US embassy cable - 05YEREVAN391

C O N F I D E N T I A L SECTION 01 OF 03 YEREVAN 000391 
 
SIPDIS 
 
DEPT FOR EUR/CACEN, EUR/ACE, EB/ESC 
DEPT PLEASE PASS TO USAID EGAT FOR WALTER HALL 
DOE FOR CHARLES WASHINGTON 
 
E.O. 12958: DECL: 03/01/2015 
TAGS: ENRG, ECON, EPET, AM, IR, RU 
SUBJECT: ARMENIA LOOKING TO IRAN TO REDUCE DEPENDENCE ON 
RUSSIAN ENERGY RESOURCES 
 
REF: A) 03 YEREVAN 152 B) 04 YEREVAN 1240 C) 04 YEREVAN 
 
2019 
 
Classified By: DCM A.F. Godfrey for reasons 1.4 (b, d). 
 
 
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SUMMARY 
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1. (C)   In a February 25 meeting, Armenia's Minister of 
Energy, Armen Movsesian, told us that Armenia's energy 
market was too dependent on Russia, especially for the 
supply of gas, and that Gazprom has proved an unreliable 
source in the past.  Armenia's number one energy priority 
is to complete the Iran-Armenia gas pipeline, which will 
reduce Armenia's dependence on Russia and the single 
poorly-maintained gas pipeline through Georgia. The Minister 
told us that Russia has been trying at every step to 
minimize the effect of the new pipeline, pressuring 
Armenia to reduce its size in order to keep Armenia 
dependent on Gazprom.  He added that although Russian 
Foreign Minister Sergei Lavrov expressed interest in 
Russian participation in the Iran-Armenia pipeline project, 
Russian involvement in the pipeline would defeat its 
purpose.  The Minister emphasized that energy diversity was 
the only purpose for the pipeline and that, caving to 
Russian requests, the GOAM had chosen to constrain the 
diameter of the pipeline to foreclose the possibility of 
onward sales outside Armenia which could threaten Gazprom's 
interests in the region (as well as being more distasteful 
to our Iran policy). 
End Summary. 
 
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MINISTER PLEDGES TRANSPARENCY ON IRAN DEALINGS 
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2. (C)  We met with Movsesian February 25 to discuss energy 
security policy in light of Armenia's developing economic 
relations with Iran.  The Minister was keen to discuss 
Armenia's energy strategy and stated that Armenia would be 
completely transparent with us about the energy 
relationship between the two countries.  On several prior 
occasions during the Iran-Armenia pipeline negotiations, 
the Minister acknowledged that the Iran-Libya Sanctions Act 
sets U.S. policy in this area and said that the 
Ministry was confident that the pipeline would not trigger 
sanctions under ILSA (Refs B and C). 
 
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HAPPINESS IS MULTIPLE PIPELINES 
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3. (C) The Minister painted a grim picture of Armenia's 
current energy insecurity.  Currently, forty percent of 
Armenia's annual electricity consumption (and up to eighty 
percent of daily consumption during summer when the nuclear 
plant is closed) depends on gas supplied through Armenia's 
only gas pipeline, the Valdikavkaz gas line from Russia 
through Georgia to Armenia.  The inevitable, albeit 
postponed, closure of Armenia Nuclear Power Plant (ANPP) 
will lead to 85 percent of Armenia's electricity supply 
depending on natural gas supply.  The current gas pipeline 
is poorly maintained and traverses mountainous regions, and 
past disturbances have halted gas supply to Armenia for 
considerable time. (Ref A.)  Besides the physical security 
of the line, the Minister expressed concern over Gazprom's 
ability to restrict gas delivery in order to improve its 
bargaining position with the GOAM, and its continued 
interest in delivering gas to Georgia, which will soon have 
the option of receiving gas from Baku. 
 
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RUSSIAN CONTROL THROUGH ENERGY 
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4. (C) The Minister stressed Russia's use of energy as 
political power. "As Georgia is more and more oriented to 
the west, Russia will try to use energy to make it a 
dependent," he said.  He expressed concern that Russia's 
relationship with Georgia could lead Gazprom to play games 
with the supply of gas to Georgia which in turn would 
affect the supply of gas to Armenia, as the two countries 
depend on the single line.  The Minister pointed to 
Gazprom's past actions giving short shrift to Armenia's 
energy needs, including failing to deliver enough fuel 
during the demanding winter months, causing Armenia to draw 
gas from its strategic reserves.  Responding to Armenia's 
strong reliance on this precarious source, Armenia made the 
construction of a second pipeline from Iran their number 
one energy priority.  In September 2004, the GOAM finally 
succeeded in signing a deal with Iran whereby Iran 
willbuild its part of the pipeline and finance Armenia's 
portion in exchange for future delivery of electricity 
(Ref C). Besides allaying Armenia's concerns about the 
current pipeline's physical security, the Minister expects 
the Iran pipeline to end Gazprom's tough bargaining tactics 
and give Armenia more power to negotiate energy contracts. 
 
