Armenia: The Power of Rumour

Thursday, 8 September, 2005

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Naira Melkumyan

A deal under which Armenia’s electricity grid could be sold to a Russian-owned energy giant has led to an outcry from opposition politicians who are worried about who controls the country’s strategic assets.

Under a deal signed in June, the Russian electricity firm United Energy Systems, UES, has agreed to run the power network in Armenia on behalf of the Canadian-owned and British-registered company Midland Resources Holdings Ltd, which acquired 100 per cent of Electricity Networks of Armenia, AEN, in a privatisation deal in 2002.

Midland Resources has made it clear in remarks emailed to IWPR that it retains ownership of AEN, but that in the long term it would like to sell it to UES.

In Armenia, initial reports about the nature of the deal were contradictory, and as rumours of an immediate Russian takeover started circulating, the government appeared not to know about the long-term goal of transferring shares in the national power company to UES.

The first news reports said simply - and accurately - that Interenergo, part of the UES group, was to manage AEN, under a 99-year lease from Midland Resources.

Neither the energy ministry nor the regulatory body for the public sector in Armenia appears to have been informed of the move, because technically there was no requirement for this.

AEN told IWPR that it was under no obligation to tell the government.

“We are only obliged to notify the government if we sell shares in the company. This was a management transfer and not a sale of shares. That is why we did not inform the government,” AEN press officer Margarita Grigorian told IWPR.

Even at this point, critics of the Armenian government were put on the alert.

“Any fool can see that handing over management of a company for 99 years means only one thing – the [future] sale of the company,” said Aram Sargsian, a member of parliament who heads the Democratic Party.

Sargsian said the AEN deal would make Armenia even more dependent on Russia. He noted that UES’s company holdings already accounted for 75 to 80 per cent of Armenia’s energy production – and now it was seeking control of distribution as well.

“It’s patently obvious. Whoever controls the switch controls the country,” he said.

The issue became confused after people began reading UES’s annual financial report for 2004 (dated June 28), saying that in June 2005, Interenergo had acquired 100 per cent of AEN’s shares for 73 million US dollars.

The reported sale of a key national asset stoked concerns in Armenia, fuelled by the government’s resolute silence.

Eduard Aghajanov, an economist at Armat, a political science institute in Yerevan, said any sale of AEN to a foreign company was contrary to national strategic interests.

“The owner of the power grid will dictate his terms to both producer and consumer, and that is an unacceptable situation,” Aghajanov told IWPR.

Victor Dallakian, of the opposition Justice faction, went further, warning that “Armenia will be under the threat of energy terror”.

International institutions were perturbed at the lack of clear signals from the Armenian government about what was going on.

Roger Robinson of the World Bank’s Armenia mission told a press conference on July 8 that he considered “the regular provision of transparent and official information on events concerning this sphere [electricity distribution] very important”.

This week, Robinson told IWPR that those remarks were intended to “press the red alarm button to alert people, especially the government, that the due process of law should be observed”.

He believes his strategy paid off, “That press conference really galvanised a lot of people.”

On July 18, the United States government’s development agency USAID followed suit with a press release expressing concern “that a transfer of the ownership of AEN may have taken place without following important Armenian government regulations which exist to protect Armenian consumers”. USAID said it “would review its assistance portfolio to Armenia in light of any revised AEN ownership or lack of due process in changing that ownership agreement”.

On July 25, Mikhail Mantrov, the deputy director of UES subsidiary Inter RAO UES, which owns Interenergo, retracted the group’s earlier statement and corrected the record, telling a press conference that AEN was the subject of a management transfer rather than a purchase. Midland issued a statement on July 20 confirming that it remained AEN’s owner.

After talking to the companies involved, Armenia’s Public Sector Regulatory Commission concluded on August 22 that all of AEN’s shares did indeed remain with Midland Resources.

This week, Midland Resources president Alex Shnaider told IWPR by email that the company did hope to sell AEN to the Russian firm eventually, once all the legal requirements had been met. He insisted that his firm had been punctilious in meeting its obligations to the Armenian government.

“The aim of the transaction is to sell 100 per cent of Midland’s shares in AEN to RAO [UES],” he said. “The deal is divided into two stages. First, in order to prepare for the transaction, both parties will study the company’s assets and create joint management provisions for the company in consultation with the Armenian government. During this stage, Midland will remain the sole owner of AEN’s shares.

“The second stage of the transaction will involve the transfer of the shares. This can only occur following approval from the government, as outlined in the initial contract between Midland and the government of the Republic of Armenia.”

Shnaider said he was not aware of any unresolved issues with the Armenian government and he did not feel there were any solid grounds for further inquiries. “To the best of our knowledge, the declarations made by UES and Midland have fully satisfied the government commission. Midland always fulfils its contractual obligations and has fully complied with the laws of the Republic of Armenia,” he told IWPR.

The deal is worth a total sum of “upwards of 70 million dollars”, he added.

The government has instructed its legal experts to check the nature of the transfer of AEN’s management to UES.

“We want to study the contract, comprehend the deal that’s taken place, and compare what’s happening with what was set out in the deal the Armenian government signed with Midland resources in 2002,” Deputy Energy Minister Areg Galstian told IWPR

“Until then [completion of the study], we will refrain from drawing any conclusions.”

But the public perception that the government failed to reveal what it did – or did not – know about the deal has laid it open to accusations of lack of transparency.

“Since independence, almost all the [privatisation] deals done in this country have taken place under a veil of secrecy… This is no exception,” said opposition deputy Sargsian.

Repeated requests by IWPR to government spokespersons to comment on the deal have not resulted in any further clarifications, or even in an official acknowledgement that Midland’s ultimate goal is to sell its AEN shares to UES.

In Yerevan, World Bank representative Robinson said he had still received no official confirmation that AEN was to be sold to the Russian energy group.

But he said he was less concerned about the potential buyer being Russian-owned than about ensuring the Armenian government is satisfied that the purchaser possesses the right energy-industry expertise, has sound financial management and will act with integrity.

If the government adheres to its own procedures on these matters, and to the international rules on transparency, Robinson sees no obstacle to the World Bank continuing its current programme in Armenia.

In political circles, the issue of Russian control over key Armenian assets is likely to rumble on. Government allies like Vahan Hovhannisian, the deputy speaker of parliament, argue that because the two countries are allies, “there is no threat to our national security” from UES’s engagement in Armenia’s power industry.

But opposition parties are unlikely to pass up the chance to attack the government the moment the Russians open negotiations on acquiring AEN.

Naira Melkumian is an independent journalist in Yerevan.