Energy security – Georgian perspective

Special edition on energy security

SUMMARY:

IN ENGLISH

РЕЗЮМЕ НА РУССКОМ ЯЗЫКЕ (Summary in Russian) Page 3

REGIONAL REVIEWS:

WESTERN CIS

- Recent political developments Page 5

- Special theme – energy security Page 6

SOUTH CAUCASUS



CENTRAL ASIA



EXPERT ARTICLES:

Ildar Gazizullin: Ukraine – captured energy security Page 11

Liana Jervalidze: Azerbaijan and Georgia – energy transit from the Caspian to EU market:

Current position and potential Page 13

Anton Lobach: Belarus’s energy security Page 15

Meruert Makhmutova: Kazakhstan electricity sector reform Page 17

Murman Margvelashvili and George Mukhigulishvili: Energy security – Georgian perspective Page 19

Alex Oprunenco: Energy security in Moldova – a long road ahead Page 22

Gulmira Rzayeva: Azerbaijan – energy power in the region Page 24

Sevak Sarukhanyan: Armenia – the energy security or the failed diversification Page 27

Aida Alymbaeva: NGOs in Kyrgyzstan and their role in immediate peace and stability operations

after the 2010 June inter-ethnic conflict in the south of Kyrgyzstan Page 29

ISSUE NO. 2, 22 JUNE 2011

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Western CIS - South Caucasus - Central Asia

Biannual Review

Wider Europe - Regional Security Report

Regional Security Report, 22.6.2011 Biannual Review 2•2011

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Pan-European Institute

Summary in EnglishDuring the recent years, energy security has become one ofthe most significant factors affecting the security and foreignpolicies of the countries in Western CIS, South Caucasusand Central Asia. Indeed, due to its significance as both anenergy producing and transit area and its strategic location inthe neighbourhood of the EU, Russia and China, the WiderEurope is in the centre of the global energy interplay.

The disintegration of the Soviet Union had aconsiderable impact on the energy sector of the WiderEurope area. During the Soviet period and immediately afterit, the energy sectors of the countries were heavilyinterdependent. Since then, the countries in the region havestarted to emphasise self-sufficiency of energy. While theenergy exporting countries have been exploring possibilitiesto penetrate markets outside the region, the energyimporting countries have been searching for differentsuppliers in order to diversify their energy supply.However, despite of these changes, the region is stillrelatively interdependent with regard to its energy sector. Themajority of the countries depend on Russia either for theirenergy supply or energy infrastructure, particularly withregard to natural gas.1 Russia’s own energy resources, aswell as its strategic location and control over most exportroutes for Central Asian oil and gas, make the countryparticularly important actor regarding issues related to energysecurity of the Wider Europe countries. All the post-Sovietcountries – even those that have close relations with Russia– are interested in diversifying their economic and energyrelations and getting access to new markets. Russia, on theother hand, aims to maintain its traditional sphere ofinfluence, and control the energy transport routes in theformer USSR area.2

In addition to Russia, the EU, the US and China are allinterested in reinforcing their relations with the countries inthe Wider Europe area. The US aims to promote the post-Soviet countries’ relations with the west and has a strategicsecurity interest particularly in Central Asia.3 In turn, bothChina and the EU seek to diversify their energy supplies.China’s growing energy demand has compelled the countryfor a global hunt for energy. China is the world’s largestproducer and consumer of coal4 but it needs other fuels aswell to produce enough energy for economic development.China is particularly interested in the hydrocarbon resourcesof the Central Asian countries of Kazakhstan, Turkmenistanand Uzbekistan. The EU aims to secure energy supply andavoid over-reliance on any one country, and looks for newenergy suppliers for instance in Azerbaijan andTurkmenistan. On the other hand, countries like Ukraine andGeorgia have a strategic position in the EU’s objectives todiversify its energy supply and to guarantee secure andreliable energy routes, and could play a significant geo-economical role as energy transit states in the future.

Energy supply is linked to a number of economic andpolitical security issues. Energy is one of the most importantinputs into national economies, and their competitiveness is

1 The International Bank for Reconstruction and Development (IBRD)/ The World Bank 2010: Lights Out? The Outlook for Energy inEastern Europe and the Former Soviet Union.2 German, T.: Corridor of Power: The Caucasus and Energy Security.Caucasian Review of International Affairs, Vol. 2 (2) Spring 2008;Peyrouse, S.: Is there any unity to the Trans-Caspian Region? Theeconomic relations between Central Asia and Caucasus. AsiaEurope Journal, vol. 7, no. 3, 2009.3 Peyrouse 2009; Stockholm International Water Institute: RegionalWater Intelligence Report Central Asia. Paper 15, March 2010.4 U.S. Energy Information Administration: International EnergyStatistics 2009.

affected by energy prices. In the Wider Europe area, theeconomic aspect is particularly important for the energyproducing countries, such as Azerbaijan, Kazakhstan,Uzbekistan and Turkmenistan, which receive a great shareof their revenues from oil and natural gas exports. Inthose countries, energy exports are a booster for economicgrowth and a significant source of prosperity, althoughunevenly distributed among the citizens. The effectivemanagement of such revenues has remained problematicin many countries in the region, and some nationaleconomies have grown too dependent on energy sector.

Countries such as Azerbaijan, Kazakhstan andTurkmenistan that have considerable hydrocarbonreserves, aim to increase their significance on the worldenergy market. However, to translate these significantreserves into production, large investments are needed,and the countries need to attract both foreign investmentsand advanced technological know-how. Reaching this goalwould require creating an investor-friendly businessclimate.5 Furthermore, to become major players on theinternational energy market, they need not only to increasethe production of hydrocarbons, but also to developtransport routes for their energy supplies. So far, limitedexport options and reliance upon the Russian pipelinenetwork has restricted their ability to profit from theirextensive oil and gas reserves. The constructions of theBaku-Tbilisi-Ceyhan oil pipeline and the parallel SouthCaucasus natural gas pipeline have had considerablesymbolic significance as providing links between theCaspian region and Europe. In turn, for the countries withlimited energy reserves, such as Georgia and Ukraine,energy transit is an attractive option to receive significantrevenues and boost the economic security.6

Energy is closely linked to foreign and security policyand geopolitics of most of the supplier and consumernations. The availability of energy directly affects thedefence capability of states, and instead of just a basictrading good, energy is often seen as a strategiccommodity, which can be used as a strategic and foreignpolicy tool. In the EU–Russia relations, as well as inRussia’s relations with its neighbouring countries inWestern CIS, South Caucasus and Central Asia, energyissues have emerged as the single most important factordefining the development of the foreign relations betweencountries and regions. The gas disputes between Russiaand Ukraine, of which the most recent in 2009, and the warbetween Russia and Georgia are extreme examples of thefragility of the energy balance in the Wider Europe.

As particularly gas supply has sometimes been usedas a political leverage, many countries in the Wider Europehave been moving towards domestically produced energysources, such as coal and hydropower. As coal ischeaper than oil and gas, it could be increasingly used fordomestic heat and power production, which would increaseenergy security of energy importing countries and freemore oil and gas for export in energy exporting countries.Particularly Ukraine and Kazakhstan have large coalreserves, and they have potential to increase their coalproduction. Kazakhstan already exports roughly a third ofits production to Russia and other countries, and forUkraine, increasing domestic coal production could providebetter energy security. However, as coal-fired plantsproduce significant CO emissions, for example twice as

5 IBRD / The World Bank 2010.6 German 2008.


2


much as gas-fired plants, the challenge will be to make coalmore environmentally acceptable.7

With regard to CO emissions, nuclear energy is asignificantly cleaner way to produce electricity. However,following the nuclear accident in Japan’s Fukushima, somecountries have adopted a more cautious approach to nuclearenergy and are reconsidering the necessity of building newnuclear reactors. For now it seems that the events inFukushima have had the largest impact on countries in whichnuclear energy has already been a debated issue, such asGermany. However, in countries where civil society is muchweaker and public opinion is not a driving factor behind thenuclear decision-making, the effect of Fukushima on energypolicies is likely to be less significant. In the Wider Europeregion, development of nuclear power is underway forexample in Belarus where plans to build a Russian-financednuclear power plant are progressing.8 Countries such asKazakhstan, Ukraine and Uzbekistan also have substantialuranium reserves to fuel nuclear power plants.9 In Armenia,on the other hand, Japan’s nuclear accident has raised adebate over the safety of Metsamor nuclear power stationwhich is also situated on an earthquake-prone zone, andprompted the Armenian government to invite the IAEAinspection to the plant.10

In Central Asia, Kyrgyzstan and Tajikistan areincreasingly using water resources to develop hydropowerstations. As they do not have hydrocarbon resources, theyhave been suffering from severe electricity shortages duringwintertime. Meanwhile, the arid but energy-rich downstreamcountries of Kazakhstan, Turkmenistan and Uzbekistan needwater for irrigation and are concerned that the upstreamdamming of rivers will lead to shortage of water duringirrigation season.11 The countries have not succeeded inagreeing on the management of the shared water resources.Instead, they are increasingly viewing the water issue as azero-sum game.12

Moreover, Central Asian water problems haveimplications that could extend beyond the region itself. Chinaand Afghanistan are already included in the water-relatedtensions, as they both rely on the water of the same rivers,the Amu Darya and the Syr Darya, for which the CentralAsian states are competing. If the situation in Afghanistanstabilises, its demand for both water and energy is likely toincrease significantly, which may also further increase thecompetition for water in the region.13 Indeed, competition forwater resources is adding tensions to an already uneasyregion of Central Asia and increasing the potential for energy-related conflicts there. Cooperative approach to themanagement of shared water resources and more effectiveuse of them would be needed to solve the water problem inthe region, but the long history of mistrust among thecountries hinders regional cooperation.

Energy waste is a problem throughout the Wider Europearea. Energy is wasted in production, particularly through gasflaring and venting in Kazakhstan, Uzbekistan, Turkmenistan,and Azerbaijan. Technical and commercial gas transmissionand distribution losses are also high throughout the region.For example in Uzbekistan, they accounted for approximately

7 IBRD / The World Bank 2010.8 See e.g. Naviny.by 20.5.2011: Loan agreement for Belarus' nuclearpower plant project may be signed in summer, says Russian financeminister.9 IBRD / The World Bank 2010.10 See e.g. Grigoryan, M.: Armenia: Metsamor Awaits IAEAInspection. EurasiaNet 4.5.2011.11 Libert, B. et al.: Water and Energy Crisis in Central Asia. Chinaand Eurasia Forum Quarterly, Vol. 6, No. 3 (2008).12 Stockholm International Water Institute 2010.13 Cruz-Del Rosario, T.: Risky riparianism: cooperative watergovernance in Central Asia. Australian Journal of InternationalAffairs, Vol. 63, No. 3, September 2009.

a fifth of total gas production in 2005. Energy waste is botheconomic loss and environmental harm – gas flaring andventing, for example, contribute significantly to COemissions. Furthermore, the deteriorating energyinfrastructure, particularly for power generation anddistrict heating, can lead to an energy crisis, if action toupgrade is not taken soon.14

Indeed, the impact of energy production andconsumption on the environment is an increasing concern,and addressing the climate change will be one of thegreat challenges in the energy outlook of the Wider Europearea. Reducing the reliance on coal, improving energyefficiency and increasing the use of renewable energysources would all contribute to the reduction of greenhousegas emissions. Countries in the Wider Europe area havesignificant potential to increase their energy efficiency,from which they could benefit in several ways: investing inenergy efficiency would lower greenhouse gas emission,enhance energy security and contribute to moresustainable economic growth. The example of Belarusshows that increasing energy efficiency substantially ispossible if the government places high priority on it:between 1996 and 2008 energy intensity of Belarusdecreased by almost 50 percent.15

The Western CIS, South Caucasus and Central Asiaas well as individual countries throughout the region areconfronted with significant challenges in their energyoutlooks. Diversifying energy supplies – both sources ofsupply and fuels – and developing alternative transportroutes for energy are important factors contributing to thecountries’ energy securities. Upgrading the deterioratingenergy infrastructure, reducing energy waste andincreasing energy efficiency also enhance their energysecurity. However, the current state of the world cries outfor sustainable development, which requires contributionsfrom all countries. The impacts of energy production andconsumption on the environment are of increasing concern.Indeed, in the Wider Europe area, as well as in other partsof the world, there is an increasing demand forenvironmentally sound energy solutions to fight climatechange, without sacrificing the economic development.

Hanna MäkinenResearch DirectorPan-European Institute

This report is part of a research project financed byFinland’s Ministry for Foreign Affairs within Finland’sdevelopment cooperation. The Pan-European Institutewishes to thank the Ministry for Foreign Affairs for thefinancial support.

