GEORGIA: MINISTER OF ENERGY ON ENGURI AO DEAL,

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 000097

SIPDIS

E.O. 12958: DECL: 01/19/2018
TAGS: ECON ENRG PGOV PREL RU GG
SUBJECT: GEORGIA: MINISTER OF ENERGY ON ENGURI AO DEAL,
ABKHAZ POLITICS

REF: A. A) TBILISI 57

B. B) 08 TBILISI 1654 (NOTAL)

C. C) 08 TBILISI 1867 (NOTAL)

D. D) 08 TBILISI 2190

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


1. (C) Summary: Minister of Energy Alexander Khetaguri
provided the Ambassador with more details and his private
thoughts on the recent deal to enter into a joint management
agreement for the Enguri power facility with Russian firm
InterRAO-UES (ref A). Despite the negative press the
Minister continues to receive for signing a deal with the
Russians on one of Georgia,s strategic energy assets, the
Minister was optimistic. He stressed that the deal with RAO
was the best possible option given the increasingly untenable
situation the Georgians found themselves in at Enguri. He
said that any deal relating to Enguri was a gamble, but he
believed RAO to be a more stable bet than the unpredictable
Abkhaz. He added that Georgia will now be paid annually the
nearly 14 million GEL (approximately $8.4 million) it had
lost providing electricity free of charge to the Abkhaz for
the last 15 years. Khetaguri stressed that the MOU is only a
management agreement, and no shares of the Enguri facility
will be sold to or controlled by the Russians. End Summary.

BETWEEN A ROCK AND A HARD PLACE ) RUSSIANS OR ABKHAZ?


2. (C) While Khetaguri would have preferred not to negotiate
with either the Abkhaz or the Russians over Enguri
production, he recognized in the current situation that a
formal agreement was necessary. After meeting separately
with both his counterpart (de facto "minister" of Energy) in
Abkhazia Rezo Zantaria and the head of the Russian firm
InterRAO-UES Yevgeniy Dod, Khetaguri decided that RAO was the
safer gamble for the Georgians. Khetaguri told the
Ambassador that given Enguri's strategic importance in
Georgia,s energy infrastructure, he had to make a gamble on
who would be the better partner. Referencing Zantaria's
request following the conflict for Georgia to give 50 percent
ownership of the Enguri power plant to the Abkhaz or face a
power cut off (ref B),Khetaguri said a joint management
agreement is much more palatable. He stressed that bringing
in a Russian commercial entity would hopefully decrease the
chances that the Russians would support a take over of the
dam by military means. He also noted that RAO has been a
reliable investor in the Telasi electricity facility, as even
during the conflict they did not shut off power to Tbilisi.
In short, Khetaguri said he trusts RAO more than the Abkhaz.

ONLY MANAGEMENT ) ENGURI REMAINS GEORGIAN


3. (C) Khetaguri stressed that the agreement with RAO was
management only, and all 100 percent of Enguri's shares
remain in Georgian hands. Any change in the ownership
structure would require Georgian Government approval and that
there are no plans to mortgage the country's assets. He said
that while the Abkhaz were demanding ownership shares, RAO is
quite happy with joint management and 40 percent of
production.

MOU DETAILS ) PRODUCTION SHARING AND PROMISED INVESTMENT


4. (C) The MOU between Georgia and RAO defines a joint
management contract with a 60-40 split on produced
electricity. The two sides continue to negotiate on the
actual contract, which should be signed by mid-February. As
reported earlier, the management board would consist of three
Russians and three Georgians, with the current executive
director and facility staff maintaining their positions (ref
Qdirector and facility staff maintaining their positions (ref
A). RAO has pledged to invest in redeveloping the Vardinili
power generation facilities. Khetaguri also said that he
pushed RAO to include the Telasi facility and blocks 9 and 10
of the Gardabani thermal station as collateral to give the
Georgians more certainty. When RAO hesitated, Khetaguri told
them that if the Enguri facility was seized they would
nationalize Telasi anyway. RAO quickly agreed. RAO will
essentially take over the electricity that had been provided
free to the Abkhaz over the past 15 years, and presumably ask
the Abkhaz to pay commercial prices. Khetaguri was also
optimistic that this agreement could help to stabilize prices
in Georgia, as the two sides agreed to a 700M KW power swap,
in which RAO would take 350M KW of its power in the summer
and the Georgians 350M KW in the winter, when they need it
most. In the winter only, the Georgians have granted RAO a
650M KW right of way to use Georgia,s lines to export to
Russia or Turkey. Khetaguri said the Ministry is negotiating
RAO,s management fee, but that he intended to ask for a
symbolic price based on the profits RAO takes from the
agreement

