Russia to start paying Georgia financial compensation for gas transit

Russia's Gazprom and the Georgian Energy Ministry reached an agreement, according to which Georgia will shift to a system of financial compensation for the transit of Russian gas into Armenia, the Georgian Deputy Prime Minister, Energy Minister Kakha Kaladze said.

Yesterday, Kaladze met with the management of Gazprom. The parties discussed conditions of gas transportation, according to which, Georgia will receive the payment for transit through the country, carried out by using money. However, Georgia wishes to maintain the previous form of payment and receive 10% of total transported gas.

At today’s government meeting the Government of Georgia signed a new two-year agreement with Gazprom as the former agreement expired on December 31, 2016.

The new agreement entails monetary compensation for the transport of Russian gas to Armenia through Georgia in place of the former arrangement, which afforded Georgia 10% of all natural gas transported through the country.

"After several rounds of negotiations, we have reached a deal with Gazprom and accepted an optimal proposal from them. Under the new agreement, Georgia’s dependence on Russian energy resources will not increase. Only the payment conditions have been changed. And it will be one of the highest transit fees among European countries” Agenda.ge cited Kaladze as saying.

The Minister further explained that the agreement of 2016 will remain valid for 2017, after which the new payment system will come into effect.

In addition Kaladze said Georgia may receive additional gas supplies from Russia in order to fill the deficit during the winter months when gas consumption is higher. "We will be able to receive additional gas supply for a reduced price – for $185 instead of $215 [per 1,000 m3] ,” Kaladze added.

Against the backdrop of a deep decline in the economy of Georgia the absence of an alternative to the Georgian route of export flows from Russia to Armenia and from Azerbaijan to Turkey via Tbilisi is still used as a lever of pressure on its neighbors to solve its own financial and economic problems.

The deputy director of energy policy of the Institute of Energy and Finances, Alexey Belogoriev, speaking to Vestnik Kavkaza, noted that Gazprom could accede to pressure from Tbilisi, based on the outlook for rising gas prices. "In conditions of low gas prices benefits from the payment for the Georgian transit using money are very questionable.  of this There will be benefits from this if gas prices are high, but taking into account the European market. Due to this the new payment terms are focused on the future with the expectation of higher prices," he believes.

In addition, the practice of payment for energy resources transit by using energy resources is obsolete. "The payment for transit by using money is a worldwide practice. Therefore, it is difficult to criticize Gazprom," Alexey Belogoryev added.

For the same reason, according to which Gazprom intends to benefit from the new conditions, the expert sees risks to Tbilisi. "Georgia's gain or loss depends on the cost of gas. At different gas prices, cash equivalent, which is received by Georgia, changes dramatically. This is a risk. As Gazprom is set for the rise in prices, it is advantageous for it to fix a tariff in the current circumstances, when prices are low and it is easier to put pressure on the opponent. The Georgian side's actions, respectively, are based on the exactly opposite position," the  economist pointed out.

At the same time, the expert drew attention to Russia's political component of this decision. "It is about Armenia. The Armenian gas sector is under control of Gazprom, so providing gas and energy security to the country is one of Russia's priorities in the Caucasus. In this regard, the Russian side in a certain way is also forced to compromise with Tbilisi. To some extent, gas transit to Armenia is much more important for Russia than obtaining 10% of gas transit for Georgia," Alexey Belogoryev concluded.