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ISET Economist Blog

A blog about economics in the South Caucasus.

Armenia Generates Windfall Profits for Georgia

When Armenia entered the Russia-dominated customs union in 2013, fear spread among the Georgian public and policy makers. It looked as if Georgia would be economically squeezed in between Russia and Armenia, the latter being one of Russia’s staunchest allies in the region and, given its geopolitical dependency on Russia, sometimes seen as a little more than a Russian agent.

Being wary about Russia’s economic influence in the region, it was straightforward for Georgia to respond to this development by upgrading economic ties with our Western allies. Therefore, it may not have been a coincidence that Georgia’s decision to sign the EU Association Agreement came almost simultaneously with Armenia’s official statement to join Russia’s customs union.

Were Georgian fears justified? Looking at the situation from a levelheaded perspective, Armenia’s decision yields both risks and chances for Georgia. It is important to keep in mind that Armenia depends on Georgia as a transit country, and any increase of Armenian trade – within or without the Russian customs union – is inevitably beneficial for its Northern neighbor. Moreover, the customs union makes it particularly attractive to facilitate exports through Georgia, as this is the shortest route to the partner countries. Even if Armenia would normalize its relations with Turkey (which is not to be expected in the near future), Georgia would still remain the most important transit country for Armenian exports.

What are the most important developments in the Armenian economy from a Georgian perspective?


THE ENERGY FLOW

In future, Armenia wants to become an important energy exporter. Yet Armenia is a landlocked country neighboring hostile Azerbaijan and Turkey. Iran, struggling with international sanctions, also provides no export passage. Georgia is practically the only way to bring Armenian energy to international consumers. But will Armenian energy exports pick up?

Through a number of steps, the Armenian government is pushing for setting up shale gas production on a huge scale – an endeavor that is not only to be be explained by the desire to earn money, but also by the geopolitical goal of energy independence.

These activities may become big business, as Armenia arguably possesses vast reserves of shale gas. In June 2011, the energy minister of Armenia and the US Ambassador to Armenia signed a memorandum of understanding about providing US expertise for the exploration of Armenia's shale gas reserves. The US support is provided by the US Geological Survey (USGS), a scientific organization that also delivers scientific services commercially.

Ever since the agreement was made, USGS representatives have discovered 44 million tons of shale reserves near the village of Aramus in Armenia. Moreover, significant amounts of shale deposits were discovered in the districts of Ijevan, Shamut, Jermanis, and Dilizhan (not far from the Georgia-Armenia border). In addition, some conventional natural gas reserves were found in the district of Oktomberiani in a depth of 3.5 km.

But this is not the only initiative to exploit the Armenian energy potential. The Armenian ministry of energy commissioned International Minerals & Mines Ltd. (registered on the Isle of Man) to asses Armenia's energy resources. For this purpose, a joint company – IMM Energy Armenia – was founded in Yerevan. Likewise, in 2012 the Swiss company Integral Petroleum obtained a governmental license for exploration of oil and gas reserves. The involved parties are so optimistic about the exploration prospects that they already signed a production sharing agreement, which will be applied in case of commercially exploitable energy resources being discovered. Armenia had business relations with Integral Petroleum before when importing fuel from Bulgaria and Romania. The Swiss company also operates successfully in Turkey, Albania, Greece and the CIS countries and is active in the market for liquid gas. However, Integral Petroleum has limited experience in geological activities.

Also the Canadian Tim Energy has discovered a natural gas field with the reserves of 3 billion cubic meters located in the village of Vartan in the region of Armavir. Representatives of the Canadian Vangold Resources and the Irish Blackstairs Energy believe that also the oil reserves in the regions of Syunik, Vayotsdzore and Gegarkuniky are sufficiently large to allow for commercial extraction.

In support of these developments, the government of Armenia approved a new law that simplifies the issuing of exploration and extraction licenses.  Yet whether these opportunities will materialize depend on the future oil and gas prices, the big unknowns in the Armenian energy plans. Thus, while it is too early to talk about tangible results, it can be still concluded that the successful exploration of energy resources might lead to considerable income for Georgia as the only available transit country.

Already now, Georgia benefits considerably from the transport of energy, mainly through the transit fees paid for the Baku-Tbilisi-Ceyhan pipeline. Armenian gas transports might soon become a second source of income.


MINERALS AND METALS

25% of the Soviet molybdenum concentrate was produced in Armenia. The biggest producers of Armenian molybdenum and copper include the Zangezur, Kapan and Agarack plants, processing the raw material extracted in Kajaran, Agarack and other nearby areas. The molybdenum concentrate produced in the Armenian plants contains 50% molybdenum, the molybdenum copper concentrate contains about 15% copper, both of which are economically profitable levels.

However, the Armenian plants operate only at 60-70% of their capacity. Besides the currently rather low world market price, an even more important problem are Armenian difficulties to deliver their product to worldwide customers. And again, Georgia comes into play. A close cooperation between Armenian plants and Georgian enterprises (JSC RMG Copper and RMG Gold LLC), which is envisioned, could solve these problems: Armenian minerals could reach Europe via Georgia.  There are similar plans for a cooperation between the Armenian Mgart gold deposit and the Georgian RMG Gold.


WHAT TO DO?

While it can only be advantageous for Georgia if Armenia’s economy picks up, Armenia's entry into the Customs Union forces the termination of the existing free trade agreement between Georgia and Armenia. This gives Georgia an opportunity to file dispute against Armenia at the WTO Dispute Settlement Center, which will probably oblige Armenia to compensate Georgia for the losses caused by the increase in customs duties. Not nice to do this kind of thing to a neighbor, but in economics there is no place for altruism.

Moreover, Armenia is lobbying Russia to remove 900 goods from the customs union. If successful, Armenia will have the chance to keep the free trade agreement regime with Georgia for all relevant goods (like energy, minerals, and metals). Georgia should remind Armenia to include those central goods in their talks with Russia – this is a core interest of Armenia anyway, so not much persuasion should be necessary.

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Guest - Eric Livny on Tuesday, 11 November 2014 15:41

Armenia becoming a major gas exporter? Who would have thought of this...

Armenia becoming a major gas exporter? Who would have thought of this...
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