TBILISI 00000097 002 OF 002



WHAT ABOUT THE ABKHAZ?


5. (C) The Ambassador asked where this new deal left the
Abkhaz, and Khetaguri said that now depended on RAO. He said
the only physical changes or access to the system that RAO
requested of the Ministry were access and permission to meter
in Abkhazia. Of course, the Georgians readily agreed. It
appears that Abkhazia will now have to pay the Russians for
what the Georgians gave them free for 15 years (equivalent to
approximately 15M GEL annually). The Abkhaz historically
only consume about 20 percent of Enguri's production. RAO
could therefore, continue to provide electricity to the
Abkhaz while exporting to more lucrative markets in Turkey
and Russia. Khetaguri said it would not surprise him if this
agreement and its practical implementation led to conflicts
between the Russians and Abkhaz.

RUSSIAN AND ABKHAZ POLITICS BEHIND THE DECISION


6. (C) Khetaguri said that he believed Dod had won
permission directly from Putin to sign the deal with the
Georgians, nd that Putin in turn dictated to the Abkhaz.
Publicly, the Abkhaz have said they are "bewildered" by the
agreement. Khetaguri said that, although Zantaria is a
supporter of de facto "president" Bagapsh, he was strongly
against the deal because he believed it was bad for Abkhazia.
Bagapsh, on the other hand, was privately supportive.
Khetaguri believed that RAO had paid off Bagapsh in order to
buy his support. He said that Bagapsh needs the money to
defeat de facto &foreign minister8 Shamba in
&presidential8 elections scheduled to take place in late

2009. (Note: In a January 20 Apsnipress statement, Bagapsh
is quoted as being "bewildered" by the deal and claims Enguri
belongs to the Abkhaz. At the same time, he expressed
willingness to "hold negotiations" with RAO.

COMMENT: MAKING THE BEST CHOICE


7. (C) Khetaguri, a smart and savvy technocrat, believes
that RAO was Georgia,s best choice for maintaining Georgia's
electricity supply and control of Enguri. He is weathering
the negative media campaign well and said he spent many hours
at Parliament on January 15 explaining the agreement. He
walked away from the hearings feeling that the Georgian
Parliament understood his actions and the choice that Georgia
faced. The unpredictability of the Abkhaz, as well as an
increasingly tense Abkhaz-Russian relationship, made signing
a joint management deal with RAO a gamble he was willing to
take. This deal also shows that despite Abkhaz
&independence8 and Russian recognition of the &country,8
that Georgian law continues to govern the territory, and the
fact that a Russian company has signed a deal on Enguri means
that the Russians have de facto recognized as much. This
creates a legal precedent for other countries looking to make
deals with Abkhazia.


8. (C) Comment Continued: According to the agreement,
Georgia will be able to profit from electricity it has given
away for free for 15 years, while securing capital to
undertake infrastructure upgrades on the Vardnili complex.
If RAO does not hold up its end of the bargain, the Georgians
can seize the company's assets in Tbilisi. If the Abkhaz
suddenly find themselves forced to pay for electricity which
had previously been free, Khetaguri is right that this deal
could sow seeds of disagreement between the Russians and
Abkhaz. Khetaguri's insights on the Abkhaz political
landscape illustrated breaks between Abkhaz leadership, even
within consolidated camps. Khetaguri asserted that
Qwithin consolidated camps. Khetaguri asserted that
competition between Shamba and Bagapsh for leadership of the
region could present an opportunity to reach out to one party
or the other. End Comment.


TEFFT