Georgia, Velvet Underground in Overdrive by Edward Teague

24 November 2003 — The New Dark Age

I returned and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all. – Ecclesiastes

50 year old Russian Oligarch, Alexander Smolensky must have pondered this when typesetting the Bible for illegal distribution in Russia. An offence for which the KGB ordered a prison sentence of 2 years, but of which he endured but one night.

Now his Stolichny Bank aka SBS/AGRO is at the centre of many of the enterprises spawned by buyouts or “privatization” of Russian State assets in the wake of the Berlin wall’s reduction to dust and souvenirs. An interest free loan of US$3Mn to the Leningrad based academic and state Bureaucrat Anatoly Chubais has certainly helped provide him with bread and riches.

Elevated to the Deputy prime ministership under Chernomerdyn, Chubais has seen a meteoric rise to the head of RAO (Unified Energy Systems) which controls more than 70% of the CIS electric power capacities, and output of more than 70% of electricity in the country. Now he seeks to extend this control from Moscow over the Southern republics “The political implications of the UES’s economic expansion are obvious,” Yevgenii Arsyukhin wrote recently in the Russian government daily Rossiiskaya Gazeta and “Since we are not talking about the sale of cold drinks – electricity supply being vital for the people to have a normal life – Moscow is set to gain control over key economic sectors [in Armenia and Georgia], and over their overall existence in general.”

Articulate, energetic and pragmatic, Chubais used to be the golden boy of Russia’s emerging market. But the days when Western investment banks showered him with money and Western politicians and newspapers parroted his opinions are long gone.

Initially dismissed by Yeltsin, Chubais later landed on his feet. The Yeltsin government promptly made him general director of UES. It is a position of extraordinary power. Chubais now presides over most of Russia’s biggest power plants and the bulk of the national transmission grid. Since UES also has major stakes (49% on average) in all but two of Russia’s regional utilities, he calls the shots in most local markets as well.

In May, Gazprom signed a deal to manage natural-gas routes in Georgia (1/7th the size of California with 5Mn population. GDP per head US$2000) without disclosing many contract terms, American diplomats were so alarmed that US President George W. Bush’s top Caspian adviser hastily flew to Tbilisi to warn that the deal could harm American-backed efforts to develop natural gas resources in Azerbaijan. “These negotiations between Gazprom and the Georgian Ministry of Fuel and Energy are not, in my opinion, sufficiently transparent,” said Steven Mann, Bush’s Caspian-energy envoy, told Rustavi-2 television. He also cautioned that the Gazprom agreement could “significantly weaken Georgia’s position along East-West energy transportation routes.”

Mann’s visit a few days after Richard Miles the US Ambassador’s expression of “concern” that Gazprom’s plans for piping gas from Azerbaijan’s Shah Deniz field to Erzurum, at the Georgian-Turkish border. would hamper the development of the Shah Deniz BP/Statoil pipeline. On October 18th Anatoly Chubais was in Yerevan signing up a deal with Armenia.

These diplomatic developments highlight the geopolitical motives behind energy-sector deals in the Caucasus. Gazprom is closely allied with the Kremlin. Russian leaders have long sought to increase their economic leverage in former CIS states, including Georgia, in the belief that stronger commercial ties enhance Moscow’s political influence. Conversely, the United States has long sought to reduce Russia’s economic dominance of countries on the Caspian Basin.

After his meeting with Shevardnadze, Mann stressed that the Gazprom deal is “not yet final.”

However, elsewhere things were moving. After the collapse of Enron, AES who had bought into the Georgian electricity industry saw their shares plummet from US$73 to a little over a dollar. On May 1st 2003 AES announced Richard Darman as new Non Executive Chairman. A busy man. Ex-manager of the Office of the Budget, famous for saying that George Bush as Presidential candidate did not say “No more Taxes”, it was “just something he read in a speech”. MD of the shade loving Carlyle group whom he joined in 1993, Darman is also on the hugely influential and secretive Council of Foreign Relations, as is Philip Odeen, ex-chairman of huge DoD contractor TRW who joined AES at the same time (also one time aide of Henry Kissinger).

On May 8th 2003, PA Government Services Inc. (PA), part of the PA Consulting Group, (We are proud that our clients say ‘PA makes it happen’) announced in a little noticed Press release, an interim management contract with the Republic of Georgia, to manage the United Distribution Company for a period of approximately 18 months, with funding to be provided by the US Agency for International Development (USAID).

The United Distribution Company (UDC), they said, was formed in 2002, as an amalgamation of several regional electricity companies. It is estimated to have approximately 660,000 customers, close to 5,000 employees and a service area covering 70% of the country, much of it being rural. It is also a company in very serious difficulty, characterized by dismal financial performance, huge payables, inadequate business systems, all of which combine to make the UDC unable to provide reliable electricity supplies to its customers.