14 IBRD / The World Bank 2010.15 IBRD / The World Bank 2010.


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5


Western CISRecent political developments

Deepening economic crisis increases populardiscontentThe economic situation in Belarus has worsenedsignificantly during this year. In May, the Belarusianrouble was devaluated strongly. The inflation hasincreased dramatically and, according to theBelarusian Ministry of Finance, is expected to reachalmost 40 % during this year. Country’s foreigncurrency reserves have fallen dramatically. Shortagesare increasing, as importers lack cash to buy basicgoods and drastic price increases have made theBelarusian public to buy a great deal of goods inshops. The public discontent has been rising becauseof the shortages, and it was further increased after theBelarusian government decided to impose restrictionsand extra duties on exports of a range of goods byBelarusian individuals. This decision harms particularlyresidents of the border areas, for whom the sale ofgoods, mainly fuel, to neighbouring countries has oftenbeen an important source of income. In June, severalsmall protests have taken place at the border crossingsto Poland and even in Minsk, where hundreds ofdrivers blocked the main street to protest againstincreasing petroleum prices. The protest in Minsk wasorganised through social networks, which is increasingin popularity also in Belarus.31

Following the recent protest, President Lukashenkahas said that he will not allow any further publicprotests in Belarus and will put them down.32

Repression of opposition has also continued with thetrials connected to the opposition demonstrations heldin Minsk last December. Opposition presidentialcandidate Andrei Sannikau, who was accused oforganising post-election riots, was sentenced to fiveyears in prison, and other presidential candidates havereceived milder sentences.33 Several other oppositionactivists have been convicted to prison as well.34

Belarus applies for international loansBelarus has requested for an up to USD 8 billion loanfrom the International Monetary Fund (IMF). TheEurasian Economic Community (EurAsEC) has alreadyapproved an USD 3 billion stabilisation loan forBelarus, and the Export-Import Bank of China hasagreed to provide over USD 1 billion in loans to financejoint projects in Belarus.35

The statist economic model of Belarus has comeunder increasing strain and the government’s policy of

31 EIU ViewsWire 1.6.2011: Belarus politics: Grim; Eastweek15.6.2011: Rising public dissatisfaction in Belarus.32 RFE/RL 14.6.2011: Lukashenka Says He Will Not Allow FurtherProtests.33 Eastweek 25.5.2011: Belarus: Further convictions of oppositionactivists.34 RFE/RL 17.6.2011: Belarusian Opposition Activists' ConvictionsUpheld By Court.35 RIA Novosti 1.6.2011: Belarus seeks $8 bln IMF loan – premier;RIA Novosti 4.6.2011: EurAsEc approves $3 bln. loan for Belarus;RIA Novosti 14.6.2011: China's Eximbank to give Belarus $1 blnloan.

keeping the people satisfied by increasing wages andwelfare will be increasingly difficult in a worseningeconomic situation. The operation of the Belarusianeconomic model has for long been based oninexpensive Russian energy and trade subsidies butRussia has gradually increased its oil and gas pricesand reduced preferences previously given forBelarusian firms. Furthermore, the global economiccrisis has caused a fall in demand for and prices ofthe key Belarusian exports in international markets.The government has tried to avoid any structuralreforms of the economy fearing public destabilisationbut the mounting economic problems in Belarus maybe so serious that significant economic reformscannot be avoided by any loans.36 Furthermore, if theIMF grants a loan to Belarus, the conditions will bestrict – the IMF will likely demand the implementationof structural economic reforms from Lukashenka.37

Moldova and Ukraine negotiate on associationwith the EUUkraine is aiming to deepen its relationship with theEuropean Union as it hopes to sign an associationagreement, including an agreement on a free-tradezone, with the EU by the end of this year. This couldbe a setback for Russia who has preferred Ukraine tojoin customs union among CIS states. However,Ukraine has suggested a compromise that wouldinclude both the association agreement with the EUand a relatively free trade with CIS states – butwithout jeopardising the integration with the EU.38

Russian and Ukrainian officials have even presenteda vision that Russia, Ukraine and the EU couldeventually forge a common economic area in the next15–20 years.39

The pro-European course of the currentgovernment in Moldova has also brought the countrycloser to the EU. The sixth round of the negotiationson the Moldova-EU Association Agreement was heldin April, and the next round is scheduled to be held inJune. However, although there were progress innegotiations, implementing the promised pro-European reforms in Moldova is lacking. Both theinefficiency of the state administration and effectiveresistance from industry and state-administrativelobbies have prevented the government to carry outmajor reforms to the system.40

36 K ysi ski, K.: On the verge of crisis? Mounting economicproblems in Belarus. OSW Commentary 6.4.2011; EIU, BelarusCountry Report May 2011.37 Coalson, R.: With Economy In Free Fall, Belarusian PresidentRunning Out Of Options. RFE/RL 14.6.2011.38 EIU 19.5.2011: Ukraine politics: Stumbling west.39 Gotev, G.: Special Report: Russia, Ukraine eye customs unionwith EU. EurActiv 19.5.2011.40 Eastweek 20.4.2011: Moldova’s pro-European course: progressin negotiations, but no real reforms.


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Western CISSpecial theme – energy security

Ukraine balances between the EU and RussiaUkraine is getting closer to signing the AssociationAgreement with the EU. In the end of May 2011, acompromise was reached on one of the finaldisagreements concerning the energy sector. Contraryto the EU’s previous demands, it was now decided thatUkraine will not be obliged to pay compensation for anyinterruptions in gas transit.41 Ukraine is important forthe EU as a transit country for Russian gas, and theEU is interested in integrating Ukraine to West.42

Russia, on the other hand, has promised Ukrainecheap gas supplies in return for joining a free-tradeunion with Russia, Belarus and Kazakhstan. The risinggas prices have affected Ukrainian economy whichrelies heavily on energy-hungry industries such assteel and chemicals. Furthermore, the transit fees forRussian gas are very important for Ukraine. ThereforeRussia’s offer of cheap gas supplies is very attractivefor Ukraine. Ukraine has been trying to perform abalancing act between the EU and Russia, attemptingto move closer to the former without alienating thelatter.43 However, despite of increasing pressure fromRussia, for now it seems likely that the AssociationAgreement with the EU will be signed during this year,and thus Ukraine would prefer the rapprochement withthe EU.44

Belarus to build a nuclear power plantBelarus is planning to build a nuclear plant inOstrovets, close to Lithuanian border. The plant isestimated to have a capacity of 2 400 MW and to beput in operation in 2018. In March 2011, RussianPrime Minister Putin and Belarusian PresidentLukashenka signed an agreement on a Russian loan ofUSD 9.4 billion to Belarus for the construction of thenuclear power plant.45

Belarus has been aiming to increase its energysecurity as it currently depends almost completely onRussian natural gas supplies. In this regard, thecountry has two options: either to diversify energysupplies or to increase its own energy resources.Currently neither of the options seems achievable.Belarus can hardly diversify its energy supplies awayfrom Russia now when the country is increasinglyisolated from Europe. Furthermore, as the plannednuclear power plant will be both financed andconstructed by Russians, it won’t guarantee increasedenergy security for Belarus either.46

41 Eastweek 1.6.2011: Getting closer to signing the EU AssociationAgreement with Ukraine.42 EIU ViewsWire 18.4.2011: Ukraine/Europe politics: Gas games.43 EIU ViewsWire 18.4.2011: Ukraine/Europe politics: Gas games.44 Korduban, P.: Ukraine Drifting Away From Customs Union WithRussia. Eurasia Daily Monitor 25.5.2011; Eastweek 1.6.2011: Gettingcloser to signing the EU Association Agreement with Ukraine.45 Stratfor 22.3.2011: Lithuania’s Concerns over Russian NuclearProjects; The Baltic Times March 24–30, 2011: Baltic region goingnuclear.46 Denisenko, V.: The Energy Security of Belarus. Geopolitika14.3.2011.

Lithuania has strongly opposed the Ostrovetsnuclear power plant project. The safety issues haveraised concerns among Lithuanians because theplant would be located only 50 kilometres fromVilnius and the water of the river Neris, flowing intoLithuania, would be used for cooling the reactors.47

Furthermore, Lithuania is concerned about theimproving relations between Russia and Belarus.Besides, the Ostrovets nuclear power plant mightcompete with Lithuania’s own nuclear power plantthat is intended to be built in Visaginas.48

The Fukushima accident has affected nuclearpolicy of some countries, most notably Germany.However, in countries where public opinion does notplay a major role in forming governmentpolicymaking, such as Russia and Belarus, thedevelopment of nuclear power will probablycontinue.49

Ukraine hopes to exploit shale gas depositsUkraine is hoping to reduce its dependence onRussian natural gas supplies by developing shalegas production. Ukraine has been looking to theUnited States that has set an example of profitableshale gas production. Ukraine has negotiated withExxon Mobil, Chevron and Shell of searching forshale gas deposits in Ukraine. Ukrainian Parliamenthas also passed investor-friendly legislation aimed atopening its domestic natural gas market to shale gasproducers. In addition, President Yanukovich hassigned a shale-gas exploration agreement with theUS and agreed with the EU on energy transport thatopens Ukraine’s pipeline system to Westerncompanies.50

In Europe, Poland’s shale gas industry has set apromising example – Poland is believed to be rich inshale gas resources and exploration wells havealready been drilled there.51 Ukraine has beenestimated to have at least two basins containingpromising shale gas targets. However, they have notbeen thoroughly explored yet and therefore there areonly preliminary estimates of their potentialavailable.52 Gazprom has been critical regarding thepotential of shale gas production in Ukraine.According to the company, shale gas would not helpto reduce Ukraine’s dependence on Russian gas.53

47 Tracevskis, R.: Anti-nuclear sentiment of the Lithuanians. TheBaltic Times May 5–11, 2011.48 Stratfor 22.3.2011: Lithuania’s Concerns over Russian NuclearProjects.49 Recknagel, C.: First Chornobyl, Then Fukushima. Will NuclearEnergy Survive? RFE/RL 24.4.2011.50 Kramer, A.: Ukraine Looks to Texas for an Energy Path. TheNew York Times 4.5.2011.51 Kramer, A.: Ukraine Looks to Texas for an Energy Path. TheNew York Times 4.5.2011.52 U.S. Energy Information Administration: World Shale GasResources: An Initial Assessment of 14 Regions Outside theUnited States. April 2011.53 Kyiv Post 21.2.2011: Gazprom: Shale gas won't help Ukrainereduce reliance on Russia.


7


South CaucasusRecent political developments

Large opposition protests in GeorgiaSeveral thousand Georgians took part in anti-government protests during several days in Tbilisi inlate May, inspired by the recent wave of protests inNorth Africa and the Middle East. The protests startedas peaceful but later turned into a violent clashbetween police and demonstrators, leaving four peopledead. Protesters were demanding the resignation ofPresident Saakashvili. The protests were coordinatedby the People's Representative Assembly, an umbrellaopposition group established by former parliamentspeaker Nino Burjanadze.54

The protests did not succeed in their goal of forcingSaakashvili to resign. However, the events have raisedquestions about the human rights situation in Georgia.The police response has been condemned byinternational human rights groups as an excessive useof force, and a thorough investigation into the eventshas been demanded.55

Opposition groups protest in Azerbaijan –government aims to restrict online free speechSince March 2011, anti-governmental activists haverallied in Azerbaijan as well. So far, the protests havebeen rather small but happened quite frequently, andfurther protest can be expected, despite of policecrackdowns they have faced. The demonstrations havebeen inspired by the wave of protests in North Africaand the Middle East. Currently the opposition’s abilityto challenge the leadership of the authoritarian regimeseems limited but as the example of North Africashows, the situation could change rapidly. The risks toPresident Aliyev’s regime could also increase if theeconomic slowdown were to become more serious.Furthermore, the growing strength of Islamiccommunity has worried the Azerbaijani authoritiesduring recent years, and if the government will imposemore restrictions on religious freedom, it could lead tosocial unrest.56

The protests have been mostly called for by youthactivists via Facebook. A young opposition activist whoused Facebook to organise anti-governmental rallieswas recently sentenced to prison for two years officiallyfor evading military service. Indeed, Azerbaijaniofficials seem to be concerned about youth activity onsocial networks. Currently the Azerbaijani governmentis aiming to criminalise the act of spreadingmisinformation in the internet – for example Skype andWikipedia have been named as potential threats toAzerbaijan’s security. Although the amendments aredenied to be used to restrict free speech, the critics

54 Kramer, A.: Riot Police Break Up Opposition Protest in Georgia.The New York Times 26.5.2011; RFE/RL 8.6.2011: The GeorgianPolitical Landscape After May 26.55 RFE/RL 8.6.2011: The Georgian Political Landscape After May 26.56 Muradova, M.: Azerbaijani police cracks down on protests. CentralAsia-Caucasus Analyst 16.3.2011; EIU, Azerbaijan Country ReportMay 2011.

point out that they will potentially aim at exactly thatpurpose.57

Anti-government rallies in ArmeniaLarge opposition protests have been held in Armeniaas well during this spring. Thousands of people havebeen gathering to the Freedom Square in Yerevan,which has been off limits to opposition rallies since2008 when at least ten people were killed in violentclashes on the Square. Again, references were madeto the protest in Arab countries. The protests wereled by former President Levon Ter-Petrosian, whoheads the largest opposition party in Armenia.58

The worsening economic conditions feed publicdiscontent in Armenia. Now, the Armeniangovernment seems to be improving its relations withthe opposition. The negotiations between Ter-Petrosian and President Serzh Sargsyan’sgovernment have continued for weeks. Allowing theopposition to hold rallies at Freedom Square has alsoindicated a thaw in government-oppositionrelations.59 The release from prison of someprominent opposition figures, considered as politicalprisoners by the opposition, has been set as one ofthe preconditions of starting a dialogue with thegovernment. The Armenian authorities seem to haveaccepted the demand because in late May 2011, ageneral amnesty was granted for the two mostprominent members of the opposition remaining inprison.60

Georgia still blocking Russia’s WTO membershipGeorgia seems to be the only obstacle left onRussia’s long path of becoming a member of theWTO. Georgia still insists that it should have controlover the borders between Russia and the breakawayregions of South Ossetia and Abkhazia, andthreatens to veto over Russia’s membership.However, although historically countries have alwaysjoined the WTO only with the unanimous consent ofall members, according to the treaty, accession onlyrequires the approval of two-thirds of the membercountries. Still, if the other countries would overruleGeorgia’s objections, it would send an unpleasantsignal that more powerful nations can dominate overweaker countries. Therefore, some kind ofcompromise between Russia and Georgia is likely tobe sought.61

57 RFE/RL 18.5.2011: Azerbaijani Facebook Campaigner JailedFor Two Years; Abbasov, S.: Azerbaijan: Baku Moving to RestrictOnline Free Speech? EurasiaNet 25.5.2011.58 Grigoryan, M.: Armenia: Opposition Bypasses Police, StagesRally in Freedom Square. EurasiaNet 17.3.2011¸ The AssociatedPress/The Canadian Press 28.4.2011: Thousands of oppositionsupporters protest in centre of Armenia's capital.59 Grigoryan, M.: Armenia: Government, Opposition Hold “Open”Dialogue Behind Closed Doors. EurasiaNet 12.5.2011.60 Martirosian et al.: Prominent Armenian Opposition Figures AreReleased Under Amnesty. RFE/RL 27.5.2011.61 Coalson, R.: Russia's 17-Year Bid to Join the WTO Faces OneLast Hurdle. RFE/RL 9.5.2011.


