Sunday, August 17, 2008

Transit fee for Russian gas

Local media has reported up to 30 percent reduction in the volume of Russian natural gas piped through Georgia beginning on August 7th (ArmInfo, 2008-08-11 15:37:00), with full service seeming to have been restored by August 13th. Regardless of the reasons why Georgia reduced the volume of gas transmitted, what I learned from the recent news is that Armenia pays 10 percent of the gas it receives as a transit fee; Georgia is not an importer of Russian gas.

This transit fee paid by Armenia, particularly given the relatively short length of the pipeline, is likely to be the highest price paid by any country. For a direct local comparison, Azerbaijan pays only 5 percent of the gas it transmits through Georgia to Turkey as a transit fee.

It is obvious why Armenia pays this high price. The country would otherwise freeze and much of the economic activity would come to a screeching halt; 30 percent of the cars run on natural gas.

Armenia is surrounded by big and little bullies. That it cannot help. But nevertheless, it should work hard to diversify its energy sources.

Sunday, August 10, 2008

Georgia and Russia at war

I wrote back in October of 2006 on the potential economic implications of the tension between Georgia and Russia. But not in my wildest dream I expected the tension to escalate to this degree. This is nothing short of insane!

While landlocked Armenia imports little from Georgia, about 95 of its trade transit through it, making it effectively the country's most important trading partner; it is blockaded to the west by Turkey and to the east by Azerbaijan, and carries little trade with Iran. See imports and exports.

Much of the country's exports are destined west, and much of its imports, other than Russian natural gas which is piped through Georgia, are also from the west. The infrastructure that makes these transactions possible is Georgia's, which by extension is Armenia's. Unfortunately, this infrastructure is getting degraded with the escalation in hostilities.

From an economic perspective, there will be no winners, and Armenia will be a casualty of this war. There is nothing that the government can do to alter the status quo. But there are a number of steps that it should take immediately. These include (1) maintain contacts with its main benefactor, the United States, to ensure the continuous flow of aid, (2) review the adequacy and the appropriateness of the funded programs given the changing environment, (3) accelerate reforms in the custom's agency, liberalise air transport, and remove any obstacles to trade and commerce. The country is de facto blockaded on all sides, by (1) instability to the north, (2) Azerbaijan to the east, Iran (the terrain and distance) to the south, and (4) Turkey to the west. Unless wisdom prevails, this winter can be very cold!

August 17. ARKA news agency (2008-08-16) reported that the destruction of the bridge linking Gori to Tbilisi by rail has interrupted the shipment of goods to Armenia.

September 4. I should have accounted for the imports/exports of diamonds which don't need to be shipped over Georgian territory. Rough diamonds are imported to the country, polished, and then exported.