All-in or Fold: Gazprom’s Geopolitical Card Play with Georgia

There was much public outcry in Georgia as it emerged that the agreement signed by the government with the giant Russian oil & gas corporation, Gazprom, contained significant changes compared with its predecessor, and those changes weren’t exactly in Georgia’s favor, at least at first glance. Despite the commercial agreement coming under the “classified” tagline, it didn’t take long for the main details of the contract to become public knowledge.

The transit fee for the Russian gas supplied to Armenia that Georgia was dully paid in natural reserves before, became of monetary value, it apparently being Gazprom’s make-or-break demand. So the 10 % that was due (2 billion cubic meters of gas) will be paid in money, with the fixed rate registered at the moment of the signing (this was most likely what the whole commercial secrecy was about).

Another thing that should very much worry Georgian society that the agreement is a short term one – two years, which gives Russia ample leverage to further bully Georgia into even more unfavorable demands in due time. What is also lamentable that the amount of gas supplied to Armenia is due to be increased by 0,3 billion cubic meters for 2019, which means that Georgia will have to settle for financial “royalties” for this, too.

According to the agreement, an additional supply of gas will be provided to Georgia for for social consumption – for a “preferential”, advantageous, price of $185, which when you look at how much Georgia has been paying Azerbaijan - $170, doesn’t look that advantageous all of a sudden.

The previous agreement, signed in 2002, lasted for 15 years and was seen as a coup as it provided a 10 % transit fee in natural resources, which satisfied 70 percent of Georgia’s annual needs (it needs to be mentioned that these needs have increased by 1.5 since 2015).

The talk about monetization isn’t new, either: In 2005, Russia offered a healthy sum and advantageous gas prices to the then Government of Georgia in exchange for selling major transit communication routes, but the offer was refused, not without the intervention and advice of the US administration. This in turn resulted in the 2006 Gas War between Georgia and Russia, suspension of the agreement for a year and purchasing gas for $230 from Iran, which the Georgian government announced amid much fanfare as a feat towards lessening energy dependence on Russia. Notably, Gazprom later played out the same scenario in Armenia.

Speaking of energy dependence, Georgia is very much dependent on gas consumption – according to the 2013 statistics, gas constituted 41 percent of the overall energy consumption in the country (compared to 29 percent in 2010). Furthermore, back in 2015, the government adopted a strategy document, “Georgia’s Energy Strategy 2015-2030”, where in the chapter dedicated to challenges and risks, one can read a rather bluntly put summary that Georgia is completely dependent on energy resources provided by Azerbaijan, especially the import of gas, and that the Azeri corporation Socar has an undisputed monopoly on the Georgian energy market (with more than 50 percent of the segment). The same sentiments were voiced by the Energy Minister and Vice Prime Minister, Kakha Kaladze, who maintained that a whopping 90 percent of Georgia’s gas consumption, that is, 2.5 billion cubic meters, originate in Azerbaijan. Therefore, it comes as no surprise that the Georgian government’s energy diplomacy overtures did not fool Gazprom, which pushed its own demands and, eventually, the Georgian side relented.

Now one might wonder to what end this whole ordeal really was and why Georgia accepted such disadvantageous terms, with a façade of perhaps reversing them in two years’ time. Yet, all the more interesting is what Gazprom’s cards are. 92 percent of the monopolistic corporation’s shares are owned by the Kremlin, while Prime Minister Medvedev acts as head of its executive board.

Here are the main gains that Gazprom is set to see from the agreement with the Georgian government:

1) Becoming a member of Eurasian Union, Armenia gets the full benefits of preferential tariff prices from 2017. This will undoubtedly see larger volumes of Russian gas supplied to Armenia, which is already dependent on the Russian gas market, with 60 percent of imported gas coming from Russia. Monetization will give Gazprom the opportunity to supply Armenia with the needed volume, all the while not allowing Georgia to reap its real benefits and also further outclass Iran as a potential provider (Armenia paid $190 for Iranian gas back in 2015). A win-win scenario for Gazprom, relative win for Armenia (if you discount them becoming even more dependent on Russia as a real alternative), failure for Georgia and inconvenience for Iran. There is also a hint of political blackmail in there – Georgia has its hands tied, as its refusal or stubbornness on this matter would surely aggravate relations with its Armenian neighbors.

2) Tying Georgia down to new agreement can make it easier for Gazprom and Russia to further purchase Azerbaijani Gas themselves, therefore becoming the only major energy provider in the region. Back in 2016, Gazprom voiced that it was ready to purchase the whole export capacity of Azeri gas – 16 billion cubic meters. Gazprom used the same ploy to wholesale purchase Turkmen gas, effectively annihilating the EU-supported Nabucco project before it even started to materialize. Whether Azerbaijan will accede to such requests remains to be seen, but the two sides already have a history of gas trade, with the biggest volume purchase coming exactly one year after the 2008 War.

3) The agreement, especially the fact of its being so short-term, may be a prelude to a joint geological venture on the Black Sea shelf which is reputed to be rich with natural resources, namely gas and oil. In Abkhazia, such endeavors are already carried out by another Russian giant, Rosneft, and it wouldn’t come as such a surprise to see Gazprom nab advantageous terms in delivering and distributing oil from the Black Sea.

Add to that the flash-royal of Russia’s geopolitical poker, the security blackmail, and one can see what choices the much-maligned Georgian side might have had in these negotiations – that is pretty much, none.

Vakhtang Maisaia

26 January 2017 21:06