8


South CaucasusSpecial theme – energy security

The future of the Nabucco pipeline remainsuncertainConstruction of the Nabucco pipeline, scheduled tostart in 2012, has been postponed to start in 2013.According to Nabucco Gas Pipeline InternationalGmbH, the postponement is resulting from thechanges in the timing for gas supplies in the Caspianand Middle East regions, as announced by potentialsuppliers. The company aims to align the Nabuccotimeline with potential gas suppliers, and first gas isexpected to flow through the pipeline in 2017.62

Currently the only potential supplier for Nabucco is theShah Deniz II field in Azerbaijan, from where the firstgas is scheduled to be on stream in 2017.63

However, some steps have been taken in thedevelopment of the Nabucco project as well. NabuccoGas Pipeline International GmbH has announced thatthe Project Support Agreements for the pipeline havebeen finalised and signed by the Nabucco companiesand the representatives of the five transit countries(Austria, Bulgaria, Hungary, Romania and Turkey) inTurkey in June 2011.64

Negotiations on the status of the Caspian SeaCaspian Sea coastal states have continued tonegotiate on the legal status of the Caspian Sea inApril 2011. So far, the five littoral states Russia,Kazakhstan, Turkmenistan, Azerbaijan and Iran havemanaged to sign agreements on Caspian Seasecurity, the delimitation of national zones and a banon fishing for sturgeons, as well as progressed innegotiating on the environmental protection.Negotiations will continue in the summit in Russia laterthis year.65

The legal status of the Caspian Sea has remainedunresolved for long. The sea is very rich in oil and gasresources, and all littoral states would like to havetheir share on hydrocarbon resources.66 Russia,Kazakhstan and Azerbaijan support the so-calledmedian lines division principle, which Turkmenistanand Iran oppose as it would leave them with smallershares of the Caspian Sea. Iran and Turkmenistanwould prefer equal division, with the five littoral stateseach receiving 20 percent of the sea. In the absenceof an overall agreement, Russia is advocating bilateralagreements. However, Iran has declined to recogniseany other deals on the Caspian division before an

62 Nabucco Gas Pipeline International GmbH Press release,6.5.2011.63 EurActiv 9.5.2011: Nabucco pipeline construction pushed back to2013.64 Nabucco Gas Pipeline International GmbH Press release,8.6.2011.65 Turkmenistan Newswire 27.4.2011: Caspian coastal statesnegotiate legal status on sea.66 Papandropoulos, A.: The Caspian Sea region and its legal status.New Europe 13.2.2011.

overall Caspian Convention is signed by all five littoralstates.67

The safety of Armenia’s Metsamor nuclear powerplant questionedAfter the crisis in Japan’s Fukushima, concerns havebeen raised about the safety of the Metsamor nuclearpower plant in Armenia. The Metsamor nuclear plantis located close to Turkish border, less than 40kilometres from Armenia’s capital Yerevan and in aseismic zone. Metsamor was shut down for sevenyears following an earthquake of 6.8 magnitudes in1988 that killed 25 000 people. The epicentre of theearthquake was less than 100 kilometres fromMetsamor. The plant itself survived without damagebut the massive earthquake heightened concernsabout the safety of the facility. However, in 1995, thegovernment of the independent Armenia decided toreopen the nuclear plant.68

The Metsamor nuclear plant currently providesmore than 40 percent of electricity in Armenia.Armenia is isolated from Azerbaijan and Turkey andtherefore has difficulties in obtaining energy fromelsewhere. The country suffered from severeelectricity shortages during the time Metsamor wasclosed. Therefore Metsamor is very important forArmenia in terms of energy production.69

The critics of the plant point out that due to itsdesign and location, Metsamor is among the mostdangerous nuclear power plants in the world.However, government officials and nuclear experts inYerevan dismiss such concerns, claiming thatsignificant improvements to the plant’s safety havebeen made and currently it is no less safe than anyother nuclear reactor in the world. Armeniangovernment refuses to shut the plant down and a fewyears ago even declined the EU’s offer of an EUR 200million loan to finance its closure. Instead, Armeniaplans to replace Metsamor with a new nuclear powerplant at the same location by 2017.70 In order todampen down the international critique, the Armeniangovernment recently invited the IAEA to investigatethe safety of the Metsamor plant.71 The initial findingsof the IAEA suggest that the Metsamor plant will passthe inspection but the debate over plant’s safetycontinues.72

67 Blagov, S.: Littoral States Struggle to Agree on the CaspianSettlement. Eurasia Daily Monitor 6.5.2011.68 Lavelle, M. & Garthwaite, J.: Is Armenia's Nuclear Plant theWorld's Most Dangerous? National Geographic News 11.4.2011.69 Lavelle, M. & Garthwaite, J.: Is Armenia's Nuclear Plant theWorld's Most Dangerous? National Geographic News 11.4.2011.70 Bedevian, A. et al.: In Wake Of Japan Disaster, Safety OfArmenian Nuclear Plant Questioned. RFE/RL 19.3.2011; Danielyan,E.: Armenia Debates Nuclear Energy After Japan Disaster. EurasiaDaily Monitor 11.4.2011.71 Grigoryan, M.: Armenia: Metsamor Awaits IAEA Inspection.EurasiaNet 4.5.2011.72 Grigoryan, M. & Hayrapetyan, A.: Armenia: Fight Brews OverIAEA’s Thumbs-Up Appraisal of Metsamor. EurasiaNet 7.6.2011.


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Central AsiaRecent political developments

Tajikistan experiencing a socio-economic collapseFood prices in Tajikistan have risen by approximately30 % during recent months after Russia increased itsexport tariffs of oil and petrol exports to Tajikistan.Tajikistan receives most of its petroleum products fromRussia. In addition, Tajikistan has been suffering fromelectricity shortages and Uzbekistan’s rail blockade.73

Almost half of the Tajik population already lives inpoverty and the skyrocketing inflation threatens toimpoverish Tajikistan even more. Malnutrition is agrowing problem in the country. The Tajik officials haveresorted to price controls in order to halt the rising foodcosts as well as allocated considerable sums of moneyfor purchasing wheat and fuel, and for subsidies for themost vulnerable families. However, the government’sefforts are inadequate to resolve the situation in thelong term. Tajikistan’s dependence on importedfoodstuff and fuels is significantly adding to theproblem as the exporting countries are raising theirprices. Furthermore, as a landlocked country Tajikistanhas to pay transit fees for neighbouring countries whichhave increased lately as well. Therefore, reducing thedependency on imported food by encouraging theagricultural sector could ease the situation in the longterm.74

Despite the growing frustration of the public, anysignificant public protests are unlikely in Tajikistan.However, if the economic situation continues itsextreme deterioration, the possibility of social unrest inthe future cannot be ruled out.75

Two deadly explosions in KazakhstanKazakhstan, the most stable country in Central Asia,has avoided social unrest and violent outbreaks thathave occurred in its neighbouring countries. However,in May 2011 two blasts in less than a week shook upKazakhstan, in different cities but both outside thefacilities of the country’s security services. The firstexplosion was identified as a suicide bombing, the firstknown incident of its kind in Kazakhstan. However,Kazakh officials claim that the second incident wasonly a spontaneous explosion in a car, killing twopeople. The Kazakh Interior Ministry has ruled out linkswith terrorism although the suicide bomber hadconnections with criminal and underground religiousgroups. Still, the attacks raise concerns that theextremist violence might be spreading to Kazakhstanfrom Afghanistan and other Central Asian states.76

73 Parshin, K.: Tajikistan: Dushanbe Feeling an Economic Squeeze.EurasiaNet 26.4.2011; Eastweek 18.5.2011: Tajikistan in collapse.74 Najibullah, F.: Frustrations Grow In Tajikistan As Food PricesSpike. RFE/RL 15.5.2011; EurasiaNet 23.5.2011: Tajikistan:Dushanbe Price Controls Aren’t a Fix for Rampant Inflation.75 Najibullah, F.: Frustrations Grow In Tajikistan As Food PricesSpike. RFE/RL 15.5.2011; Eastweek 18.5.2011: Tajikistan incollapse.76 Lillis, J.: Second Mysterious Blast Rocks Kazakhstan. EurasiaNet24.5.2011; Najibullah, F. & Abdirova, A.: Kazakh Suicide BombingPuts Spotlight On Western Regions. RFE/RL 24.5.2011; RFE/RL24.5.2011: Blast Kills Two Outside Kazakh Security Service Building.

Foreign powers compete for influence inKyrgyzstanKyrgyzstan has tried to cooperate with both the US,China and Russia. The country has allowed the US touse its Manas airport for supporting efforts inAfghanistan, welcomed Chinese investments, andallowed Russia to use an air base at Kant. After theoverthrow of President Bakiev's regime a year ago,relations with Russia have improved, and Russia hasbeen keen to support the current leadership.77

However, during her visit in Washington inMarch, President Otunbaeva requested USassistance in border protection and the fight againstterrorism, including establishing an American anti-terrorist training centre in the south of the country.However, increasing the US presence in Kyrgyzstanis contrary to Russian interests and may lead todeterioration of Kyrgyz–Russian relations.78

China strengthens its economic influence in theregionBoth Turkmenistan and Uzbekistan have recentlystrengthened their economic cooperation with China.In April 2011, the Chinese Development Bankgranted an USD 4.1 billion loan to Turkmenistan’sstate gas company Turkmengaz, intended forexploiting the largest gas deposits in Turkmenistan.Another deal guaranteeing the supply of gas to Chinawas signed alongside with the loan agreement. Thedeteriorating economic situation in Turkmenistan,following the decrease of gas supplies to Russia andfall in export revenues has forced Turkmenistan toattempt to diversify its gas exports, and currentlyChina is rising in importance as a partner country.79

Uzbekistan has also signed several agreementswith China, including a Chinese loan of USD 1.5billion to Uzbekistan. Furthermore, the countries haveagreed on an Uzbek section joining the Central Asia–China gas pipeline which would allow Uzbekistan tostart exporting natural gas to China, and encouragingChinese investments in Uzbek infrastructure andextractive industry. The recent agreementsdemonstrate a change in Uzbekistan’s policy towardsChina. Before, Uzbekistan has been cautious aboutcooperation with China, fearing China’s growingeconomic influence. Now Uzbekistan seems to bedeveloping cooperation more actively, which couldalso be seen as a sign of the country’s deterioratingeconomic situation.80

77 Pannier, B.: Russia's Star On Rise Again In Kyrgyzstan.EurasiaNet 9.4.2011.78 Eastweek 16.3.2011: President of Kyrgyzstan requests USsupport.79 Eastweek 11.5.2011: Turkmenistan makes another big loan fromChina.80 Eastweek 11.5.2011: Uzbekistan will strenghten its cooperationwith China.


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Central AsiaSpecial theme – energy security

Expanding natural gas production in TurkmenistanThe South Yolotan natural gas field in Turkmenistanhas recently been estimated to be world’s 2nd largestgas field, holding up to 21 trillion cubic meters of gas.However, Turkmenistan – as well as other CentralAsian energy producers – has problems intransforming its resources into actual output and thendelivering them. Turkmenistan wants to retain fullcontrol over its major onshore projects and is willing toallow foreign companies only service contracts, notdirect stakes in the giant field. Foreign investors wouldbe eager to develop Turkmenistan’s large gasreserves, and Turkmens might not even be able tosucceed in such a large project without directinvolvement of foreign investors.81 Several Westerncompanies, such as Exxon, Chevron and Total arenegotiating on exploration and commercialdevelopment of hydrocarbon resources in the Turkmensection of the Caspian Sea.82

Turkmenistan has been selling gas to Russia,China and Iran, and the EU is hoping that in the futureTurkmenistan could supply gas to Nabucco pipeline.Turkmenistan is aiming to increase its gas productionand diversify its exports, and is interested in exportinggas to open market such as the EU.83 In order to reachthat goal, the accelerated development of the CaspianSea would be of strategic importance for Turkmenistan.There is great potential for finding new oil and gasfields in the Caspian Sea. Besides, transportingTurkmen gas to European market would require layinga gas pipeline between Azerbaijan and Turkmenistanthrough the Caspian Sea or developing LNG facilities.84

Turkmenistan is also looking to India and Pakistanin its search for new markets. In December 2010,Turkmenistan, Afghanistan, Pakistan and India signedan agreement on the development of trans-Afghan gaspipeline, aiming at delivering Turkmen gas to India andPakistan through Afghanistan.85 However, as long asthe security of the project remains questionable, theconstruction of the pipeline is still a long way off.86

Electricity shortages in Tajikistan – hydropowerprojects increase tensions in Central AsiaTajikistan is suffering from electricity shortages duringwintertime. In the spring and summer, country’shydropower plants generate enough electricity even for

81 Roberts, J.: Struggle for Central Asian energy riches. BBC News1.6.2010; Leonard, P.: Turkmenistan gas field is now said to beworld's 2nd largest. USA Today/The Associated Press 25.5.2011.82 Hasanov, H.: Media: Exxon sees prospects for cooperation withTurkmenistan. Trend 25.5.2011.83 Roberts, J.: Struggle for Central Asian energy riches. BBC News1.6.2010; Leonard, P.: Turkmenistan gas field is now said to beworld's 2nd largest. USA Today/The Associated Press 25.5.2011.84 Hasanov, H.: Media: Exxon sees prospects for cooperation withTurkmenistan. Trend 25.5.2011.85 Itar-Tass 11.12.2010: Turkmenistan, Afghanistan, Pakistan signact on trans-Afghan gas pipeline.86 Pannier, B.: TAPI Pipeline Signed, Sealed – Not Yet Delivered.RFE/RL 15.12.2010.

export but in the autumn and winter electricity isusually rationed for several months, especially after adry summer when the water level in reservoirs is low.This year, electricity was rationed during March–August.87

According to Tajik officials, the power shortageproblem will be permanently solved after theconstruction of two hydropower stations: theSangtuda-2 hydropower station and the firstgenerating line of the Rogun hydropower plant.88

Sangtuda-2, a Tajik-Iranian joint venture, should startproducing electricity later this year.89 Tajikistancurrently also aims to complete the construction ofthe massive Rogun dam, which was first startedduring the Soviet era. The Rogun hydropower plantis estimated to start generating electricity in 2013.90

However, Uzbekistan has strong reservationsabout the Rogun hydropower project because it fearsthe dam will disrupt the water supplies needed for thecountry’s large cotton sector.91 Uzbekistan has alsoexpressed similar concerns over Kyrgyzstan’shydropower projects Kambarata-1 and Kambarata-2,saying that they will reduce the amount of water itreceives.92 Indeed, the use of shared water resourcesis increasingly creating tensions in Central Asia,adding to already unsettled situation in the region.

Kazakhstan–China cooperation intensifiesMaintaining good relations with China is an importantpart of Kazakhstan’s foreign policy. Kazakhstan aimsto diversify export routes for its energy, and China isvery interested in Central Asian hydrocarbons.93 Theenergy collaboration between China and Kazakhstanis expanding to other industrial sectors as well, suchas manufacturing, shipbuilding, transport, technology,and trade. Russia, the EU and the US have beencompeting on Kazakhstan’s energy resources andthe country aims to balance the situation byexpanding its cooperation with various actors.Several Chinese companies have already penetratedthe Kazakh energy market and oil and gas pipelinesconnecting the two countries and bypassing Russiahave been built. Indeed, China’s energy cooperationwith Central Asian countries has already underminedRussian dominance on the region’s energy exports.94

87 RFE/RL 15.4.2011: Electricity Rationing Lifted In Tajik Capital.88 RFE/RL 8.4.2011: Tajik Official Blames Power Rationing OnWater Shortage.89 Chorshanbiyev, P.: Iranian company building Sangtuda-2 HPPchooses routes to bypass Uzbekistan. ASIA-Plus 20.5.2011.90 RFE/RL 8.4.2011: Tajik Official Blames Power Rationing OnWater Shortage.91 Hurriyet Daily News 15.3.2011: Electricity rationed in Tajikistan,redirected to Pakistan.92 RFE/RL 5.1.2010: Kyrgyz Hydropower Station To BeOperational By May.93 EIU, Kazakhstan Country Report May 2011.94 Muzalevsky, R.: Nazarbayev’s visit to China revealsKazakhstan’s balancing strategy. CACI Analyst 2.3.2011.


