GOAM FORMALLY ACCEPTS SALE OF NATIONAL ELECTRICAL

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001725

SIPDIS

DEPT FOR EUR/CACEN, EUR/ACE, EB/ESC, PLEASE PASS TO USAID
FOR EE/EA, EGAT FOR WALTER HALL
DOE FOR CHARLES WASHINGTON

E.O. 12958: DECL: 09/26/2015
TAGS: ENRG ECON GG AM RU
SUBJECT: GOAM FORMALLY ACCEPTS SALE OF NATIONAL ELECTRICAL
NETWORK TO RAO-UES

REF: YEREVAN 1234

Classified By: CDA A.F. Godfrey for reasons 1.4 (b,d).

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Summary
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1. (C) On September 23, Armenian Minister of Energy Armen
Movsisian announced that the GOAM has consented to the formal
sale of the national power grid Electricity Networks of
Armenia (ENA) to Interenergo B.V., a subsidiary of Russian
energy giant RAO-UES. According to news reports, the GOAM
consented to the sale after RAO-UES agreed to accept the
obligations of the current owner Midland Resources Holding
(MRH). This sale, which the Minister said will be finalized
in the coming weeks, formalizes MRH's de facto transfer of
ownership of ENA to RAO-UES which reportedly occurred in July
2005 (reftel). The process followed in this case
demonstrates the limits of the authority and effectiveness of
the Public Services Regulatory Commission (PSRC) and the lack
of transparency within the Armenian energy sector. End
Summary.

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The De Facto Sale in July 2005
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2. (C) In July 2005, InterRAO, a partially owned subsidiary
of RAO-UES, reportedly purchased ENA from MRH for USD 73
million and took full control of Armenia's electrical
distribution network under a management contract (reftel).
According to Armenian law, the ENA license and the ENA
privatization contract, both the Ministry of Energy and the
PSRC must approve any transfer of control of ENA. The July
transaction was not sanctioned by either the Ministry of
Energy or the PSRC and appeared to have been concluded
without their knowledge (reftel). The World Bank and USAID
criticized the transaction.

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Midland Requests Approval of the Sale
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3. (C) Over the subsequent weeks, the Ministry of Energy and
the PSRC exchanged a number of letters with MRH. These
exchanges failed to clarify the nature of the transaction.
After first denying PSRC and Ministry of Energy jurisdiction,
on September 9, MRH sent letters to the PSRC and the Ministry
of Energy citing both the Armenian Energy law and the
privatization contract, requesting written consent for the
sale of 100 percent of the ordinary common shares of ENA from
Midland Resources to Interenergo B.V., a company registered
in the Netherlands, Antilles.
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GOAM requires that RAO-UES assume Midland's liability
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4. (C) According to PA Consulting, a USAID contractor working
on reform within the energy sector, on September 14, the
President tasked the Ministry of Energy, the Ministry of
Justice, the Ministry of Finance and Economy and the PSRC
with developing a common set of GOAM requirements for
approval of the sale. On September 19, PA Consulting
reported to us that the GOAM had come to internal agreement
on the sale. The GOAM's "number one requirement" for
approval of the sale was that RAO-UES accept 100 percent of
the responsibility and liability for ENA. PA Consulting
observed that "given that RAO only owns 42 percent of the
InterRAO and InterRAO owns Interenergo B.V., it would be
difficult for RAO to accept 100 percent liability for
Interenergo B.V." (Note: The remaining 58 percent of the
InterRAO shares are reportedly owned by Russian businessmen
and the Russian government, both of whom are likely to
support the sale.)

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GOAM Accepts the De Facto Deal
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5. (C) At a press conference on September 23, Armenian
Minister of Energy Armen Movsisian announced that RAO-UES has
agreed to accept the obligations of ENA's current owner MRH
and that the sale would be finalized in the next 40-45 days.
It was not clear from the Minister's statement whether
RAO-UES agreed to accept 100 percent of MRH's
responsibilities or only 42 percent which would be
commensurate to their ownership in Interenergo B.V. At the
same conference, in an apparent effort to refute the claim
that Russia is consolidating its control of the Armenian
energy sector, the Minister announced that the GOAM agreed to
accept Iranian assistance to renovate a gas-fired electricity
generation station near Yerevan.

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No Mention of the PSRC
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6. (C) While there is no official text of the Minister's
press conference, according to all available reports the
Minister did not mention the PSRC. Since July 2005, members
of the international donor community, including the USG, have
urged the PSRC to become actively involved in the GOAM review
of the de facto sale. According to PA Consulting, however,
the PSRC was unwilling to assume a leadership role in this
process.

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Comment: Russia Wins the Shell Game
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7. (C) The sale of ENA to RAO-UES will likely be completed
and formalized without further incident. This transaction
further enhances Russia's already significant level of
control over the Armenian energy sector. Currently RAO-UES
controls approximately 80 percent of generation capacity in
Armenia.


8. (C) It is disappointing that the sale of ENA was not
carried out in a transparent manner. The GOAM's official
approval of the sale was a face-saving maneuver confirming
the de facto sale that was completed in July 2005. While it
is positive that there was some sort of government review of
the transaction, the failure of the PSRC to take an active
role in the review process calls into question its
credibility as an independent regulator. We should consider
whether further assistance to the PSRC is a useful investment.
GODFREY