US embassy cable - 05YEREVAN1234

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001234 
 
SIPDIS 
 
DEPT FOR EUR/CACEN, EUR/ACE, EB/ESC, PLEASE PASS TO USAID 
FOR EE/EA, EGAT FOR WALTER HALL 
DOE FOR CHARLES WASHINGTON 
 
E.O. 12958: DECL: 07/07/2015 
TAGS: ENRG, ECON, AM, GG, RU 
SUBJECT: RUSSIAN ENERGY GIANT RAO-UES BUYS ARMENIAN 
ELECTRICITY DISTRIBUTION, IGNORES REGULATOR 
 
REF: A) 04 YEREVAN 2769 B) 04 YEREVAN 2224 
 
Classified By: Amb. John M. Evans for reasons 1.4 (b/d). 
 
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SUMMARY 
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1. (C) Russian energy giant RAO-UES has reportedly taken over 
Armenia's electricity distribution company, Electricity 
Networks of Armenia (ElNetArm), without formally seeking 
approval, as required by law, from Armenia's Public Services 
Regulatory Commission (PSRC) or Ministry of Energy.  Despite 
the Energy Minister's past comments that he and the PSRC 
would frown on RAO-UES's bid to buy the distribution company 
(RAO-UES already controls 80 percent of generation), Ministry 
officials now seem at a loss, having been presented with a 
claimed fait accompli and the presumption of a blessing from 
higher up.  In addition to deepening RAO-UES's present 
dominance in Armenia's electricity sector, the deal makes 
implementing market rules and competitive policies 
troublesome, thereby increasing the importance of effective 
regulation by the PSRC.  The lack of regulatory process, if 
not corrected, casts doubt on the role and authority of 
Armenia's PSRC to provide such regulation.  Post is 
considering whether a USAID assistance program to the PSRC 
should be continued; since the GOAM has evidently decided to 
ignore this institution, any further investment may be wasted 
resources.  End Summary. 
 
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RAO-UES BUYS ARMENIAN DISTRIBUTION COMPANY 
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2. (C) Following eight months of talks, Inter-RAO, a 
subsidiary of RAO-UES, has reportedly purchased ElNetArm's 
parent company Midland Resources for USD 73 million, and 
taken full control of ElNetArm under a management contract. 
On July 5 Yevgeniy Gladunchik, the Director of ElNetArm, told 
us that as of July 1, RAO-UES had assumed control of the 
company.  Gladunchik asserted that the deal had been 
structured so as to avoid regulatory hurdles.  Although 
RAO-UES announced the purchase to its shareholders June 30, 
ElNetArm carefully denied that it was sold, asserting 
initially only that a management contract had been signed but 
later conceding that RAO-UES has become "the beneficiary of 
all shares."  ElNetArm is trying to stress that the PSRC need 
not approve a sale of its parent company, Midland Resources, 
a subtlety lost on the local press and rejected by a local 
USAID contractor and the World Bank. 
 
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RAO-UES TRIES TO AVOID SEEKING GOAM APPROVAL 
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3. (C) Armenia's Energy Law, ElNetArm's license and 
ElNetArm's privatization contract (Share Purchase Agreement 
with the GOAM) provide that both the Public Services 
Regulatory Commission (PSRC) and the Ministry of Energy must 
approve any transfer of control of ElNetArm.  According to 
those two bodies, neither ElNetArm nor RAO-UES formally 
notified any GOAM agency of the deal.  Deputy Ministry of 
Energy Areg Galstyan told us that when he received informal 
information about the sale he told the company that "it was 
impossible because (they) must receive our permission." 
Despite ElNetArm's arguments, Galstyan persists:  "Even in 
this case, they must receive our positive approval.  We must 
ask them what happened."  On July 8, the Ministry of Energy 
was preparing a letter to Midland Resources asking them to 
clarify the transaction to the Ministry of Energy and the 
PSRC.  But Galstyan added, "Even if we now require them to 
give some sort of explanation to comply with the Energy Law, 
if this transaction is not good under our rules, I don't know 
what we can do." 
 
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MINISTRY:  "NO MORE SPACE FOR RAO-UES IN ARMENIA" 
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4. (C) For several months, the Ministry of Energy had 
outwardly opposed the sale of further energy assets to 
RAO-UES.  "The Ministry does have an official policy to keep 
Russian control of the energy sector within its current 
limits....  There is no more space for RAO-UES in Armenia's 
Energy market" Deputy Minister Areg Galstyan told us in a 
February 23 meeting, alluding then to RAO-UES's bid to buy 
ElNetArm, (Ref A).  At that time the Ministry expressed 
concern that it would be difficult to regulate the energy 
sector according to market rules if RAO-UES owned 
distribution assets as well as generation assets.  In the 
last two years, RAO-UES took financial control of the Armenia 
Nuclear Power Plant (ANPP), five hydroelectric power plants 
in the Sevan-Hrazdan Cascade, and the Hrazdan thermal power 
plant.  RAO-UES and its subsidiaries control 80 percent of 
Armenia's electricity generation capacity, as well as a 
distributor in Armenia's only paying export market, Georgia. 
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WORLD BANK CRITICIZES DEAL 
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5. (C) On Friday, July 8, the World Bank local office issued 
a strong statement of "serious concern" about the reported 
sale, demanding an "official and clear explanation from the 
authorities in Yerevan."  The World Bank Country Head Roger 
Robinson publicly criticized the lack of a review and 
approval process, saying that the government's failure to 
confirm or refute the deal is "a sign of something that is 
not right."  Robinson has urged both the PSRC and the 
Ministry of Energy to open a formal review of the deal "in an 
open and transparent way." 
 
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COMMENT:  TIME FOR THE REGULATOR TO STEP UP 
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6. (C) The lack of transparency and process in this purported 
transaction contradicts the GOAM's Energy Law and its 
officially stated policy and goals--that an independent 
regulator will oversee a private energy sector on the basis 
of market rules.  It is not clear if the Ministry of Energy 
and the PSRC would now approve or reject the deal if given 
the chance, as RAO-UES is a powerful player in Armenia's 
energy sector and probably did not make the deal without 
approval of someone in the GOAM.  It is troublesome, however, 
that this deal appears to have been made without even the 
official notification of those who are charged to approve it. 
 
 
7. (C) We look to the GOAM to correct the lack of process and 
transparently investigate the transaction and evaluate 
whether it is in the best interests of Armenia.  Assuming 
that the transaction remains in force, the capacity of the 
PSRC to regulate the electricity sector directly and 
transparently will be more important than ever to check 
RAO-UES's monopoly power.  If they fail to act, the PSRC and 
Ministry of Energy risk undermining their institutional 
credibility as regulators.  We have made these points to both 
the Ministry of Energy and the PSRC.  If, however, the GOAM 
takes no action, we are considering a range of actions, 
including cutting off technical assistance to the PSRC, to 
express our disappointment. 
EVANS