ROSNEFT: A NEW BUSINESS PROJECT IN ARMENIA

30.04.2014

ROSNEFT: A NEW BUSINESS PROJECT IN ARMENIA

Mikhail Aghajanyan
Political Analyst

A new large business project brews in Russian-Armenian relations. Rosneft corporation is just one step away from entering the Armenian market. The agenda of negotiations between business entities of the strategic partner-countries in South Caucasus includes two main issues. Rosneft wants to acquire a share in the Nairit production complex and to supply petroleum products to Armenia. One of the leading Russian companies thus expands it geography of foreign markets. This is done in an important phase of Yerevan’s integration in the Customs Union, with all the economic, political and social priorities stemming from that.

On December 25, 2013 Rosneft, Italian Pirelli and Armenian Oil Techno companies signed a memorandum of understanding on joint establishment of butadiene-styrene rubber production. In the past years the Nairit plant changed hands several times and each new owner attempted to restore its production capacities, but did not succeed. Nairit used to be the only manufacturer of chloroprene rubber in the former USSR, In 1980s the plant’s share in the global market for chloroprene rubber constituted 10-12%. By 1987 the plant produced over 75,000 tons of rubber annually. In 2006 the British consortium Rhinoville Property Limited acquired 90% of Nairit’s stocks for $40 million, while the Armenian government kept remaining 10%. The plant has been idle since 2010, and a large debt has been accumulated for the wages of workers and administration. Rosneft involvement may re-energize the plant and dissipate the serious social tensions around it. The Russian, Italian and Armenian companies plan to organize production of tires. Rosneft intends to become the leading investor and shareholder of the plant, whereas Pirelli will carry out research and development in innovative rubber production technologies, together with the Russian and Armenian partners. The Italian company has also expressed willingness to purchase the final output of the plant.

Given the relatively receptive Armenian market for vehicles and auto parts import, the tire production at Nairit plant promises high economic gains and increasing demand. In 2012 some 31,800 vehicles were imported in Armenia. About 60% of total imports were from Germany, while Japan followed next with 17.6% and Russia was the third with less than 6.3%¹.

In 2013 supply of light vehicles to Armenia increased by 18.3%. In the last twelve years about 312,600 vehicles were imported to Armenia, of which 67,200 from Russia (which is 21.5% of the total car imports).

About 10,000 people in Armenia are involved in imports of vehicles and auto parts, as well as car servicing. About 70% of vehicles are imported by “physical persons” who do not work for specialized companies. Recently some alarming prognoses appeared for such individuals regarding possible car price hikes after Armenia’s joining the Customs Union. It is too early to make final conclusions, because the process of reconciling the Armenian interests with those of future partners in the Customs Union is still under negotiations. However, it is already clear that Rosneft offers an opportunity to amend the situation in one of the most problematic industrial and social areas of the local market by creating employment alternatives.

The second potential area of Rosneft involvement in Armenian economy is also closely linked to the car market. In the recent years passenger vehicles were the third largest imports to Armenia after natural gas and petroleum products. It is important to mention that a considerable part of energy imports in the country is directly related with running the vehicles (light vehicles as well as other types, such as minivans, buses and trucks). For example, natural gas filling stations for vehicles consume almost one-third of the natural gas total supply to all users.

On April 4, 2013 Igor Sechin, Rosneft Chairman visited Armenia on a business trip where he was met with a highest political level reception. The outcome of the visit was signing an agreement with the Armenian Oil Techno company on cooperation for establishment of a joint venture for marketing and distribution. At the end of the visit I. Sechin presented his assessments for prospects of the business led by him in the Armenian market. According to him supply of jet fuel, petrol and diesel has a serious potential in Armenia. He also noted about the opportunity to “establish a platform for cooperation in this direction”.

Since summer of 2012 Rosneft has been exploring the opportunities for sales of petroleum products in the Armenian market. The company may become the main supplier of petroleum products in the Armenia and establish a joint venture that would build a chain of 40-50 petrol stations, as well as a fuelling station at the Zvartnots airport of Yerevan.

Currently the bulk of petroleum products are mainly supplied from oil refineries in Romania and Bulgaria. The Georgian port Poti is very important in the supply route and logistics, as it is the transit point for Armenia’s system of economic ties with the external world.

It is known that Rosneft has a strategic approach even when developing not so large external markets (such as the Armenian market for petroleum products, which is totally dependent on imports and is estimated at 350,000 tons annually). The Russian company aims at fully meeting the mentioned estimated demand in the internal market, which incidentally, tends to decrease². It is planned to supply 370,000 tons of petroleum products annually to the country. In January 2014 the Rosneft management approved supply of this volume (up to $400 million worth) by Rosneft-Armenia company that was established on December 10, 2013 jointly by Rosneft and its Armenian partner Oil Techno.

Thus, Rosneft entrance in Armenian market for petroleum products implies a systemic approach, with involvement of all business links in the Armenian direction. Meanwhile, before creating a chain of gas stations and fuelling station at the Zvartnots airport, the source of supply needs to be determined along with the arranged route to deliver the products to the Armenian customers. In 2012, after learning about consultations between Rosneft and the Armenian side, the analysts pointed to the Tuapse Refinery that belongs to this energy corporation. In the official Rosneft website this plant is described as having “the most favorable location among Rosneft’s refineries, and is also the only Russian refinery on the Black Sea coast”. Experts note that the company continues working on expansion of the Tuapse Refinery crude distillation capacity from the current 4.5 million tons to 12 million tons annually. Most likely, Rosneft will ship oil refinery output products to Armenia from this facility located in Krasnodar Krai.

The Russian real industrial sector capital entrance to Armenian market is hindered by logistical difficulties. The land communications of Armenia to the external world have to go through Georgia in the north and Iran in the south. For quite a long time complicated relations between Russia and Georgia have been making vulnerable the establishment of transport communications from Russia to Armenia through Georgian territory. However, there is no other way. The foreign economic and political approaches have to be tied to the conditions dictated by geography.

There is also a political context in Rosneft’s entrance in the Armenian market, which is related to the sustainability of integration processes among the former Soviet Union countries. In particular, the success of Rosneft’s Armenian contract may help assess how pragmatic was Armenia’s choice in favor of the Eurasian integration project.

Reasonably, Yerevan points out the absence of a common land border with Russia as a seriously obstructive factor for the country’s involvement in integration schemes. However, Rosneft and other Russian companies have a good opportunity to build an arranged system for introducing petroleum products business without having a direct land access to the partner’s territory. There is also an opportunity to revive the Nairit plant, which may turn out as yet another confirmation for establishment of systemic ties in the economic dimension of the Russia-Armenia relations. It would be interesting to follow what impact Rosneft’s successful activities in the Armenian market would have on regional political issues that receive much publicity (such as reopening railroad section from Russia’s Krasnodar Krai to Armenia that passes through Abkhazia and Georgia).

¹ Russian cars imports in the country in 2012 constituted 1.7% of total Russian exports to Armenia (as reported by National Statistical Service of Armenia, which amounted in $18.5 million). In the same year Russian exports to Armenia in the product category “rubber and articles made of rubber” amounted in $12.9 million.

² In 2013 imports of petroleum products to Armenia comprised 328,000 tons, a 5.3% reduction compared to 346,000 tons in 2012. The main reason is that for many vehicles in the country natural gas is chosen as an alternative fuel. Some reports suggest that as many as 70% of all vehicles in Armenia run on natural gas.

“Globus” analytical bulletin, No. 4, 2014

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