Armenia and the Changing Energy Landscape: Will Armenia Benefit from the “Energy Revolution”?

As the world goes through what some pundits have already called a new “energy revolution”, one of its most obvious and far-reaching consequences is the downward trend in oil and natural gas prices. Coupled with recent geopolitical developments, namely the so called “Iranian opening”, this development looks set to open up new opportunities for Armenia. However, in reality things are more complicated: for Armenia, given its complicated geopolitical and geo-economic situation, the consequences of the “energy revolution” have so far been a mixed blessing.

Not so cheap: the limited impact of oil and natural gas prices

Obviously, Armenia, as a fossil fuels importer country expects to benefit from the low prices. However, while there has been a certain decrease in the prices of fossil fuels imported into Armenia, the drop has been too limited to re-ignite the country's stagnant economy. Thus, in the case of natural gas, the price which Armenia had been paying to Russian Gazprom during the previous years was already lower than what Gazprom charged other customers. In 2013 the price for Armenia was set at 189 USD per square metre, which at the time was significantly lower than the average price of natural gas supplied by Gazprom to European customers - around 350 USD. This had been advertised by the Armenian government as one of the most obvious economic benefits of Armenia’s strategic partnership with Russia, as well as of Armenia’s participation in the Eurasian Economic Union. However, the gas deal signed in 2013 also included the transformation of ArmRusGazprom, a company co-owned by the Armenian government and Gazprom, into Gazprom Armenia, into a 100-per cent Russian-owned venture. This was an important addition to the picture, since while the gas price on Armenia’s border was quite low, the price paid by Armenian customers within the country to the Russia-owned company were significantly higher: 330 USD per 1000 cm for the general population, and 277 USD per 1000 cm for large enterprises.[1]

In 2013 oil and natural gas prices were quite high globally, which allowed the government to defend the gas deal, even as it lost control over a company that enjoyed a monopolist position in Armenia’s gas market. However, today the benefits of the 2013 deal do not seem so obvious, as gas prices have fallen significantly for most Gazprom customers, including most European countries, even Ukraine. While Gazprom did cut the price for Armenia from 189 USD per 1000 cm to 165 in 2015, this has not resulted in a drop in the price for consumers inside Armenia.

Another benefit of falling oil prices all over the world has been the drop in petrol prices for consumers in fossil fuel-importing countries. While customers in many countries of the world are taking advantage of lower petrol prices, in some countries the drop in prices has been quite insignificant, and in others, including Eurasian Economic Union members Russia and Kazakhstan, the price has even gone up[2]. Currently petrol in Armenia is cheaper than the global average, but more expensive than in most post-Soviet countries, including oil importers such as Georgia, Kyrgyzstan and Tajikistan[3].

Strong currency: a mixed blessing

One of the fields where the Armenian economy proved more stable than that of many oil-exporting post-Soviet countries is the national currency's exchange rate. The majority of oil-exporting countries have suffered from currency devaluation. Unlike them, Armenia, which has no reliance on energy exports, has gone through a relatively mild devaluation. After an initial shock in December 2014, directly related to Russia's “black Tuesday”, when the Armenian Dram plunged to historical lows against the euro and US dollar, the Armenian currency returned to relative stability. In August 2015, Bloomberg listed the Armenian dram as one of the 10 currencies most likely to suffer from devaluation[4]. However, this gloomy forecast has not come true, at least not yet: so far the Armenian dram’s devaluation has been slow and limited, especially compared to that of currencies of countries of the region directly affected by the drop in oil prices. This, however, has been a mixed blessing. On the one hand, it has helped the Armenian government to maintain some degree of economic stability, but at the same time it has dealt a major blow to Armenian exports, which are losing their competitiveness in the Russian and other post-Soviet markets. Besides, the relatively high national currency exchange rate has been a disaster for those Armenian families who depend on financial remittances from guest workers living abroad.

Thus, while in theory, low energy prices could have been a boost to Armenia’s economy, Armenia has largely failed to benefit from the benign effects of the energy revolution. However, being largely dependent on the Russian economy (it is not only a major trade partner, but also the main destination of Armenian guest workers, whose remittances are a major pillar of the Armenian economy), Armenia has indeed felt its share of the negative consequences of the low oil prices. The above-mentioned devaluation of the Russian rouble, coupled with a significant drop in consumer spending in Russia, against the background of a relatively stable exchange rate of the Armenian dram, has decreased the competitiveness of Armenian products on the Russian market.

Armenia and the “Iranian opening”                         

Another factor that could change the energy balance in the region, and have a particularly beneficial effect on Armenia’s energy sector, is the lifting of the Western sanctions on Iran. Discussions about a potential transit pipeline from Iran passing through Armenia to Georgia, and potentially further, via the Black Sea to Europe, have been present in Armenia’s media for decades. While the continuation of the gas pipeline to Europe via Black Sea may be a somewhat utopian aspiration, at least at the current stage, Armenia could indeed use the Iranian “opening” to diversify its natural gas imports, and even become a transit country for Georgia.

The fact that that is a somewhat distant prospect may have to do with both economic and political considerations. Many in Armenia believe that the project of transiting Iranian gas via Armenia to Georgia, in discussion for over a decade, had been scrapped mostly because of political considerations, chiefly Gazprom's influence. As a result, a pipeline linking Armenia with Iran, which was opened in 2007, allowed only for limited gas imports to Armenia. And this gas was used for producing electricity that was sold back to Iran. Obviously, the pipeline was controlled by ArmRosGazprom, later to become Gazprom Armenia, which meant that Iranian gas would hardly be able to compete with Russian imports.

Now, as Iran is emerging from its economic isolation, the idea of Iranian gas transit to Georgia via Armenian territory, was revived, this time with the participation of Gazprom. An additional geopolitical benefit to this deal, from the Armenian point of view, would have been the reduction of Georgia’s dependence on Azerbaijani gas imports. However, apparently, Gazprom and Georgia failed to close the deal, thus leaving the Armenian-Iranian component redundant[5]. But even if the deal had gone through, it would hardly have amounted to a significant diversification in Armenia’s gas supply, as the Russia-owned Gazprom would still remain in control of Iranian gas import and transit. In any case, the discussions of possible deals involving Armenia, Gazprom and Iran are likely to continue, but whether these will produce any concrete results remains to be seen.

In the long run, the “opening” of Iran, will bring new possibilities for Armenia in terms of gas imports diversification and becoming a transit country. However, for this to happen, two important conditions have to be met. First, the Iranian “opening” has to continue over the long term, which can hardly be taken for granted, given the degree of opposition both in Iran and in the West (not to mention the West’s allies in the Middle East). And, second, Armenia needs to be able to withstand the political pressures that may arise from its various partners, including Russian state-owned companies. To this point, the Armenian government has not been very successful in doing that.