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Georgia economy: Russia's power failure(EIU Viewswire Via Thomson Dialog NewsEdge)COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT The severe disruption of Russian gas and electricity supplies to Georgia, in the midst of winter, has sparked a political row between the two states, with Tbilisi hinting that Russia is punishing Georgia. Beyond the immediate economic effects, the power cuts are likely to bolster Georgian resolve to continue with energy diversification plans that are already in hand. Even then, however, Russia will remain an important player in Georgias energy equation. Electricity and gas supplies from Russia to Georgia (and gas supplies to Armenia via Georgia) were disrupted on January 22nd by near-simultaneous attacks on energy infrastructure in the North Caucasus area of southern Russia. The main electricity transmission line, Kavkasioni, was ruptured by an explosion that destroyed two pylons in Karachaevo-Cherkessiya. In North Ossetia, meanwhile, explosions ripped apart two gas pipelines that run into Georgia. The Russian authorities blame terrorists for the explosions. The consequences for Georgia were severe. The country relies on Russian gas for 24% of its energy balance, as the fuel is used for heating and to generate electricity. Russian electricity imports are essential for getting the country through the winter, when demand is at its highest and generating capacity falls at the countrys hydro-electric power plants. The fact that Georgia, in common with much of Eastern Europe, is suffering from some of the lowest temperatures in several decades has exacerbated the situation. In the capital, Tbilisi, and much of the east of the country there was little heating and intermittent electrical blackouts. The countrys predicament was only partially alleviated by the start of deliveries of gas from Azerbaijan via a renovated pipeline. As of January 25th, it was expected that the electricity line would not be operating for at least another week. The gas shut-off is especially inopportune for Georgia because this year the country has commissioned new gas-fired turbines to help meet peak demand during the winter. Accordingly, Georgia reached an agreement with Russian gas monopolist Gazprom in late 2005 to increase its purchase of gas to 2.2bn cubic metres this year, from 1.3bn cu metres in 2005. Punishing Georgia? Georgias president, the impulsive Mikhail Saakashvili, on January 22nd all but accused the Russian authorities of sabotaging energy supplies in order to punish his country. He claimed that the gas pipelines were located in an area under full Russian military control and added that no terrorist group in the North Caucasus had the operational sophistication to mount near-simultaneous attacks. Mr Saakashvili presented no evidence to back up his claims and they are difficult to square with Russias interests at present. Gazprom is already on the defensive in the wake of two separate but significant disruptions in gas supplies to central and Western Europe: the first in early January as a result of a dispute with Ukraine, and the second from the middle of the month as a result of unseasonally high demand for gas in Russia itself. In this context, the last thing that either Gazprom or the Russian state needs is another incident which calls into question the reliability of Russia as an energy supplier. Nevertheless, Mr Saakashvili has some grounds for being suspicious. Elements of the Russian state have sought to destabilise Georgia since independence and bilateral relations have been fraught for much of Mr Saakashvilis two-year presidency. Recently, energy issues have come to the fore. In common with most CIS states, Georgia has faced sharply higher gas prices this year: the charge has risen to US$110 per 1,000 cu metres from US$62.50 in 2005. The late-2005 talks with Gazprom were not only about gas prices, however: the Russian monopoly sought to buy Georgias gas pipeline networkor, at a minimum, the high pressure line which delivers gas to Armenia. The proposal had some support within the Georgian government but has, for the moment, been quashed by the strident opposition of nationalists in parliament on energy security grounds. Nevertheless, Gazprom is eager to secure control of the pipelineas it has done already in Belarus and is seeking to do in Ukraine. Reform push The impact of the energy supply cuts has already been severe. Many neighbourhoods in Tbilisi are without heat and electricity; factories are operating on reduced power supplies. This is having a marked impact on living conditions and it is inevitable that nearly all branches of the economy will suffer as a result. Once power supplies are restored, the experience of the supply cutsallied to the perception that this