KEEPING ARMENIA'S LIGHTS ON: PIPE DREAMS AND

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000281

SIPDIS

SIPDIS

DEPT FOR EUR/CARC AND NEA/ARPI
DEPT ALSO FOR INR/B

E.O. 12958: DECL: 02/27/2031
TAGS: PINR PGOV PREL ASEC EAID ENRG KNNP GG AJ AM
SUBJECT: KEEPING ARMENIA'S LIGHTS ON: PIPE DREAMS AND
CAUCASUS ECONOMIC DECISIONMAKING

REF: STATE 27788

Classified By: Amb. John M. Evans for reasons 1.4 (b, d).

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SUMMARY
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1. (C) President Robert Kocharian is, by most accounts,
Armenia's negotiator-in-chief on energy. He has personally
formulated and, through a tight network of close advisors,
controlled the implementation of the GOAM's strategically
important and financially significant energy deals with
Russia and Iran. In Russia at the time of the January 22
Mozdok-Tbilisi pipeline explosions, Kocharian witnessed the
resulting interruption in gas supplies, the depletion of
Armenia's limited strategic gas reserves, and the
proliferation of wide ranging conspiracy theories about
delays in restoring the pipeline. In the wake of the
explosions, the ten-day countdown to rolling blackouts and
forced outages likely impressed upon him, and an
already-anxious set of advisors, the need to diversify energy
supplies.


2. (C) The temporary cut-off also played into the ongoing
Iran-Armenia courtship which, with hundreds of millions of
dollars in Iranian pipeline, thermal, hydro-, and solar power
projects in various stages of implementation or negotiation
in Armenia, threatens to challenge Russia's monopoly hold on
the energy market. Faced with few alternatives and tough
negotiations with Moscow over April 1 price hikes in Russian
natural gas supplies, Armenian leaders openly and actively
support expanded economic ties with Iran. Few Armenian
officials, if any, oppose Armenia expanding the trade of
energy resources with Iran. End Summary.

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YEREVAN'S ECONOMIC DECISION MAKING
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3. (C) Answers are keyed to reftel questions:

A) Who is Armenia's lead negotiator for energy deals with
Russia and Iran? To what extent is President Kocharian
involved in the negotiations?

--President Robert Kocharian is Armenia's lead negotiator on
high-level energy deals. By most accounts, Kocharian
utilizes a tight network of close advisors (Defense Minister
Serzh Sargsyan for Russia, Minister of Energy Armen Movsisyan
for Iran, and ArmRosGazProm Executive Director Karen
Karapetyan for technical issues) to personally manage
Armenia's energy policies and negotiations. (Note: Until
reports on February 24 of Presidential Chief of Staff
Artashes Tumanyan's resignation (septel),Tumanyan served as
Kocharian's chief messenger on energy negotiations with Iran.
End Note.) (Comment: It is too soon to predict whether
Tumanyan's successor, 33-year-old Armen Gevorgyan, will play
as prominent a role in Armenian-Iranian relations in general,
and energy negotiations in particular. Gevorgyan served as
Kocharian's first assistant from 2000 until his promotion to
Chief of Staff on February 24. He has worked for Kocharian
in various capacities since 1997.)

--As with other foreign policy objectives, Armenia's energy
policy is based on the principle Foreign Minister Vartan
Oskanian describes as "complementarity" -- balancing
relations with competing partners. With Russia, Kocharian
likely taps Minister of Defense Serzh Sargsyan who already
has strong ties -- established over years of military
cooperation -- as a conduit to official Moscow. With Iran,
Minister of Energy Armen Movsisyan, a frequent visitor to
Tehran as a member of the Iran-Armenia Joint Economic
Commission (which former Presidential Chief of Staff Artashes
Tumanyan headed),will now be Kocharian's likely conduit to
official Tehran. (Note: Armenian ambassador to the United
States Tatul Markaryan is Minister of Energy Armen
Movsisyan's brother. End Note.)

