US embassy cable - 04YEREVAN2769

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 002769 
 
SIPDIS 
 
STATE FOR EUR/CACEN, EUR/ACE, EB 
 
E.O. 12958: DECL: 12/14/2014 
TAGS: ECON, ENRG, AM, RS 
SUBJECT: RUSSIAN POWER GIANT MOVES TO CONSOLIDATE CONTROL 
OVER ARMENIA'S ENERGY SECTOR 
 
REF: A) 03 YEREVAN 2023 B) 03 KIEV 4530 C) 02 YEREVAN 
 
     2093 
 
Classified By: A/DCM Larry Richter for reasons 1.4 (b/d) 
 
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SUMMARY 
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1. (C) Russian energy giant RAO-UES is moving to take over 
Armenia's sole electricity distributor, Electricity Networks 
of Armenia (ElNetArm), which would consolidate its hold on 
Armenia's energy infrastructure.  The director of ElNetArm 
and officials in the Government of Armenia have acknowledged 
the possibility of a sale to RAO-UES and at the same time 
expressed reservations about a sale to any Russian company, 
and especially to RAO-UES, on the grounds that it will lead 
to Russian vertical domination of the Armenian power sector. 
RAO-UES already controls 80 percent of Armenia's power 
generation capacity and the distribution network in Armenia's 
main export market, Georgia.  Iosif Isayan, Deputy Minister 
of Energy, told us that the Minister of Energy opposes the 
deal and will consider ways to block it.  The Minister of 
Justice told us he thought the deal was "dangerous" and would 
create a system that is "impossible to regulate."  Apart from 
concerns about market regulation, consolidated Russian 
control of distribution is a step backwards from Armenia's 
stated energy policy goal of reducing Russia's control over 
its energy infrastructure.  End Summary. 
 
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ElNetArm FOR SALE 
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2. (C) Yevgeniy Gladunchik, ElNetArm's Director General, told 
PA Consulting, a USAID implementer in the energy sector, (and 
a member of ElNetArm's staff confirmed to us) that 
ElNetArm,s owners were looking to sell the distribution 
company as soon as possible.  Gladunchik was called to Moscow 
to meet with the owners, who were visiting a steel factory 
they own there.  (Note:  ElNetArm is owned by Midland 
Resources, an offshore British company whose primarily 
shareholder is Ukrainian oligarch Eduard Shifrin (ref B). 
Armenian oligarch and National Assembly Member Harutiun 
Pambukian is also a stakeholder in Midland.  End Note.) 
Gladunchik was told to provide the 2004 financial statement 
of the company as soon as possible so that they could offer 
the company for sale.  They intend to sell the company in 
order to free up assets for another acquisition.  According 
to Gladunchik, Midland Resources hopes to get USD 100 million 
for the company. 
 
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RUSSIA BUYING 
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3. (C) According to Gladunchik, three firms have expressed an 
interest in purchasing ElNetArm:  RAO-UES, Energotech Export, 
and another, unnamed Russian firm.  In a December 15 meeting, 
Minister of Justice David Harutyunian volunteered that there 
has been discussion about RAO-UES buying the company, 
although he (correctly) emphasized that this was a private 
commercial deal and that the governement was not involved 
except to approve or disapprove of the deal once it had been 
formally offered.  In a December 16 meeting with the 
Ambassador, AmCit Director of the Diaspora Armenia Cafesjian 
Foundation, John Waters, told us that he had approached 
Midland stakeholder and National Assembly member Harutiun 
Pambukian to try and buy the company in an effort to block 
further Russian domination of the energy sector.  Waters told 
us that Midland Resources and RAO-UES were planning to sign a 
letter of Intent to Sell in the "very near future." 
Publicly, both RAO-UES and ElNetArm have recently denied 
press reports about an imminent sale following the November 
30 meeting of RAO-UES Management Board Chairman Alexander 
Voloshin with President Kocharian and Gladunchik. 
 