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Ukraine – captured energy securityBy Ildar Gazizullin

Ukraine's energy inefficient economy and financiallyweak energy sector continue to undermine country'senergy security. Russia has all chances to succeed ingaining control over Ukraine's energy assets as Kyiv ischoosing short-lived solutions to address its securityproblems.

Current trendsThe financial viability of the energy sector has becomehigh on Ukraine's policy agenda. With energy pricesreaching the pre-crisis levels in 2011, the country'senergy sector and public finances have been putunder pressure. Households and local utilitiescontinue to pay gas prices that are not covering costs.The resulting financial burden is significant given thatthese sectors consume more gas than Ukraine's majorenergy intensive industries like steel and production offertilizers.

The new government actively addresses energypolicy challenges yet its decisions are heavilyinfluenced by business interests. While this can stilllead to positive outcomes for the country, limitingcompetition and tolerating corruption inevitably resultsin inefficiency.

Ukraine has decided to attract foreign investmentin upstream gas sector to boost production. Thecountry is believed to have significant unexplored gasdeposits - not being utilized due to the lack ofdomestic technical capacity. The government isholding negotiations with the large majors (Shell,Chevron, Exxon-Mobil, Lukoil, TNK-BP) with a numbermemorandums of understanding being alreadysigned. Non-conventional gas exploration is alsoconsidered. However, it remains to be seen how theentry and operation on the Ukrainian gas market willbe regulated. In the past, the only tender with aforeign investor (the Vanco, which teamed up with alarge Ukrainian business) in the upstream ended up tobe controversial and was later contested in the court.

Another major initiative is the development of therenewable energy, which is still marginal in thecountry’s energy mix (with the exception of largehydro). The preferential green tariffs have alreadyattracted large investments into wind and solar. Theprojects are mostly related to businesses close to thegovernment, though foreign companies have alsovoiced interest. Yet, this policy is hardly economicallysustainable, given the supply of renewable energycomes at a high cost (subsidies per kWh are at parwith the EU levels).

A long expected privatization in the power sector(electricity generation and distribution companies) willlikely to be limited to domestic investors which alreadyown some of the energy assets. (A recent privatizationof the state-owned UkrTelecom, an incumbenttelecom company, indicates that the strategic assetsare not for open and transparent sale). Such policymay lead to the monopolization on the energy marketand may not provide enough capital to modernize the

sector’s capacity. The Ukrainian opposition also viewsthe government’s decision to pardon USD 3bn ofdebts in the gas and power sector (mostly bad debtoriginating from the 1990s) as a step to advanceprivatization and benefit businesses.

The role of IFIs and the EU in fostering energyreforms has been modest. The government isreluctant to further increase gas and electricity pricesfor households as required by the IMF. Ukraine hasmore bargaining power given a much bettermacroeconomic situation in the country compared to2009. Eventually the government will be graduallybringing energy prices to full cost recovery levels asremoving the practice of cross subsidies is in theinterest of energy companies.

Ukraine has also high chances of failing itscommitments as a member of the European EnergyCommunity Treaty. The legislation approximationschedule is quite ambitious – most of the EUDirectives have to be implemented over the two to sixyears. Naftogas debts and significant price distortionsare some of the major impediments to the gas marketreform. The Ukrainian power sector is closer to the EUstandards as restructuring, privatization and institutionbuilding have already been started back in the 1990's.However, the reform was halted since the early2000's. Besides, the implementation of the EUenvironmental directives in thermal generation (thatpredominantly uses domestic low quality coal) canundermine energy security and affordability.

The government might also be missing theimportance of sequencing reform steps by prioritizinginvesting into physical infrastructure instead ofimproving regulation and changing energy marketdesign. An LNG terminal at the Black Sea from the listof the announced national infrastructure projects isone such example. While diversifying gas supplies inthe country may indeed be a prerequisite for asuccessful gas market liberalization, EnergyCommunity Treaty implementation would have lead tomore investment inflows and much sooner.

Finally, Kyiv and Moscow do not seem to getalong as well anymore. At the start of his tenure thePresident Victor Yanukovich promised better relationswith Russia and lower import gas prices. However, atthe moment his government wants to revisit itsKharkiv agreement (fleet in exchange for cheaper gas)as Ukraine is not happy with the resulting gas prices.

There are a number things on the table beingnegotiated between Ukraine and Russia, but it is notclear whether there will be a new gas agreement ornot. Making small fixes in the gas formula assuggested by Kyiv (targeting coal and not oil prices)will not interest Moscow, which insists on respectingthe terms of the contract. While Ukraine's membershipin the Customs Union could be too high price to payfor Kyiv, partnering in managing the country's gastransit system could be the solution. Given the high


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level of indebtedness of Naftogas, Russia seems to bean ideal candidate for bailing out the company.

OutlookRussian interest and presence in the Ukrainian energysector will remain significant. It is up to Ukraine toincorporate that interest in a way that does notendanger country’s security. In a market economy(which Ukraine is) regulation and not state ownershipmay serve public interest in a best way. The EnergyCommunity Treaty and associated markettransformation can become an effective way to makethe country’s energy market resilient to abuse fromlarge companies or even states. Despite protestingagainst gas market liberalization in the region, Russiamay agree to enter the reformed Ukrainian energymarket like it did in a number of Central Europeancountries.

Unlike barter schemes energy reforms are difficultand slow to implement. First, the same rules shouldapply to all market players and favoritism nottolerated. Yet, reforms could be supported by

Ukraine's large businesses (aka oligarchs), once theyrealize that Russia can be more successful incorrupting Ukrainian policy makers. Another challengeis that conducting energy reforms requiresprofessional bureaucracy, winch would be as difficultto achieve as fighting corruption.

Ukraine's governments have been consistentlytaking decisions that reflect extremely short-term andvolatile political cycles. Revisiting Russian contractson an annual basis is but one example. Such practiceharms energy security, including the reliability of theaging energy infrastructure. The country risks to endup in a situation with no options when a time comes tomake long-lasting and irreversible decisions.

Ildar GazizullinSenior EconomistInternational Centre for Policy StudiesUkraine


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Azerbaijan and Georgia – energy transit from the Caspian to EU market:Current position and potentialBy Liana JervalidzeGeorgia has been a historical route for transportationof Azerbaijani oil to the west and south east Asia fromthe end of XIX century. Starting from the end of XXand the beginning of XXI century Azerbaijan andGeorgia together with Turkey have become a transitbridge for the Caspian oil (Azerbaijan, Kazakhstanand Turkmenistan) to the west. Currently this bridge,the so called South Caucasus Energy corridor includeBaku-Tbilisi-Jeyhan oil and Baku-Tbilisi-Erzurum gaspipelines. Unlike BTC, which transports Azerbaijaniand other Caspian basin countries oil to internationalmarket, BTE gas pipeline has a regional dimension asit ends in Turkey. Thus, the Caspian gas (includingAzerbaijani, Kazakh and Turkmen gas) has no directaccess yet to the EU market and still depends(Kazakh, Turkmen gas) on Russia’s Eurasiantransportation system crossing the Ukrainian andByelorussian territories.

Having said this, the Azerbaijani gas from giantShakh Deniz field, which is transported by BTE-SouthCaucasus Gas Pipeline crossing Azerbaijan andGeorgia to Turkey, has been stuck in Turkey.Although Azerbaijan and Turkey have been reportedto have come to agreement on the conditions of thetransit of Shakh Deniz gas to the EU market in June2009, apparently there are some unresolved issueshindering further progress in this regard. The situationis further complicated by the fact that the companiesinvolved in the Shakh Deniz consortium also supportdifferent gas pipeline options from Turkey to the EU.These options include to upgrade the existing Turkishpipeline system and use it together withTurkey/Greece Interconnector, ITGI (InterconnectorTurkey Greece Italy) and/or Adria pipeline projectsconnecting Greece with Italy under the Adriatic Sea todeliver Azerbaijani gas first to Greece, then onward toItaly and thereafter onward to the EU.

Another option for transporting Azerbaijani andother Caspian basin gas to the EU is the NABUCCOproject strongly supported by the EU and US as astrategic option for the EU to get alternative gas by analternative route. As it stands today1 the NABUCCOpipeline starting in the east of Turkey as acontinuation of SCP (South Caucasus Pipeline) andending up in Austria’s Baumgartner, has also beendiscussed for many years without no final “go ahead”yet. It is expected that the final decision on NABUCCOis to be taken by end 2011 or beginning of 2012.Because of the mentioned delays in developing thegas transportation network, the bringing to upstreamof Shakh Deniz phase two has been put off for severalyears from 2012 to 2017.

1 In March 2011 the Shakh Deniz consortium members startedconsidering an option to start Nabucco in Azerbaijan in caseAzerbaijan and Turkmenistan agree to interlink their gasinfrastructures across the Caspian sea (Trans-Caspian pipeline),but there is no final decision yet in this regard (LJ).

New geopolitical conditionalities for theAzerbaijani gasSouth Caucasus gas pipeline2 was commissioned inthe end 2007 to supply Georgia and Turkey withAzerbaijani gas. Since then, the relations betweenAzerbaijan and Turkey, formerly strong strategicpartners, have worsened severely first for commercialand later for geopolitical reasons. In spring 2008 thecontract3 (provisions related to setting the price) ondelivery of Azerbaijani gas to Turkey through SCPexpired and the parties needed to renegotiate theprice. Turkey looked very much interested inpreserving the price USD 120 per 1000 cubic meteron Azerbaijani gas for its domestic market.

At that time Georgia and Turkey were the onlymarket for Shakh Deniz gas.4 Thus Azerbaijan wasnot only motivated and but also firmly decided toincrease its export earnings from gas sales. In the endof long and difficult negotiations in June 2009 Turkeyagreed to pay the market price for Azerbaijani gas andto compensate gradually the difference of the price inthe period starting from the date when the contractexpired and finishing with the date when the newcontract was signed.

But new differences emerged between the partiesin 2009 when the US mediated negotiations betweenArmenia and Turkey on the opening of the borders.These countries had ceased diplomatic relations in1991 when Turkey supported Azerbaijan in the conflictwith Armenia over Nagorni-Karabakh, an Azerbaijaniterritory populated by the ethnic Armenians.

The new administration of President Obamasuggested and the parties agreed that Armenia andTurkey should proceed to negotiations on the openingof their borders without any preconditions5. Armeniaand Turkey even signed a memorandum as result ofthese negotiations which, in the end, was not ratifiedby their parliaments. But nevertheless, a severe blowwas ported to Azerbaijani-Turkish relations as theformer considered the opening of borders betweenTurkey and Armenia without the settlement overNagorni-Karabakh as an attempt of its isolation byboth of its strategic partners the US and Turkey.

Azerbaijani-Turkish relations came to normalcondition again when the memorandum was notratified but the trust which existed before wasdefinitely undermined. Azerbaijan started promoting itsown conditions for gas transit and sales in Turkey andonward to the EU market. These conditions

2 Another name of this pipeline is Baku-Tbilisi-Erzurum pipeline (LJ).3 The contract provided that the parties renegotiated the price onAzerbaijani gas a year after the commissioning of the SCP.4 Currently Azerbaijan has signed gas sales contracts apart fromGeorgia and Turkey with Russia and Iran as well (LJ).5 Turkey usually set the settlement over Nagorni-Karabakh as aprecondition for the opening of borders with Armenia (LJ).


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encompass the agreement on sales point and accessto wholesales market both in Turkey and the EU.Negotiations on these issues between Azerbaijan onthe one side and Turkey and other potential buyers onthe other side have been underway.

With Turkey becoming increasingly difficult onregional and transit issues, Azerbaijan started lookingfor alternative transportation opportunities for itssurplus gas. Azerbaijan’s current contracts on gassales with Russia and gas swaps with Iran are shortterm, and more of convenience rather than of astrategic choice as it is looking for a direct access forits gas to EU market avoiding intermediaries. Both,Azerbaijan and Georgia are convinced there will be ademand for natural gas in EU, in particular on theeastern European gas market which wholly dependson imports from Russia. So, they expect growinginterests from eastern European countries forAzerbaijani gas as an alternative resource deliveredby alternative transportation network. Azerbaijan andGeorgia have started considering building LNGterminal on the Black Sea as an option for Azerbaijanigas transportation to EU avoiding challenging transitroutes through Russia/Ukraine and Turkey.

LNG terminal on the Black SeaAs it has been mentioned above, Governments ofAzerbaijan and Georgia started studying the potentialof transporting liquefied Azerbaijani natural gas fromKhulevi oil terminal on Georgia Black Sea coast toRumania. The LNG terminal project outlines were firstpresented at the international conference in Batumi on14 January, 2010.

As up to now the national companies of theparties Azerbaijan, Georgia and Rumania establisheda joint venture – Azerbaijan/Georgia/Rumania

Interconnector – AGRI and intend to open a bid for afeasibility study shortly. Hungary also manifested itsinterest in this project and declared itself ready tofacilitate its promotion within EU together withRumania. According to Georgian Ministry of Energy6

the capacity of LNG terminal at Khulevi has beenassessed at maximum 10 bcm per annum with EUR 4bln capital cost for building of a liquefaction plant, 10%of this amount would be required for the building of aregasification terminal in Rumania.

Obviously LNG is more expensive than the gastransported by pipeline but this project has someobvious advantages. First of all it provides Azerbaijanigas, in addition to the route through Turkey, withanother outlet to the EU market involving Georgia asthe only transit country. In addition, SOCARAzerbaijani Public Oil and Gas company has alreadyunder a long term lease the Kulevi terminal onGeorgia’s Black Sea coast, where the liquefactionplant is projected to build. Second, and no lessimportant, it provides Rumania and Hungary with anopportunity to diversify their gas imports and becomean entry point for an alternative Azerbaijani gas to theEU market delivered by an alternative route. ForGeorgia implementation of AGRI means strengtheningits transit function and enhancing the geopoliticalsignificance of South Caucasus Energy corridor.

Liana JervalidzeResearch FellowIlia State UniversityGeorgia

6 Interview with the First Deputy Energy Minister on 6 April 2010(author).


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Belarus’s energy securityBy Anton Lobach

Economy vs. ecologyThe system of energy security is a strategic issue for anymodern state. However, there has always cooperatedand confronted each other two very important factors: thenature of environmental safety and economic security ofthe country. Belarus is not an exception, because energycosts are above to 35% of GDP. Belarus uses 36.14billion kWh of electricity and 33.9 million Gcal of heatenergy consumed per year.1

Classic or modern: the oil against the wind and sunIn Belarus, 95% of electricity and thermal energy isgenerated using imported natural gas. It makes thecountry's growing economy too sensitive to fluctuations ingas prices. It forces us to seek alternative sources ofenergy.2

In 2011 Belarus imports 3 billion kWh of electricityfrom Russia, as well as 2.5 billion kWh from Ukraine inaddition.3

Gross consumption of energy resources will increasefrom 37.05 in 2005 to 52.4 million tons of equivalent fuelin 2020, and including electricity – from 35 to 50.3 billionkW/h, according to the estimates.4

Up to 25% of electric and thermal energy has to beproduced from local resources by 2012. By increasingthe extraction of peat (up to 3.3 million tons) and wood(up to 11 million cubic meters), which is equivalent toreplacing the 3.5 billion cubic meters of gas, basically.Brown coal, shale oil, combustible organic and polymerwaste, as well as construction of new thermal andhydroelectric power station on the Neman and WesternDvina, provides for involvement in trafficking in therepublic reserves. Implementing the program wouldrequire investment of USD 1.3 billion.

