ARMENIA LOOKING TO IRAN TO REDUCE DEPENDENCE ON

C O N F I D E N T I A L SECTION 01 OF 03 YEREVAN 000391

SIPDIS

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

E.O. 12958: DECL: 03/01/2015
TAGS: ENRG ECON EPET AM IR RU
SUBJECT: ARMENIA LOOKING TO IRAN TO REDUCE DEPENDENCE ON
RUSSIAN ENERGY RESOURCES

REF: A) 03 YEREVAN 152 B) 04 YEREVAN 1240 C) 04 YEREVAN

2019

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


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SUMMARY
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1. (C) In a February 25 meeting, Armenia's Minister of
Energy, Armen Movsesian, told us that Armenia's energy
market was too dependent on Russia, especially for the
supply of gas, and that Gazprom has proved an unreliable
source in the past. Armenia's number one energy priority
is to complete the Iran-Armenia gas pipeline, which will
reduce Armenia's dependence on Russia and the single
poorly-maintained gas pipeline through Georgia. The Minister
told us that Russia has been trying at every step to
minimize the effect of the new pipeline, pressuring
Armenia to reduce its size in order to keep Armenia
dependent on Gazprom. He added that although Russian
Foreign Minister Sergei Lavrov expressed interest in
Russian participation in the Iran-Armenia pipeline project,
Russian involvement in the pipeline would defeat its
purpose. The Minister emphasized that energy diversity was
the only purpose for the pipeline and that, caving to
Russian requests, the GOAM had chosen to constrain the
diameter of the pipeline to foreclose the possibility of
onward sales outside Armenia which could threaten Gazprom's
interests in the region (as well as being more distasteful
to our Iran policy).
End Summary.

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MINISTER PLEDGES TRANSPARENCY ON IRAN DEALINGS
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2. (C) We met with Movsesian February 25 to discuss energy
security policy in light of Armenia's developing economic
relations with Iran. The Minister was keen to discuss
Armenia's energy strategy and stated that Armenia would be
completely transparent with us about the energy
relationship between the two countries. On several prior
occasions during the Iran-Armenia pipeline negotiations,
the Minister acknowledged that the Iran-Libya Sanctions Act
sets U.S. policy in this area and said that the
Ministry was confident that the pipeline would not trigger
sanctions under ILSA (Refs B and C).

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HAPPINESS IS MULTIPLE PIPELINES
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3. (C) The Minister painted a grim picture of Armenia's
current energy insecurity. Currently, forty percent of
Armenia's annual electricity consumption (and up to eighty
percent of daily consumption during summer when the nuclear
plant is closed) depends on gas supplied through Armenia's
only gas pipeline, the Valdikavkaz gas line from Russia
through Georgia to Armenia. The inevitable, albeit
postponed, closure of Armenia Nuclear Power Plant (ANPP)
will lead to 85 percent of Armenia's electricity supply
depending on natural gas supply. The current gas pipeline
is poorly maintained and traverses mountainous regions, and
past disturbances have halted gas supply to Armenia for
considerable time. (Ref A.) Besides the physical security
of the line, the Minister expressed concern over Gazprom's
ability to restrict gas delivery in order to improve its
bargaining position with the GOAM, and its continued
interest in delivering gas to Georgia, which will soon have
the option of receiving gas from Baku.

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RUSSIAN CONTROL THROUGH ENERGY
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4. (C) The Minister stressed Russia's use of energy as
political power. "As Georgia is more and more oriented to
the west, Russia will try to use energy to make it a
dependent," he said. He expressed concern that Russia's
relationship with Georgia could lead Gazprom to play games
with the supply of gas to Georgia which in turn would
affect the supply of gas to Armenia, as the two countries
depend on the single line. The Minister pointed to
Gazprom's past actions giving short shrift to Armenia's
energy needs, including failing to deliver enough fuel
during the demanding winter months, causing Armenia to draw
gas from its strategic reserves. Responding to Armenia's
strong reliance on this precarious source, Armenia made the
construction of a second pipeline from Iran their number
one energy priority. In September 2004, the GOAM finally
succeeded in signing a deal with Iran whereby Iran
willbuild its part of the pipeline and finance Armenia's
portion in exchange for future delivery of electricity
(Ref C). Besides allaying Armenia's concerns about the
current pipeline's physical security, the Minister expects
the Iran pipeline to end Gazprom's tough bargaining tactics
and give Armenia more power to negotiate energy contracts.

