Russia is boosting its economic presence in Armenia, and recent acquisitions are raising new questions about the nature of Yerevan's close relationship with Moscow. Armenian President Robert Kocharian's administration is downplaying domestic opposition claims that Russia's growing economic presence poses a threat to Yerevan's sovereignty.

"I don't consider [these developments] dangerous," Defense Minister Serzh Sarkisian, who also co-chairs a Russian-Armenian intergovernmental commission on economic cooperation, told reporters on November 6. "Because I have still not seen the Russian side use its economic levers in Armenia [for political aims.]"

Reports that Russia's state-run Gazprom monopoly will raise its stake in ArmRosGazprom (ARG), a Russian-Armenian joint venture running Armenia's gas infrastructure, from 45 percent to 58 percent were confirmed by Kocharian during his latest visit to Moscow. The ARG chief executive, Karen Karapetian, explained in late October that the deal involves the circulation of $118 million worth of new ARG shares, all of which will be bought by Gazprom.

The Armenian government has until now also possessed 45 percent stake in ARG, with the remaining 10 percent controlled by the private Russian energy firm, ITERA. The increase in the Armenian gas distributor's charter capital will dilute the government's share to just over 30 percent. Karapetian confirmed that it is part of a complex April 2006 agreement that allowed Armenia to avoid a doubling of the price of Russian gas to $110 million until January 2009. In return, authorities in Yerevan controversially agreed to hand over more energy assets to Gazprom. Those included the incomplete fifth unit of Armenia's largest thermal power plant located in the central town of Hrazdan.

Armenian officials have indicated in recent weeks that the April deal also allows the Russian conglomerate to gain control of a gas pipeline from neighboring Iran, currently under construction. Prime Minister Andranik Markarian told reporters in late October that the pipeline, whose first Armenian section is slated for completion this winter, will likely be incorporated into ARG, arguing that "it would be illogical to have two gas distribution networks in Armenia."

All this will give the Russians a near total control over the Armenian energy sector. Gazprom is currently Armenia's sole gas supplier, and already owns the four other operating units of the Hrazdan plant. Another state-run Russian company, the RAO Unified Energy Systems (UES) utility, owns a cascade of hydro-electric plants north of Yerevan and manages the finances of the nuclear power plant at Metsamor. As recently as September 26, UES formalized its $73 million takeover of Armenia's electricity distribution network. [For background see the Eurasia Insight archive].

Receiving Kocharian in the Kremlin on October 30, Russian President Vladimir Putin bluntly described as "shameful" the fact that his country is only the third largest investor in the Armenian economy. Three days later, a leading Russian mobile phone operator, Vimpel-Communications, announced the purchase of a 90 percent share in Armenia's national telecommunications company, ArmenTel, from the Greek firm OTE. Armenian state regulators gave the green light to the deal on November 14. "Putin has no reason to be unhappy," commented the Yerevan newspaper 168 Zham. "His country has received 80 percent of the energy sector, the backbone of the Armenian economy, and many other facilities as gifts from its strategic partner."

Interestingly, the latest Russian takeovers come amid Yerevan's continuing efforts to forge closer political and security links with the West. Armenian Foreign Minister Vartan Oskanian was in Brussels on November 14 to sign a detailed plan of actions stemming from the European Union's European Neighborhood Policy program that entitle Armenia to a privileged relationship with the economic bloc. A day earlier, Sarkisian flew to Iraq on a visit aimed at showing support for a small contingent of Armenian troops stationed there. Analysts believe the influential defense chief, widely seen as a Kocharian successor, is thereby trying to enhance his pro-Western credentials.

Economic dealings with Russia are one of the least transparent areas of governance in Armenia, with Kocharian and Sarkisian believed to make all key decisions without outside input. Both men have repeatedly stated that the controversial deals cut with Moscow are purely commercial, infusing the Armenian economy with badly needed capital investments. But Armenian opposition leaders and many local analysts claim that their main motive is to ensure the Kremlin's support for their continued hold on power. Hmayak Hovannisian, a maverick parliamentarian sympathetic to Russia, insisted on November 6 that the Kocharian-Sarkisian duo has served as the catalyst for the deals.

"The Russians have a good proverb: Accept what you are given, run when you are beaten. If the Armenian authorities are ready to easily present strategic facilities, why should
Russia refuse to accept them?" Hovannisian told a roundtable discussion in Yerevan.

Whatever the real motives of its two top leaders, Armenia is beginning to face the possibility of disruptions in Russian gas supplies as a result of the festering confrontation between Russia and neighboring Georgia. [For background see the Eurasia Insight archive]. Adding a new twist to the standoff are Gazprom's threats to drastically raise the price of its gas for Georgia from $110 to $230 per thousand cubic meters unless the pro-Western government in Tbilisi follows Yerevan's example and cedes some of its own energy assets, notably the sole gas pipeline running from Russia to Armenia. [For details, see the Eurasia Insight archive].

"If no agreement on gas deliveries is signed with Georgia [before the end of this year], gas will be delivered through Georgian territory to Armenia only," the Russian ITAR-TASS news agency quoted Gazprom Deputy Chairman Aleksandr Medvedyev as saying November 7.

There are mounting fears in Yerevan that Georgia could retaliate against what its leaders have denounced as "political blackmail" by siphoning off the gas intended for Armenia and thus forcing the Russians to stop the supplies altogether. It is also unclear what the gas price will be for Armenia from January 2009, when nothing will prevent Gazprom from charging Yerevan as much as it seeks from Tbilisi. The asset handover to Russia may thus have brought only temporary relief to Armenian consumers.