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Georgia, Gazprom To Renegotiate Gas Transit Deal

The two-year contract between the government of Georgia and the Russian energy giant Gazprom on natural gas transit from Russia to Armenia expired on December 31, 2018 (Georgia Today, January 21, 2019). And talks are now ongoing about extending or renegotiating this arrangement.

Tbilisi and Moscow had reached the previous deal on gas transit to Armenia back in January 2017, after long and difficult negotiations (see EDM, January 19, 2017). In December 2015, the then–minister of energy, Kakhi Kaladze (now the mayor of the Georgian capital), told this author that Gazprom presented Georgia with a particularly onerous demand: the South Caucasus country had to agree to “monetize” the payments it was receiving from Russia for allowing the transit of gas via its territory. Kaladze considered Moscow’s ultimatum to be particularly difficult and “heavy” for Georgia to accept (Author’s Interview, December 15, 2015).

For almost 25 years, since 1992, Gazprom paid Tbilisi for the shipment of gas to Armenia not with money, but with a portion of this transited energy fuel: Georgia was receiving 10 percent of the Russian gas in lieu of a monetary transit fee. Kaladze noted that the previous contract was much more profitable because under a “monetized” transit fee scheme, Tbilisi would have had no guarantees of still being able to purchase the same volume of Russian gas—that is, the 10 percent of gas shipped to Armenia (Author’s Interview, December 15, 2015). The energy minister promised to “protect Georgian interests” in the negotiations with Gazprom. But ultimately, he was forced to sign the new contract with a monetized transit fee scheme (effective after one year) after Moscow threatened to divert all of its Armenia-bound gas from Georgian pipelines to the Iranian network (see EDM, January 27, 2016January 19, 2017). Related: Global Outages Boost Oil Prices

The Georgian government feared that, under the new transit payment regime, it would not be able to procure enough substitute gas from Azerbaijan to satisfy domestic demand. Georgia consumes approximately 2.7 billion cubic meters of natural gas annually. And as a transit fee, the country received 200 million–250 million cubic meters of gas from Russia. The previous contract was also quite “comfortable” since it did not depend on international energy prices.

Nonetheless, during 2017–2018, Azerbaijan was able to find an opportunity to increase the volume of natural gas supplied to Georgia. As a result, Georgia did not buy a single cubic meter of gas from Russia last year. But the costs incurred by Azerbaijan’s State Oil Company (SOCAR) forced it to increase prices for Georgian consumers, which Tbilisi refused to pay. The disagreement over the price of gas has not yet led to serious tensions between Azerbaijan and Georgia, but bilateral relations could start to suffer as the growing Georgian economy starts to need ever larger energy inputs (Vestnik Kavkaza, December 20, 2018).

Many Georgian observers argue that, under such a situation, Gazprom could attempt to take advantage and propose a new ultimatum to Georgia—proposing even less favorable terms for future gas transit payments. “Gazprom is the Kremlin’s geopolitical instrument, and if Georgia finds itself in a difficult situation due to a lack of fuel in the spring, Moscow could put forward new, tough conditions,” an expert with the weekly Georgian newspaper Prime Time, Keti Khatiashvili, told this author. According to her, Moscow could try to offer the Georgian side better payment terms and, crucially, the opportunity to buy more Russian gas, in exchange for the consent of the Georgian government to begin direct negotiations with Abkhazia and South Ossetia on land transit from Armenia to Russia (Author’s Interview, January 22, 2019). Recently, during his visit to Georgia, the prime minister of Armenia, Nikol Pashinyan, discussed precisely the “development of trade” and further transit opportunities (Vestnik Kavkaza, January 17, 2019). Related: The Next Big Threat For Oil Comes From China

The opposition considers the government’s agreement to “monetize” the gas transit fee in 2017 as a crime against the interests of Georgia. One of the founders of the European Georgia party, parliamentary deputy Sergo Ratiani, noted that the opposition parties are demanding an investigation into why then-minister Kaladze had agreed to the unfavorable Russian conditions on transit fees. “The new contract has caused tremendous damage to Georgia and gave Moscow [new] tools to use against us,” the lawmaker argued (Author’s interview, January 20, 2019).

The opposition is demanding that the authorities not renew the contract with Gazprom and return to negotiations on an in-kind payment for gas transit. But as energy expert Georgi Khukhashvili explained, making such demands now is both unlikely and unrealistic: “The contract on the monetization of transit fees is very disadvantageous for Georgia, but it complies with international norms and international transit payment tariffs.” As he stressed, according to international practice, if the parties do not break the contract, its prolongation occurs automatically. “The government does not have the resources to terminate the contract with Gazprom, so it will be extended for another year,” Khukhashvili predicted (Author’s interview, January 22, 2019).

Economy Minister Georgy Kobulia assured journalists in a recent interview that the Georgian government will try to “improve the contract.” Negotiations with the Russian energy giant will begin soon. But Kobulia did not specify how Tbilisi would react to Moscow’s likely refusal to pay Georgia more for gas transit (Accentnews.ge, January 21, 2019).

Georgia has never considered the radical step of terminating the transit across its territory of Russian gas to friendly Armenia. Whereas, Moscow wields multiple military and economic instruments with which it can influence Tbilisi, such as by exacerbating at will the situation on Georgia’s de facto borders with the occupied territories of Abkhazia and South Ossetia or by threatening to cut off access to the Russian market. In this lopsided bilateral relationship, the current government in Tbilisi is, thus, unlikely to stand firm against Gazprom.

By The Jamestown Foundation

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