3,150 megawatts of electric power efficient due tothe introduction of modern steam units with an efficiencyof at least 57%, modernization of existing equipment atthe thermal power stations with the latest gas turbinetechnology, the transfer of steam turbines in the mode ofloss of vacuum, the implementation of measures toimprove the structure of electricity generation for thermalpower stations, as well as decommissioninguneconomical obsolete equipment with an efficiency lessthan 39% is planned to be introduced in Belarus during2011–2015.5 It will be spending USD 7.5 billion for thispurpose, including investments in power will be total USD5.9 billion.6 This will reduce the specific fuelconsumption for electricity production up to 10% in thewhole energy system by 2015.

1 Data from the Ministry of Energy of the Republic of Belarus.2 Message of the President of the Republic of Belarus AlexanderLukashenko to the Parliament and belorussian people. 24.04.2011.3 Http://www.Interfax.by. An interview with Interfax-West "AssistantSecretary of Energy of Belarus Lyudmila Zenkovich 04.02.2011.4 The development strategy of national power. Sergei Tkachev,Vladimir Timoshpolsky. Journal of the Science and Innovation"Number 11 (57) 2007. (Special Issue).5Http://www.belta.by/ru/all_news/economics/V-razvitie-energosistemy-Belarusi-planiruetsja-vlozhit-75-mlrd-za-5-let_i_526724.html.6 Speech by Minister of Energy of Belarus Alexander Ozerets by theCouncil of Ministers 05.10.2010.

These factors should cause a significant reduction inthe short run in quantities of natural gas used to heat andelectrical energy – from 81% in 2005 to 57–43% by 2020in consumption of boiler and furnace fuels (CBT) – with81 to 61–51%. The volume of the dominant supplier ofenergy (natural gas) will decrease from 83 to 64–57%.

There is a state program for development ofalternative energy in Belarus. State Concern "Belenergo"buys electricity produced by organizations based onalternative sources of energy at the rate of 300% of theprice of electricity serving the standard fare. This isintended to encourage the introduction of newtechnologies and develop alternative energy sources.

However, despite all the efforts being made onlythese factors are not sufficient to ensure economicsecurity.

Despite the fact that since 1992, "The Concept ofSustainable Development" is an integral part of theinternational political agenda and must be taken intoaccount in the strategies of each country. Today,unfortunately, this is more a tribute to politicalcorrectness, rather than a real program of action. Thereasons for this are clear. And it is primarily marketfundamentalism (the principle of "Profit above all else").

Since any energy is always expensive source ofenergy, it inevitably begins to advance economic securityto environmental.

After using all available resources rises the questionabout other sources of energy. And then begin to thinkseriously about nuclear power.

Nuclear power energy safety and risksNuclear power is based on a chain reaction of uranium.In the process of energy production it does not bear adirect impact on the ecology and the environment. Butthere is a risk of force majeure, in the event which meritsof nuclear power becoming a disastrous shape.

Occurrence at Fukushima drew attention to one ofthe most important problems associated with nuclearenergy – safety and risks. Risk of damage to thecontainment of a nuclear reactor was estimated as one toone million for each reactor per year. Common was theview that the consequences of a nuclear catastrophethere could potentially be serious, but the probability ofthis is extremely small... We see that the math is notalways relevant in this aspect.

Belarus and nuclear power station plansDespite the efforts made by people, electricity remainsthe most costly economic factor constraining economicgrowth.

In connection with a substantial load on the energyeconomy of the country the government of Belarus hasdecided to build its own nuclear power plant.

The question about nuclear power security is ofparticular importance in Belarus. Indeed, in 2011celebrated 25 years since the catastrophe at theChernobyl nuclear power plant. And despite the fact thatgeographically plant was located on the territory ofUkraine, the Belarusian lands and communities wereseverely affected by the Chernobyl nuclear power plant.

http://www.Interfax.by./

http://www.belta.by/ru/all_news/economics/V-razvitie-


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Belarus is particularly closely related to issues ofenvironmental safety, in this connection.

A characteristic feature of the Chernobyl reactor wasan open channel-type heavy-duty protection only fuelcells. Ignalina nuclear power plant in Lithuania is exactlythe same. That is why the requirement for EU about itsclosure, from the point of view of experts, is absolutelyjustified.

Modern nuclear power plants have three levels ofexternal protection, in contrast to the Chernobyl andothers like her. The first circuit: the shell of fuel cells toprevent the release of gaseous fission fragments.Second: thecase reactoritself(Chernobylreactor wasnot thecase). Thethird path:the concreteprotectivecover overthe stationitself whichhas thestrength towithstand adirect hit byan airplane.Chernobylreactor didnot havesuch bell.Therefore, if there is a rupture of the primary circuit andmelt, as happened in Chernobyl, all the pieces must belocalized inside the metal case on the second line ofdefense, according to experts’ view. The estimatedprobability of an accident at a reactor such as Chernobylis 10 thousand years whereas in more sheltered stationsthis probability is much smaller. There an explosion canoccur within 1 billion years.

No one can predict the end or the beginning of thedesign life will crash, but the severity of the impactsvaries dramatically. For example, in 1978 in the U.S.nuclear power plant there was an accident of the reactorwith a molten core. But thanks to several levels ofsecurity background radiation in the county remainedwithin normal limits and the population did not haveotselyat.

Belarus plans to build station with three levels ofexternal protection and passive protection system, whichprotects the reactor from melting and the release ofnuclear fuel. According to the Joint Institute for Energyand Nuclear Research, it is economically feasible to buildtwo or three units with total capacity of about 2 MW.According to specialists, it would take about USD 3billion.

According to various estimates, the output of nuclearpower stations on the settlement will eliminate thepurchase of 3.6–4.2 billion cubic meters of gas. It is onefifth of the current energy balance of Belarus.

Attitude towards nuclear energy still remainsambiguous. Nuclear power stations are being built inSouth Korea, China, Iran, Brazil, and Romania. However,the Austrian public in due time made the closure ofnuclear power plants built. Actively nuclear power is used

in the United States, France, Japan and other countries,as shown in Figure 1. 27 European countries received31% of electricity and 14.6% of primary energy fromnuclear power plants in 2010. Europe has seen a growthof nuclear power stations over the past 8 years.Countries that had previously halted construction ofnuclear reactors (Germany and Sweden) or completelyabandoned their nuclear programs (Italy and Poland),start thinking seriously about lifting the moratorium, theabolition of restrictions and deterrent penalties.7

Figure 1 Number of reactors in operationworldwide

Note: * Long-term shutdown units (5) are not counted; ** In theWorld Total there are also 6 reactors in operation in Taiwan, China.Source: Http://www.iaea.org/cgi-bin/db.page.pl/pris.oprconst.htm.

Atom has never been completely safe. Just suchproblems as growing demand for energy, the depletion ofhydrocarbon reserves and climate change, have no easysolutions. Nuclear power solves all these problems.

In today's world, when designed and operatedefficient technologies for energy production fromrenewable sources, nuclear power plant construction isexcessive and not sufficiently justified by the risks.

Thus, any decision on the construction, operation orclosure of existing nuclear power plants is not simple andstraightforward. There are always different points of view.And the economic factor has while prevailed over theecological ones.

Anton LobachAssisting Development DirectorPromInvestCapital Group;Aspirant of National Academy of Sciences ofBelarusBelarus

7 Http://be.wikipedia.org.

http://www.iaea.org/cgi-bin/db.page.pl/pris.

http://be.wikipedia.org./


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Kazakhstan electricity sector reformBy Meruert Makhmutova

Kazakhstan is one of the first countries of formerSoviet Union that has developed functioning electricpower market. As a result of the reforms in the 90ththe following milestones were reached1: Division of power sector into competitive entities

and regulated monopolies; Large scale privatization of generation; Creation of the Kazakhstan Electricity Grid

Operating Company (KEGOC); Formation of regional distribution companies

(RECs).The Concept of further development of market

relations in the Kazakhstan power sector wasapproved in February of 2004. The KazakhstanElectricity Law was passed in July 2004. Thus it wasprovided framework for power market development.

The Ministry of Industry and New Technologies(MINT) is the policy making body. The Agency for theregulation of Natural Monopolies (AREM) deals witheconomic regulations and sets transmission tariffs.Competition Protection Agency (CPA) regulatescompetitive issues on electricity market. StateElectricity Supervision Committee under the Ministryof Industry and New Technologies providessupervision and control over the implementation oftechnical requirements.

State owned electricity companies such asKEGOC, Kazakhstan Wholesale Electric PowerMarket (KOREM), Samruk-Energo, managed byNational Wealth Fund Samruk-Kazyna. Large powerstations: Ekibastuzskaya GRES-2, ZhambylskayaGRES, Bukhtarminskaya GES, Shulbinskaya GES,Ust’-Kamenogorskaya GES, Shardarinskaya GES,Almatyenergo (or Almaty Power Consolidated, APC),in whole accumulating 28 percent of generationcapacity, are managed by Samruk-Energo.Shulbinskaya GES and Ust’-Kamenogorskaya GESare under the concession holding by AES Corporationtill 2015. Also Samruk-Energo is working onconstruction of Moinakskaya GES and reconstructionof Shardarinskaya GES.

Kazakhstan privatized most of its power sectorwith the exception of high voltage transmission2.Around 97% of power plants in Kazakhstan areprivately owned. There are 66 power stations3,including five hydroelectric plants. This represents aninstalled capacity of approximately 19,400 MW, andavailable output 15,300 MW. At the moment, 85.5percent of Kazakhstan’s electricity comes from coal-fired plants and 8.7 percent from hydroelectric sources(Table 1). The coal fired plants are located in northcoal producing regions. Hydroelectric facilities arelocated mostly along the Irtysh River. The southern

1 Makhmutova M., Akhmetova A. Electricity Sector of Kazakhstan:How to Raise Effectiveness and Attract Investment forModernization. Public Policy Research Center. Almaty.2 ADB (2005), Electricity Sector in CAREC countries. A DiagnosticReview of Regulatory Approaches and Challenges.3 KEGOC 2010 report available at www.kegoc.kz.

regions of Kazakhstan don’t have an enough energyresources and electricity consumption covered byimport from the Kyrgyz Republic.

The electricity production and consumption fellsignificantly since independence (Figure 1). SinceKazakhstan was a republic in the Soviet Union until1991, its energy sector was part of the state-ownedand vertically integrated Soviet energy system. Due toeconomic crisis after the collapse of Soviet Union inthe beginning of 90th energy consumption fell almosttwice to minimum in 1999 – 50.3 billion kilowatt-hours(Bkwh). As a result electric power generation’s sharein the industrial output fell in three times: from 15.7percent in 1995 to 4.7 percent in 2009.

Robust economic growth since 2000 has helpedboost generation to 82.3 Bkwh in 2010 (6.2%decrease comparing to 1990) and consumption to83.6 Bkwh (25.2 percent decrease comparing to1990).

Deficit of energy generation in the beginning of90th converted into surplus in 2003 whenKazakhstan’s domestic electricity generationexceeded its consumption (Figure 2). Since countryhas more than enough electricity to support its owndemands, it has been able to export electrical energyto Russia.

KEGOC is 100 percent government ownedtransmission company. Kazakhstan built two north-south and north-west transmission lines (first in 1997and the second in 2009) and connected its southernand western regions with main energy resources innorth and decreased dependence from neighboringcountries. There are 29 regional distributingcompanies.

Low energy tariffs are the main reason forunderinvestment, high commercial and technicallosses, and lack of energy conservation4. Theintroduction of maximum electricity tariffs has allowedthe Government to begin the full-scale renovation ofenergy facilities. This would improve the situation ofhigh levels of equipment degradation in the electricpower industry.

The electric power industry remains a key factor inKazakhstan’s industrial development and economicgrowth. Kazakhstan’s new Accelerated IndustrialInnovation Development Program (2010–2014)identifies the energy sector as one of its priorities inthe overall plan to diversify the economy andsignificantly increase the country’s GDP by 2015.According to the Ministry of Industry and NewTechnologies, power generation will increase ademanding 30 percent to 2015. Nevertheless thefollowing challenges remain: The ageing of Kazakhstan’s generating equipment

are 70 per cent, electrical network – 65 per cent,heat network – 80 per cent.

4 Central Asia: Decay and Decline. Crisis Group Asia Report 201, 3 February 2011.

http://www.kegoc.kz./


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Loss of large energy in transmission anddistribution over the national distribution lines.

Attracting of huge investments for financing fornew generation facilities remains questionable.

Meruert MakhmutovaDirectorPublic Policy Research CenterKazakhstan

Table 1 Electricity generation by types of stations

2004 . 2007 . 2008 . 2009 .Billion

kilowatt-hours

(Bkwh)

Share,%

Generation,Bkwh

Share,%

Generation,Bkwh

Share,%

Generation,Bkwh

Share,%

Electricitygeneration, total 66.6 100.0 76.4 100 80.0 100.0 78.4 100.0

Coal-fired plants 56.3 84.5 64.4 84.3 68.5 85.5 67.0 85.5Heat powerstation, workingon gas and blackoil (mazut)

2.3 3.4 3.9 5.0 4.1 5.2 4.5 5.7

Hydroelectricstations 8.0 12.1 8.1 10.7 7.4 9.3 6.9 8.7

Source: KEGOC

Figure 1 Electricity generation and consumption in 1990–2010, billion kWh

Source: Agency of Statistics of the Republic of Kazakhstan, Ministry of Industry and New Technologies

Figure 2 Deficit and surplus of electricity in 1990–2010, billion kWh

Source: Agency of Statistics of the Republic of Kazakhstan, Ministry of Industry and New Technologies

104,7

50,3

83,6

0,0

20,0

40,0

60,0

80,0

100,0

120,0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Generation Consumption

-17,3

-2,8 -1,3

-20,0

-15,0

-10,0

-5,0

0,0

5,0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Deficit (-), surplus (+)


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Energy security – Georgian perspectiveBy Murman Margvelashvili and George Mukhigulishvili

Energy security means reliable and sustainableprovision of energy at affordable price and acceptablequality. In short term energy security is defined by theprobability of sudden changes in supply or demandand the ability of energy system to react efficiently.Long-term energy security is linked to timelyinvestments to supply more of own energy, and othersupporting measures to reduce the probability andadverse effects of external supply disruptions. Therequirements of sustainable economic and socialdevelopment and environment protection limit thescope of security measures. Here we briefly reviewthe current and prospective factors of Georgia’senergy security.

