Institute for Advanced Strategic & Political Studies
IASPS Policy Briefings: Oil in Geostrategic Perspective
Date: November 13, 2002 Number: 5
Passing Under Russia's Control
by Vladimir Socor, IASPS Senior Fellow
Armenia has become the first case study in the application of Russia’s strategy to regain political dominance over post-Soviet countries by taking over their economic infrastructure. This strategy is ongoing in Ukraine, and incipient in Belarus, Moldova, and Kyrgyzstan. The indebted energy sector and Soviet-era industrial plants in these countries are the primary targets for Russian takeover. Property-for-debt swaps (acquiring ownership by simply writing off the debts to Russia) is the preferred method. Absorption by Russia’s “natural monopolies” or its military-industrial complex is often the result. Failure of market reforms, clan-based economics, and official corruption -- in target countries and in Russia as well -- are preconditions to the success of this strategy, in which Moscow and elements in the local governments collude.
On November 5 in Yerevan, top Russian and Armenian officials signed the final documents of an assets-for-debts transaction, whereby the Russian state takes over five enterprises in Armenia. Prime Minister Mikhail Kasyanov and Industry Minister Ilya Klebanov signed for Russia; Prime Minister Andranik Markarian and the defense and security strongman Serge Sarkisian signed for Armenia. These property transfers fully settle $100 million worth of Armenian state debts to Russia. Though economically ailing and technologically obsolete, these enterprises were picked by the Russian government for takeover, overhauling and integration into Russia’s energy and military-industrial systems.
President Vladimir Putin, chairing a Russian government session on November 4, remarked the economic and political significance of this deal with “strategic partner Armenia.” On November 7, Putin had Kasyanov report to him personally in the Kremlin on the agreements just signed. Putin’s remarks, reported by the Russian media, implicitly underscored the political and strategic considerations behind this property transfer. Its monetary value is relatively modest for Russia, though beyond Armenia’s capacity to repay.
Under the signed agreements, the five enterprises pass from 100 percent Armenian state ownership into 100 percent Russian state ownership. These are: the Hrazdan thermal power plant, Armenia's largest by far; the Mars electronics and robotics plant in Yerevan, a Soviet-era flagship for both civilian and military production; and three research-and-production enterprises -- for mathematical machines, for the study of materials, and for automated control equipment -- these being Soviet-era military-industrial plants. The property transfer documents signed on November 5 include an agreement on the protection of secret information. As part of this swap, Russia receives the legal status of investor -- entailing various privileges and facilities -- without having invested a dollar in these enterprises.
Meanwhile, the Armenian government is discussing the handover of Hrazdan’s uncompleted fifth power bloc--the plant’s largest and most modern--to Russia. The government in Yerevan is also negotiating the sale of its remaining 26 percent stake in the Kanaker Aluminum plant (Armenal) to the giant Russian Aluminum (Rosal), which already owns 74 percent of Armenal.
In August of this year, the Armenian government sold an 80 percent stake in the Armenian Electricity Network (AEN) to the little-known upstart Midland Resources, a British offshore-registered firm which is said to have close Russian connections. The firm, a late entrant in that tender, is believed to have been instrumental in circumventing the World Bank’s and other Western donors’ objections to a direct sale of AEN to Russian companies. Earlier, Russian state companies had acquired a 55 percent majority of the shares in Armenia’s natural gas distribution system (ArmRosGaz). Russia is also the nuclear fuel supplier to Armenia’s nuclear power plant, the Soviet technology of which is obsolete and potentially hazardous. As a cumulative result, Russia now holds overwhelming control of Armenia’s energy sector.
The five firms, just taken over by the Russian government, are to be handed over to state companies and “integrated into Russia’s production cycles,” according to Kasyanov. He named the military production conglomerate Oboronitelnye Sistemy [Defense Systems] as a possible operator of these Armenian enterprises. Oboronitelnye Sistemy seems to have been assigned a role of refloating and absorbing military-industrial plants in some of the formerly Soviet-ruled countries. Last year, Oboronitelnye Sistemy took over several such plants in Belarus. For its part, Armenia signed a cooperation agreement with Belarus in the military-industrial sector while Yerevan and Moscow were negotiating toward the property transfer that has just taken place. The pieces of this triangle seem now to be falling into place.
The November 5 property-transfer agreements took more than a year to negotiate. On the Armenian side, Serge Sarkisian led the negotiations in his triple capacity as Defense Minister, Secretary of the National Security Council, and Armenian co-chairman -- with Klebanov as Russian co-chairman -- of the Russian-Armenian intergovernmental commission for economic cooperation. Sarkisian, who holds a general’s rank, handles all aspects of Armenia’s relations with Russia -- a situation that reflects the predominantly military and security-related content of those relations. Significantly, on the Russian side, Klebanov’s oversight responsibilities include the military industry.