Then, unexpectedly on August 6 2003 (surprisingly Anatoly Chubais was in Tblisi that day) RAO/UES announced the purchase of a 75 percent stake in Georgia’s AES-Telasi joint venture from AES Silk Road, a subsidiary of the US-Arlington based AES Corp. for an undisclosed purchase price (AES paid US$35Mn in 1999 and claim to have spent a further US$250 since). “The Georgian government will take all the steps necessary to convince AES to stay,” Georgian Energy Minister David Mirtskhulava Business Week quoted as saying. “AES’s presence is important for the future investment climate. This gave UES a virtual lock on Georgia’s domestic electricity market.

On July 31, 2003 the US Embassy made a public statement, “The US is sorry that AES Corporation of Arlington, Virginia, has decided to sell its assets in Georgia”. A brilliant film by Paul Devlin “Powertrip” shown at the Berlin Film Festival Feb 2003 detailed the problems AES had including machine gunning of their Georgian executives.

On August 18th there was a complete blackout throughout Georgia – unremarked in the West and whose causes are still subject to wild speculation. Fuel and Energy Minister Mamuka Nikolaishvili, enjoying his first day in office said “We know only that an emergency shutdown occurred. Power was off from 7.00 am to 10.00pm.” Prior to this there had been some surprising and influential visitors to President’s Shevardnadze’s office. US frustration with Georgia has been mounting, as second largest per capita recipient of US aid after Israel, the US has given US$778 Mn roughly 5 times that of neighbouring Azerbaijan.

So in early July, interrupting his Independence Day weekend celebrations, in flew former US Secretary of State, James Baker, acting as a special Bush Administration envoy, to discuss the problems of the president’s cronies ponying up the proceeds of the sale amongst themselves and to seek assurances about the conduct of the forthcoming elections.

On September 24, a US State Department official responsible for aid-related issues in the former Soviet Union, Thomas Adams, announced that Washington’s assistance to Tbilisi would decline in 2004 from the roughly $100 million that Georgia is receiving this year.

This was followed by another high powered US delegation — including John Shalikashvili, the former chairman of the US military’s joint chiefs of staff, along with Strobe Talbott, a former deputy secretary of state during the Clinton administration and head of the Brookings Policy Research Institute to monitor developments after Baker’s plan and attempt to defuse the confrontational mood then enveloping domestic politics. Even Republican Arizonan Senator John McCain turned up to put the heat on the most famous Georgian after Stalin – but with no success.

A letter from the President on October 31st when his fellow countrymen were celebrating Hallowe’en failed to win Shevardnadze to control the excesses expected in the election 2 days away.

It’s evident that after the shambles of the election with missing ballots, dead voters and all the other paraphernalia of fraudulent elections (something the US President is intimately acquainted with), that Russia and the United States, rivals for control over the Caspian Sea’s enormous oil wealth, set up a pragmatic deal to protect their joint interests and ensure a smooth transfer of power.

Half Georgian Igor Ivanov, Putin’s representative flew in and saw Shevardnadze and eventually spoke to Colin Powell after Shevardnadze had twice refused to take calls from Jim Baker. In a move which could exaggerate tensions over the former Soviet state between the US and Georgia’s neighbour, Russia, US national security adviser Condoleeza Rice rang her Georgian counterpart Tedo Japaridze (who has six aides paid for by USAID) after the election confirming that the US was “ready to help Georgia, and support it in transition”. Senior western diplomats confirmed separately that the US and EU are keen to assist.

Evidently Moscow and Washington saw their own interests were best met by engineering a peaceful exit for long-time and mortally weakened President Eduard Shevardnadze.

Russia doesn’t need more problems on its sensitive southern border to allow militants to step up attacks on Russian forces in rebel Chechnya.

The US, whose main interests are currently elsewhere don’t want local political unrest to disrupt construction of oil and gas pipelines that cross Georgia to bring Azerbaijan’s huge energy reserves to Western markets via Turkey.

So fast forward to today. The “velvet” revolution (nice sound bite PR bullshit line from the Czech revolution ) has ripped a few doors off the parliament building, Shevardnadze has gone home, (spurning fleeing to Germany where Gerhardt Schroeder has invited him to spend his retirement at his $11Mn villa) Nino Burdzhanadze , smart, tough and classy lady who was the last elected speaker of the country’s parliament, is temporary President until elections early in January and the opposition is led by ambitious and well connected Harvard educated lawyer and ex-Justice Minister Mikhail Saakashvili. “We feel like a plane taken over by hijackers,” he said last year.

The White House has not expressed preferences for the incoming President, but said it would support “free and fair elections.”


Unified Energy Systems have announced they are close to acquiring stakes in a number of Ukrainian utilities, a company spokesman confirmed Friday Nov 22nd.

The UES statement comes amid speculation that a deal worth up to $100 million has already been sealed.

In the Washington Post on Saturday Dean White, a senior partner at PA Consulting Group is quoted as saying of the Georgian electricity system “It’s just a big dysfunctional web.”

As has been said elsewhere concerning the US obsession with exporting democracy:

“Military might is a sign of strength, but the US military is not invincible world-wide. America’s use of force as both first and last resort is a sign of profound systemic weakness.”

Edward Teague

Paranoid Obsessive November 24th 2003

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