09TBILISI57, GEORGIA SIGNS MOU ON ENGURI WITH RUSSIAN FIRM RAO

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Reference ID Created Released Classification Origin
09TBILISI57 2009-01-13 14:27 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

VZCZCXRO5701
PP RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHSI #0057/01 0131427
ZNY CCCCC ZZH
P 131427Z JAN 09
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC PRIORITY 0698
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 000057 
 
SIPDIS 
 
E.O. 12958: DECL: 01/11/2019 
TAGS: ECON ENRG PGOV PREL RU GG
SUBJECT: GEORGIA SIGNS MOU ON ENGURI WITH RUSSIAN FIRM RAO 
 
REF: A. 08 TBILISI 1654 
     B. 08 TBILISI 1867 
     C. 08 TBILISI 2190 
     D. OLSON 1/12/09 E-MAIL 
 
Classified By: Ambassador John F. Tefft for reasons 1.4 (b) and (d). 
 
1.  (C) SUMMARY:  First Deputy Minister of Energy Marika 
Valishvili confirmed that the Georgian Ministry of Energy and 
Russian electricity trader InterRAO signed on December 31 a 
ten-year Memorandum of Understanding (MOU) on joint 
management of the Enguri Hydropower Plant, located on both 
sides of the Abkhazia administrative boundary.  The agreement 
will give 60 percent of the electricity output to Georgia and 
40 percent to RAO, effectively replacing the long-standing 
agreement between the Georgians and Abkhaz.  According to the 
agreement, Georgian engineers will continue to run the 
facility, overseenby a Georgian General Director.  The Board 
of Directors will consist of an equal number of Georgians and 
Russians, but no Abkhaz.  The Ministry of Energy hailed the 
agreement, as it now will be paid for electricity that had 
previously been provided for free to Abkhazia.  In addition, 
the Ministry stressed it is now clear with whom they must 
deal on Enguri.  RAO has also pledged to invest funds to 
strengthen the hydro-system by renovating inoperable power 
plants in Vardnili.  Public opinion on this agreement has 
been decidedly negative, with many fearing that the 
government has now "sold" one of the country's most strategic 
assets to the Russians, at a time when the Russians are using 
similar assets to impact policy in Europe, and others 
concerned that the Government kept this agreement under wraps 
for nearly two weeks after the agreement was signed. 
However, from the Ministry's perspective, it is the best 
solution to a potentially crippling problem resulting from 
the August conflict and continued Russian pressure on 
Georgia.  END SUMMARY. 
 
BACKGROUND ) STRADDLING THE ADMINISTRATIVE BOUNDARY 
 
2.  (C) Since the August conflict, the Enguri Power Station 
has been an area of possible conflict and concern.  While the 
power station is located in Abkhazia, the dam is located on 
undisputed Georgian territory.  The power station provides 40 
percent of Georgia's winter electricity.  Since the 1993-94 
war in Abkhazia, the Georgians, in agreement with the Abkhaz, 
have run the power plant and provided Sukhumi electricity 
free of charge.  Given Enguri's location and importance in 
the regional power grid, there has been much concern that the 
Abkhaz and/or Russians might move to annex the territory on 
which the dam is located.  The pressure on the Ministry of 
Energy to keep Enguri power in the Georgia system has been 
acute, as has the pressure from the Russians and Abkhaz to 
either offer a sweetheart deal or risk confiscation and loss 
of control of the dam. 
 
OPERATIONS TO CONTINUE AS NORMAL ) AGREEMENT DETAILS 
 
3.  (C) Valishvili confirmed that the MOU had been signed 
between Georgian Minister of Energy Khetaguri and the 
Chairman of RAO UES Dod on December 31.  According to 
Valishvili, the MOU envisions a Board of Directors that will 
consist of an equal number of Georgians and Russians, but no 
Abkhaz.  The Director General of the joint management company 
will be a Georgian, ensuring, in Valishvili,s words, that 
all decisions will be beneficial for Georgia.  The ten year 
joint management agreement gives Georgia control of 60 
percent of the power produced and RAO-UES 40 percent.  This 
breakdown mirrors the pre-existing ad hoc agreement between 
the Georgians and Abkhaz on power usage, except now the 
Georgians will be paid for the 520 MW of power that was 
QGeorgians will be paid for the 520 MW of power that was 
formerly provided to the Abkhaz for free.  RAO can use this 
power as its sees fit, which could include selling it to 
Sukhumi, or exporting it to Russia and Turkey.  Daily 
operations will continue as normal, with Georgian engineers 
running the power plant and overseeing operations at the dam. 
 Although the MOU was signed on December 31, 2008 the 
Minister of Energy only announced the deal publicly on 
January 12, after RAO leaked information to the press, 
creating public speculation that the Ministry was attempting 
to hide the deal. 
 
