BACKGROUND: Russia is the largest source country of investments in the economy of Armenia, (US$405 million between 1996 and 2005) which is significant for this small country. As a result, a significant part of the country’s economic assets are controlled by Russians, both by the government and state-owned companies, and by private Russian companies. The bulk of the former group of assets came from the 2002 debt-for-equity swap, whereby Armenia repaid its US$97 million dollar debt to Russia accumulated during the crisis of 1990s. The state-controlled Russian companies are especially strong in the energy and power industry. In particular, more than half of the electricity-producing capacities of Armenia are controlled by Interengo, a subsidiary of RAO UES. Among this company’s assets in Armenia are four blocks of the Hrazdan Thermal Power Plant (TPP), the largest power plant in the country, and Armenia’s energy distribution network. Another Russian state-controlled giant, Gazprom, owns 45% of Armrosgazprom, Armenian gas network operator (with another 45% belonging to the Armenian government and 10%, to another Russian- and Gazprom-associated company, Itera). Recently Gazprom declared its decision to increase its stake in Armrosgazprom to 58 percent, by buying a new issue of shares. This stake will be increased even more when the declared sale of the fifth block of the Hrazdan TPP to Gazprom is completed. Among non-governmental Russian companies, Vympelcom is by far the largest single investor in Armenia, as it took 90 percent of the ArmenTel shares of its previous owner, Greece OTE for some Euros 482 million or US$616 million dollars, equivalent to more than 10 percent of Armenia’s projected GDP this year. Another large private investor is the Russian aluminum giant Rusal, which owns Armenal, a large foil-producing factory. Rusal in recent years invested 80 million dollars to modernize it. The Russian leadership looks interested in activating this process, as seen, in particular, from the statement by president Vladimir Putin, who told his Armenian counterpart Robert Kocharyan on October 30 that he regretted that in recent years Russia “occupied a shameful third place” among foreign investors in Armenia. Not surprisingly, in recent years an increasing number of concerns have been expressed in Armenia about “selling the country to Russians,” or about Armenia “becoming an appendix to Russia,” etc. Concerns are expressed that the penetration of Russian capital may keep Armenia far from approaching the West, and that Armenia may fall out of the prevailing trend for the South Caucasus region which is westward. The government, of course, says this process is beneficial to Armenia. As for the Armenian population, it is neutral if not positive, given the absence of significant anti-Russian sentiments among Armenians. IMPLICATIONS: The facts show that, at least for the time being, Russian investments in Armenia have had a mostly positive impact with the goals pursued appearing to be purely economic. Whereas in the 1990s, there were cases of politically motivated competition among Russian and western investors for Armenian assets, no such cases are known to have taken place in the past six years. Moreover, Russian funds have often been the only available investments in Armenian assets, with no competitors. This was the case, in particular, with the fifth block of the Hrazdan TPP, which was founded back in Soviet times but has remained unfinished as the Armenian government failed to find interested investors. Under the deal agreed in April 2006, Gazprom not only pledged to invest US$150 million to finalize this block, but also promised to keep gas prices stable at US$110 per 1000 cubic meters for three years to come (meanwhile, most other CIS buyers will pay twice as much in 2007). The political context of these investments, if any, is not obvious. On the one hand, the Russian government does not conceal its interest in acquiring assets in Armenia, just as Is the case in other countries. However, the real influence of the political factor in these deals is mostly overestimated. The ArmenTel deal is good evidence, as in this case, two out of the four companies participating in the tender were Russian ones, and reportedly, the Armenian government would prefer to see MTS, a company close to the Russian government, as the winner. However, the tender was won by Vympelcom, whose largest shareholder is Telenor of Norway. In addition, the Armenian government used the sale as an opportunity to get rid of the ArmenTel monopoly on many communication services, which strongly hindered development of the IT and telecom sectors in Armenia. Finally, it is not obvious that these deals will make Armenia even more dependent of Russia than it already is. In fact, the opposite may be true. For example, Armenia has long been dependent on supplies of Russian gas, and this is, of course, a leverage of political pressure. However, as Russia has spent money to acquire large energy consuming assets in Armenia, it would be less inclined to stop gas supplies to Armenia as that would harm its own economic interests as well. As for the problem of ownership of the Iran-Armenia gas pipeline, its value seems highly overestimated. This is a 40 km long pipeline connecting the Iranian-Armenian border with Armenia’s existing gas distribution network, owned by ArmRosgazprom. It cannot serve as a transit route due to its small diameter, as Russia reportedly purposefully prevented the construction of a larger pipeline. Even if this fragment is given to Russia (in fact, to ArmRosgazprom, a subsidiary of Gazprom, which works according to Armenian laws), the valve of this pipeline is controlled by Iran rather than by Russia. Aside from satisfaction that no Armenia does not transit Iranian gas, it will not be great enhancement of Russia’s influence in this sector. CONCLUSIONS: For the time being and for an foreseeable future, the large Russian investments look beneficial for the Armenian economy and have no visible political impact in terms of Armenia’s attitude to the West. They do not prevent Armenia from continuing advanced market reforms and establishing closer ties with the USA and the EU, in particular, through the recently signed Action Plan of Armenia in the European Neighborhood Policy. AUTHOR’S BIO: Haroutiun Khachatrian is an analyst on political and economic issues based in Yerevan, Armenia.