Since the independence and transformation to market economy the price of gas supplied to Armenia has always been a hot topic of discussions. Even more, this issue has always been discussed from the prospective of political issues.
Why does GazProm want to increase the price if gas? The answer would be that this company wants to have more income. However, everything is not so simple in this case. GazProm may have two types of benefits from us. First, this company sells gas to ArmRusGazArd company at a price that includes their incomes and profits. The higher the price is, the more income they may have. However, in this case ArmRusGazArd will have less income. In fact this company is a branch of GazProm. In other words, if the Russian company increases the price, the Armenian company cannot do it as there is no place for that anymore, thus it will have less income. Accordingly it is not in the interests of the Russian company either.
According to the annual report 2010 of ArmRusGazArd company, in 2010 they had 11,381 mln drams loss in case when in 2009 they had 3.3 bln drams profit.
If the Armenian company is asked what is the reason that they have had loss this year, the answer will be that the price was increased, thus people started to buy less gas. The report of the ArmRusGazArd company writes that the reason for reduction of their income is the fact that the capacity of the imported and sold gas has been less this year. In addition, this company also is spending more money as this year they have several projects that require large investments.
In 2010 the capacity of gas import from Russia to Armenia has reduced by 11,6% (1440.1 million cubic meters instead if 1628.7 million cubic meters in 2009). In the same period the capacity of usage was reduced by 18% (1361.7 million cubic meters instead of 1660.8 million cubic meters in 2009). However, in 2010 the profit of the company increased by 8.2% (123.6 billion drams instead of 114.2 billion in 2009).
How did the profit grow if the sales capacity was reduced? The reason is the fact that on April 1 of last year the company increased the price of gas by 37.5% for people, and by 13% for companies. According to the rules of economics, increased prices result in reduced consumption. Of course the dependence from different types of products is different (elasticity). For example, there are certain types of products that people have to buy notwithstanding the price. Gas can be considered one of such types of products. Definitely this is the reason why the managers of the company believe that people depend on gas and the capacities of consumption will not suffer. However, as a result of this decision the company had a loss. Once former PM Hrant Bagratyan said that “this was a simple mistake for which people are usually punished”. Hrant Bagratyan also asked to pay attention to the fact that gas is bought at the price of 180 dollars but it is sold to people at the price of 370 dollars. “The local expenditure on supply is 190 in Armenia, in Ukraine it is 20 dollars, during the time when I was prime-minister it was 8 dollars. They spend more money on supplying gas to consumers inside the country than they pay for buying. The net price is the most expensive one on 100 kilometers in Armenia; it is more expensive by 4-5 times than in Georgia, Ukraine and other places,” said Hrant Bagratyan in January. The company explained this difference by saying that they were spending money on gasifying the remote regions of Armenia. In answer to this observation Hrant Bagratyan asked why they were gasifying the remote regions if people would not be able to consume gas in the regions anyway. If state officials advised the people from the remote regions to use substitutes for heating.
As for the large investment projects they are speaking about, it is the project of Hrazdan 5th energetic bloc, for which they have taken a lot of borrowings from Areximbank-Gazprombank and made their financial loads heavier. It would be reasonable to take such borrowing and load only in case if we could know the exact time the mentioned power plant could be operated. However, they have announced about change of the dates so many times that it does not seem to be serious anymore.
What is the conclusion? There are opinions that it is not by chance and as a result of this loss on part of the company certain individuals get money. For example, spending money on gasification of remote regions the company loses but other companies that are in charge of construction and supplying pipes benefit. Of course we do not want to believe in such opinions, but if it not the case, it means that the company’s management is not effective.
Has GazProm done any research to find the reasons of these shortcomings? This company should have been in charge of the Armenian branch’s affairs as it owes 80% of the shares. However, we do not know what the decision of the GazProm management is in connection with this issue because the issue of gas has a political component, which is decisive. However, the impression is that currently GazProm does not want to go in details and wants to have more profit from Armenia. And if it is not possible to do it through increased effectiveness of management, it can be done through increasing the prices.