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Caucasus Report: January 5, 2007

January 5, 2007, Volume 10, Number 1

GEORGIA, AZERBAIJAN SEEK ALTERNATIVES TO RUSSIAN GAS. Following the announcement in early November by Russia's Gazprom that it planned to raise the price of natural gas supplied to CIS countries beginning in 2007, Georgia and Azerbaijan have both sought to secure alternative supplies, rather than pay Gazprom's new price of $230-$235 per 1,000 cubic meters. The Georgian government claimed in late December to have negotiated agreements with Turkey and Gazprom that will enable it to meet its estimated requirement for 2007 of 1.7 billion-2 billion cubic meters (bcm), but the quid pro quo reached with Turkey may result in a gas shortfall in 2008. Azerbaijan for its part began ramping up domestic production in 2006 and will continue to do so in 2007 with the aim of extracting sufficient gas in 2008 to cover all its domestic needs.

Georgian officials immediately challenged Gazprom's stated rationale for the planned price hike -- the need to charge market rates -- and denounced the new price as politically, rather than economically motivated. Such objections are valid insofar as Gazprom announced different rates for different countries: Belarus will pay $110 per 1,000 cubic meters in 2007, Ukraine -- $130, and Azerbaijan and Georgia -- $230, while Armenia managed to negotiate a continuation for 2007 of the previous preferential rate of $110. Georgian Prime Minister Zurab Noghaideli initially said Tbilisi would not pay the new price of $230 and hoped to reach agreement with Azerbaijan and Turkey on increasing the amount of gas Georgia would receive from Azerbaijan's Shah Deniz offshore Caspian field that was due to come on stream by the end of the year, Caucasus Press reported on November 4 (see "RFE/RL Newsline," November 2, 3 and 6, 2006).

Even before Gazprom's price bombshell, Georgia had sought unsuccessfully to negotiate with Baku an increase in the amount of additional Shah Deniz gas it could purchase (see "RFE/RL Newsline," August 21, 2006). Under an agreement signed in October 2003, Georgia is to receive in 2007 200 million cubic meters of gas (5 percent of the total) in transit fees for the Shah Deniz gas exported via the Baku-Tbilisi-Erzerum pipeline and has the option of purchasing a further 50 million cubic meters at $50 per 1,000 cubic meters (see "RFE/RL Newsline," October 1, 2001 and October 31, 2003).

But Baku, faced with a similar price hike to $230 and a reduction in the amount of gas it buys from Gazprom from 4.5 to 1.5 bcm, was reluctant to cede to Georgia any of its own projected share of the gas to be extracted from Shah Deniz in 2007. Azerbaijan's annual consumption is officially given as 12 bcm; it will receive 4.3 bcm in 2007 from Shah Deniz and a further 6.4 bcm from other fields, according to calculations by Oil Research Center Director Ilham Shaban quoted by on December 28. (The discrepancy between Georgia's and Azerbaijan's annual consumption, allowing for the difference in land area and population size, can be partly accounted for by the fact that Azerbaijan relies on gas-fired power stations for 80 percent of its electricity needs.)

Only after three rounds of talks between the energy ministers of Georgia, Azerbaijan, and Turkey, and a face-to face meeting in Ankara between Georgian President Mikhail Saakashvili and Turkish Prime Minister Rejep Tayyip Erdogan, was agreement reached in mid-December that Turkey will cede to Georgia the 800 million cubic meters of Shah Deniz gas it was to have received in 2007, on condition that Georgia "pays back" the equivalent volume of gas in 2008. Even though it has contracted to purchase more gas than it needs, Turkey rejected Georgian offers to "pay" for the Shah Deniz gas in electricity or cash, according to the Georgian daily "Rezonansi" on December 22. In addition, Azerbaijan will sell to Georgia 1 million cubic meters of natural gas daily during the 2006-07 "winter period" at a price of $120 per 1,000 cubic meters, a concession that President Saakashvili described on December 26 as "political heroism," Caucasus Press reported.

