The Moscow Connection
The Moscow Connection


by Haroutiun Khachatrian

And even after they were disjoined in December 1991, their economies remained linked though politics separated them. While still learning what it meant to be an “independent” republic, Armenia was doing its best to preserve connections inside the “united economy space” of the former Soviet Union. Like a suckling untrained for self-survival, Armenia (as well as other suddenly-single republics) had little choice but to maintain the only lifeline it had known for 70 years.

Armenia had reason to keep the ties tight: Russia was its major market (if not the only one) and an even more important supplier of strategic commodities. Evidence of the need to maintain the link became clear on August 14, 1992 when, because of the Georgian-Abkhazian war, the only railroad link connecting Armenia and Russia was blocked (the second link, which passed through Azerbaijan, was blocked even earlier, as the war over Nagorno Karabakh sparked).

The terrible economic crisis and energy shortage which started that winter were caused by conditions that made it impossible to transfer crude oil and grain from or through Russia; gas supplies (then from Turkmenistan) were often interrupted due to numerous acts of sabotage by gorilla rebels on the pipeline in Georgia, as ethnic conflicts flared in the south Caucasus.

The next event marking separation of the Armenian and Russian economies was the breakdown of the common ruble zone initiated by Moscow in 1993. And again, the Armenian government made every effort to remain inside the ruble zone, and became one of the last former Soviet Republics to introduce its own currency. The Armenian dram began circulation on November 23, 1993, nearly two full years after the unraveling of the Soviet Union.

The Armenian government’s efforts to preserve integrated links with the Russian economy faltered finally in 1994, when Hrant Bagratian, then Prime Minister of Armenia, proposed to create a sort of single currency of the Commonwealth of the Independent States (CIS) to make their trade simpler (similar to the ECU of the European Union, which later grew into the Euro). Bagratian’s initiative was misunderstood and rejected by fellow diplomats in the CIS, whose countries were eager to establish independent identities far from the shadow of their communist pasts. Since then, the economies of Armenia and Russia have followed radically different paths. Sharing still a common foreign policy and defense strategy, the allies no longer shared an economic road map.

Midway into the second decade of independent Armenia as no longer a USSR satellite, but spinning for better or worse in its own orbit, it is difficult to believe that once the economies of Armenia and Russia were a single entity. Of course, both turned to free market principles and privatization. But there are striking differences which are best reflected in several so-called unofficial ratings.

One, the Index of Economic Freedom, calculated by the Wall Street Journal and Heritage Foundation has, since 2001, ranked Armenia 42-46th, among some 155 countries. But last year, Armenia jumped to 27th place, well ahead of not only most other former Soviet countries, but also many EU states.

As for Russia, it never ranked higher than 110th. This suggests not only more freedom for investors in Armenia, but implies that the two economies have become less compatible. In particular, Russia has a heavier tax burden and a more cumbersome custom system.

Not surprisingly, Armenia rejected invitations to join any economic union initiated by Russia, such as the CIS Custom Union, Eurasian Economic Union, not to mention the Russia-Belarus Union, which some politicians and a large part of the population of Armenia strongly supported in the late 1990s. Instead, Armenia joined the World Trade Organization to have as much free trade as possible with all its partners. Time has proved the soundness of that decision, as none of the Russian-initiated unions has been as successful as WTO.

A consequence of these factors was Russia’s decline in the share of the foreign trade of Armenia; from more than 50 percent in early 1990s to 13-15 percent in recent years. Thus Russia has become merely one of Armenia’s numerous trade partners, although still the largest one. Russia exports to Armenia machinery and equipment, cars and trucks, metals, agricultural products and food. Of vital importance are Russian natural gas and nuclear fuel. Armenia exports to Russia food, chemicals, metals, precious stones, alcoholic beverages and numerous other goods.

Politics, Economy and Friendship

Separating economics from politics was a double-edged sword for Armenia-Russia relations. On the upside, Armenia became less reliant on the superpower. Armenia has not, however, profited economically as a consequence of its shared political point of view.

