RUSSIAN CONTROL OVER ENERGY RAISES QUESTIONS ABOUT GEORGIA'S DIRECTION-- EXPERTS
Eric A. Miller 10/28/03

Georgia watchers in Washington have worried in recent weeks about the chances for free and fair parliamentary elections in the country on November 2. Of equal concern to some are recent developments in Georgia's energy sector. In what has been described as a "one-two punch," two Russian energy giants have acquired a dominate position in the Georgian market. A recent panel discussion met in Washington to examine the implication of these moves.

Participants at the October 15 roundtable, titled Georgia Energy Security: Potential or Peril, urged Georgian officials to take discernible control over how its citizens obtain and pay for electricity and heat. The event was sponsored by the Georgia Forum, a Washington, DC-based organization dedicated to supporting Georgia's political and economic development, as well as to promoting stronger US-Georgian relations. A co-sponsor was the Central Asia-Caucasus Institute at Johns Hopkins University.

The panelists -- Zeyno Baran, Director of the International Security and Energy Program at the Nixon Center, Fiona Hill and Mamuka Tsereteli, executive director of the America-Georgia Business Council, all advocated international activism on Georgian energy issues.

Through deals made this summer, Russia's electricity monopoly RAO Unified Energy System (UES) gained control over roughly 75 percent of Georgia's power grid. In May, Gazprom, Russia's natural-gas behemoth, entered the Georgian market via a handshake deal. [ For background, see the Eurasia Insight archives.] Panelists saw Russian geopolitical gamesmanship in these deals.

Each panelist asserted that the Russian companies -- which have close ties to government, or are partly state-owned -- are intent on making Tbilisi more economically dependent on Moscow. [For background see Eurasia Insight archive]. Hill said: "It is an understatement to say that Russian energy and state interests overlap."

Baran suggested that the US preoccupation with larger geopolitical questions enabled the UES and Gazprom deals. "The United States is willing to turn a blind eye to these developments in the Georgian energy market because Washington is focused on larger issues such as [dismantling] weapons of mass destruction and dealing with the [so-called] Axis of Evil," Baran said.

The Bush administration likewise appears reluctant to openly confront Russia at this time, in part because Washington feels it may need Moscow's help in dealing with Iran and North Korea on the nuclear proliferation question, as well as on the reconstruction of Iraq. Accordingly, said Baran, Russia is acting as though it can dictate the terms of Georgia's energy-sector development.

Hill characterized the recent deals in Georgia, Armenia, and elsewhere as a "re-penetration of old markets and not a penetration of new ones." By forgiving former republics' debt in exchange for big stakes in state enterprises or capital assets, especially those in critical sectors like energy, Russia seeks to make itself politically and economically indispensable. Hill noted that Anatoly Chubais, chairman of UES and a senior official in former president Boris Yeltsin's cabinet, has been a leading advocate of using Russia's economic leverage to expand political power. She cited a September 17 speech in which Chubais, describing the company's focus on vulnerable markets throughout the Commonwealth of Independent States, called it a "springboard for expansion elsewhere."

But panelists also laid blame at Georgia's doorstep. They agreed that if Georgia's energy sector were less corrupt and more modern, it would not have become such an easy target for Russian takeover. "The energy sector is the most corrupt sector in Georgia and has been for ten years," noted Tsereteli. Other panelists cast Georgia's energy sector in a broader context. Hill agreed that those in the energy sector are the "worst offenders," but noted undoing the Soviet legacy in 10 years is an "unrealistic expectation."

Panelists also focused on the quality of Georgian management. "Where there is strong management, especially on the Georgian side, companies have been most successful. But when management talent is lacking, companies are prone to failure," said Tsereteli. But, Tsereteli insisted, management must be both competent and appreciably local. In this context, AES, the American firm that sold its energy stake to Chubais' UES, failed in part because it "failed to put a Georgian face on the company, and was always seen as a US company," Tsereteli said. Panelists held out little hope that the UES and Gazprom deals might create more open or sound energy-sector companies. Instead, they focused on projects with American or British sponsors that could stoke outside investment in Georgian energy projects. These included the Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the Shah Deniz gas pipeline. [ For background see the Eurasia Insight archive].

Baran argued that BTC, which has required cooperation among Azerbaijan, Georgia, and Turkey, is capable of opening new markets for Georgia, potentially lowering the amount of economic pressure that Russia can exert on Tbilisi. "The East-West energy corridor helps Georgia diversify its energy imports, and may have the added benefit of increasing its independence, development, and security," she said.

The Shah Deniz project, slated for completion in 2006, is equally vital to Georgia's energy future. According to Tsereteli, Georgia would receive 5 percent of the gas transported across its territory to Turkey as payment in kind. Once the pipeline is fully operational, Georgia would also enjoy the right to buy an additional 500 million cubic meters per year at a fixed price of $55 per thousand cubic. However, in the short term, shipments from the pipeline will be smaller than what Georgia demands, meaning natural gas for the country will come overwhelmingly from Russian sources.

That, in turn, may give Russian companies the chance to wrest greater control over Georgia's energy sector. As Tsereteli sees it, corruption and mismanagement have fostered a sense of "donor fatigue" among Western governments and investors. If the November 2 elections are marred by fraud, Western interest in Georgia's energy sector could dwindle.

Editor's Note: Eric A. Miller, Ph.D., is an Analyst at the National Institute for Public Policy in Fairfax, Virginia and Managing Editor of the journal, Comparative Strategy.

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Posted October 28, 2003 © Eurasianet
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