4. (U) RAO-UES's acquisition of the distribution network 
would leave only two major energy assets outside of RAO-UES's 
control, the Vorotan Cascade Hydro-Power Plant (controlled by 
the Armenian government) and the Yerevan Thermal Power Plant. 
 In the last two years, RAO-UES took financial control of the 
Armenia Nuclear Power Plant (ANPP), five hydro-electric power 
plants in the Sevan-Hrazdan Cascade, and the Hrazdan thermal 
power plant (ref A).  RAO-UES controls 80 percent of 
Armenia's electricity generation capacity, as well as the 
distributor in Armenia's single paying export market, 
Georgia.  In addition, Russian state-controlled firm Gazprom 
owns a majority share of ArmRosGazprom, which controls the 
delivery of all piped natural gas in Armenia, and Russian 
firms control the supply of the nuclear fuel for the Armenia 
Nuclear Power Plant. 
 
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REGULATORY APPROVAL REQUIRED 
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5. (SBU) Acquisition of the distribution company requires the 
approval of the Public Services Regulatory Commission (PSRC). 
 In a December 15 meeting, Minister of Justice David 
Harutyunian (who struck the original privatization deal with 
Midland Resources) volunteered that he knew about the 
proposed sale to RAO-UES, but that he was "not sure" if there 
would be a deal, and that a sale to RAO-UES would be 
"dangerous" because they would be difficult to regulate as 
both distributor and generator.  He added that the deal he 
had struck with Midland Resources two years ago had many 
"poison pills" in it that, in effect, required the approval 
of the GOAM to sell the company.  Iosif Isayan, Deputy 
Minister of Energy, told us the Minister of Energy was 
concerned about the sale and that the Ministry was 
considering how to block it.  (Note:  The original sale to 
Midland Resources was not transparent.  Midland's 
stakeholders are well connected in Armenia and Russia and may 
be able to influence government officials (ref C).  End 
Note.) 
 
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AMERICAN DIASPORA GROUP INTERESTED 
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6. (SBU) The Cafesjian Foundation, owned by AmCit Diaspora 
Armenian Gerard Cafesjian, is seeking to bid on ElNetArm in 
order to avoid Russian domination of the energy sector.  In a 
December 16 meeting with the Ambassador, Cafesjian's new 
director John Waters told the Ambassador that he was looking 
for partners to participate in the bid, but that Cafesjian 
could, if necessary, finance an investment of USD 75 to 100 
million himself.  Waters said that he had approached Richard 
Stanaro of EBRD, who said that EBRD would be willing to 
participate and put up 35 percent.  Cafesjian bid on ElNetArm 
three years ago with financing from EBRD, but the GOAM 
ultimately rejected their bid in favor of Midland Resources. 
Waters told us that he was trying to get the deal together 
very quickly, as he understood that RAO-UES and the 
government of Armenia are to sign a letter of Intent to Sell 
very soon.  Comment:  American investment in ElNetArm would 
be an important step towards Armenia's goal of reducing its 
energy dependence on Russia.  Cafesjian is likely the best 
candidate for the job, because he is policy minded and can 
afford to suffer some financial loss (although ElNetArm was 
officially Armenia's most profitable company in 2004). 
Nevertheless, Midland Resources is a private company, so 
there is no place for our advocacy on Cafesjian's behalf. 
End comment. 
 
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COMMENT:  SLOUCHING TOWARDS MOSCOW? 
----------------------------------- 
 
7. (C) Russian firm RAO-UES currently dominates Armenia's 
electricity generation capacity:  Armenia should have a 
strong interest in keeping Russian firms, especially RAO-UES, 
out of its distribution network.  If RAO-UES is successful in 
its bid to buy ElNetArm, a single company will serve as the 
primary generator, sole distributor (and, therefore, 
exporter) and foreign client of Armenian electricity.  It 
would be a difficult regulatory task to prevent the export of 
Armenia's cheapest electricity at market prices while 
charging Armenian consumers tariffs for more expensive 
generation.  Besides this market concern, further Russian 
control goes against the Government of Armenia's stated 
energy policy of freeing itself from heavy energy dependence 
on a single state or actor.  While the Government has no 
legal authority to demand how a purchaser is selected, it 
does have the authority to approve or disapprove the 
purchase.  The approval of a sale to RAO-UES would be hard to 
explain in terms of Armenia's interest in its energy market 
or its concerns about energy dependence. 
EVANS