BACKGROUND: On July 31, 2003 the U.S. power company AES Corp. announced its plans to sell its businesses in Georgia to the Russian power monopoly Unified Energy Systems of Russia. AES sold 75% of the Tbilisi electricity distribution company and the 9th block of the Gardabani Power station, and the right to manage hydroelectric power stations Khrami-1 and Khrami-2. This is the next step in the process of implementation of the UES’ strategy to regain control over the electricity system of the entire former Soviet Union. Following the take-over of the Armenian power-generation facilities in a debt-for-asset swap, RAO UES is substantially increasing its presence in Caucasus. One may wonder what makes Georgian assets so attractive for UES, since it is known that AES was losing money in Tbilisi and that the electric power system in Georgia is deteriorating rapidly due to corruption and incompetent management. Clearly, UES’ knowledge of the business environment in Georgia and its potentially greater cooperation with the Georgian Government may help the company to obtain better results than AES, but the commercial attractiveness of this deal is questionable, as high returns on UES’ investment in near future are not likely. It is worth to mention that in addition to Mr. Chubais, who manages UES, there are several very influential politicians on its Board of Directors, including Mr. Alexandr Voloshin, the Head of Presidential Administration, who chairs the Board. As a parallel process in late May, Alexei Miller, the Chief Executive Officer of Gazprom, Russia’s state-owned gas monopoly, visited Tbilisi and met with President Eduard Shevardnadze to discuss bilateral energy cooperation. The two sides agreed that Gazprom would invest in the rehabilitation of a natural gas pipeline connecting Russia\'s northern Caucasus city of Vladikavkaz to the Armenian capital, Yerevan, through Tbilisi. In addition, the two sides reportedly agreed to revive efforts to create GruzRosGazprom, a Russian-Georgian venture that would control the Georgian natural gas pipeline network. Plans for the creation of GruzRosGazprom were initially announced in October 2001, but were never finalized. The details of the current arrangements are not known, but it is expected that Gazprom will be the majority shareholder in the newly created company and therefore will have the power to control the strategic Georgian gas pipeline network. As a modest compensation, Gazprom has offered to provide Georgia with natural gas for less than the $60/Mcm that Georgia currently pays to the U.S.-registered trader Itera, which enjoys a monopoly on 1.7 Bcm/yr gas sales to Georgia. This element of the deal serves another strategic objective of Mr. Miller: to replace the gas trader Itera in the former Soviet republics and consolidate Gazprom’s influence in those politically sensitive markets. In August 2002, a similar arrangement with Itera was proposed, but failed to materialize due to some internal opposition in Georgia and criticism from the United States.

IMPLICATIONS: The policy of regaining control over the strategic energy assets of Eastern Europe and the former Soviet Union has already brought significant geo-economic advantages to Russia. But unlike Eastern European and Baltic states, where Western (NATO) strategic presence is already secured, Georgia is facing a direct security threat. As previous experience shows, Russia will use its control over the strategic energy assets of Georgia for political purposes. Unfortunately, weak and corrupt political elites in Georgia, both government and opposition, are busy with internal fights. They only pay attention to this development once it becomes an issue for internal politics. But there may be some larger scale implications as well. On the gas side, if Georgia approves the deal with Gazprom, it will further facilitate the creation of a Eurasian gas monopoly led by Russia. In addition to Turkmenistan and Kazakhstan, Russia is actively lobbying Azerbaijan to send its gas through the Gazprom network and the BlueStream line to Turkey, thus directly threatening the proposed South-Caucasus gas pipeline, which will connect the Shah-Deniz natural gas field in Azerbaijan to Turkey via Georgia by 2006. The Statoil-led group, which also includes BP, announced recently that the Azerbaijani field\'s proximity to Turkey makes its position very competitive despite a recession in Turkey and an associated drop in gas consumption. It is obvious that Russia is trying to prevent new entrants from obtaining a substantial stake in the Turkish gas market in order to maintain its dominance there. Moreover, Russia is trying to prevent the opening of a new natural gas corridor connecting Turkey to Europe. Greece and Turkey already have an agreement on this subject, and just about the same time as Mr. Miller was visiting Tbilisi, Greece\'s state-owned gas company DEPA was negotiating deals to re-export natural gas from Azerbaijan through Georgia and Turkey to Western European countries. If this corridor is opened and new pipelines are built, they may be filled not only with gas from Azerbaijan, but also with gas from Iraq and potentially Iran, making competition for European markets much harder for Gazprom and substantially diversifying energy supplies to Europe.

CONCLUSIONS: Despite the successful security operation of the Georgian Government in the Pankisi Gorge and the ongoing U.S. Train-and-Equip military assistance program in Georgia, Russia maintains important mechanisms that it can use to leverage political influence in Georgia. Abkhazia is the key element in Russia’s policy of keeping Georgia weak and unstable, but Abkhazia alone does not provide a sufficient tool for Russia to directly influence political processes in Georgia. With the Russian state-owned energy monopolies in Georgia, it is becoming easier for Russia to assert political control over Georgia. Russia’s activities in the energy sector in the Caucasus may expose the South Caucasus Energy Corridor and energy assets of Azerbaijan to serious political and economic risks. These developments also threaten the U.S. policy of multiple pipelines and in general, America’s interest to have diversified energy supplies. The primary measure to mitigate those multiple risks is to expedite the integration of Georgia and other South Caucasian states in the broader Transatlantic partnership and in NATO. Only Western security guarantees can prevent Russia from manipulating with the situation in Georgia, and in the Caucasus as a whole. Continuing strong support for the development of pipeline projects of both oil and natural gas is needed, as is continuing support for the democratic political process in Georgia and for a free entrepreneurship-based economic recovery of Georgia.

AUTHOR BIO: Mamuka Tsereteli is the Executive Director of the America-Georgia Business Council and Adjunct Professor of international relations at American University in Washington, D.C. His areas of interests include economic security, political and economic risk mitigation strategies, and Business development.