US embassy cable - 05YEREVAN1725

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001725 
 
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: 09/26/2015 
TAGS: ENRG, ECON, GG, AM, RU 
SUBJECT: GOAM FORMALLY ACCEPTS SALE OF NATIONAL ELECTRICAL 
NETWORK TO RAO-UES 
 
REF: YEREVAN 1234 
 
Classified By: CDA A.F. Godfrey for reasons 1.4 (b,d). 
 
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Summary 
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1. (C) On September 23, Armenian Minister of Energy Armen 
Movsisian announced that the GOAM has consented to the formal 
sale of the national power grid Electricity Networks of 
Armenia (ENA) to Interenergo B.V., a subsidiary of Russian 
energy giant RAO-UES.  According to news reports, the GOAM 
consented to the sale after RAO-UES agreed to accept the 
obligations of the current owner Midland Resources Holding 
(MRH).  This sale, which the Minister said will be finalized 
in the coming weeks, formalizes MRH's de facto transfer of 
ownership of ENA to RAO-UES which reportedly occurred in July 
2005 (reftel).  The process followed in this case 
demonstrates the limits of the authority and effectiveness of 
the Public Services Regulatory Commission (PSRC) and the lack 
of transparency within the Armenian energy sector.  End 
Summary. 
 
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The De Facto Sale in July 2005 
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2. (C) In July 2005, InterRAO, a partially owned subsidiary 
of RAO-UES, reportedly purchased ENA from MRH for USD 73 
million and took full control of Armenia's electrical 
distribution network under a management contract (reftel). 
According to Armenian law, the ENA license and the ENA 
privatization contract, both the Ministry of Energy and the 
PSRC must approve any transfer of control of ENA.  The July 
transaction was not sanctioned by either the Ministry of 
Energy or the PSRC and appeared to have been concluded 
without their knowledge (reftel).  The World Bank and USAID 
criticized the transaction. 
 
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Midland Requests Approval of the Sale 
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3. (C) Over the subsequent weeks, the Ministry of Energy and 
the PSRC exchanged a number of letters with MRH.  These 
exchanges failed to clarify the nature of the transaction. 
After first denying PSRC and Ministry of Energy jurisdiction, 
on September 9, MRH sent letters to the PSRC and the Ministry 
of Energy citing both the Armenian Energy law and the 
privatization contract, requesting written consent for the 
sale of 100 percent of the ordinary common shares of ENA from 
Midland Resources to Interenergo B.V., a company registered 
in the Netherlands, Antilles. 
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GOAM requires that RAO-UES assume Midland's liability 
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4. (C) According to PA Consulting, a USAID contractor working 
on reform within the energy sector, on September 14, the 
President tasked the Ministry of Energy, the Ministry of 
Justice, the Ministry of Finance and Economy and the PSRC 
with developing a common set of GOAM requirements for 
approval of the sale.  On September 19, PA Consulting 
reported to us that the GOAM had come to internal agreement 
on the sale.  The GOAM's "number one requirement" for 
approval of the sale was that RAO-UES accept 100 percent of 
the responsibility and liability for ENA.  PA Consulting 
observed that "given that RAO only owns 42 percent of the 
InterRAO and InterRAO owns Interenergo B.V., it would be 
difficult for RAO to accept 100 percent liability for 
Interenergo B.V."  (Note: The remaining 58 percent of the 
InterRAO shares are reportedly owned by Russian businessmen 
and the Russian government, both of whom are likely to 
support the sale.) 
 
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GOAM Accepts the De Facto Deal 
------------------------------ 
 
5. (C) At a press conference on September 23, Armenian 
Minister of Energy Armen Movsisian announced that RAO-UES has 
agreed to accept the obligations of ENA's current owner MRH 
and that the sale would be finalized in the next 40-45 days. 
It was not clear from the Minister's statement whether 
RAO-UES agreed to accept 100 percent of MRH's 
responsibilities or only 42 percent which would be 
commensurate to their ownership in Interenergo B.V.  At the 
same conference, in an apparent effort to refute the claim 
that Russia is consolidating its control of the Armenian 
energy sector, the Minister announced that the GOAM agreed to 
accept Iranian assistance to renovate a gas-fired electricity 
generation station near Yerevan. 
 
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No Mention of the PSRC 
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6. (C) While there is no official text of the Minister's 
press conference, according to all available reports the 
Minister did not mention the PSRC.  Since July 2005, members 
of the international donor community, including the USG, have 
urged the PSRC to become actively involved in the GOAM review 
of the de facto sale.  According to PA Consulting, however, 
the PSRC was unwilling to assume a leadership role in this 
process. 
 
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Comment: Russia Wins the Shell Game 
----------------------------------- 
 
7. (C) The sale of ENA to RAO-UES will likely be completed 
and formalized without further incident.  This transaction 
further enhances Russia's already significant level of 
control over the Armenian energy sector.  Currently RAO-UES 
controls approximately 80 percent of generation capacity in 
Armenia. 
 
8. (C) It is disappointing that the sale of ENA was not 
carried out in a transparent manner.  The GOAM's official 
approval of the sale was a face-saving maneuver confirming 
the de facto sale that was completed in July 2005.  While it 
is positive that there was some sort of government review of 
the transaction, the failure of the PSRC to take an active 
role in the review process calls into question its 
credibility as an independent regulator.  We should consider 
whether further assistance to the PSRC is a useful investment. 
GODFREY