President Robert Kocharian and other Armenian leaders in Yerevan issued self-congratulatory statements on the signing of the latest property transfers. More optimistically than their Russian counterparts, the Armenian leaders predicted that Russia would use these enterprises to full capacity, and finance their modernization. Such prospects are, however, far from certain even in the medium term, let alone the short term, considering the difficulties being experienced by Russia’s state-owned industry and its budget.
For now, the only quasi-certainties are: that Russian investments will not bring up-to-date technology to these plants in Armenia; that Moscow will assign relatively low-grade items for production at these plants; that the plants will produce to the inferior quality standards of the Russian economy, possibly for some low-priced exports to similarly undemanding markets; and that a growing portion of Armenia’s budget revenue will become dependent on the Russian-owned industrial sector in Armenia, and thus on Russian government decisions. Moreover, takeovers of Armenian industrial property by the Russian state signify a major setback to market reforms in general and to privatization in particular.
The World Bank’s Yerevan office blessed these latest property transfers for relieving Armenia of the annual debt service to Russia, and for promising to revive idled production capacities and create jobs. The bank’s resident representative declared for Yerevan journalists that the World Bank welcomes any decision to reduce Armenia’s overall external indebtedness. Such a stance appears to allow short-term fiscal considerations to trump structural reforms and economic modernization, not to mention broader strategic concerns. Neither market reforms, nor Western strategies are served by the expansion of Russian state-controlled energy companies and military industry into post-communist countries.
Armenian pro-Western political groups, small and embattled, view the situation with concern. Some of them pointed out that Armenia’s Western creditors, unlike Russia, do not style themselves “strategic partners” to Armenia and do not seize Armenian assets for debt repayment. The newspaper Haikakan Zhamanak editorialized that the debt-for-assets swaps can turn Armenia’s economy into an appendage to Russia’s “industrial rust-belt.” It went on to comment that “Armenia is so closely integrating with Russia, you can even say that it is becoming a part of Russia.”
Russia plays a strong hand because Armenia is failing to attract Western investments in its decaying, corruption-plagued industry. Even the wealthy Armenian diaspora evidences, in general, serious reservations about investing in the country of origin. Armenia’s government laments the fact that such investments amount to only a fraction of the diaspora’s investment potential.
Until recently, Russian and Armenian officials from the presidents on down often remarked that bilateral military and political relations had far outpaced the economic relations, and that the two countries can not for long sustain their alliance without economic underpinnings. That discrepancy has now become a thing of the past. The military-industrial sector is bridging the gap to some extent. Property transfers, however, especially in the energy sector, lead straight to political dependence on the country that combines the roles of supplier and owner.
Russia’s growing economic clout in Armenia is likely to cement the two countries’ military-political alliance. It also will inevitably impact on Armenia’s position on international and regional issues. Yerevan’s declarative policy of “complementarity,” which professes to balance Russian and Western interests in the South Caucasus, may acquire an even more pronounced Russian tilt than is already the case. Long-term, structural economic dependence on Russia would significantly constrict Yerevan’s foreign policy options. It will become increasingly difficult for the government and political forces to question Armenia’s over-reliance on Moscow for national security in the broadest sense.
The deployment of Russian troops opposite Turkey in Armenia, however anachronistic and irrational, may become politically unchallengeable in Yerevan under circumstances of dependence on Moscow. This constrains Armenia’s ability to make its own decisions on improving relations with Turkey. By the same token, Moscow is acquiring stronger direct influence on Armenia’s policy regarding the Armenia-Azerbaijan conflict. Russian policy seeks to conserve that conflict unresolved, in hopes of paving the way to a Russian-arbitrated resolution. On this and related issues, Russian direct leverage on Armenia can translate into indirect leverage on Azerbaijan. Moreover, growing Russian clout can turn Armenia from a safe into a problematic neighbor to Georgia, specifically in Georgia’s Armenian-populated Javakheti area.
The quest for a viable framework of regional security and economic cooperation will become even more elusive if Armenia drifts further into Russia’s orbit. This trend can complicate the ongoing efforts by the U.S. and NATO to encourage Armenia to cooperate on regional security issues with its neighbors and the West. Meanwhile, Georgia and Azerbaijan are deepening their pro-American and generally pro-Western orientation -- economically, politically, and in terms of their national security. By contrast, Armenia’s heavy reliance on Russia is a prescription for economic underdevelopment and semi-isolation in the region.