GEORGIA SIGNS MOU ON ENGURI WITH RUSSIAN FIRM RAO

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 000057

SIPDIS

E.O. 12958: DECL: 01/11/2019
TAGS: ECON ENRG PGOV PREL RU GG
SUBJECT: GEORGIA SIGNS MOU ON ENGURI WITH RUSSIAN FIRM RAO

REF: A. 08 TBILISI 1654

B. 08 TBILISI 1867

C. 08 TBILISI 2190

D. OLSON 1/12/09 E-MAIL

Classified By: Ambassador John F. Tefft for reasons 1.4 (b) and (d).


1. (C) SUMMARY: First Deputy Minister of Energy Marika
Valishvili confirmed that the Georgian Ministry of Energy and
Russian electricity trader InterRAO signed on December 31 a
ten-year Memorandum of Understanding (MOU) on joint
management of the Enguri Hydropower Plant, located on both
sides of the Abkhazia administrative boundary. The agreement
will give 60 percent of the electricity output to Georgia and
40 percent to RAO, effectively replacing the long-standing
agreement between the Georgians and Abkhaz. According to the
agreement, Georgian engineers will continue to run the
facility, overseenby a Georgian General Director. The Board
of Directors will consist of an equal number of Georgians and
Russians, but no Abkhaz. The Ministry of Energy hailed the
agreement, as it now will be paid for electricity that had
previously been provided for free to Abkhazia. In addition,
the Ministry stressed it is now clear with whom they must
deal on Enguri. RAO has also pledged to invest funds to
strengthen the hydro-system by renovating inoperable power
plants in Vardnili. Public opinion on this agreement has
been decidedly negative, with many fearing that the
government has now "sold" one of the country's most strategic
assets to the Russians, at a time when the Russians are using
similar assets to impact policy in Europe, and others
concerned that the Government kept this agreement under wraps
for nearly two weeks after the agreement was signed.
However, from the Ministry's perspective, it is the best
solution to a potentially crippling problem resulting from
the August conflict and continued Russian pressure on
Georgia. END SUMMARY.

BACKGROUND ) STRADDLING THE ADMINISTRATIVE BOUNDARY


2. (C) Since the August conflict, the Enguri Power Station
has been an area of possible conflict and concern. While the
power station is located in Abkhazia, the dam is located on
undisputed Georgian territory. The power station provides 40
percent of Georgia's winter electricity. Since the 1993-94
war in Abkhazia, the Georgians, in agreement with the Abkhaz,
have run the power plant and provided Sukhumi electricity
free of charge. Given Enguri's location and importance in
the regional power grid, there has been much concern that the
Abkhaz and/or Russians might move to annex the territory on
which the dam is located. The pressure on the Ministry of
Energy to keep Enguri power in the Georgia system has been
acute, as has the pressure from the Russians and Abkhaz to
either offer a sweetheart deal or risk confiscation and loss
of control of the dam.

OPERATIONS TO CONTINUE AS NORMAL ) AGREEMENT DETAILS


3. (C) Valishvili confirmed that the MOU had been signed
between Georgian Minister of Energy Khetaguri and the
Chairman of RAO UES Dod on December 31. According to
Valishvili, the MOU envisions a Board of Directors that will
consist of an equal number of Georgians and Russians, but no
Abkhaz. The Director General of the joint management company
will be a Georgian, ensuring, in Valishvili,s words, that
all decisions will be beneficial for Georgia. The ten year
joint management agreement gives Georgia control of 60
percent of the power produced and RAO-UES 40 percent. This
breakdown mirrors the pre-existing ad hoc agreement between
the Georgians and Abkhaz on power usage, except now the
Georgians will be paid for the 520 MW of power that was
QGeorgians will be paid for the 520 MW of power that was
formerly provided to the Abkhaz for free. RAO can use this
power as its sees fit, which could include selling it to
Sukhumi, or exporting it to Russia and Turkey. Daily
operations will continue as normal, with Georgian engineers
running the power plant and overseeing operations at the dam.
Although the MOU was signed on December 31, 2008 the
Minister of Energy only announced the deal publicly on
January 12, after RAO leaked information to the press,
creating public speculation that the Ministry was attempting
to hide the deal.

LONG-TERM INFRASTRUCTURE INVESTMENT


4. (C) The MOU also provides for further development of the
hydropower system by both parties. RAO has reportedly agreed
to rehabilitate the existing, but inoperable, Vardnili 2, 3,
and 4 power stations in Abkhazia. RAO has offered its shares
in Telasi, its rights to Khrami 1 and 2 near Tbilisi, and its
shares of thermal unit 9 at Gardabani as collateral to the
Georgian Government. If RAO is unable to meet its investment
obligations, then the Georgian Government will be able to
take the above as "collateral."


TBILISI 00000057 002 OF 002


WHY DID THE GEORGIANS DO IT?


5. (C) Following the August conflict, there have been many
questions about just which entity is in control of Enguri,s
power, and great uncertainty about the future (reftels). The
pressure on the Georgian energy system, especially throughout
the fall, was intense, as it was unclear if the
Russians/Abkhaz would attempt to cut Enguri's power supply to
Georgia by seizing the dam or turning off the power station
on the Abkhaz side of the line. As discussions progressed on
Enguri, it was extremely unclear to the Georgians with
exactly whom they should negotiate. In an earlier meeting
with the Ambassador, Minister Khetaguri said he had
discussions with his &counterpart8 in Abkhazia, then was
going to fly to Turkey to meet with RAO in order to determine
who called the shots. In ticking off the advantages to the
agreement for Georgia, Valishvili stressed that the MOU
provides long-sought clarity, since the Georgians will now
have a precise partner and counterpart. (Embassy note. The
fact that RAO controls electricity distribution in Tbilisi
and did not cut the power during the August conflict with
Russia may have added to Georgia's perception of RAO as a
reliable commercial entity. End Note.) The agreement also
provides the Georgians with much needed investment to further
develop their hydropower system. In addition, Georgian will
also now receive payment for the megawatts of power that was
given away for free in the past. The Georgian Government
also likely made the calculation that it will be much more
difficult for the Russians or Abkhaz to completely cut
Georgia off from Enguri, if doing so would also hurt their
own bottom line.

COMMENT: WIN-WIN?


6. (C) While the Ministry of Energy appears to be optimistic
about the deal, it has already been criticized in the press
as "selling" one of Georgia's strategic assets to the
Russians. The Ministry highlighted to post the positives of
the agreement, namely clarity, money and infrastructure
investment. It is clear the Ministry hopes this will bring
some stability to the electricity situation, as the Russians
will be much less likely to grab the dam by military means if
a Russian company is managing it. The agreement, as
described, appears to give the Georgians the upper hand,
especially as their own engineers will continue to run the
plant. However, domestically, many are already questioning
the reliability of a Russian partner in such a strategic
asset and sector, given Russia's August invasion of Georgia.
RAO's interest in this investment undoubtedly is based on the
potential of the large Turkish market just beyond Georgia's
doorstep, as well as the growing electricity market in Russia
itself. In Turkey, RAO, as well as Georgia, can sell
electricity at much higher rates to provide Turkey's peak
summer demand. What is unclear, however, is how the Abkhaz
will pay for the electricity that they have received for free
for the last fifteen years, or indeed the Abkhaz view of this
transaction. It will be interesting to see if RAO attempts
to collect from Sukhumi, or if the Russians will pick up the
expense. It is possible that if the Abkhaz are unable to
pay, RAO might look to sell the electricity that had powered
Abkhazia to other more profitable markets in Russia and
Turkey, leaving Sukhumi literally in the dark.
TEFFT