#15 - JRL 7285
Transitions Online
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August 11, 2003
Georgia: Russian Hands on the Switches
Georgians and U.S. officials protest as secret deals give Russia’s control of
the gas system and a dominant position on the electricity market.
By Dima bit-Suleiman
TBILISI, Georgia--With parliamentary elections due in November, two new deals that could ensure heat and light this winter for Georgians might have been expected to boost the popularity of the government. But the reaction of the public to the news that the beneficiaries in two secretly signed agreements are Russians has led to protests and fueled long-standing concerns about Russia’s influence over Georgia.
They have also angered the United States, anxious that plans to bring gas from the Caspian to Turkey could be affected.
In late July, Georgians discovered that the government had, on 1 July, secretly signed a 25-year agreement on strategic cooperation with Gazprom, Russia’s state-owned gas producer, to supply gas to Georgia. Then, on 6 August, parliament was told that UES Nordic, a subsidiary of Unified Energy Systems (UES), the Russian electricity group, had already bought a 75 percent controlling interest in the Tbilisi electricity generator, Telasi.
Since the mid-1990s, when Turkmenistan stopped supplying gas to Georgia because of unpaid bills, Russia has, through Itera, a subsidiary of Gazprom, been the sole provider of gas to Georgia. Since 2002, when it bought Tbilgazi, Itera has also been the key gas distributor in Georgia. The gas deal therefore does not change the status quo in Georgia. It does, though, extend it and deepen it, as Gazprom has promised to invest into upgrading two existing pipelines.
The seller of the Telasi stake was AES Telasi, a joint venture part-owned by the U.S. electricity giant AES.
Nonetheless, the secrecy of the deals and the sight of long-term deals being given to Russian companies has led to a surge in Georgians’ already high-voltage relationship with its large neighbor, with accusations that the government has sold out to Russian interests.
“Of course it’s bad, even dangerous for us. Would we have died fighting in the [1991-2 separatist] war in Abkhazia and after that if we’d known they [the government] were going to sell Georgia back to Russia?” says Manana, a 49-year-old doctor from Tbilisi.
“I just know it’s bad,” a lady next to her agrees.
The public anger ensured that the boss of UES, Anatoly Chubais, was accompanied by protests everywhere he went during his visit to Tbilisi on 6 August. Tensions were so high that the police tried to break up some demonstrations, injuring a few protestors in the process.
Many Georgians see the increased role of UES and Gazprom in the energy sector as nothing short of a political deal between Moscow and Tbilisi to restore Russia’s control over Georgia.
Since 1991, when Georgia gained independence, Russia has retained significant influence over the country. Two ethnic conflicts in Abkhazia and South Ossetia remain unresolved, with Moscow’s decision to issue Russian passports to people in both regions raising questions about the real role of Russian peacemakers. Russian military bases in the regions of Ajaria and Djavakheti mean that both are effectively outside the control of the government in Tbilisi.
Last year, the problems were aggravated by Russian pressure on Georgia to flush out Chechen rebels based in the Pankisi Gorge, which included the bombing of a Georgian village near the border.
With these deals Russia has now secured its role in supplying and distributing gas to Georgia, and won a new and dominant position in the electricity market. UES now owns two power plants and power lines to Turkey and Armenia, and also has managerial control of two hydroelectric plants.
THE ARGUMENTS
Chubais tried to dismiss fears that his company would use its position to increase pressure on Tbilisi on behalf of the Kremlin. “UES’s entry in Georgia is motivated purely by economics,” he said. “This was not a political or Kremlin-guided deal.”
“Now we will be able not only to export electricity to Georgia, but also generate the power locally and distribute it in Tbilisi and other regions of the country. We will also be able to transit electricity to Turkey, which is particularly important for us,” Chubais said.
Though the deal was between AES Telasi and UES, Georgian Energy Minister David Mirtskhulava attended the same press conference and welcomed the purchase. “Georgia is experiencing a severe energy crisis and Russia is the best partner [to help]… This winter promises to be much better,” he concluded.
There could be other benefits too for Georgian customers. Alexei Miller, head of Gazprom, has hinted that Gazprom would consider "setting the gas price according to the purchasing power of Georgian consumers."
