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Russia Tightens Grip On Debt-Burdened Armenia

By Emil Danielyan

Russia looks set to strengthen its economic hold on Armenia, its sole Caucasus ally, taking advantage of Yerevan’s apparent inability to service its post-Soviet debts to Moscow. The relationship between the two states, until now largely confined to political and military cooperation, is on course to gain a serious economic dimension as they move closer to a deal whereby the Russians will get substantial assets in the Armenian industry in exchange for writing off or scaling down the $100 million debt.

President Vladimir Putin’s visit to Armenia late last week made that prospect even more real, producing further progress in the ongoing talks on its repayment. Putin and his Armenian counterpart, Robert Kocharian, said they will agree all the terms of the unprecedented arrangement by the end of the year.

The scheme could allow Moscow to reverse the downward trend of recent years in its trade links with Armenia. Armenian analysts say that could also give it additional leverage over Yerevan.

Some officials had predicted that the assets-for-debt agreement will be signed during Putin’s visit which had a clear economic emphasis. But the two presidents said at the end of their two-day talks on Saturday that more time is needed to work out all of its details.

“Our negotiations on the issue center on concrete enterprises and concrete topics. I hope that we will able to tell you about the solution before the end of this year,” Putin said at their joint news conference.

The debt arrangement is expected to be sealed as an appendix to a ten-year agreement on economic cooperation signed by the two men in Yerevan. Russian Deputy Prime Minister Ilya Klebanov said the agreement is aimed at the “integration” of the two economies.

The planned transfer of large Armenian enterprises under full or partial Russian ownership will be a serious step in that direction. Among them are state-run factories that used to be part of the Soviet military-industrial complex and mainly produced electronic equipment for various Soviet missile systems. The break-up of the empire left them in decline. The Russians say they want to revive those industries to the benefit of both countries.

But perhaps more important for them is Armenia’s mining and energy sectors that may also be encompassed by the debt repayment scheme. Russian energy giants like Gazprom and RAO UES, whose top executives accompanied Putin on the trip, have long been trying to acquire stakes in Armenia’s power generation and distribution facilities.

The Armenian energy sector is already heavily dependent on Russia. The Metsamor nuclear power station and thermal power plans, which provide 80 percent of the country’s electricity output, operate with Russian fuel.
While in Yerevan, Putin claimed that a stronger Russian involvement will result in thousands of new jobs in the unemployment-stricken Armenia. He said: “It is not about the debts, it is about attracting Russian capital into the Armenian economy.”

But according to Aghasi Yenokian, director of the Armenian Center for International and Political Studies, the promised economic benefits will come at a cost. “I think that even if some (Armenian) factories start operating again, they will not benefit our budget as much as they will Russia’s. Our economic dependence will therefore deepen,” he told RFE/RL.

Kocharian, sitting next to Putin, was anxious to dispel domestic concerns about political implications of the impending deal. Kocharian said he has already assured Western donors that the idea of giving Russian firms stakes in Armenian enterprises in payment of the debt is entirely his. “I want to make it clear that this proposal was made from our side. Nobody is trying to foist anything on us,” he told reporters.

Russian and Armenian officials say that the agreements are part of their broader efforts to expand economic cooperation which has lagged behind bilateral political
and security ties. Armenia is seen as the closest Russian ally in the volatile region. Russian troops have remained on its soil since the Soviet collapse. For successive governments in Yerevan they are the main deterrent against a perceived security threat from neighboring Turkey. The military alliance with Moscow also has helped the Armenians, still locked in a conflict with Azerbaijan over Nagorno-Karabakh, build and strengthen their armed forces.

Putin’s arrival in Yerevan on Friday was preceded by the signing of two more military agreements by the Armenian and Russian defense ministers.

By contrast, the Russian-Armenian economic relations are quite modest in scale. Russia accounted for less than a fifth of Armenia’s external trade equaling 550 million dollars in the first half of this year. Supplies of Russian natural gas made up the bulk of the share.

Economically, Armenia is now more dependent on Western financial institutions and governments. It is a leading per capita recipient of US assistance which has totalled $1.4 billion since 1992.

Yenokian and other local observers say this situation does not sit well with Russia which has taken a firmer line on ex-Soviet states under Putin. They point, in particular, to months of difficult negotiations between Armenian and Russian energy officials. Armenian Energy Minister Karen Galustian, a frequent visitor in Moscow, spends much of his time settling periodical disputes with Gazprom and the Russian ministry of atomic energy.

The Russian gas monopoly repeatedly has cut its supplies to Armenia over the past two years, demanding payment of a $10 million debt incurred in the late 1990s. The figure pales in comparison with the sums owed by other former Soviet republics. The fact that some of them enjoy more privileged treatment by Gazprom has prompted speculation that there are political motives behind the tougher line on Armenia. Especially after the defeat of Russian energy companies in last year’s international bidding for Armenian power utilities. The bidding, which eventually ended in failure, raised eyebrows in Moscow. RAO UES, Gazprom and its INTERA subsidiary are now preparing to take part in a second international tender for the utilities and may stand a better chance after the latest inter-governmental agreements.

Minister Galustian has also had to hold marathon negotiations on the Metsamor nuclear plant. His ten-day visit to Moscow late last month produced a deal paving the way for fresh supplies of Russian nuclear fuel. The Armenian government is under pressure to pay the $13 million bill on time and clear its $17 million debt for past fuel deliveries.

The Russians reportedly have been pushing for Metsamor’s transformation into a joint venture with a 50 percent Russian share. Yerevan has opposed the idea so far.

All in all, the problem of the Russian debt is one of the thorniest for the Armenian authorities. They were last April forced to divert $20 million from their privatization proceeds to the partial repayment of the debt which Russia refuses to reschedule any further. Vice-premier Klebanov defended Moscow’s stance over the weekend, saying that the arrangement currently finalized by the two countries is the best deal Armenia can get.

Whether or not this is the case will be clear only after the disclosure of the list of the Armenian enterprises in question and all financial details of the deal.