While hosting Russian troops contributes to Armenia’s sense of national security, having Russia’s only military base in the Caucasus is of little monetary value. Russia has never, for example, awarded grants or low-interest loans to Armenia, unlike the millions given to the republic by the US and other developed nations. Still, traditionally pro-Russian Armenian public opinion has largely ignored these differences.

In 2002, Armenia had to transfer several enterprises to Russian ownership to redeem a commercial loan provided by Russia in the mid-1990s. Again, it remained largely unnoticed that the loan, $93 million, was equivalent to the amount (at least) of the assistance the United States had provided to Armenia every year since 1992. On the contrary, much of the population was happy to know that these assets were transferred to the “friendly nation”.

Moreover, joint efforts of the parties to stimulate bi-lateral cooperation often failed. Among these failures, those related to the transfer routes are the most important. Although due to re-orientation of trade, Armenia has become less dependent on Russia, it is still seen as the best market for Armenian goods. The blocked Abkhazian part of the railroad connecting Georgia with Russia is a bottleneck, forcing Armenian traders to use alternative and much more expensive routes. Bilateral Armenian-Russian economic commissions exist both at the intergovernmental and the inter-parliamentary levels. And, at every session of these commissions, re-opening this stretch was on the agenda. The Russian part gives promises to take measures to re-open the railroad (Russia is an influential player in the Georgian-Abkhazian conflict), but no results have been achieved so far.

Another similar example is the Mars enterprise—one of five enterprises passed to Russia under the mentioned 2002 debt-for-equity deal—an up-to-date British-made factory for manufacturing a wide range of the modern electronic and robotic equipment installed in Yerevan shortly before the breakdown of the USSR. The Armenian government, which had failed to find either an investor or a manager for Mars, hoped that Russia would be able to activate the factory by integrating it into its military industry (it was for that very purpose that the Soviet government built it in the 1980s). However, so far Mars works below 10 percent of its capacity, and its proper use remains the subject of complaints by the Armenian side, which hoped to have hundreds of highly paid jobs at the high-tech enterprise.

Any failed expectations of Russia being Armenia’s cash cow aside, the friendly empire has, however, been the land of opportunity for thousands of Armenians who without so much as a visa migrate there for work.

Currently, some 800,000 Armenian citizens work abroad, (most emigrated during the hard days of 1993-95), and the total bank transfers of monies to Armenia is estimated at as much as $700 million per year (an amount more than with the state budget of Armenia). Seventy percent of that money comes from Russia. Thus, Russia remains a country of hope for many Armenians even now, after several years of good economic performance at home.

Gas pains

Unexpectedly enough, in recent months public opinion in Armenia toward Russia has apparently changed to what can be termed as somewhat more pragmatic. This was due to the issue of raising the price of the Russian gas supplied to Armenia.

Last August, it was announced that Gazprom, the Russian gas giant, was to apply “market prices” to former Soviet republics. The media report quoted an unnamed Kremlin official, leading to speculation that the decision was politically motivated—and aimed at clients who had contentious relations with Russia—especially given that Gazprom is a state-owned company.

Ukraine and Georgia were the apparent targets of increases (imposing at least twofold price increases). As for Armenia, no change in prices was mentioned for several months. It was only in late November that Gazprom declared its decision that the market prices would be applied to its “strategic ally” Armenia as well. The news was met by shock in Armenia, where the 2006 budget had been set assuming previous gas tariffs.

After a special summit in the Russian resort city of Sochi on December 16, Armenia was given a three-month delay in enacting the new price, whereas Georgia, Azerbaijan and Ukraine had to pay the increased prices starting January 1. It was perhaps the first ever case when the “strategic partner” was given an economic benefit from Russia. (Russian President Vladimir Putin told reporters in Sochi that politics had nothing to do with the gas issue as it was merely “a dispute of economic entities”.)