B) Do any Armenian non-state actors influence the energy
decision making process?

--ArmRosGazProm Director Karen Karapetyan, a savvy
businessman appointed by Kocharian to head Armenian interests
in the multi-million dollar conglomerate, is the technical
expert and business manager Kocharian largely credits with
improving ArmRosGazProm's financial status and expanding the
market to an estimated USD 100 million annual business.

YEREVAN 00000281 002 OF 002



C) Which officials are the greatest proponents of an
increased economic relationship with Iran? Who opposes this
relationship?

--Faced with few alternatives and tough negotiations with
Moscow over April 1 price hikes in Russian natural gas
supplies, Armenian leaders openly and actively court expanded
economic ties, especially in the energy sector, with Iran.
Few, if any, oppose strengthening overall relations. Through
Minister of Energy Armen Movsisyan (and until his February 24
resignation former Kocharian Chief of Staff Artashes
Tumanyan) the GOAM regularly courts Iranian investment in
Armenia's energy infrastructure. Foreign Minister Vartan
Oskanian is also an outspoken advocate of increased economic
relations with Iran, as is Kocharian's economic advisor
(Amcit) Vahram Nercessiantz (whose father still lives in
Tehran). (Note: Armenian Ambassador to Iran Karen Nazarian,
a rising star in Armenian foreign affairs, was one of
Oskanian's closest advisors at the Ministry of Foreign
Affairs before assuming his post in Tehran in 2005. End
Note).

D) What concessions is Kocharian prepared to make to Gazprom
to obtain favorable energy pricing?

--Where other Gazprom subscriber states failed, Kocharian
successfully delayed the implementation of a 100 percent
Russian gas price hike (from USD 56 to USD 110 per thousand
cubic meters) to April 1, a short-term victory that will see
gas subscribers through a rough winter. Though the price of
Russian gas will double after April 1, Armenian officials and
energy sector experts predict the cost will have only a
nominal impact on industry, perhaps buying additional time
for Kocharian to take a longer-term approach. Though
unconfirmed news reports have suggested Armenia has offered
Russia its remaining 45 percent ownership of ArmRosGazProm
(Russia already owns 45 percent),official Yerevan has
provided little indication of the concessions it may or may
not be prepared to make.

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ARMENIAN ENERGY INFRASTRUCTURE LARGELY CONTROLLED BY RUSSIA
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4. (C) Russia has virtually monopolized control of Armenia's
energy infrastructure through management agreements (Armenian
Nuclear Power Plant),debt for equity swaps (Hradzan Thermal
Power Plant),outright sales (UES Inter RAO's purchase of the
one-million subscriber-strong Armenian Electricity Network),
joint ownership arrangements (Russia's controlling interest
in ArmRosGazProm),and numerous other privatization schemes.
According to most accounts, Armenian President Robert
Kocharian personally presided over the final disposition of
each of these agreements.

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RUSSIA AND IRAN POSTURING FOR BUSINESS IN ARMENIA
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5. (C) In late-January 2006, Minister of Energy Armen
Movsisyan reported that Armenia imported almost 1.7 billion
cubic meters of gas from Russia, its only supplier, in 2005.
According to Movsisyan, the Iran-Armenia gas pipeline would
potentially increase Armenia's import capacity to 2.8 billion
cubic meters of gas annually. Successful pressure from
Russia led Armenia to reduce the size of the Iran-Armenia
pipeline (currently scheduled for completion in 2007) by half
(from a standard 1500 millimeter diameter to about 730
millimeters) -- effectively limiting Iran's pumping capacity
and Armenia's ambitions to become a conduit for Iranian
exports to other parts of the Caucasus.

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COMMENT: KOCHARIAN FIRMLY AT THE HELM ON ENERGY POLICY
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6. (C) Armenian decision makers, outside of Kocharian's inner
circle, are few and far between, particularly on energy
issues.
EVANS