When Konstantin Kosachyov, the head of the Russian Federation Council's International Relations Committee, said the protests in Armenia against a 16.7 percent power price hike follow a color revolution scenario sponsored by Western powers, many commentators rushed to compare the crisis in Yerevan with the 2014 protests in Kyiv that toppled the pro-Russian president, Victor Yanukovych.

However, the street protests in Armenia have more to do with the overall economic situation in the country than with proxy clashes between foreign countries. Although the main power supplier, the Electric Networks of Armenia (ENA) company, 100 percent-controlled by the Russian state-owned energy giant Inter RAO United Energy Systems, is behind the proposal for a steep power price hike, Armenian activists reject the notion that the protests are anti-Russian. What they have demanded is a halt of widespread corrupt practices in the power sector, which ultimately are the real reason why prices have to go up.

As in other former Soviet countries, the energy behemoth ENA remains a heavily mismanaged enterprise. This was confirmed by a recent probe, in which the energy regulator has found that suppliers and traders often use shady intermediaries to push energy managers to inflate procurement costs or steal electricity. This has led to more than EUR 70 million in losses for the company in just the last three years, according to the energy ministry.

The company’s overall debt has reached $250 million. Initially, ENA has suggested a 40 percent increase in electricity tariffs in order to cover its obligations. The government of the pro-Russian president Serge Sargsyan and the quasi-independent energy regulator initially refused but ultimately had to accept a 16.7 percent rise after a series of high-level visits from Moscow. Although the government has confirmed the results of the regulator’s investigation, it has decided to look the other way.

Even after the hike, power tariffs would still be just EUR 0.11 cents/kWh, or about half of what average EU households pay. At purchasing power parity, though, their impact on household budgets is much greater. According to a World Bank study, Armenians spend around 8% of their income on energy use, while consuming three times less energy per capita than people in Central and Eastern Europe, also a region where energy poverty is a widespread phenomenon. Related: Oil Markets Await Outcome Of Iran Talks

In addition, if accepted, this would be the third consecutive power price hike in two years at a time when the economy is facing slow growth and high unemployment rate. The Armenian economy, which is heavily dependent on Russia, has faced a major downturn since the start of economic troubles for its powerful neighbor to the north. Russia is the key destination for labor migrants, who contributed more than 20% of the national income in the form of remittances in 2013 and 11 percent in 2014. In the first five months of 2015, cash transfers have halved.

The economic link with Russia is most profound in the energy sector. Apart from ENA, the Russian state, through Gazprom, owns 100 percent of the country’s wholesale gas supplying company. The bulk of FDI inflows also have Russian origin, and 40 percent of them are targeting the energy sector.

In addition, Armenia imports almost all of its gas from Russia and natural gas imports comprise around 80 percent of all energy imports. Furthermore, 60 percent of the country’s total primary energy supply is derived from natural gas, which is responsible for the majority of residential energy use, especially in big cities. Related: Why Buffett Bet A Billion On Solar

However, the increase in gas import prices in 2010 and the subsequent 40 percent hike in household gas tariffs pushed some urban residents to switch from natural gas to electricity for heating, which became comparatively cheaper (about one-fifth of Armenia’s electricity is generated from natural gas, with the rest supplied by a number of hydro power plants and a nuclear power plant, which is currently being modernized). Hence, when power prices began to increase, the outrage in the capital, Yerevan, was easy to understand.

According to the protest leaders, the rallies are not anti-Russian in nature and the main demand of the people is a reversal to the government’s power price decision. President Sargsyan seemed have backed down after he told senior officials on 26 June that the government will cover the difference between the old and the new price with budget subsidies until the end of a comprehensive audit of the ENA’s activities.

Protesters, however, seem determined to stay on the streets. Deep-seated mistrust in the government’s ability to implement reforms could trigger an impulse for a regime change. This is the biggest fear in Moscow, which sees the current Armenian government as an important ally in its natural backyard. Russia has been able to preserve its influence in the small Caucasian state by expanding its control over key economic sectors. This was done by recruiting senior government officials, who used Russia’s influence to limit outside competition and preserve the dominant position of Russian companies in the energy sector. Related: What Would A Saudi-Russian Partnership Mean For World Energy?

If there is a change of guard in Yerevan, the established connections that have served Moscow so well, could crumble. Not surprisingly, similar to the aftermath of Ukraine’s Maidan rally in early 2014, Moscow’s propaganda has presented the street protests in Yerevan as a Western plot to contain Russia’s influence.

In a sign of full support, Moscow provided the government with $200 million in military aid on 26 June. Armenia relies for its security on the 3,000 Russian troops stationed in the country, which have so far deterred efforts by Azerbaijan to try to reclaim the separatist republic of Nagorno Karabakh, occupied by Armenia during a bloody five-year war in the early 1990s.

Paradoxically, Russia’s attempts to secure its influence and, more importantly, its energy interests in the neighborhood could backfire. While Armenian demonstrators have largely limited, domestic aims, the Russian insistence on turning the protests into an East-West clash could incite protesters to demand that the Armenian government take a sharp turn away from Moscow.

Faced with such a choice, president Sargsyan might have to abandon his close ties with Kremlin in an attempt to stay in power. This is likely to lead to economic retaliation from Russia such as gas supply cuts. The alternative, though, may be to follow the path of Ukraine’s former president, Victor Yanukovych.

By Martin Vladimirov for Oilprice.com

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