CAUCASUS BLOG: Armenians left in dark by electric utility sale

By bne IntelliNews October 6, 2015

Carmen Valache in Istanbul -


Electric Networks of Armenia (ENA), the utility whose tariff rises this summer sparked the worst protests in Armenia for more than a decade, will have a new owner: Russian real estate conglomerate Tashir Group. But will the acquisition bring about real change for the utility, which under Russian state-owned Inter Rao was accused of mismanagement and embezzlement?

That the heavily indebted ENA was on Tashir's radar has been common knowledge in Armenia since the protests in June over a 16.7% electricity tariff hike. The increase was the third significant rise in the last two years, and prompted Armenians to take to the streets to get the increase scrapped and to demand more transparency from the utility and the government.

The man behind the bid is Tashir’s owner, Armenian billionaire Samvel Karapetyan, who made his fortune in Russia's real estate market and is on good terms with the Kremlin, but also maintains business interests in Armenia, as well as (family) connections in the government - his brother is a member of parliament.

However, the lack of transparency over how the deal was carried out, as well as the Armenian government's obligation to co-subsidise tariffs for a year, raise fears that the Armenian government has something to hide and is merely delaying dealing with a problem that will continue to fester.

Wind of change, or is it?

The way in which the deal was carried out is the first red flag, for it reeks of the Russian-style under-the-counter business practices that Armenians have come to detest. The murky nature of Tashir Group's bid, done through a makeshift intermediary, and its opaque and fast-changing corporate structure, has already cast a shadow over the legitimacy of its acquisition of ENA.

While rumours about Karapetyan's interest in the Armenian utility have been circulating in the Russian and Armenian media for months, the magnate waited until September 30, two days before the bid received final approval from the Public Services Regulatory Commission (PSRC) regulator, to go public. Until then, he used one of his Cyprus-based subsidiaries, Liormand Holdings, to conceal the true identity of the bidder. The attempt did not work, for Russian media gave him away straightaway, but Tashir Group's spokesperson initially refused to corroborate the reports.

More worrisome is the Armenian government's handling of the bid and its deliberate lack of transparency in its communication with the public. Eventually the government admitted that it had invited Karapetyan to purchase the utility in the first place. "At our request, Tashir Group assumed the liabilities to introduce management in line with international standards in the company within the next five years, and [to] reduce technological and trading losses," Armenian Prime Minister Hovik Abrahamyan told the press on September 30.

"The lack of transparency promotes misinformation," says Richard Giragosian, director of the Regional Studies Centre, an independent think-tank based in Yerevan. "This Armenian government is the most unpopular ever and the current cabinet of ministers the wealthiest, for all the wrong reasons, so they personify the problem," he told bne IntelliNews. He says the opacity of the government’s decisionmaking, which allows preferential treatment of politically connected individuals and businesses, is seen by the public as one of the causes of the the widening disparities in wealth and income in the country.

Key details about the deal remain shrouded in secrecy. For example, neither the government, nor Tashir Group made any mention about the price it will pay. Neither the government, nor Tashir Group spoke about the time frame for the acquisition, although, judging by the pace at which the deal was okayed by the cabinet and the PSRC, both parties are in a rush to get it over and done with.

Moreover, an agreement between the Armenian government and Karapetyan, under which they will compensate households and small businesses for the tariff increases for a year, raises questions about the source of funding for the subsidies. This is a classical example of "good governance gone bad", believes Giragosian, "Where will the money come from, if not from the budget itself?"

On Tashir Group's part, the source of money is pretty clear - Karapetyan's deep pockets.  "Tashir Group President Samvel Karapetyan expressed a readiness to provide his personal funds, and, on a parity basis with the government of Armenia, compensate the difference after the tariff rise for citizens and small businesses using up to 250 kWh a month until August 1, 2016," Abrahamyan told the press on September 30.

The oligarch's wealth is somewhat reassuring for Armenians, because he has the funds to get the utility back on track without resorting to relentless tariff increases as Inter Rao did.   "Karapetyan represents Russian capital, he is close the Vladimir Putin administration, so Armenians see him as a reassuring figure at the head of the utility. However, I am a little worried because this may give a political opening to Russia to involve itself more directly in domestic politics," Giragosian says.

The price is right

ENA had been under the management of Inter Rao since 2006, during which time it racked up $220mn in debt, despite doubling tariffs in four increments between 2009 and 2015. Inter Rao itself is an extension of the Kremlin, as it is controlled by Rosneft, the public energy company run by President Vladimir Putin's ally Igor Sechin.

When the company applied for a tariff hike this year, claiming that it was on the brink of default because of the depreciation of the Armenian currency and outages of electricity generation, the public seized the opportunity to protest against mismanagement and alleged embezzlement, bringing up reports that the Russian management used company money to finance luxury car and real estate rentals. Giragosian calls this a prime example of corporate mismanagement and arrogance. "This goes to show that they never expected to undergo public scrutiny."

An audit of ENA’s accounts by consultancy Deloitte, which was commissioned by the government after the protests, argued that the tariff hike was justified as ENA was on the verge of default because of "the discrepancy of the predictions of the system operator and the loading of powers”. As it turns out, Inter Rao was not only a profligate spender, but also a poor planner, whose predictions about the amount of hydropower that it could load onto the grid during the dry summers of 2009- 2012 were way off. At the last minute, it had to resort to purchasing power from the Hrazdan thermal power plant at a price that was three to five times higher than that of hydropower, which led to high losses.

Karapetyan promises to completely overhaul the utility. "Plans for further development will include the introduction of an anti-crisis programme to optimise the financial performance of the company and the gradual modernisation of the distribution network equipment", Tashir Group said in a press release.

Time will tell whether Karapetyan will do a better job at managing ENA than his predecessor. When the subsidies expire in August 2016, and consumers feel the brunt of the contested tariff hike, Yerevan may experience a new outbreak of civic unrest if Karapetyan's group has not delivered on its promises by then.

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