Institute for War and Peace Reporting | Giving Voice, Driving Change

Armenian Sell-Off Crisis

Ambitious bid by little-known company to buy electricity distribution grid faltering, after major foreign stakeholder pulls out of deal.
By Susanna Petrosian

The European Bank for Reconstruction and Development has confirmed it is pulling out of a deal to acquire a minority stake in the Armenian electricity-distribution network because of concerns about its would-be partner.

The EBRD press office told IWPR on October 17 that it would not be taking up a 20 per cent shareholding, because it was not confident that Midland Resources, the little-known offshore-registered company, which is seeking to acquire the grid, had a "proven track record in the energy business."

"We told the government that we have very clear criteria about taking part in something like this," the EBRD said.

This leaves Midland Resources struggling to complete its deal to take over the network by the deadline of November 1. In a continuing spate of bad publicity about the sell-off, Armenian opposition politicians are alleging the network has been sold to the wrong buyer for political reasons; and the World Bank has held up release of a 20 million US dollar budgetary loan, pegged to the privatisation deal, apparently as a result of worries about how it is going.

Furthermore, although Midland Resources representative Andrei Zavrazhnov told a September 6 press conference that his firm would sign a contract with an operator to manage the grid within two weeks, no such deal has materialised.

Observers in Yerevan say Midland Resources' potential partners have turned down its offers of collaboration. One Yerevan-based western businessman, who did not want to be identified, told IWPR, "We do not want to have anything to do with them."

However, Edward Shifrin, one of the directors of Midland Resources contacted by telephone in Kiev, insisted that everything was on course for the acquisition to go ahead by the end of this month. He told IWPR that the EBRD pullout would not jeopardise the deal because "We are taking 100 per cent of the shares".

Shifrin said Midland Resources was hiring technicians to operate the electricity system themselves, " We are not talking about operators here, so much as about technical managers. We will get them from outside Armenia - from Europe and America."

The saga began on August 24, when the small British-based company acquired an 80 per cent stake in the Armenian Electricity Network, AEN, in a government auction. Midland Resources, the only foreign investor to put in a bid, was promised 37 million US dollars worth of shares - considerably less than the company was estimated to be worth only two years ago.

For the last two years, the Armenian government and president have argued that they must sell the country's power-distribution network, as they do not have the resources to keep it in good working order and guarantee Armenians round-the-clock electricity.

The grid has been reorganised several times, since the country emerged from the intense energy crisis that plunged it into semi-darkness from 1991 to 1995. In 1999, the company was split into four regional parts. Earlier this year, they were reincorporated into one company as AEN, with all shares belonging to the state.

The government made two unsuccessful attempts to sell off the shares. It was a hard task because the network had a reputation for being plagued by mismanagement and corruption and had amassed large amounts of debts.

The auction that eventually took place in August caused an uproar. Midland Resources won the tender, being allowed to acquire 80.1 per cent of the company, while the remaining 19.9 per cent was left for the EBRD to acquire. The price was 37 million dollars, although the energy ministry had valued the grid at 160-200 million dollars two years ago.

Midland Resources says it has undertaken to pay off 25 million dollars of debt accrued by the company, including a backlog of staff wages. It will decide how to deal with the remaining debts, estimated at between 150 and 200 million dollars, jointly with the government.

But opposition politicians have accused the government of selling off a valued state possession in cavalier fashion. Aram Sarkisian, leader of the Democratic Party, thundered that the sale of such a strategic asset as AEN to such a little-known company "is proof of the criminality and incompetence of the government".

As a result, the hitherto almost unknown Midland Resources has come under intense scrutiny.

The company, which was created five years ago, is formally registered in the offshore Channel Island of Guernsey and has an office in London. But its biggest business activity is in Ukraine, where it owns a majority stake in the Zaporozhstal steel factory. In Armenia, the company has up to now been working only in the agricultural sector, marketing cereals and apricots.

Shifrin denied the charge that Midland Resources was unfit to take over AEN because it had no track record in the electricity business, saying his firm had the highest professional standards, that it had dealt with electricity in both Russia and Ukraine and would, in any case, be hiring "professional managers" to run the business.

Many in Yerevan believe there is an as yet unclear political subtext to the whole deal.

"Big enterprises in Armenia, including AEN, are privatised not out of necessity, but because some influential people wanted to make them their property," commented Tatul Manaserian of the Armenian Centre for National and Strategic Studies.

"It's completely clear to us that some of the powers that be are implicated in this deal, including parliamentary deputies, whose names will soon be revealed," said opposition deputy Alexan Karapetian.

Karapetian said that the energy sector was plagued by criminal activities and that "every year losses of up to 100 million dollars are written off, which are subsequently redirected to election campaigns". Gevorg Danielian of the general prosecutor's office said that many abuses in the electricity system have been identified late and never punished.

Most ordinary Armenians are only interested in the sell-off in so far as it relates to possible price hikes. Andrei Zavrazhnov of Midland Resources said the latter would not be discussed before January 1, 2004. After that, he said, a procedure for setting prices would be worked out between the company and the state energy regulatory commission.

That still leaves some worried that in the long term a single owner of the grid will have too much power. "In a country, where most of the population is short of cash, it's vital to regulate prices," said an official from the energy ministry, who asked not to be named. "But as a monopolist, the owner will probably fix prices for electricity as it sees fit, as has already happened with the telephone system."

Without EBRD support, Midland Resources now faces a stiff challenge of completing its bid for the grid by November 1. "There are no problems," Shifrin told IWPR. "We'll meet that deadline."

Susanna Petrosian is a correspondent with Noyan Tapan news agency in Yerevan. Thomas de Waal is IWPR's Caucasus editor in London.

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