Rosneft: A New Business Project In Armenia

ROSNEFT: A NEW BUSINESS PROJECT IN ARMENIA

[ Part 2.2: “Attached Text” ]

30.04.2014

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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____________________________________________________________________________
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IN THE LIGHT OF “ZONAL” ASPECT OF WORLD FINANCIAL CRISIS [07.05.2009]

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