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SIZE MATTERS 
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5. (C) The Minister described how Russia lobbied Armenia to 
reduce the 
size of the pipeline (originally planned to be over 1 meter 
in diameter), saying at first that Armenia needed only a 
253 millimeter pipeline and later that a 500 millimeter 
diameter pipeline would suffice.  Armenia demanded at least 
720 millimeters in diameter, which, according to the 
Minister, can deliver 2.4 billion cubic meters of gas per 
year, enough to serve 480,000 subscribers, the number in 
Armenia during Soviet times.  According to the Minister 
Armenia currently consumes 1.7 billion cubic meters of gas 
per year, serving 282,000 subscribers.  Note:  Although 
Armenia may never reach its Soviet-era level of gas 
consumption, the Minister's numbers are still justifiable. 
Forty percent of Armenia's electricity currently comes from 
the Armenian Nuclear Power Plant (ANPP), which will be shut 
down over the next 10-15 years, and probably replaced by 
gas-fired generation. 
End Note.) 
 
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"RUSSIAN CONTROL OF THE PIPELINE WOULD DEFEAT ITS PURPOSE" 
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6. (C) The Minister was dismissive of comments made by 
Russian Foreign Minister Sergei Lavrov during his February 
17 visit to Yerevan that Russian participation in the Iran- 
Armenia pipeline is under consideration.  The Minister 
pointed out that the pipeline's purpose is not to add 
capacity but to reduce dependence on Russia.  Gazprom's 
participation in the pipeline, he said, would defeats its 
purpose.  Two days earlier Deputy Minister of Energy Iosef 
Isayan told us that there was Russian interest in the 
pipeline, but that the Ministry believes the only reason 
that Russia wants to participate in the pipeline is 
to keep their strong bargaining position in the region. 
 
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MINISTER:  PIPELINE NOT FOR TRANSIT 
----------------------------------- 
 
7. (C) The Minister stated emphatically that the GOAM had 
no intention of using the Iran-Armenia pipeline for transit 
to third countries.  Despite early talk of building a 
pipeline that would also bring economic benefits 
as a transit line (one version called for a transit 
pipeline taking Iranian gas to Europe), GOAM officials 
acknowledge that they restricted the pipeline's diameter 
partly in response to Russian lobbying.  Other factors, 
like the lack of financing and the apparent lack of an 
onward market also contributed to this decision.  Armenia 
will continue to use the cheaper gas delivered through 
Gazprom's Georgian pipeline for its domestic energy 
consumption.  It will use gas delivered through Iran to 
produce electricity that will then be re-exported to Iran 
(Ref B). 
 
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COMMENT: CAN ARMENIA FEND OFF RUSSIA? 
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8. (C) Having lobbied hard to constrain the size of the 
Iran-Armenia pipeline, Gazprom now wants control over the 
northern segment of the pipeline.  While the Ministry's 
policy of reducing Armenia's dependence on Russia is well- 
founded, it is not clear that they will succeed in keeping 
Russia out.  They already have caved to Russian lobbying to 
keep the pipeline small, despite ambitious talk of a larger 
transit pipeline.  Their troubles resisting Gazprom's 
influence mirror their troubles resisting another Russian 
energy giant, RAO-UES that has managerial control over 80 
percent of Armenia's generation capacity and is now trying 
to take over the distribution network (septel).  In both 
cases the Ministry of Energy has claimed a policy of 
diversifying the energy market, but the Ministry has not 
succeeded in transferring this policy into actual 
decisions.  (Whether this is because the Ministry loses in 
power struggles with other interests or because Russia is 
the only one buying, we can't tell.)  Both Gazprom and RAO- 
UES have publicly stated their intent to take on energy 
 
SIPDIS 
assets in Armenia as pieces of larger regional goals.  We 
agree with the Ministry that the regional goals of Gazprom 
and RAO-UES may not always serve Armenia's interests. 
EVANS