 million inhabitants of Armenia proper -- who send home remittances of roughly $110 million every year (equivalent to 4 percent of GDP), according to the Armenian Foreign Ministry. Not surprisingly, there is no stigma attached to speaking Russian in Armenia, unlike elsewhere in the former Soviet bloc. Armenian dependence on Russia is steadily deepening, binding Armenia's future -- for better or for worse -- all the more tightly to Russia. And as Russian influence in the CIS continues to erode, its role in Armenia serves as a pleasant, if Lilliputian, reminder of what it once had.

Source: http://www.strategypage.com/militaryforums/47-885.aspx

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