The total volume of gas, from Shah Deniz and other fields, that Georgia will receive from Azerbaijan in 2007 still falls short of its projected total needs, however. That presumably is why individual Georgian gas suppliers nonetheless agreed on December 22 to buy 1.1 bcm (according to some sources, as much as 1.46 bcm) of gas from Gazprom in 2007 at a price of $235 per 1,000 cubic meters, or $5 more than Gazprom said two months earlier it would charge. Georgian Prime Minister Noghaideli was quoted by "The Wall Street Journal" on December 23 as saying that agreement is "a short-term solution" and that once technical problems that are delaying production at Shah Deniz are solved, Georgia will cease purchasing Russian gas in favor of cheaper gas from Shah Deniz.

But it is not clear whether, by 2008, Shah Deniz will be producing enough gas to permit Georgia to purchase the additional 800 million cubic meters it must supply Turkey with that year, and if not, where Georgia would find both the additional gas that it will "owe" Turkey, and the amount it will need for domestic consumption.

Any hopes the Georgian (or Azerbaijani) government may have had of buying gas from Iran now look increasingly remote. Not only has the U.S. administration made clear its displeasure at the prospect of any significant Georgian dependence on Iran. That country is currently hard-pressed to meet domestic demand, which has risen 45 percent in 2006, Iranian Deputy Oil Minister Hasan Kasai told ILNA on January 1 (see "RFE/RL Newsline," January 3, 2007). Kasai said Iran has scaled back exports to meet domestic demand for gas. Iranian gas exports to Turkey have been suspended, according to on January 4.

Meanwhile, faced not only with a steep price hike but a two-thirds reduction in the volume of gas Gazprom was prepared to offer, Baku has announced that it will not buy any Russian gas in 2007. (The Azerbaijani authorities are clearly angered that Gazprom will continue to sell gas to Armenia at the preferential 2006 price of $110 per 1,000 cubic meters.) Azerbaijan's state oil company SOCAR has intensified the extraction of gas since early 2006 by 43 percent, to 15.6 million cubic meters per day, the daily reported on December 30, and plans to drill new wells to increase production by a further 3-3.5 bcm in 2007. By 2008, output should be more than enough for the country's domestic consumption, the online daily quoted SOCAR President Rovnag Abdullayev as predicting. (Liz Fuller)

TYCOON REGARDED AS LIVING HERO BY MANY ARMENIANS. Gagik Tsarukian, a former arm-wrestler and millionaire businessman with ties to the Armenian government, is the most popular and revered individual in modern-day Armenia, according to the findings, released in December, of an opinion poll commissioned by the U.S. Agency for International Development (USAID). That widely held perception suggests that thanks to Tsarukian's rising populist appeal, his Prosperous Armenia (BH) party will be a major contender in the parliamentary elections due in May 2007.

The survey was designed by the U.S. Gallup Organization and conducted by the Armenian Sociological Association across the country between November 10-19, with 1,200 randomly chosen people asked to answer a long list of questions relating to domestic politics, foreign affairs, and the unresolved Nagorno-Karabakh conflict.

One of the questions read, "Of the prominent Armenian people and characters in Armenian history and folk culture, who is most suitable to be a national hero or leader at the present time?" The late Prime Minister Vazgen Sargsian was the most frequently named figure, with 15 percent of those polled describing him as a national hero. He was followed by two early-20th-century Armenian military leaders and Karen Demirchian, who served in the 1980s as first secretary of the Communist Party of Armenia and ran unsuccessfully for president in 1998. Demirchian and Sargsian were both killed in the October 1999 terrorist attack on the Armenian parliament.

Of all the living Armenians mentioned by respondents, Tsarukian had by far the highest rating: 8 percent. Trailing him were opposition leaders Artashes Geghamian (3 percent) and Artur Baghdasarian (2 percent), as well as President Robert Kocharian (2 percent). Tsarukian had 4 percent support in the previous USAID-funded study that was conducted in August 2006. The apparent rise in his popularity may well be the result of the recent upsurge in his party's election-related activities, which are widely reported by the Tsarukian-controlled Kentron television and other channels loyal to Kocharian.