Georgia's inability to secure energy supplies has been such a major cause of its social and economic problems that Georgian President Eduard Shevardnadze once said: "If the lights go out, I go out." However, while some of the supply problems can be attributed to poor infrastructure, Russian companies have often been seen as exerting pressure on the government by deliberately turning off the taps.
Shevardnadze told reporters on 28 July that they should not dramatize the deal with Gazprom, saying that Georgia has no alternative. Azerbaijan itself imports five to six billion cubic meters of gas, he said, and Kazakhstan is far away. He made no mention of renewing supplies from Turkmenistan.
However, Shevardnadze did view the AES deal differently. Prior to the agreement, he had said he hoped a controlling interest would remain in Georgian hands.
The opposition is skeptical that these were purely commercial arrangements. David Gamkrelidze, a parliamentary deputy and a leader of the New Rights opposition party, said on the TV channel Rustavi 2 that “the [Gazprom] agreement is an obvious danger to Georgian sovereignty and independence. Russia failed to ruin our statehood and now it has changed tactics. It is trying to penetrate the Georgian energy market by buying its most important strategic units, such as the entire gas and energy system, including pipelines.”
“I am absolutely sure that the people do not want electricity at the price of independence,” parliamentary chairwoman Nino Burjanadze told the press on 6 August.
Many fear this is just the beginning of the advance of Russian commercial interests into Georgia. Tbilisi currently owes UES around 40 million Lari ($19 million) for electricity. Experts believe UES might, instead of cash, demand additional strategic assets. In the gas sector, too, Gazprom stands a chance of extending its interests if the gas distributor Sakgaz goes bankrupt and is sold.
Gia Khukhashvili, a Georgian energy expert, believes that "the decision to sell AES-Telasi was clearly political. A year ago,” he continues, “Putin stressed that energy is not only about the economy but is also a political tool."
He also said there are indications that the Russians are eyeing Georgia’s Black Sea ports. “That means we will actually loose independence. But I don't blame the Russians, they have their interests. I blame our government, which actually sold the country."
WORRIES IN WASHINGTON
The United States is also deeply concerned. It issued a statement expressing its regret that AES, a U.S. company, had sold its stake, adding that Washington "remains committed to supporting reform in Georgia's energy sector."
AES Telasi has been thinking of leaving Georgia for over a year. Its difficulties were compounded last August when its chief financial officer, Niko Lominadze, was found dead in his house in Tbilisi.
In particular, Washington is concerned at the possible impact on the transfer of gas.
Work has already begun on the construction of an oil pipeline from the Caspian to Turkey, via Georgia. However, there are also plans to build a pipeline that would run between the Shah Deniz gas field off the Azeri coast to Turkey, again via Georgia.
In early June, Stephen Mann, a senior energy advisor to U.S. President George W. Bush visited Tbilisi to tell Shevardnadze and the government that “Georgia should do nothing that undercuts the powerful promise of an East-West energy corridor.”
“Support for any competing gas export pipelines at this stage would be destructive for Shah Deniz,” he added.
According to Mann, the first he heard of the Gazprom deal was when he “read about it on the Russian company’s official website.”
“Such agreements should always be transparent,” he told Rustavi 2.
However, Energy Minister Mirtskhulava is cited by the news website Civil Georgia as saying that the agreement with Gazprom “complies with U.S., as well as Georgian interests.”
Shevardnadze stresses that the agreement with Gazprom does not include east-west gas pipelines. Under the agreement, Gazprom would invest hundreds of millions of dollars to modernize pipelines running from Russia to Ajaria and from Russia to Armenia.
However, the possibility that the pipeline to Ajaria could be extended to Turkey could create competition to the Western-backed gas pipeline from Baku to Erzerum in Turkey.
A leading figure in the Georgian energy industry, Gia Chanturia, president of the Georgian International Oil Corporation, had also warned the government not to take “any steps that would trigger the devaluation of these vital projects,” meaning the oil and gas pipelines from the Caspian to Turkey. “It is worth noting,” he told Civil Georgia “that the expected investment by Gazprom in Georgia's pipelines--$200 million at the first stage--is nothing compared to the dividends that the Baku-Tbilisi-Erzerum pipeline would bring to Georgia,”
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