US embassy cable - 04YEREVAN2019

C O N F I D E N T I A L YEREVAN 002019 
 
SIPDIS 
 
DEPT FOR EUR/CACEN, EUR/ACE, EB/ESC, NEA/ARP 
 
E.O. 12958: DECL: 09/10/2014 
TAGS: ECON, ENRG, EPET, AM, IR 
SUBJECT: IRAN-ARMENIA PIPELINE:  IRAN TO FINANCE PIPELINE 
 
REF: A) YEREVAN 1240 B) YEREVAN 816 C) YEREVAN 698 D) 
     YEREVAN 382 
 
Classified By: DCM A.F. Godfrey for reasons 1.4 (b) and (d). 
 
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SUMMARY 
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1. (SBU) During Iranian President Mohammad Khatami's visit to 
Yerevan September 8-9, the Armenian and Iranian governments 
signed a deal to finance the Armenia-Iran gas pipeline as far 
as Kajaran, 41 kilometers into Armenia.  In May the 
governments had signed an agreement providing for the 
construction of the pipeline and a swap of natural gas from 
Iran for electricity produced in Armenia (ref A).  But it was 
never clear how Armenia was going to pay for its portion of 
the pipeline;  the government had been unsuccessfully seeking 
private investment.  While the economics of the project still 
don't pencil out, both governments view the pipeline as an 
important part of their energy strategy:  Iran as a step 
towards exporting to new markets and Armenia as a necessary 
measure to ensure its energy security and diversity of 
supply.  End Summary. 
 
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IRANIAN EXPORT BANK TO FINANCE PIPELINE 
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2. (SBU) Since Armenia and Iran signed a 20-year gas for 
electricity swap deal in May 2004, it has been unclear how 
Armenia intended to finance its portion of the pipeline.  The 
Iranian Bank for Export and Development has agreed to finance 
a USD 30 million segment of the pipeline from the border of 
Iran to Kajaran, Armenia, 41 kilometers north.  The Armenian 
Ministry of Energy will pay back the loan over 7 years at 5 
percent annual interest.  In a shift from prior 
announcements, the GOAM has forgone its search for private 
investors for the pipeline and has decided to bear the debt 
burden itself. 
 
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BAD FOR BUSINESS, BUT GOOD ENERGY POLICY 
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3. (SBU) The pipeline's lack of private investors is no 
surprise:  the deal has never made economic sense (ref B). 
Armenian officials have nevertheless made the pipeline the 
number one energy priority.  Facing the closure of the 
Armenian Nuclear Power Plant (ANPP) as early as 2015, Armenia 
wants to reduce its long-term reliance on the single gas 
pipeline through Georgia that accounts for 80 percent of 
Armenia's non-nuclear energy supply (refs C and D).  Memory 
of the energy crisis following the temporary closure of ANPP 
in the early 1990s still stings, and Armenia is unlikely to 
waver in its ambitions to diversify its energy sources.  For 
its part, Iranian officials reportedly told the IMF Resident 
Representative in Yerevan that they viewed the pipeline as 
part of a larger strategy to export gas to new markets in 
hope of someday reaching Europe. 
 
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COMMENT:  AMERICAN POLICY LEAVES NO OPTIONS 
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4. (C) The GOAM is aware of U. S. opposition to gas pipelines 
from Iran, and say that they have looked carefully at ILSA 
(ref A).  But they are caught in a three-way Catch 22: 
 
--We oppose any pipeline through Iran, whether it carries 
Iranian or Turkmen gas; 
 
--We oppose the continued operation (not to mention the 
probable extended operation -- ref D) of ANPP; and 
 
--We oppose Armenia's complete energy dependence on Russia 
and Russian investment to upgrade and expand the gas pipeline 
through Georgia. 
 
While the GOAM is aware of our policy rationales for each 
objection, taken together their effect is to remove us from 
the debate on all these topics as we fail to offer any 
sustainable solution to Armenia's energy concerns. 
EVANS