RUSSIAN POWER GIANT MOVES TO CONSOLIDATE CONTROL

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 002769

SIPDIS

STATE FOR EUR/CACEN, EUR/ACE, EB

E.O. 12958: DECL: 12/14/2014
TAGS: ECON ENRG AM RS
SUBJECT: RUSSIAN POWER GIANT MOVES TO CONSOLIDATE CONTROL
OVER ARMENIA'S ENERGY SECTOR

REF: A) 03 YEREVAN 2023 B) 03 KIEV 4530 C) 02 YEREVAN

2093

Classified By: A/DCM Larry Richter for reasons 1.4 (b/d)

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SUMMARY
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1. (C) Russian energy giant RAO-UES is moving to take over
Armenia's sole electricity distributor, Electricity Networks
of Armenia (ElNetArm),which would consolidate its hold on
Armenia's energy infrastructure. The director of ElNetArm
and officials in the Government of Armenia have acknowledged
the possibility of a sale to RAO-UES and at the same time
expressed reservations about a sale to any Russian company,
and especially to RAO-UES, on the grounds that it will lead
to Russian vertical domination of the Armenian power sector.
RAO-UES already controls 80 percent of Armenia's power
generation capacity and the distribution network in Armenia's
main export market, Georgia. Iosif Isayan, Deputy Minister
of Energy, told us that the Minister of Energy opposes the
deal and will consider ways to block it. The Minister of
Justice told us he thought the deal was "dangerous" and would
create a system that is "impossible to regulate." Apart from
concerns about market regulation, consolidated Russian
control of distribution is a step backwards from Armenia's
stated energy policy goal of reducing Russia's control over
its energy infrastructure. End Summary.

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ElNetArm FOR SALE
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2. (C) Yevgeniy Gladunchik, ElNetArm's Director General, told
PA Consulting, a USAID implementer in the energy sector, (and
a member of ElNetArm's staff confirmed to us) that
ElNetArm,s owners were looking to sell the distribution
company as soon as possible. Gladunchik was called to Moscow
to meet with the owners, who were visiting a steel factory
they own there. (Note: ElNetArm is owned by Midland
Resources, an offshore British company whose primarily
shareholder is Ukrainian oligarch Eduard Shifrin (ref B).
Armenian oligarch and National Assembly Member Harutiun
Pambukian is also a stakeholder in Midland. End Note.)
Gladunchik was told to provide the 2004 financial statement
of the company as soon as possible so that they could offer
the company for sale. They intend to sell the company in
order to free up assets for another acquisition. According
to Gladunchik, Midland Resources hopes to get USD 100 million
for the company.

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RUSSIA BUYING
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3. (C) According to Gladunchik, three firms have expressed an
interest in purchasing ElNetArm: RAO-UES, Energotech Export,
and another, unnamed Russian firm. In a December 15 meeting,
Minister of Justice David Harutyunian volunteered that there
has been discussion about RAO-UES buying the company,
although he (correctly) emphasized that this was a private
commercial deal and that the governement was not involved
except to approve or disapprove of the deal once it had been
formally offered. In a December 16 meeting with the
Ambassador, AmCit Director of the Diaspora Armenia Cafesjian
Foundation, John Waters, told us that he had approached
Midland stakeholder and National Assembly member Harutiun
Pambukian to try and buy the company in an effort to block
further Russian domination of the energy sector. Waters told
us that Midland Resources and RAO-UES were planning to sign a
letter of Intent to Sell in the "very near future."
Publicly, both RAO-UES and ElNetArm have recently denied
press reports about an imminent sale following the November
30 meeting of RAO-UES Management Board Chairman Alexander
Voloshin with President Kocharian and Gladunchik.