was a deliberate act on Russias partis likely to galvanise Georgian efforts to pursue energy reforms. While in the EU there is plenty of talk about energy diversification but little guarantee of action, Georgian reforms are already underway. In the past year, Mr Saakashvilis government has undertaken a programme of repairing and upgrading the energy infrastructure (including the gas pipeline to Azerbaijan which is now delivering vital supplies). As a result, the incidence of power disruptions has fallen by a reported 80% between 2003 and 2005 on official data. The aims of the energy sector reforms are to eradicate the blackouts for which Georgia has been notorious in the past decade, by improving the infrastructure, and to increase power productionfrom a capacity of around 1,600mw this year to around 2,000mw by 2009with a view to increasing self-sufficiency and becoming an exporter. The key to this strategy is a greater reliance on hydro-electric power, as this does not rely on imported fuelalthough gas will be needed to fire the thermal plants that will ensure sufficient energy supply during the winter months. The government has already commissioned two gas-fired turbines. It plans to hold a tender in February for the construction of a number of small and medium-sized hydro-electric power plants, and to complete the construction (with World Bank assistance) of the large Khudoni hydro-plant which is earmarked as a producer of electricity for export. The Azeri alternative If these plans are implemented, Georgia should be able largely to do without Russian electricity imports. In the longer term, furthermore, it has a possibility to greatly reduce its reliance on Russian gas. In November 2005, when it was clear that Gazprom was intent on doubling the gas price, Georgias leadership reached an outline agreement with Kazakhstan for the purchase of 2bn cu metres of gas. The price, though not disclosed, is likely to have been appreciably lower than the US$110 per 1,000 cu metres demandedand eventually achievedby Gazprom. The deal fell apart because Gazprom either refused to permit transit of the gas or insisted on a transit fee that would raise the end-user price above US$110 per 1,000 cu metres. Once the South Caucasus Gas Pipeline (SCGP)the companion to the Baku-Tbilisi-Ceyhan (BTC) oil pipelineis commissioned, Georgia will have the opportunity to get its gas from the BP-operated Shah Deniz field in Azerbaijan. Under the reported terms of the transit arrangement, Georgia will receive 5% of the gas that transits its territory and will have the right to purchase finite volumes at a price of US$55 per 1,000 cu metres. On this basis it can expect to receive up to 1bn cu metres annually in lieu of a transit fee and would probably have the potential to meet moreor allof its gas supply needs from Shah Deniz at a preferential price. (The prospect that Georgia might be able within a few years to do without Russian gas probably underlines for Gazprom the importance now of exploiting its status as Georgias sole gas supplier to gain control of the pipeline running to Armenia.) Neighbourhood ties Even if Georgia succeeds with its plans to boost its hydro-generating capacity and switch mainly to Azerbaijani gas, Russia will remain an important partner for the Georgian energy sector. The gas trade with Gazprom is unlikely to cease entirely, given existing commercial ties between it and Georgias generators and the advantages for Georgias energy security of not being reliant on a single supplier (Azerbaijan). Even if Georgia opts for Kazakh gas rather than Russian gas, it will rely on the Russian pipeline network for delivery. Moreover, there is already a heavy Russian presence in Georgias energy sector. UES, Russias electricity monopoly, owns 75% of Tbilisi distributor Telasi and controls 19% of Georgias generating capacity. It is also playing a leading role in the completion of Khudoni power plant. Russian finance facilitated the recent purchase of thermal generating capacity and there is a reasonable chance that Russian firms will participate in the construction of new hydro-power facilities. There is a risk that the political tension caused by the power supply cuts, and the Georgian leaderships reaction to them, will create obstacles to new investment by Russian companies in the energy sector. On balance, however, this appears unlikelynot least because many existing plants run on Russian technology and the government is fairly pragmatic with regard to Russian investment. The gas and electricity cuts are thus likely to push forward Georgian plans for greater energy independence and less reliance on Russian supplies; but its northern neighbour cannot be cut out entirely and will probably assist Georgia in realising the new energy strategy. SOURCE: ViewsWire Eastern Europe |