Georgia’s energy mixGeorgia does not have significant oil & gas reserves.As a result, about 65% of country’s primary energysupply is from external sources. Imported natural gasconstitutes about 45% of total energy supply whileimported oil products constitute about 25% of energymix. Own hydro generation is sufficient for internaldemand and constitutes 20–25% of total energysupply and the rest is fuel wood.

Georgia is situated on important geopoliticalcrossroads of the continent, major energytransmission lines and pipelines go through thecountry. South Caucasus Pipeline (SCP) connectsCaspian Shah Deniz gas field to Turkey. The BakuTbilisi Ceyhan (BTC) oil pipeline connects the offshoreoil fields in the Caspian to the Turkish coast andfurther European markets. Western Route ExportPipeline Baku-Supsa (WREP) also serves for supplyof Azeri oil by tankers to global markets. Georgianrailway provides a corridor for transporting petroleum

products and crude from Azerbaijan, as well asKazakhstani and Turkmenistan to the Black Sea.North-South main gas pipeline serves for export ofRussian gas to Armenia.

These transport routes involve many internationalstakeholders and provide to Georgia relative politicalsecurity as well as transit revenue and own energy.Currently about 60% of Georgia’s current domesticgas demand is provided from in-kind gas transit feesfrom SCP and North-South gas pipelines.

Current state of energy securitySabotage on Russian territory of the natural gastransmission pipeline and the main electricitytransmission line, serving for energy export toGeorgia, in severe winter of 2006, resulted in energycrisis for almost two weeks. Russian-Georgian war in2008 didn’t create much of energy disruption andmajor energy infrastructure was damaged, howeverthe risks were extremely high. This was preceded byalmost quadruple increase in the price of imported gasover previous three years. These developments haveindicated a serious need for strengthening Georgia’senergy security and urged the actions for diversifyingenergy supply sources.

There has been a significant improvement inGeorgia’s energy security standing over the lastseveral years. In difference with the situation of 2006,together with development of Shahdeniz field inAzerbaijan more gas became available to Georgiaboth as in-kind fee for the transit over SCP, and alsofor direct purchase from Azerbaijan. Georgia hasreoriented its gas purchases and has concluded along term agreement with SOCAR to supply the gas atfixed price as well as to supply gas in emergencies.

The portion of Russiangas in energy balanceis now limited to in-kindfee for transit toArmenia.

Georgia hasbecome self sufficientin electricity due tohydro plantrehabilitation, thoughwith one importantcomment: most ofelectricity productioncomes in summerwhen the demand islow, while in winter thehydro potential isinsufficient for coveringthe demand and gasfired thermal plants orimport need to comeon line. Major concernis related toEnguri/Vardnili hydro


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power plant cascade. It is a key contributor toGeorgia’s electricity generation and therefore majorfactor of energy security. The power house andswitchyard are located on the territory occupied byRussia, while the dam and reservoir are on theterritory controlled by Georgian state. This can resultin serious energy problem in case of politicalescalation with Russia who already occupies 20% ofGeorgian territory.

Remaining strong dependence on imported gas,pronounced seasonality of Georgia’s vast hydropotential and threat to control of key energy assets arethe most important challenges to Georgia’s energysecurity. In order to cope with these challengesGeorgia needs to develop internal energy resources,diversify further energy supplies and seek the ways formore political stability in the region.

Internal resourcesBy far the hydro electric potential is the mainprospective resource of domestic energy. According tovarious estimates there is a possibility to economicallydevelop about 20–30TWh of annual generation. TheGeorgian government program “Renewable Energy2008” has initiated energetic action in this directionand there is a big number of large and mediumprojects already in development.

In 2010 Georgia has already achieved a level of1.3TWh of net electricity export, however furtherdevelopment requires reliable external market andpossibility of seasonal electricity exchange tocompensate for summer excess and winter deficiencyof domestic electricity. This urges the development oftransmission interconnections with neighboringcountries as well as development for long term reliableand transparent arrangements that might start asbilateral contracts but eventually should lead to morestable regional market structures. Turkey isconsidered as most promising market for Georgianelectricity at least in medium term.

Ongoing construction of 500/400kV transmissionline with back-to-back DC connection substation inAkhaltsikhe, rehabilitation of existing interconnectionswith Armenia (220kV) and Azerbaijan (330kV) andconstruction/rehabilitation of additional lines show astrong development in this direction. With thisconstruction of new transmission capacity Georgiatries to open up the new possibilities for renewableelectricity trade and exchange with neighbors. Thiscan become more relevant since recent Fukushimaaccident and growing concern over climate changecaused by greenhouse gases.

Georgia has own resource of brown coal which isestimated at 300mln tonnes. There is already use ofbrown coal in industry and ongoing construction ofsmall CHP Plant in Tkibuli that signifies the start ofcoal utilization in power sector for security andeconomic development reasons.

There is a vast untapped potential of EnergyEfficiency (EE) and Renewable Energy (RE) inGeorgia that have to be incorporated in energysecurity improvements. The economically achievableannual potential of renewable energy sources (RES)can be estimated as: small hydro – 5 TWH1, wind – 5TWH, biomass – 3–4TWH, solar – 60–120 GWH,geothermal – 0.8 TWH2. However, the share ofrenewable energy, except big hydro, is still only a few

percent in Georgia’senergy balance. At thesame time energyintensity of Georgianeconomy is high andthe amount of specificenergy needed toproduce goods andservices in Georgia is2–2.5 times higher thanin Western countries. Itis estimated that energyefficiency measurescan provide up to 20%of energy saving in thecountry.

Up to now Georgiahas been slow indevelopment of EE &RE, but recentlyespecially after thepledges by Georgianpresident at Cancun

2010 conference and Tbilisi joining the Covenant ofMayors, there is a visible trend towards developmentof these internal reserves. Adoption of RE & EElegislation would be a strong factor in support ofdeveloping these resources. Development of thisresource offers the potential for cooperation in thisfield with neighboring countries that are facing thesimilar challenges.

Georgia continues to explore its oil & gasreserves. A new development of 21st century shale

1 Http://www.minenergy.gov.ge/index.php?m=249&lang=eng.2 Renewable Energy Potential in Georgia and the Policy Options forIts Utilization (WEG), 2008.

http://www.minenergy.gov.ge/index.php?m=249&lang=eng.


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gas can become an additional and even mostimportant source of energy. This potential resourceneeds to be evaluated and developed over a comingdecade, however preliminary rough estimates indicatethat in case of success the scale of the resource canbe comparable to some most successful shale gasplays in the US.

Another major development is the expectedconstruction of gas storage facility in Ninotsminda oilfield. The gas storage will allow to store more than300 million cubic meters of gas. The pre-constructiondesign study has been completed last year and theconstruction preparations are going to start soon.

Energy transitThe concept of Southern energy corridor adopted andpromoted by European Commission provides majoropportunities to increase Georgia’s energy securityboth in terms of additional in-kind transit revenue aswell as political support that will strengthen theprotection against political risks facing the country.

The near term significant development is expectedwith further development of Shahdeniz gas production(stage 2) scheduled for 2017. It will tripling overallproduction from the field and delivers an additional 16bcm of gas for transit over SCP therefore increasingthe transit revenue to Georgia. 5–10 bcm/y additionalgas will be available from Turkmenistan off-shorefields developed by Petronas even sooner if TCGP isimplemented timely.

Nabucco – the flagship project of southerncorridor is developed to connect the world’s richestgas regions – the Caspian region, Middle East andEgypt – to the European consumer markets. It willcarry about 32 bcm of gas annually. The concurrentproject – White Stream has been conceived totransport gas from Caspian via Georgia over thebottom of the Black Sea directly to the markets ofEastern Europe. Together with Nabucco, WhiteStream will provide an essential link for Europe to gasresources in the Caspian and will contribute tosecurity of gas supply by providing a complementaryexport route with diversification benefits for both

producers and consumers. The project will bedeveloped in stages with initial throughput of 8 bcm to32 bcm per year.

There is an active discussion of Azerbaijan-Georgia-Romania Interconnection Project (AGRI), theproject plans to supply 6–8 bcm of liquefied Azeri gasto Europe by Black Sea tankers to Romania annually.The feasibility of the project is still under examination.

All the above projects have the potential tocontribute to energy security and political stability ofGeorgia and relate it closer to energy security of theEU.

ConclusionsLack of own oil & gas reserves, excess of hydropotential and tense political relationships with Russiadefine the current picture of Georgia’s energy security.

There are three main directions for Georgia’senergy security: 1. Developing internal energyresources, 2. Developing the regional energyexchange and cooperation, 3. Developing country’scapacity for international energy transit, especially inthe context of Southern Corridor. All three directionsare productive grounds for international cooperationand can provide economic, security andenvironmental benefits to participants. Thisdevelopment shall be supported by creation oftransparent legal and regulatory framework of westernstandards.

Murman MargvelashviliDirector, Energy StudiesWorld Experience for Georgia (WEG)Georgia

George MukhigulishviliResearcherWorld Experience for Georgia (WEG)Georgia


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Energy security in Moldova – a long road aheadBy Alex Oprunenco

Undoubtedly energy security is one of Zeitgeist issuesof the modern times. A series of factors contributed tothe rise of this issue: Climate change, rocketingcommodity prices, heightening political andinternational struggle for energy resources and use ofaccess to these resources as a proxy of geopoliticalinfluence. For certain countries, such as the Republicof Moldova, the lack of energy security may pose adevelopment threat as it affects both political stabilityand economic competitiveness of the country.

Special case of Moldova: wrong endowment,wrong geography?If you look at the drivers behind Moldova’s energy(in)security you would wonder how all of them couldcoincide in the case of this small country, landlockedcountry. Three specific predicaments for Moldova’sappear crucial: domestic resource endowment /energy generation, geography / lack of diversification,and technology / low share of renewable and ofenergy efficiency.

Indeed, let’s take energy endowment / localproduction, first. Prior to independence (1991)Moldova was part of the former Soviet Union and wasmassively supported by cheap energy imports fromRussia. Certainly, situation started to change sinceMoldova declared independence in August 1991.Firstly, as the outcome of the internal strife, theTransnistrian region, home to Cuciurgan power plantwith capacity to both cover power domestic needs andoffer some exports, broke away. Secondly, for sometime Moldova could still receive some cheap naturalgas from Russia. This ‘bonanza’ ceased in 2006 whenGazprom started to calibrate its price policy along withRussia’s geopolitical imperatives1 and apply Europeanprices to its neighbours. In the aftermath of thesuccession of price hikes, Moldova has been payingEuropean price for Russian gas since 2011, meaninga more than three-fold increase in five years2.

As the result Moldova has had to sustaincombination of the falling local production, both due tosecession of Transnistrian region and lack ofinvestments in domestic generation capacities, andrising prices, change of Gazprom price policy androcketing oil prices on the global markets since thesecond half of 2000’s. Furthermore, Moldova is themost energy imports’ dependent country in the region(Table 1). Main energy resources in use are: naturalgas (around 40%), petrol and its derivatives (over30%), and electricity (over 10%)3.

1This remark does not imply that former Soviet Union republicsshould receive favorable price treatment.2 There is ongoing dispute with respect to debts for Russian gasaccumulated by Transnistrian region, which is de jure part ofMoldova and whose gas network is owned by the Moldova-Gazstock company (co-owned by Gazprom, majority stake, andMoldovan Government).3Data from National Bureau of Statistics of Moldova, EnergyBalance, 2010.

Table 1 Level of energy imports’ dependency,by country, 2008

Country Energy imports, net(% of energy use)

Albania 45Armenia 73Bulgaria 48Georgia 64Latvia 60Moldova 97Slovakia 65

Source: World Development Indicators, World Bank.

This ‘endowment’ predicament is furthercompounded by geography. As former part of SovietUnion Moldova was closely integrated into thecommon energy infrastructure (gas and power) andthe consequences cannot easily shed. In fact, itmeans that there is technical capacity to importnatural gas only from Russia, while westwards powerconnections are severely limited by the technicaldifferences between European (ENTSO-E) and formerSoviet power grids (IPS). Moreover, Moldova not onlyreceives all of its natural gas from single source,Russia, the transit of this gas also goes only via onecountry, Ukraine. In other words, Moldova can suffernot only if it has political or economic rift with supplier,but also if transit country is in conflict with supplier.This was exactly the case in winter of 2009 whenUkraine was involved in spat with Russia over the gasprices and Moldova was effectively cut from supply ofRussian gas (that time the needs were covered fromUkrainian reserves).

The third crucial predicament is technology gapexpressed as low energy efficiency and low share ofrenewable energy in the country’s energy balance. Infact, as much as energy efficiency is concernedMoldova again fares below regional standards (Table2), despite the fact that normally lack of cheap energyresources should lead to more efficient use of them.

Table 2 GDP per unit of energy used (constant2005 PPP $ per kg of oil equivalent), by country,2008

Albania 11Armenia 5.8Bulgaria 4.6Georgia 6.6Latvia 7.9Moldova 3.1Slovakia 6.1

Source: World Development Indicators, World Bank.

Furthermore, although the Government declareddevelopment of the renewable energy sources asstrategic goal in energy policy, too little has been


23


achieved so far. The share of renewable energy hasbeen hovering these years around 3% of total energybalance, nowhere close to the official goal of 10% by2010.

It is worthwhile to mention that Moldova’s Energystrategy aims at closer integration in European energymarket and convergence to European standards inenergy efficiency and use of renewable energy.Indeed, the new EU’s energy strategy sets ambitioustargets for further decarbonisation of the energyproduction and energy saving. If developments inMoldovan and European energy sectors will continueat current pace the gap between Moldova’s declaredgoals and reality will only get wider and will transformcurrent goals of integration and convergence in amission impossible.

To sum up, lack of energy security (domesticgeneration and diversification of supply) makeMoldova vulnerable in face of eventual politicalpressure, while technological undercutscompetitiveness of Moldovan companies which arepoised to have more expensive energy inputs andcosts in local production activities.

In search of solution: a light in the end of tunnel…There appears to be certain degree of understandingof the main risks and drivers by the MoldovanGovernment. The National Energy Strategy (2007–2020)4 outlines however vaguely several risks andchallenges, although strategy is based on sectoralapproach and clearly lacks holistic vision. At the sametime, since 2010 Moldova has been member of theEuropean Energy Community Treaty and process oflegislative approximation to the EU’s acquis in thisarea proceeds apace. The legislative processhowever refers mostly to the market rules andstandards, and can only partly facilitate arrival ofinvestments and know-how needed to increaseenergy security and jump-start development ofdomestic energy sector.