4. (U) RAO-UES's acquisition of the distribution network
would leave only two major energy assets outside of RAO-UES's
control, the Vorotan Cascade Hydro-Power Plant (controlled by
the Armenian government) and the Yerevan Thermal Power Plant.
In the last two years, RAO-UES took financial control of the
Armenia Nuclear Power Plant (ANPP),five hydro-electric power
plants in the Sevan-Hrazdan Cascade, and the Hrazdan thermal
power plant (ref A). RAO-UES controls 80 percent of
Armenia's electricity generation capacity, as well as the
distributor in Armenia's single paying export market,
Georgia. In addition, Russian state-controlled firm Gazprom
owns a majority share of ArmRosGazprom, which controls the
delivery of all piped natural gas in Armenia, and Russian
firms control the supply of the nuclear fuel for the Armenia
Nuclear Power Plant.

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REGULATORY APPROVAL REQUIRED
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5. (SBU) Acquisition of the distribution company requires the
approval of the Public Services Regulatory Commission (PSRC).
In a December 15 meeting, Minister of Justice David
Harutyunian (who struck the original privatization deal with
Midland Resources) volunteered that he knew about the
proposed sale to RAO-UES, but that he was "not sure" if there
would be a deal, and that a sale to RAO-UES would be
"dangerous" because they would be difficult to regulate as
both distributor and generator. He added that the deal he
had struck with Midland Resources two years ago had many
"poison pills" in it that, in effect, required the approval
of the GOAM to sell the company. Iosif Isayan, Deputy
Minister of Energy, told us the Minister of Energy was
concerned about the sale and that the Ministry was
considering how to block it. (Note: The original sale to
Midland Resources was not transparent. Midland's
stakeholders are well connected in Armenia and Russia and may
be able to influence government officials (ref C). End
Note.)

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AMERICAN DIASPORA GROUP INTERESTED
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6. (SBU) The Cafesjian Foundation, owned by AmCit Diaspora
Armenian Gerard Cafesjian, is seeking to bid on ElNetArm in
order to avoid Russian domination of the energy sector. In a
December 16 meeting with the Ambassador, Cafesjian's new
director John Waters told the Ambassador that he was looking
for partners to participate in the bid, but that Cafesjian
could, if necessary, finance an investment of USD 75 to 100
million himself. Waters said that he had approached Richard
Stanaro of EBRD, who said that EBRD would be willing to
participate and put up 35 percent. Cafesjian bid on ElNetArm
three years ago with financing from EBRD, but the GOAM
ultimately rejected their bid in favor of Midland Resources.
Waters told us that he was trying to get the deal together
very quickly, as he understood that RAO-UES and the
government of Armenia are to sign a letter of Intent to Sell
very soon. Comment: American investment in ElNetArm would
be an important step towards Armenia's goal of reducing its
energy dependence on Russia. Cafesjian is likely the best
candidate for the job, because he is policy minded and can
afford to suffer some financial loss (although ElNetArm was
officially Armenia's most profitable company in 2004).
Nevertheless, Midland Resources is a private company, so
there is no place for our advocacy on Cafesjian's behalf.
End comment.

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COMMENT: SLOUCHING TOWARDS MOSCOW?
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7. (C) Russian firm RAO-UES currently dominates Armenia's
electricity generation capacity: Armenia should have a
strong interest in keeping Russian firms, especially RAO-UES,
out of its distribution network. If RAO-UES is successful in
its bid to buy ElNetArm, a single company will serve as the
primary generator, sole distributor (and, therefore,
exporter) and foreign client of Armenian electricity. It
would be a difficult regulatory task to prevent the export of
Armenia's cheapest electricity at market prices while
charging Armenian consumers tariffs for more expensive
generation. Besides this market concern, further Russian
control goes against the Government of Armenia's stated
energy policy of freeing itself from heavy energy dependence
on a single state or actor. While the Government has no
legal authority to demand how a purchaser is selected, it
does have the authority to approve or disapprove the
purchase. The approval of a sale to RAO-UES would be hard to
explain in terms of Armenia's interest in its energy market
or its concerns about energy dependence.
EVANS