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Tbilisi’s gas dilemma and phobias of neighboring countries

Formed by the Georgian Dream-Democratic Georgia Party after the parliamentary elections this October, Georgia’s new government is trying to change the unfavorable economic situation in the country. To achieve its goal, the Cabinet has undertaken such unpopular measures as raising taxes on a range of goods and services.

Part of the population might welcome the increased taxes on gambling and tobacco, but raising of excise taxes on cars and oil products will disappoint everyone. Nevertheless, the Georgian government needs to keep the national currency from depreciation somehow and spur economy.

It is evident that the Georgian leadership’s efforts to put 25% of the state-run Oil and Gas Corporation and Georgian Railway companies’ shares on the stock exchange is a link in the same chain. “We are following the situation at stock exchanges. We had talks with a range of investment banks, to that end,” Prime Minister Giorgi Kvirikashvili said in a statement. In his words, the government is waiting for a better market situation to put the shares on stock exchange. “Last year was not the best time to do it,” the prime minister said urging “careful and right” steps.

Noteworthy that Oil and Gas Corporation of Georgia is a conglomerate of several energy companies and owns and manages the North-South state gas pipeline, the very pipeline that Armenia uses as a transit route to import gas from Russia.

What makes everyone to view the subject from different ways and so carefully?

South Caucasus is a strategically important region, the crossroad of the North and South with the West and East. Gas pipeline was on the list of strategic facilities that are not subject to privatization or sale for national security reasons. This pipeline network has always been a kind of hot spot of high political and economic importance.

Armenia and Azerbaijan have been in the state of undeclared war for over two decades. This protracted conflict may easily flare up. In early 1990s when Armenia was strangled by the blockade from Turkey and Azerbaijan, the gas pipeline network was attacked for about two dozen times, which interrupted the gas supply to Armenia.

Under United National Movement Party, the gas pipeline was removed from the list of Georgia’s strategic facilities and the question of its sale came up. It was in 2010 when the then prime minister Nika Gilauri opposed the idea. The attempts to sell the pipeline in 2011 and 2012 were failed either. Actually, they feared that Russia might buy it. The United States too was against the sale of the pipeline.

Even after joining the opposition, the United National Movement takes painfully any contacts of the new authorities in Georgia with Russia’s Gazprom. They raise hysteria and try to fail any Georgian-Russian project.

At present, the Georgian media are actively spreading rumors that Azerbaijan may buy shares of the pipeline and own it later. It is evident that owning part of the pipeline supplying gas to its major opponent in the region, Azerbaijan will get certain advantages to its rival Armenia. Yet, Yerevan says it sees no special threat to the energy security of Armenia.

Armenia’s calm response to the above rumors can be explained with the diversification of gas supply via the Armenian-Iranian border and the operating Metsamor nuclear power plant. It is not for nothing that Turkey and Azerbaijan so harshly criticize the operation of the Metsamor NPP now. Those countries demand immediate shutdown of the plant claiming that it is poorly managed and constitutes a threat commeasurable to the Chernobyl disaster to the region.

In this situation, it is hard to imagine that Armenians care for their safety less than Turks and Azerbaijanis do. The Metsamor NPP resisted the disastrous earthquake of 1988 and received high assessment by IAEA. Its closedown, if it happens, will reduce Armenia’s energy balance by one-third. Coupled with possible halting of gas supply from Russia if Azerbaijan buys the Georgian pipeline, Armenia will face serious energy problems.

However, Finance Minister of Georgia Dmitri Kumsishvili has confirmed the desire of the authorities to sell the 25% stake in the Oil and Gas Corporation. He said the shares will be placed on London Stock Exchange (LSE) or Shanghai Stock Exchange trough IPO.

Representatives of Azerbaijan’s state oil company, SOCAR, added fuel to the fire saying they are ready to consider purchase of the shares, if they are officially put on sale. SOCAR-Georgia said: “We can see nothing specific so far. If the sale of the shares is announced officially, we will be considering the issue, but there is nothing specific so far.”

It is hard, if not impossible, to say if Armenia will be further supplied with gas through North-South gas pipeline if Azerbaijan buys it. Conflict of economic and political interests sometimes results in paradoxical situations. It is commonly known that the U.S. corporations had tangible assets in the German economy when the country was fighting against the Nazi Germany. Many specialists were shocked to see Qatar, Russia’s key economic rival and political opponent in the Middle East, participating in the purchase of Rosneft’s shares a few days ago.

Another issue even more complicates that uneasy political and economic situation – the relations and talks of Georgia’s government and Russian Gazprom-export over transit of the Russian gas to Armenia via Georgia in 2017. The existing contracts are expiring in 2016. Few days are left before those contracts expire and Minister of Energy and Natural Resources of Georgia Kakha Kaladze and Gazprom-export representatives are having rather tense working meetings now. The sides are failing to agree over the payment form for farther transit. Gazprom-export offers cash payment for the transit, while Georgia insists on usual 10% of the transited gas not to face gas deficit.

“We are updating the agreement every year. It is contact on transit. In particular, they suggest shifting to monetary payment for transit. Such proposal is inadmissible to us, and we will be protecting our position and the interests of our country,” Kaladze said.

Georgia’s government refused to import gas from Russia in 2007. Since then, the key supplier of gas to Georgia is Azerbaijan. Despite this, Georgia’s leadership does prefer Russian gas to money in such situation. Although Georgia and Azerbaijan have brilliant relationships, it is unreasonable to give 100% monopoly in the gas sector even to a friend. It is noteworthy that if the Russian gas is not supplied via Mozdok-Tbilisi-Yerevan gas pipeline, its price will fall to the price of scrap metal, exclusive of expenses on removal of the pipes.

Anyway, another “Gordian knot” is emerging in the South Caucasus affecting all the three formerly fraternal republics – Georgia, Armenia and Azerbaijan.

Irakli Chkheidze (Tbilisi) for EADaily

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