From the standpoint of the previous section theapproach to enhancing of national energy securityshould be three-pronged. Firstly, domestic productioncapacity should be developed. Given Moldova’snatural endowment such a progress can be achievedonly in small-scale hydro-power generation andrenewable energy resources5 (of which biomass hasthe biggest potential, but also solar and wind energy)development both for power and thermal powergeneration. Furthermore, such approach would be inline with the goals of the new EU energy strategy, withmuch less focus should be put on development ofgeneration capacities using natural gas or other ‘dirty’

4It is being revised currently.5 For more information see National Program for Renewable EnergyResources Development (2003-2010).

fuels for power generation. As part of the EUapproximation process in the field such options aslinking to the EU Emission Trading System andintroduction of green certificates scheme should betaken into account.

Secondly, more attention should be paid to energyefficiency and saving with the aim at modernizingequipment and production process (both in energyproduction and in non-energy sector) and buildings; aswell as improvement of transport infrastructure withthe view of cutting losses. Tariff policy favouringenergy-savers, i.e. consume less – pay less per unitconsumed, may also be helpful.

Last but not least, diversification of gas supply willremain a thorny issue. Although accession to theEnergy Treaty Organization accompanied bysignificant internal market liberalization ushers way forstronger interconnection of Moldova’s power grid andgas distribution networks with those of Romania (partof larger EU networks) will ease the pressure theywould still have limited impact. In the case of powersupply the problems of compatibility between twosystems would persist, and there still would be needfor important investments in order to ensure Moldova’sswitch from fSU’s IPS to EU’s ENTSOE. In the case ofgas network building reverse connection betweenMoldova and Romania in current circumstances couldserve only as a temporary back-up option in the casenew ‘gas wars’ occur in the western CIS, but wouldnot be able to serve as a reliable substitution forRussian gas (due to limited Romanian productioncapacity). And Moldova still has to attract funds toaccomplish even this connection.

All in all, it is clear that energy security will remaina thorny issue for Moldova for many years ahead.Easing this challenge will often require some costlyinvestments which would not necessarily pay backany time soon. However, some of these, such asinvesting in energy efficiency and renewable energy,appear to be ‘win-win’ solutions and will help not onlymollify dependency on energy imports, but alsoincrease economic competitiveness of domesticcompanies.

Alex OprunencoInternational Programs DirectorExpert-GrupMoldova


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Azerbaijan – energy power in the regionBy Gulmira RzayevaOil & politicsAzerbaijan is located in one of the most volatile,vulnerable and geopolitically complicated regions inthe world – in the South Caucasus and next to theCaspian Sea; it is squeezed between Russian andIran and is next door to Turkey. Afghanistan and Iraqare not far away. There are internal factors, butpossibly the main driver for the volatility of the regionis the emerging and intersecting political andeconomic interests of the big powers – Russia, theUS, Turkey and Iran – in the wake of the collapse ofthe USSR. Since then Azerbaijan has been one of themost independent-minded of the CIS states, pursuinga diversified energy policy which seeks to dealsimultaneously with Russia and Iran, Turkey andEurope.

Since the transition to independence in 1990–91Azerbaijan has become one of the richest among thepost Soviet ("FSU")states, earning billionsof dollars from oilexports, and thus farhas maintained aneffectively balancedand diversified energysecurity policy. In theearly years the maingoal for the countrywas to use oilproduction to maintainindependence – and todo this throughachieving directaccess to internationalmarkets. To achieve these aims the government andindustrial partners launched two major oil projects.These two "contracts of the 20th century" – resulting inthe Azeri, Chirag and deep water Guneshli fieldproject (ACG) and Baku-Tbilisi-Ceyhan (BTC) project– have been unqualified successes. Azerbaijan nowhas full access to international oil markets and thecountry receives very significant revenues as a result.This opened up the Caspian reserves to worldmarkets for the first time in 80 years; for we shouldalways remember that in its "first oil boom", from 1890to 1918, Baku exported most of its oil via Georgia andthe Black Sea and it was the second biggest oilproducer in the world after the US (in fact in 1912 over20% of the Shell company's global production went viathis route and to markets as far away as Singapore).

Since September 1994 the AzerbaijanInternational Operating Company (AIOC) has invested8 billion Euros, in the 30-year contract to develop thethree ACG fields, whose total reserves are estimatedat 3–5 billion tonnes. Azerbaijan has taken great careto assure that multiple foreign powers and companieshave a stake in the expected oil boom, for botheconomic and geopolitical reasons. Azerbaijan will get

80% of oil revenues – projected to be roughly EUR 80billion – over the contract term.

Since independence around USD 33 billion hasbeen invested in the country's hydrocarbon sector,and it is expected that total investment in that sectorwill surpass USD 60 billion by 20301. The exportinfrastructure provides commercially attractive andsafe export to the international oil market not only forAzerbaijan, but also for other countries of the Caspianbasin. In 2009 an average of 100,000 barrels per dayof Kazakh oil were transported from Baku to the BlackSea2 – making Azerbaijan a bridge between wealthyCentral Asian states and the West. Up to date oil andoil products sourced from Azerbaijan have beenexported to 33 countries in the world, including theUSA, UK, Italy, Israel even Singapore.

Figure 1 Oil production in Azerbaijan (milliontonnes)

Source: SOCAR

Gas & marketsSo, Azerbaijan is generally satisfied with the results ofits oil policy and in particular with the amount that ithas been exporting to world markets; it now wishes tomaintain this situation for as long as possible.However, the situation with gas is much morecomplicated. It is well known that for gas export to besuccessful and economically profitable there needs tobe a strong bond between production andconsumption; without some guarantee of demand itdoes not make sense to supply. Since 2007 up to dateAzerbaijan has become a significant gas exportercountry. Today countries neighboring with Azerbaijan,such as Russia, Georgia, Turkey and Iran, benefitfrom the contribution that Azerbaijani gas has made totheir energy security.

1Azerbaijan State Statistic Committee.2Http://www.azernews.az/en/Oil_and_Gas/29002-Kazakhstan_seeks_to_resume_BTC_oil_exports.

http://www.azernews.az/en/Oil_and_Gas/29002-


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One of the early exploration projects in theAzerbaijani sector of the Caspian focused on what isnow known as the Shah Deniz field, in the spring of1999 a consortium led by BPAmoco and Statoil discoveredthat this was a supergiant field,containing mainly natural gas –accompanied by significantvolumes of liquid condensates.According to the provedestimates this field contains 1.2trillion cubic meters of gas and300 million tonnes of condensate;so far USD 4 billion has beeninvested in exploration anddevelopment of first stage of thefield. Up to USD 20 billion will beinvested in development of thesecond phase of Shah Deniz.From 2007 up to date 100 billioncubic meters (bcm) of gas was extracted in thecountry, of them 21 bcm have been exported to thenearby markets. If Azerbaijani policy during the firstphase of Shah Deniz was mainly driven by politicaland geopolitical challenges, in respect of the secondphase (SD-2) the country seeks to give top priority tocommercial principles – in particular as thegovernment has to guarantee the reimbursement of allcosts to investors.

In 2017 when SD-2 phase will come on stream thegas production may proceed to reach as much as 55bcm per annum; and so – with a projected nationalconsumption of 15 bcm – up to 40 bcm of gas outputwill be available for export. From 2017 the country’smain aim is to access the most lucrative, stable andthe best legally regulated market – the EU market andestablish its position there for long run. AzerbaijaniState Oil Company SOCAR is currently conductingnegotiations with all the potential buyers within theSouthern Gas Corridor, which includes the Nabucco,ITGI and TAP projects; the country and the ShahDeniz project will make its strategic choice bydetermining the most valuable commercial offers andin particular long-term viable transit and transportationtariffs.

Azerbaijan as all the other gas producer and gasexporter countries is keen to have an access to alucrative and stable market but it does not want to relyon a single national market. The country’s target is tohave multiple buyers locally as well as more widely.Azerbaijan wants to be important for the EU as energystate but not a monopolist energy exporter. Inaccordance with its diversification strategy, Azerbaijanhas made efforts to widen its export options and toaccess as many markets and evacuation routes aspossible; it can only progress by being an exporter,but it does not have direct access to open sea.

Figure 2 Gas production in Azerbaijan (billioncubic meters)

Source: SOCAR

Azerbaijani gas is seen as key to the SouthernGas Corridor concept; without it none of Nabucco,ITGI, TAP (possibly also White Stream) can beimplemented. This was made very clear in theMemorandum of Understanding signed betweenAzerbaijan and European Commission during anofficial visit on January 13 by Commission PresidentJosé Manuel Barroso to Baku where Azerbaijan isstated “as a substantial contributor to – and enabler of– the southern gas”. This new supply route willenhance the energy security of European consumersand businesses.

Recent development regarding the signing of theMemorandum of Understanding between SOCAR andGreece’s national gas company DEPA, showedpolitical support of Azerbaijan for ITGI and TAP. It isclearly stated in the Memo that the “SOCAR-DEPAgas sale contract to Greece, via Turkey, will serve,among others, as a breakthrough movement for theestablishment of direct energy links betweenAzerbaijan and Greece” and most importantly “anofficial opening of the Southern Corridor”. Thus, theSouthern Corridor might start with ITGI and TAPinstead of Nabucco. The EU should encourage theITGI and Nabucco consortiums to work together insecuring Azerbaijani gas so that both projects cancome on stream within the Southern Corridor, startingwith ITGI southward in a first phase and then followNabucco's original planned route northwards toAustria in a second phase. In any case it is vital forAzerbaijan (and the Shah Deniz project) that salesroutes are available for the additional SD-2 volumes.

After 2017 Azerbaijan may have significantadditional export potential and as the country has nota direct access to open sea it still has to decide howbest market its gas. In accordance with Azerbaijan’sstrategy for diversifying energy markets and exportroutes, the country is seeking to enter new marketsnot only within the region, but also distant huge andgrowing markets such as those in Asia, including Indiaand China. Given the increasing importance of global


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LNG trade, Azerbaijan is considering whether thereare options to diversify its energy exports throughLNG and has already launched a project named AGRIwhose aim is to look at how Azerbaijani liquefied gascan be delivered to world markets via the Black sea.Though still challenged by difficult economics, therecent announcement by the Turkish government of a"Bosporus canal" project makes LNG export from theBlack Sea a lot more credible. Azerbaijan has alsosuggested to deliver up to 5 bcm annually to Ukraine;and especially if the Bosporus canal proceeds it isvery likely that country will want to diversify its energysources by building a regas terminal on the Black Sea.

ConclusionAzerbaijan clearly aims to become one of the mainplayers in the European gas market after 2017 whenShah Deniz 2 will come on stream. However,Azerbaijan is a new and small player, which has tomake its way in a highly competitive market. It neitherexpects special political treatment, nor anymonopolistic position. SOCAR’s target is to accessmultiple buyers, multiple pipelines, and multiple

transportation routes both inside and outside theregion. Azerbaijan wants to gain importance to the EUas an energy state – it wants to build a reputation as areliable supplier and commercially focused partnerrather than as a player of ultimately pointlessgeopolitical games. In the long run Azerbaijan needsto diversify its economy away from oil & gasdependence, and to do this it needs to findsophisticated, innovative, long term economicpartners.

Gulmira RzayevaResearch FellowEconomic Analysis and Global AffairsDepartmentEnergy related issuesCenter for Strategic Studies under thePresident of the Republic of AzerbaijanAzerbaijan


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Armenia – the energy security or the failed diversificationBy Sevak Sarukhanyan

The energy crisis in Armenia at the beginning of 1990-s immediately after the collapse of the USSR came toprove that failure of the energy system might becaused not necessarily by the absence of the powergenerating capacities, but by the impossibility of thefuel imports. The energy supplies through the territoryof Azerbaijan were halted ensuing the conflict inNagorno-Karabakh, and since the early 1990s theonly supply route remaining was the one throughGeorgia, which had been suffering a political crisisand disintegration. Though in Armenia never anofficial energy strategy has been adopted, since 1990-s, the need of diversification of the routes of naturalgas import and construction of new electricity-generating units became central elements of thenational energy policy. The diversification policyincluded several ambitious projects:1. Construction of a gas-pipeline from Iran1;2. building a new unit at the Armenian Nuclear

Power Plant with capacity of 1000 MW;3. construction of the 5th unit at Hrazdan Thermal

Power Plant with capacity of 440 MW2 andinstallation of a new gas turbine unit with capacityover 300 MW at Yerevan Thermal Power Plant3;

4. construction of new hydro power plants (200–400MW).Though the new energy projects looked ambitious

for Armenia and some of them have almost beensuccessfully realized, the natural gas and the nuclearenergy will remain the key components of the nationalenergy system, giving a chance to say that thediversification policy has partly failed, because of theeconomic and political risks of dependence on naturalgas and nuclear energy.

The Russian “Iran-Armenia” pipelineThe main question which should be asked forunderstanding the importance of the Iran-Armeniangas-pipeline must be – why it has been constructed?

Here can be several answers and among themthe mains are: 1) for diversification of the Russian gasimport, 2) for diversification of transit routes of gasimport, lessening Armenia’s dependence fromGeorgia. It should be mentioned that the Armeniangovernment has never made a clear statement on theaims of the pipeline, so these two points have beenonly issues for discussions among experts. Anywayfrom the beginning of the pipeline’s constructionRussian giant “Gazprom” livened up its attention to theArmenian-Iranian energy cooperation and succeededin negotiations with the Armenian government onRussia’s participation in the project. As a resultGazprom bought the Armenian part of the pipeline at2006 and, according to the same deal, the 5th Unit ofthe biggest Hrazdan heat power-plant, which was

1 Completed at 2008.2 Completed in the middle of 2010.3 To be completed at the end of 2011.

proposed to use the Iranian gas for producingelectricity for exporting it to Iran among the deal “gasinstead of electricity”. After getting control over these 2capacities, Russia became a determinative actor inArmenian-Iranian energy deal and, in some mean,changed the Armenian government as the mainpartner of Iran in Armenia’s energy market.Possibilities, given by the involvement in Armenian-Iranian energy cooperation, has been used byGazprom for pressing the perspectives of theArmenian-Iranian energy cooperation: the constructionof the Iran-Armenian gas pipeline finished at 2008 butnor Gazprom’s Armenian branch ArmRusgazprom,nor Hrazdan power-plant have been buying theIranian gas as, according their arguments, they didn’tneed it. The first Iranian gas entered Armenia onlyafter the end of the modernization of the state-ownedYerevan heat power-plant at 2010, which startedbuying the Iranian gas for producing electricity andexporting it to Iran.

