Potential Deal With Russian Gas Conglomerate Sparks Controversy in Georgia

A top US diplomat on June 6 criticized an agreement between Georgia and Russia's biggest natural gas company, raising doubts over whether the deal will be sealed. Ambassador Steven Mann, a senior advisor to US President George W. Bush on Caspian Sea issues, met with Georgian President Eduard Shevardnadze and other top Georgian leaders, cautioning that the Gazprom agreement could "significantly weaken Georgia's position along East-West energy transportation routes."

Mann flew to Tbilisi after a handshake agreement May 28 between Shevardnadze and Alexei Miller, chief executive of Gazprom, the Russian natural gas giant. Shevardnadze and Miller announced that they would sign a new "strategic partnership" committing the Russian conglomerate to multimillion-dollar upgrades to gas pipelines from Russia to Armenia and to Turkey. These upgrades could help energize Georgia's anemic economy and secure deliveries of reliable, relatively cheap gas for Georgia in the months leading up to November parliamentary elections.

The Gazprom initiative would also compete with a pipeline project, led by Anglo-American conglomerate BP and Norway's state oil company Statoil, to deliver gas from Azerbaijan's Shah Deniz field to Erzurum, at the Georgian-Turkish border. Mann arrived days after US Ambassador Richard Miles expressed "concerns" that Gazprom's contract would hamper the Shah Deniz project. After meeting with Shevardnadze, Mann stressed that the Gazprom deal is "not yet final."

Mann's visit helps underscore the geopolitical motives behind energy-sector deals in the Caucasus. Gazprom is closely allied with the Kremlin. Russian leaders have long sought to increase their economic leverage in CIS states, including Georgia, in the belief that stronger commercial ties enhance Moscow's political influence. Conversely, the United States has long sought to reduce Russia's economic dominance of countries on the Caspian Basin.

According to a May 29 report in the Moscow newspaper Kommersant, Gazprom is eager to secure its supply line to Armenia, which is Russia's main strategic ally in the Caucasus. In 2002, however, Gazprom's leadership expressed a desire to boost gas sales to Western Europe and Turkey. Despite the ongoing dispute between Russia and Turkey concerning the so-called Blue Stream natural gas pipeline, Gazprom reportedly remains interested in increasing deliveries to the West. [For background, see the Eurasia Insight archives].

For Georgia, a Gazprom deal carries several risks, including, as Mann's visit would seem to confirm, incurring the displeasure of the United States. Washington is now Tbilisi's main supplier of security assistance. Some political observers suggest a Gazprom pact could scuttle Georgian efforts to integrate into the NATO alliance. [For background see the Eurasia Insight archives].

The Gazprom deal would also appear to threaten the Shah Deniz pipeline project, as it reportedly would cover not only gas supplies, but also give Gazprom a controlling interest in Georgia's national gas distribution network, SakGazi. Control of Georgia's gas pipeline "hardware" could put Gazprom in position to effectively block Shah Deniz, or any competing initiatives. The Shah Deniz project is planned to become operational in 2005, capable of pumping 6 billion cubic meters of gas annually.

For Georgia's incumbent political leadership, a Gazprom deal could offer several immediate benefits. Under terms of the preliminary agreement, Gazprom would give Tbilisi the opportunity to obtain energy at a cost below what Georgia currently pays to Russian gas rival Itera. Perhaps more importantly for Shevardnadze's administration, the deal would ensure steady supplies. In previous winters, Georgia suffered repeated cut-offs of energy supplies. Facing the parliamentary elections in November 2003 with his political prestige at an all-time low, Shevardnadze and his supporters desperately want good news for the electorate. [For background, see the Eurasia Insight archives]. Miller seemed aware of such political considerations when he announced May 28 that Gazprom might consider "establishing the gas price according to the purchase power of Georgian consumers."

Virtually from the moment that it was announced, the tentative Gazprom deal became a source of controversy. "There is no commercial interest in it, only political," said Roman Gotsiridze, who heads the parliamentary budget office. To Gotsiridze, selling the distribution networks would endanger Georgia's economic security. "Who controls the main distribution network controls the whole economy," he said.

Opposition parties have long accused Shevardnadze of authorizing covert and unfair deals with Russian energy companies that benefited private individuals with good government connections. In September 2002, the opposition mobilized to obstruct Itera's proposed takeover of the Tbilisi gas distribution network, Tbilgazi. [For background, see the Eurasia Insight archive]. Givi Targamadze, a member of Georgia's Anti-Corruption council, has insisted for months that the contract under which Itera obtained control over a Georgian chemical factory was illegal, as no open tender was announced. It is thus likely that opposition leaders would raise the Gazprom issue during the parliamentary election campaign. [See related story].