BH now claims to be by far the largest political party in Armenia, boasting at least 240,000 members and over 400 offices in a country of 3 million. Its publicity actions have included provision of large-scale agricultural aid, free-of-charge medical assistance, and other supposedly public services to low-income people across the country. Critics, among them some leaders of Armenia's two main governing parties, regard this as a massive vote-buying operation.

Parliament speaker Tigran Torosian, a leading member of the ruling Republican Party, complained to a visiting Western ambassador in November about the emergence of new Armenian parties led by "apolitical figures." In an apparent reference to Prosperous Armenia, Torosian said their electoral success would deal a "blow to the multiparty system." Vahan Hovannisian, a leader of the Armenian Revolutionary Federation--Dashnaktsutiun, suggested on November 24 that many Armenians are now ready to sell their votes to the highest bidder. "If a voter who has lived in independent Armenia for 15 years knows everyone, has seen every politician on TV for umpteenth times, read party programs...but has still not made up their mind, then they are expecting money," he said.

Critics also point to a huge disparity between the millions of dollars spent on Prosperous Armenia's election campaign and the modest earnings posted by Tsarukian-owned businesses. The largest of those businesses is only 76th in the government rankings of Armenia's 300 leading corporate taxpayers, giving more weight to allegations that Tsarukian is evading taxes on a massive scale.

Tsarukian, who is close to President Kocharian, rounded on his detractors at a meeting with thousands of Prosperous Armenia activists in Yerevan's Ajapnyak district late last month. "I would love to know what they have contributed from their personal accounts," he said in a speech broadcast by several television stations. "Have they personally financed any good thing? Let them talk about that, instead of hurting the people and slamming things done by others."

Kocharian publicly defended his reputed protege on December 15, saying that it is wrong to attribute Prosperous Armenia's expansion to Tsarukian's "benevolent actions." "There is a demand in our society for a new political force that comes up with a very understandable slogan, 'We think about the people,'" he said. (Emil Danielyan)

ARMENIAN PRIME MINISTER DENIES FEUD WITH OLIGARCH. Andranik Markarian dismissed on December 22 talk of growing rivalry between his Republican Party of Armenia (HHK) and businessman Gagik Tsarukian's Prosperous Armenia (BH) party. Some politicians and commentators say BH is increasingly regarded as a threat by the HHK, which is intent on retaining its control of the National Assembly. But others believe that the objectives of the two groups are not mutually incompatible. "There are attempts to artificially create such a problem," said Markarian. "Such a problem doesn't exist. Rivalry [between the HHK and Prosperous Armenia] doesn't exist."

Another, more influential HHK leader, Defense Minister Serzh Sarkisian, claimed last summer that Tsarukian is too inexperienced to pose a threat to his party. "Prosperous Armenia is not yet a party, to begin with," Sarkisian told RFE/RL on July 20. However, Tsarukian's party seems to have since rapidly expanded and now boasts over 200,000 members across Armenia. Its recent large-scale distribution of "humanitarian aid" to rural residents drew serious concerns from opposition politicians and even some HHK leaders, who have accused Tsarukian of trying to buy his party's way into the next parliament.

Kocharian dismissed such concerns on December 15. Markarian for his part indicated that he believes the Prosperous Armenia campaign will lose momentum in the run-up to the elections as "the people will acquaint themselves with new parties and their activities and compare them with older parties."

Meanwhile, the HHK-controlled parliament approved on December 22 in the final reading a package of amendments to the Electoral Code that the Armenian government says will make it more difficult to perpetrate fraud in the next elections. The opposition, however, is convinced that their impact on the freedom and fairness of the polls will be marginal.

One of the changes is meant to address a recent Constitutional Court ruling that made it illegal for Armenian judges to hold one of the nine seats in various-level election commissions. Kocharian, the six parties represented in the current National Assembly, and a group of nonpartisan parliamentarians each appoint the other commission members. The amended code stipulates that the vacant seats shall be occupied by members of court staffs to be chosen by the Court of Cassation. Opposition lawmakers said this provision is also unconstitutional and accused the pro-Kocharian majority of violating the court ruling.