A new development followed, however, which propelled the discussion already rising in Armenia, about the boundaries of the “strategic partnership.” A spokesman with Gazprom was quoted as saying in mid-January that Russia would have kept its gas price low for Armenia if the latter agreed to some preconditions. Primarily, the Russians wanted ownership of the fifth (unfinished) bloc of the Hrazdan Thermal Power Plant (HTPP), or a large stake of the Iran-Armenia gas pipeline (now under construction).

The Russians already own the four blocs of HTPP, six hydropower stations of the Sevan-Hrazdan cascade, 55 percent of the ArmRosGazprom, Armenia’s only gas operator, and, since last fall, energy distribution networks. In addition, a 5-year deal was signed in 2003, under which RAO Interworld UES, the Russian power producing giant, manages the Armenian nuclear power station in Metsamor. This makes up an estimated 70 percent of the energy sector of the country. Their bargaining for further control caused a wave of critical comments from public and political figures in Armenia.

“Russia hits below the belt,” said former Prime Minister Vazgen Manukian.

“With this unfriendly action, Russia pushes Armenia to the West,” said Parliament Member Hmayak Hovhannisian.

Even the state-owned Public TV aired opinions criticizing Russia. Of course, the government was quick to declare that it did not share these opinions.

“There is no need to change our relations due to gas prices, especially in areas that concern security and physical safety,” Minister of Foreign Affairs Vartan Oskanian said. Nevertheless, a modification of Armenian-Russian relations may be inevitable.

“Strategic distance”

In the view of some, the gas controversy points to an Armenia-Russia shift of relations. If in the early ‘90s Armenia struggled to keep its ties to the former “Union Center” to avoid economic collapse, today the challenge is to find ways to do business with Russia, without risking unilateral dependence on the “strategic ally”.

According to Armenia’s Minister of Trade and Economic Development Karen Chshmaritian, Russian investment in Armenia totalled $407 million at the close of 2005, making Russia the largest country of origin for investments (followed by Greece and Germany). The main spheres for recent Russian investment are metal processing, banking, insurance, the computer industry, construction, mining, trade and services. In fact, hopes were high in Armenia that Russian investments might be greater, to include more spheres ranging from chemical industry to construction of small aircraft.

Except for the energy sector, Russia has no other dominating position in the Armenian economy. It is simply one of many investor countries which have to compete for entering the Armenian market.

There are many cases when Russian companies lost investment tenders in Armenia, the latest being those for construction of the Iran-Armenian gas pipeline and the fifth block of the Hrazdan power plant in 2005 (both were won by Iranian participants).

As mentioned, the Russian side was unhappy, and raising the gas price for Armenia was seen in some circles as a sort of punitive measure. However, most economists share the opinion that the Armenian economy is now strong enough to withstand such shocks easily. In fact, Armenia has good prospects of having a second gas supplier when the Iran-Armenia gas pipeline is completed later this year.

Finally, the fact that Russia possesses significant assets in the Armenian energy sector can bring benefits as well, as they make Russia interested in their efficient and profitable work. In particular, the delay in the raising of the gas price for Armenia may be a consequence of this fact. After all, Russian companies are not only gas suppliers, but also gas consumers in Armenia, and ArmRosGazprom, Hrazdan TPP, Armenal and others would suffer losses due to a sudden increase in energy prices.

Although no information is available about the ongoing negotiations, it may well be that the delay in introducing the elevated gas price for Armenia was partly due to this reason, and these talks may result in a somewhat lower price than for Georgia and Azerbaijan. So, it may turn out that President Putin had some reason to say that it was “a dispute of economic entities.” That, and other factors, may well be among those favorable for Armenia.

The author is a political and economic analyst, and editor of “Noyan Tapan Highlights” in Yerevan.

Editor’s note: As this edition was going to press, it was learned that Russian interests would indeed purchase Bloc 5 of the Hrazdan power plant for $250,000,000, $60,000,000 in cash and the remainder in gas delivery until 2008. There is also conjecture that Russia will participate in the Iran-Armenia gas pipeline.

Originally published in the April 2006 ​issue of AGBU Magazine. Archived content may appear distorted on your screen. end character

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