As to the minimizing of Georgia’s role for thetransit of the natural gas to Armenia, the Iran-Armeniapipeline nominally solved this problem, offering apossibility to import maximum 2.3 billion cubic metersof natural gas to Armenia in a situation when thedomestic consumption reached its maximum in 2008 –2.1 billion cubic meters. At the time a question of theprice for the Iranian gas is still open for Armenia:according to the ongoing Armenian-Iranian contractArmenia pays for 1 cubic meter of the Iranian gas 3kWt/h of electricity. The perspective when the transitof the Russian gas through the Georgian territory toArmenia stops will make the Armenian side buy thewhole gas needed for domestic consumption from Iranand a new contract between the countries must besigned. Today there is no clear idea how muchArmenia will have to pay for the Iranian gas, and thissomehow lessens the importance of the pipeline.

The Georgian itself pipeline keeps severalproblems for Armenia: the technical condition of the pipeline is

unsatisfying, as no serious investments has beenmade after the collapse of the USSR for itsmodernization,

the perspectives of a new Russian-Georgianconflict seem at least theoretically possible and ifa new war starts the functioning of the pipelinemay stop,

Azeri company SOCAR plans to buy the Georgianpart of the gas-pipeline Russia-Armenia4.SOCAR’s plans look dangerous for Armenia

because of the ongoing Armenian-Azeri conflict overNagorno-Karabakh. Of course it will be hard forSOCAR to stop the transit of Russian gas to Armeniaand proclaim that it is done due to political reasons,but technical reasons can be used: the functioning of

4 Helena Bedwell - Azerbaijan and Georgia in Talks Over Sale ofPipeline // Jan 21, 2011, http://www.bloomberg.com.

http://www.bloomberg.com./


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the pipeline can be stopped with a purpose of itsmodernization which practically can take long months,collapsing Armenia’s heat energy system.

The new nuclear power-plant and who is going topayThe second strategically important issue of Armenia’senergy security is the construction of a new unit of theArmenian NPP instead the acting one, which is goingto be closed at 2016. December 3, 2009 theGovernment of Armenia approved the draft resolutionto establish a closed joint-stock company“Medsamorenergoatom” CJSC to build a new unit forthe Armenian NPP. The Russian companyAtomstroyexport and the Armenian Ministry of Energyand Natural Resources incorporated this CJSC withequal shares for each. As announced at theGovernment session, the new unit with the capacity of1,060 MW and operational lifetime of 60 years will beequipped with a Russian-made reactor. According tothe Armenian Prime Minister Tigran Sargsyan, “Thepolitical decision is made. We endorse theestablishment of a joint venture with our Russianpartners in equal shares.”5

The Armenian-Russian accord on construction ofa new nuclear unit can be regarded one of the majoreconomic achievements of the Armenian governmentin recent years, which became possible thanks towisely drawing on the Russian interests in the region.What will be the real cost – mostly mean the politicalone – of this achievement for Armenia will be clearonly after the construction of the plant. The project,planned to start at 2011, will cost USD 5–7 billionaccording to the preliminary estimates.

In 2009 it was supposed that “Atomstroyexport”will provide half of the project financing through“Medsamorenergoatom”, while Armenian governmentwill likely get a loan from Russia to cover the financingof the other half.

But the future negotiations between Armenian andRussian governments showed, that there are someproblems for getting even the half of money fromRussian part. At August 20, 2010 during the officialvisit of the Russian president Dmitri Mededev toArmenia Roastom’s head Sergei Kirienko and the

5 Http://www.regnum.ru/news/1231523.html.

Armenian Minister of energy Armen Movsisyan signedan agreement on “Technical and financial cooperationfor the construction of new nuclear power-plant inArmenia”. During his press-conference S.Kirienkosaid, that Russia is ready to pay only 20% of the totalconstruction cost and the other part should be foundby “Medsamorenergoatom” in an independent way6.

This can be considered as a viable change in theproject, as the Armenian part should look foradditional donors for the power-plant. It should be abig problem for Yerevan, as 1) the Armeniangovernment cannot become a serious investor forUSD 5–7 billion project with an annual state budget oflittle more than 3 billions, 2) because of the closedTurkish-Armenian border the export of the produced atthe future NPP electricity to the biggest Turkishmarket looks impossible, which threatens theattractiveness of the Armenian NPP project forpotential investors.

After August, 2010 the Armenian Ministry ofEnergy and natural resources and the Governmenttoo started negotiations with European, Chinese andAmerican donors for getting money for theconstruction. Though the Deputy-Minister A.Galstyandeclared in October, 2010 that there is a huge interestamong the possible donors7 there are no real eventsand agreements, proving his words. The donor-conference, planned to be organized at April 2011,failed. At the same time Armenian Energy Minister’sdeclaration that Armenia will not shut down thefunctioning power plant in 2016 if it has not anotherone almost built8, seems to be fact, proving that thenew plant will not be built soon. TheoreticallyMinisters’s words may mean that if Armenia nevergets enough money for a new unit, the acting old one– which got a lot of security concerns9 – will neverbeen closed.

Sevak SarukhanyanDeputy Director“Noravank” FoundationArmenia

6 Radio Liberty – Armenia //http://www.azatutyun.org/articleprintview/2133108.html.7 Http://news.am/rus/news/33361.html.8

2017 // :http://www.regnum.ru/news/1375054.html.9 Paul Brown - EU halts aid to Armenia over quake-zone nuclearplant // The Guardian, Wednesday 2 June 2004, Marianne Lavelleand Josie Garthwaite - Is Armenia's Nuclear Plant the World's MostDangerous?//http://news.nationalgeographic.com/news/energy/2011/04/110412-most-dangerous-nuclear-plant-armenia.

http://www.regnum.ru/news/1231523.html.

http://www.azatutyun.org/articleprintview/2133108.html.

http://news.am/rus/news/33361.html.

http://www.regnum.ru/news/1375054.html.


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NGOs in Kyrgyzstan and their role in immediate peace and stabilityoperations after the 2010 June inter-ethnic conflict in the south ofKyrgyzstanBy Aida Alymbaeva

What are they, NGOs in Kyrgyzstan?While building an independent post-Soviet Kyrgyzstanin early 1990s, there was risk of the country’s return tothe former communist authoritarian regime and thishad forced Western countries to support theestablishment of civil society organizations, includingNGOs in the country. The NGOs were primarily seenby donors as players in maintaining a system ofchecks and balances and bearers of a new valuesystem – democratic. Therefore, civil societyorganizations, including NGOs, were regarded as thekey institutions in ensuring democracy and thus, theywere given much attention and backing from Westerndonors.

During the last two decades from early 1990s till2011, known as the era of the last two semi-authoritarian regime rulers, Askar Akaev andKurmanbek Bakiev, NGOs served as the guards ofdemocratic values such as freedom of speech,demonstrations and association. They monitoredgovernment actions in political spheres – elections,policy-making and government appointments andprotested against their policies when they violateddemocratic norms. In such protests, a few NGOsjoined the oppositions movements created at variousstages of political development in the country.Although the members of opposition movements werechanging with some of them leaving the political arenaand new actors appearing, many NGOs remainedcommitted to the principals of social equality,democracy and rule of law.

In Kyrgyzstan, NGOs have also succeeded ingaining a reputation as the most important players inthe social sphere. Most NGOs provide valuableservices in the healthcare, education, environment,and social safety net sectors, thus acting as asubstitute for government in providing social services.The number of NGOs, according to the Kyrgyz JusticeMinistry as of January 2011, has reached 7726 (2804foundations, 4263 public associations and 659 non-forprofit legal entities). However, the existence of a largenumber of NGOs does not necessarily represent aguarantee of their sustainability. NGOs remain largelydependent on donors’ funding while government,businesses and NGOs members are unable to donatefunds for their activities yet. Although as the sector,NGOs have become very vibrant and diverse domain,only a quarter of all registered NGOs in Kyrgyzstanare active. Yet, active NGOs continue providingmonitoring, advocacy, training, human rightsprotection, environmental and other wide range ofsocial services to their communities. As a result,NGOs have become an important and sometimesinfluential actor in political and social domains.

Inter-ethnic conflict in the south of Kyrgyzstan ofJune 2010The interethnic conflict between ethnically Uzbek andKyrgyz citizens had inflamed in Osh city in the southof Kyrgyzstan on June 10 and two days later carriedon in Djalal-Abad Province. This conflict was a tragedyfor the country, during which around 470 people losttheir lives, about 2,800 houses were damaged andmany businesses destroyed. International and localhuman rights organizations reported massive humanrights violations against detainees kept by lawenforcement bodies. This factor, among others, hasled to many citizens, especially ethnic Uzbeks, fleeingKyrgyzstan to other countries and largely Russia. Theconflict has been the question for interrogation by fourdifferent commissions such as the NationalCommission, International Commission, Kyrgyzstan’sOmbudsmen Office and the Kyrgyzstan’sParliamentary Commission. The main reasons of thisconflict are interpreted to be complex, includingpoverty, unemployment, especially among youngpeople, low access to government positions in lawenforcement bodies, prosecutor’s office, tax, customs,courts and other central government offices, restrictedaccess to policy making for ethnic Uzbeks, andpolitical power gap created after the overthrow offormer President Kurmanbek Bakiev that led to thepower struggle among various national political actors.

Immediate post-conflict peace and stabilityoperations initiated and run by NGOsThe inaction, inability as well as the reducedlegitimacy of interim government and self-governingbodies in Osh and Djalal-Abad provinces to controlsituation in the aftermath of the inter-ethnic conflict,had forced NGOs to quickly mobilize their andexternal resources, launch urgent initiatives and ad-hoc structures (e.g. a Regional Humanitarian Forum)for undertaking humanitarian actions, restoring therule of law and initiating peace building endeavors.

A Regional Humanitarian Forum (RHF), a networkof 17 NGOs working in Osh and Djalal-Abadprovinces, was created to unite resources of NGOs forjoint coordination of humanitarian assistance, post-conflict reconciliation, exchange of information andensuring transparency in providing governmentassistance (e.g. housing loans) to the victims. Localauthorities understanding their incapacity to urgentlyand efficiently render the social services to the victimshave approached NGOs to become their partners inpost-conflict reconciliation process. A Memorandum ofUnderstanding was signed between the RHF and theState Directorate for Reconstruction and Developmentof Osh and Dlalal-Abad Provinces, a newly createdgovernment agency. Since the conflict started, the


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Pan-European InstitutePan-European Institute is not responsible for opinions expressed in the expert articles and they do not represent institute’s official opinions.

RHF members have been closely monitoring activitiesof the Directorate. NGOs believe that if there would beno any monitoring assistance from NGOs overactivities of the Directorate and other public agencies,the government, which still remains highly corruptedand mono-Kyrgyz, would have been unjustlydistributing the public funding for building housesamong ethnically Kyrgyz and Uzbek residents,allocating loans for businessmen or lacking atransparent process in selection of contractors for alarge housing projects. The RHF also successfullylobbied to include in resolutions of the Directorate theinterests of various vulnerable groups such aschildren, who lost their parents in the June events,families who lost their breadwinners andbusinessmen, who lost their businesses.

One of the urgent and highly demanded services,which were subsequently provided by NGOs, was thelegal assistance in preparation of documents to theReal Estate Agency for lost or damaged houses, thePassport Office of the Internal Ministry for lost identitycards, courts to defend interests both of Uzbek andKyrgyz victims and papers for other governmentinstitutions. The example of one local NGO – Centerfor Assistance in International Protection, whichprovided legal assistance to more than 4,000 peoplefrom two ethnic groups, Kyrgyz and Uzbeks since theconflict inflamed, demonstrates that NGOs were ableto provide legal assistance to a wide group of peoples.NGOs also opened several free telephone hotlinesworked 24 hours within several months to deliver legaladvice for people from the affected areas.

While international NGOs were busy with andquite slow in mobilizing their resources forhumanitarian assistance, local NGOs were firstinstitutions to start organizing humanitarian aid innorthern provinces and distributing them to theaffected areas. Moreover, the reduced legitimacy ofcentral and local governments led to only NGOs beingallowed to penetrate Uzbek residential areas(mahallya) for distribution of humanitarian assistancewithin the first post-conflict days. Overall, NGOsremained to be reliable mediator between the lawenforcement bodies, self-governing and centralgovernment structures and the community members,especially of Uzbek ethnicity, in promoting manyissues related to health, safety, human rights, childrenand housing issues - the primary security issues.

Due to the inability of Kyrgyz mass media outletsto rapidly and fully cover the conflict and post-conflictsituation in the south of Kyrgyzstan, NGOs were firstentities at the spot to disseminate information amonglocal communities about medical, humanitarian, legal,psychological and other assistance provided to thevictims and local community members by government,donors and other actors such as volunteer groupscreated by ordinary people and business companies.For this purpose, NGOs were also able to organizemobile groups in different districts of Osh in order todistribute information first hand because Internet, TVand radio outlets were idle within the first two weeksafter the conflict has started.

When many human rights violations werecommitted by local police against detainees, manyNGOs continued calling for reform of police structuresin the country, an initiative they had been advocatedfor a long time. As a result, NGOs have been electedas the members of the Advisory Board at the KyrgyzInternal Ministry and are currently working on thestrategy for reforming of this Ministry. Moreover,several ethnically Uzbek policemen were recruited,including a female policewomen, by the Osh CityPolice Office. The Internal Ministry has declared that itwill recruit more policemen among ethnically Uzbekand other minorities in the country.

The psychological (post-trauma) assistancerendered by local NGOs to the victims was veryconsiderable. NGOs opened a few hotlines forpsychological assistance, organized privateconsultations and medical treatment for the victims.They were able to invite psychologists from previousconflict zones such as Russian experts, who workedin the Northern Caucasus, Russia. They alsoorganized rehabilitation medical treatment for a varietyof groups such as children, parents of children, localjournalist or school teachers in Bishkek and Issyk-Kulprovinces.

NGOs also remained a good communicator andservice-provider of programs by international donors.It would be much more difficult to have a widecoverage of international donors’ peace buildingactivities in the south of Kyrgyzstan without supportand assistance of local NGOs.

ConclusionsWhen there was a lack of state power and inability ofcentral and local government to quickly react to thepost-conflict situation in the southern Kyrgyzstan insummer 2010, the NGOs, which suffer from chroniclack of funding for their social projects, were able torapidly mobilize their limited resources – financial,human, information and networking – in order toaddress the urgent security issues such as safety,health, housing, food, information and human rights.NGOs were first institutions appeared at the spot toreport a situation in the conflict zone, first to demandfor rapid humanitarian assistance and first to renderhumanitarian, legal, psychological and other socialassistances to the community members. If there was alack of such active and community-oriented actor –NGOs, it seems it would have been harder to guardand promote security, still vulnerable in the conflictzone, but existing.

Aida AlymbaevaDirectorSocial Research CenterAmerican University of Central AsiaKyrgyzstan

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Editors-in-chief Hanna Mäkinen and Kari Liuhto

University of TurkuTurku School of Economics, Pan-European InstituteRehtorinpellonkatu 3, FI-20500 Turku, FinlandTel. +358 2 333 9563, email: [email protected]/pei

Energy security – Georgian perspective

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