The parliament also rejected opposition demands to allow parliamentary parties to replace their representatives to election commissions at will. The opposition Artarutiun bloc and the National Unity Party claim that many of their commissioners are bribed or bullied by the authorities into turning a blind eye to vote irregularities. This argument was rejected by both the HHK and legal experts from the Council of Europe.

Another key amendment raised from 5 to 7 percent the minimum proportion of votes that an electoral bloc needs in order to win parliament seats under the system of proportional representation. The vote threshold for parties contesting elections on their own remains 5 percent. (Shakeh Avoyan and Ruzanna Khachatrian)

ARMENIAN ECONOMY AGAIN POSTS DOUBLE-DIGIT GROWTH. The Armenian economy has expanded in 2006 at a double-digit rate for a sixth consecutive year, Trade and Economic Development Minister Karen Chshmaritian said on December 26. According to government data cited by Chshmaritian, Armenia's gross domestic product (GDP) grew by 13.2 percent during the first eleven months of the year. The growth rate for the whole of 2006 is projected to hit at least 13.5 percent, he said.

President Robert Kocharian hailed the country's strong macroeconomic performance at a meeting with some 60 leading Armenian businessmen late on December 25. "It was one of the most productive years for our economy," he said. But at the same time Kocharian admitted that the growth is largely driven by a continuing boom in the construction and services sectors. The government reported a nearly 40 percent surge in the volume of construction work carried out across Armenia during the first half of 2006.

By contrast, the local manufacturing sector seems to have been largely stagnant. Chshmaritian, who avoided releasing any figures on Armenian industrial output, blamed that on a continuing downturn in the global trade in refined diamonds, one of Armenia's main export items. He said Armenian exports excluding diamonds have increased by 6 percent. "This shows that Armenia's economy is becoming more diversified," Chshmaritian told reporters. "A slump in one or two sectors does not cause a drastic fall in the overall indicators." He also stressed the fact that small and medium-sized firms now generate more than 40 percent of GDP.

Armenia's macroeconomic performance has repeatedly drawn praise from the International Monetary Fund (IMF) and the World Bank. The IMF's managing director, Rodrigo de Rato, described it as "impressive" during a visit to Yerevan last summer (see "RFE/RL Newsline," June 20, 2006).

The Armenian government insists that despite a growing income disparity, the growth has benefited all segments of the population. According to the National Statistics Service, 34.6 percent of Armenians lived below the official poverty line as of the beginning of 2005 -- down from 56 percent registered in 1999 and 43 percent in 2003.

Kocharian also spoke of a "visible" improvement of living standards, pointing to a 40 percent jump in sales of household goods and a 20 percent rise in the number of cars imported to Armenia in 2006. "This means that a middle class really is emerging and that a corresponding number of households are now somewhat better off," he said. Kocharian admitted at the same time that his government has yet to tackle "social polarization" and the widening development gap between Yerevan and other parts of Armenia. (Ruben Meloyan)

QUOTATIONS OF THE WEEK. "[Chechen President Aslan] Maskhadov had nothing to do with [the Beslan hostage taking of September 2004]. It was very important to Torshin to implicate Maskhadov in the group [of hostage takers] in order to negate those substantive efforts by Maskhadov to [begin] negotiations and release the hostages." -- Marina Litvinovich, editor of the website, commenting on the findings of the parliamentary probe headed by Aleksandr Torshin (quoted by on December 22).

"The opposition has been dealt a powerful blow, but not knocked out. Sticking to an independent opinion under a dictatorial regime, staging unauthorized [protest] actions while acutely aware of the likely consequences, waging a principled struggle for democracy, being subjected to reprisals and still not deviating from the chosen path testifies to the strength of the opposition, not its weakness. The victor is not the one who wins but the one who does not concede defeat . And the true opposition has not conceded defeat and has no intention of doing so." -- Opposition National Unity Movement Chairwoman Lala-Shovket Gadjieva, interviewed by on December 26.