RUSSIA CONTINUES TO PLAY A WINNING HAND

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 002158

SIPDIS

USNATO FOR TOM UNDERWOOD

E.O. 12958: DECL: 12/12/2015
TAGS: ECON PREL ETRD RS AM
SUBJECT: RUSSIA CONTINUES TO PLAY A WINNING HAND

REF: A) YEREVAN 575 B) YEREVAN 637 C) YEREVAN 1725 D)

YEREVAN 2118 E) YEREVAN 1044 F) DUSHANBE 1814

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

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SUMMARY
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1. (SBU) Russian Prime Minister Mikhail Fradkov visited
Yerevan December 2-3 to commemorate the end of the Year of
Russia in Armenia announced by President Putin during his
visit in March 2005 (ref A). While the Year of Russia in
Armenia was mostly show, marked by a steady stream of
high-level visits, economic relations between the two
countries continue to develop as do concerns about Armenia's
economic dependence on its "strategic partner" and
particularly, Armenia's continuing dependence on Russian
natural gas. End Summary.

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RUSSIAN VIPS - FREQUENT FLIERS
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2. (C) In March 2005, Russian President Vladimir Putin
visited Armenia on a short trip that was billed by the
Armenians as the most important official visit in recent
history (ref A). During the visit, Putin and Kocharian
announced the Year of Russia in Armenia. The last eight
months have been marked by numerous high-level visits between
the two countries, including visits to Armenia by Head of the
Russian Presidential Administration Dmitry Medvedev (May),
Minister of Internal Affairs Rashid Nurgaliyev (September),
and Russian Transport Minister Igor Levitin (October).
Russian Prime Minister Mikhail Fradkov traveled to Yerevan on
December 2-3 to mark the end of the Year of Russia in
Armenia. His visit coincided with a Russian-Armenian
business forum attended by over 300 Russian businessmen, and
a visit by the Speaker of Russia's Federal Assembly Sergey
Mironov who opened a conference on future prospects for
Armenian-Russian cooperation at the Armenian National
Assembly on December 9. While the Armenian press seems to be
swallowing the "special relationship" line, we note that
other countries in the old near abroad are also getting lots
of high-ranking attention from Moscow (ref F).

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TRADE AND INVESTMENT BY THE NUMBERS
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3. (SBU) According to data released by the Armenian National
Statistical Service, total Russian investment in Armenia for
the first nine months of 2005 was USD 36 million, an increase
of 28 percent compared to the same period in 2004. Russian
investments accounted for 16 percent of total foreign
investment in Armenia during the first nine months of this
year. The bulk of Russian investment, USD 29 million, was in
the metal industry (largely for the refurbishment of the
ARMENAL plant, see paragraph 4). According to Armenian
Deputy Minister of Trade and Economic Development Tigran
Davtian, the GOAM expects that total trade between Armenia
and Russia will reach USD 300 million in 2005 and that total
Russian investment in Armenian by the end of this year will
reach USD 400 million. In addition to the investments listed
above, the then-Russian Ambassador to Armenia, Anatoliy
Dryukov, said in May 2005 that Russian capital makes up one
third of the total authorized capital stock in Armenia's
banking system (ref C). Remittances from Russia, though
difficult to quantify precisely, play a crucial role in the
Armenian economy (ref E).

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RUSSIAN INVESTMENT UP...
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4. (SBU) On November 23 the Russian Duma ratified a
bi-lateral investment treaty between the two countries. The
treaty comes on the heels of a number of significant
commitments by Russian companies to invest in Armenia. On
December 3, Russian Prime Minister Fradkov and Armenian
President Kocharian presided over the long-awaited reopening
of the Armenian aluminum foil mill (ARMENAL),a Yerevan
subsidiary of the Russian giant RUSAL, partially owned by the
Russian aluminum magnate Oleg Deripasko. The fully
modernized factory represents a USD 70 million Russian
investment and will employ about 1000 local staff. The plant
was purchased by RUSAL in 2003 and shut down in October 2004
for complete renovation and modernization. According to
press reports, the ARMENAL plant will be able to produce 25
thousand tons of foil a year, approximately 2.5 percent of
annual global production. In September, the GOAM sold the
Demirchyan Sports Complex to the Russian company BAMO for USD
5.7 million. Under the contract, BAMO agreed to investment
USD 9 million over the next three years to renovate the
complex.
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...WITH MORE TO COME
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5. (C) Some Russian investments are clearly politically
motivated duds. Armenia transferred five Soviet-era
enterprises to the GoR as part of a debt-for-equity deal in

2002. Now the GoR seeks to unload one of these plants.
According to the President of the Russian Union of
Entrepreneurs and Manufacturers, Arkadiy Volskiy, who
traveled with Fradkov to Armenia, the Russian Commission on
State Property plans to announce a tender to privatize the
"Mars" electronics and robotics plant on December 16.


6. (SBU) Following the December Russian-Armenian trade fair,
the Pan-Russian Exhibition Center agreed to fund construction
of a new, 1000-square-meter trade show complex in Yerevan.
In response to the Russian commitment, the Yerevan Mayor's
Office designated the site where construction is scheduled to
start in 2006. Also, in connection with the trade fair, the
Director of the Foreign Commercial Activity and Customs State
Regulation at the Russian Ministry of Economic Development
and Trade announced plans to open a Commercial Office in
Yerevan in the near future.

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SCIENTIFIC AND MILITARY COOPERATION
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7. (SBU) The Armenian and Russian National Academies of
Science signed a cooperation agreement on December 3 which,
according to press reports quoting the Vice President of the
Russian Academy of Sciences Nikolai Plate, included 67 joint
scientific projects in the areas of chemistry, biology,
mathematics, earth sciences and physics. The signing of such
cooperation agreements is often widely covered in the press,
but we have no way to judge their long-term substantive
impact. Military cooperation between Russia and Armenia
remains strong. A charter member of the Collective Security
Treaty Organization (CSTO),Armenia not only gives Russia's
base in Gyumri free rent, it also pays for the base's
utilities. The GOAM recently signed a multifaceted military
cooperation agreement with Russia allowing Armenia to
purchase military hardware for a reduced rate and permitting
Armenian cadets to attend Russian military academies free of
charge (septel).

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THE VERTICAL INTEGRATION OF DEPENDENCY IN THE ENERGY SECTOR
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8. (C) Russia has long dominated the Armenian energy sector
and its position was strengthened over the past eight months
with the acquisition of a controlling stake in the Armenian
electrical distribution network (ENA) (ref C). Gazprom's
recent announcement that it intends to double the price of
natural gas exported to Armenia, also highlights Armenia's
continued energy dependence. Despite an apparent
strengthening of ties with Iran on energy issues (ref D),
Armenia remains heavily reliant on Russia. Gazprom owns the
gas, the pipeline, most of the gas-fired power generation
stations and, now, the electricity distribution system.
Russia's MinAtom is also the sole source of fuel for
Armenia's nuclear power plant.
EVANS