LONG-TERM INFRASTRUCTURE INVESTMENT 
 
4.  (C) The MOU also provides for further development of the 
hydropower system by both parties.  RAO has reportedly agreed 
to rehabilitate the existing, but inoperable, Vardnili 2, 3, 
and 4 power stations in Abkhazia.  RAO has offered its shares 
in Telasi, its rights to Khrami 1 and 2 near Tbilisi, and its 
shares of thermal unit 9 at Gardabani as collateral to the 
Georgian Government.  If RAO is unable to meet its investment 
obligations, then the Georgian Government will be able to 
take the above as  "collateral." 
 
 
TBILISI 00000057  002 OF 002 
 
 
WHY DID THE GEORGIANS DO IT? 
 
5.  (C) Following the August co
nflict, there have been many 
questions about just which entity is in control of Enguri,s 
power, and great uncertainty about the future (reftels).  The 
pressure on the Georgian energy system, especially throughout 
the fall, was intense, as it was unclear if the 
Russians/Abkhaz would attempt to cut Enguri's power supply to 
Georgia by seizing the dam or turning off the power station 
on the Abkhaz side of the line.  As discussions progressed on 
Enguri, it was extremely unclear to the Georgians with 
exactly whom they should negotiate.  In an earlier meeting 
with the Ambassador, Minister Khetaguri said he had 
discussions with his &counterpart8 in Abkhazia, then was 
going to fly to Turkey to meet with RAO in order to determine 
who called the shots.  In ticking off the advantages to the 
agreement for Georgia, Valishvili stressed that the MOU 
provides long-sought clarity, since the Georgians will now 
have a precise partner and counterpart.  (Embassy note.  The 
fact that RAO controls electricity distribution in Tbilisi 
and did not cut the power during the August conflict with 
Russia may have added to Georgia's perception of RAO as a 
reliable commercial entity.  End Note.)  The agreement also 
provides the Georgians with much needed investment to further 
develop their hydropower system.  In addition, Georgian will 
also now receive payment for the megawatts of power that was 
given away for free in the past.  The Georgian Government 
also likely made the calculation that it will be much more 
difficult for the Russians or Abkhaz to completely cut 
Georgia off from Enguri, if doing so would also hurt their 
own bottom line. 
 
COMMENT:  WIN-WIN? 
 
6.  (C) While the Ministry of Energy appears to be optimistic 
about the deal, it has already been criticized in the press 
as "selling" one of Georgia's strategic assets to the 
Russians.  The Ministry highlighted to post the positives of 
the agreement, namely clarity, money and infrastructure 
investment.  It is clear the Ministry hopes this will bring 
some stability to the electricity situation, as the Russians 
will be much less likely to grab the dam by military means if 
a Russian company is managing it.  The agreement, as 
described, appears to give the Georgians the upper hand, 
especially as their own engineers will continue to run the 
plant.  However, domestically, many are already questioning 
the reliability of a Russian partner in such a strategic 
asset and sector, given Russia's August invasion of Georgia. 
RAO's interest in this investment undoubtedly is based on the 
potential of the large Turkish market just beyond Georgia's 
doorstep, as well as the growing electricity market in Russia 
itself.  In Turkey, RAO, as well as Georgia, can sell 
electricity at much higher rates to provide Turkey's peak 
summer demand.  What is unclear, however, is how the Abkhaz 
will pay for the electricity that they have received for free 
for the last fifteen years, or indeed the Abkhaz view of this 
transaction.  It will be interesting to see if RAO attempts 
to collect from Sukhumi, or if the Russians will pick up the 
expense.  It is possible that if the Abkhaz are unable to 
pay, RAO might look to sell the electricity that had powered 
Abkhazia to other more profitable markets in Russia and 
Turkey, leaving Sukhumi literally in the dark. 
TEFFT

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