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SIZE MATTERS
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5. (C) The Minister described how Russia lobbied Armenia to
reduce the
size of the pipeline (originally planned to be over 1 meter
in diameter),saying at first that Armenia needed only a
253 millimeter pipeline and later that a 500 millimeter
diameter pipeline would suffice. Armenia demanded at least
720 millimeters in diameter, which, according to the
Minister, can deliver 2.4 billion cubic meters of gas per
year, enough to serve 480,000 subscribers, the number in
Armenia during Soviet times. According to the Minister
Armenia currently consumes 1.7 billion cubic meters of gas
per year, serving 282,000 subscribers. Note: Although
Armenia may never reach its Soviet-era level of gas
consumption, the Minister's numbers are still justifiable.
Forty percent of Armenia's electricity currently comes from
the Armenian Nuclear Power Plant (ANPP),which will be shut
down over the next 10-15 years, and probably replaced by
gas-fired generation.
End Note.)

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"RUSSIAN CONTROL OF THE PIPELINE WOULD DEFEAT ITS PURPOSE"
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6. (C) The Minister was dismissive of comments made by
Russian Foreign Minister Sergei Lavrov during his February
17 visit to Yerevan that Russian participation in the Iran-
Armenia pipeline is under consideration. The Minister
pointed out that the pipeline's purpose is not to add
capacity but to reduce dependence on Russia. Gazprom's
participation in the pipeline, he said, would defeats its
purpose. Two days earlier Deputy Minister of Energy Iosef
Isayan told us that there was Russian interest in the
pipeline, but that the Ministry believes the only reason
that Russia wants to participate in the pipeline is
to keep their strong bargaining position in the region.

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MINISTER: PIPELINE NOT FOR TRANSIT
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7. (C) The Minister stated emphatically that the GOAM had
no intention of using the Iran-Armenia pipeline for transit
to third countries. Despite early talk of building a
pipeline that would also bring economic benefits
as a transit line (one version called for a transit
pipeline taking Iranian gas to Europe),GOAM officials
acknowledge that they restricted the pipeline's diameter
partly in response to Russian lobbying. Other factors,
like the lack of financing and the apparent lack of an
onward market also contributed to this decision. Armenia
will continue to use the cheaper gas delivered through
Gazprom's Georgian pipeline for its domestic energy
consumption. It will use gas delivered through Iran to
produce electricity that will then be re-exported to Iran
(Ref B).

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COMMENT: CAN ARMENIA FEND OFF RUSSIA?
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8. (C) Having lobbied hard to constrain the size of the
Iran-Armenia pipeline, Gazprom now wants control over the
northern segment of the pipeline. While the Ministry's
policy of reducing Armenia's dependence on Russia is well-
founded, it is not clear that they will succeed in keeping
Russia out. They already have caved to Russian lobbying to
keep the pipeline small, despite ambitious talk of a larger
transit pipeline. Their troubles resisting Gazprom's
influence mirror their troubles resisting another Russian
energy giant, RAO-UES that has managerial control over 80
percent of Armenia's generation capacity and is now trying
to take over the distribution network (septel). In both
cases the Ministry of Energy has claimed a policy of
diversifying the energy market, but the Ministry has not
succeeded in transferring this policy into actual
decisions. (Whether this is because the Ministry loses in
power struggles with other interests or because Russia is
the only one buying, we can't tell.) Both Gazprom and RAO-
UES have publicly stated their intent to take on energy

SIPDIS
assets in Armenia as pieces of larger regional goals. We
agree with the Ministry that the regional goals of Gazprom
and RAO-UES may not always serve Armenia's interests.
EVANS