IRAN-ARMENIA PIPELINE: IRAN TO FINANCE PIPELINE

C O N F I D E N T I A L YEREVAN 002019

SIPDIS

DEPT FOR EUR/CACEN, EUR/ACE, EB/ESC, NEA/ARP

E.O. 12958: DECL: 09/10/2014
TAGS: ECON ENRG EPET AM IR
SUBJECT: IRAN-ARMENIA PIPELINE: IRAN TO FINANCE PIPELINE

REF: A) YEREVAN 1240 B) YEREVAN 816 C) YEREVAN 698 D)
YEREVAN 382

Classified By: DCM A.F. Godfrey for reasons 1.4 (b) and (d).

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SUMMARY
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1. (SBU) During Iranian President Mohammad Khatami's visit to
Yerevan September 8-9, the Armenian and Iranian governments
signed a deal to finance the Armenia-Iran gas pipeline as far
as Kajaran, 41 kilometers into Armenia. In May the
governments had signed an agreement providing for the
construction of the pipeline and a swap of natural gas from
Iran for electricity produced in Armenia (ref A). But it was
never clear how Armenia was going to pay for its portion of
the pipeline; the government had been unsuccessfully seeking
private investment. While the economics of the project still
don't pencil out, both governments view the pipeline as an
important part of their energy strategy: Iran as a step
towards exporting to new markets and Armenia as a necessary
measure to ensure its energy security and diversity of
supply. End Summary.

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IRANIAN EXPORT BANK TO FINANCE PIPELINE
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2. (SBU) Since Armenia and Iran signed a 20-year gas for
electricity swap deal in May 2004, it has been unclear how
Armenia intended to finance its portion of the pipeline. The
Iranian Bank for Export and Development has agreed to finance
a USD 30 million segment of the pipeline from the border of
Iran to Kajaran, Armenia, 41 kilometers north. The Armenian
Ministry of Energy will pay back the loan over 7 years at 5
percent annual interest. In a shift from prior
announcements, the GOAM has forgone its search for private
investors for the pipeline and has decided to bear the debt
burden itself.

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BAD FOR BUSINESS, BUT GOOD ENERGY POLICY
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3. (SBU) The pipeline's lack of private investors is no
surprise: the deal has never made economic sense (ref B).
Armenian officials have nevertheless made the pipeline the
number one energy priority. Facing the closure of the
Armenian Nuclear Power Plant (ANPP) as early as 2015, Armenia
wants to reduce its long-term reliance on the single gas
pipeline through Georgia that accounts for 80 percent of
Armenia's non-nuclear energy supply (refs C and D). Memory
of the energy crisis following the temporary closure of ANPP
in the early 1990s still stings, and Armenia is unlikely to
waver in its ambitions to diversify its energy sources. For
its part, Iranian officials reportedly told the IMF Resident
Representative in Yerevan that they viewed the pipeline as
part of a larger strategy to export gas to new markets in
hope of someday reaching Europe.

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COMMENT: AMERICAN POLICY LEAVES NO OPTIONS
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4. (C) The GOAM is aware of U. S. opposition to gas pipelines
from Iran, and say that they have looked carefully at ILSA
(ref A). But they are caught in a three-way Catch 22:

--We oppose any pipeline through Iran, whether it carries
Iranian or Turkmen gas;

--We oppose the continued operation (not to mention the
probable extended operation -- ref D) of ANPP; and

--We oppose Armenia's complete energy dependence on Russia
and Russian investment to upgrade and expand the gas pipeline
through Georgia.

While the GOAM is aware of our policy rationales for each
objection, taken together their effect is to remove us from
the debate on all these topics as we fail to offer any
sustainable solution to Armenia's energy concerns.
EVANS