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Charged Up: How Georgia’s energy future could change geopolitics

On January 22nd, 2006, two Russian-controlled natural gas pipelines in the North Caucasus exploded. The impending delays to energy delivery sparked outrage in Tbilisi, Georgia, leading to claims that the explosion was the Kremlin’s punishment for Georgia’s Westward political and economic trajectory since the Rose Revolution in 2003. The evidence behind this accusation may be inconclusive, but this version of events would certainly fit into a larger trend: Moscow likes to use its natural resources and economic size to maintain its position in post-Soviet space, including Georgia. There is, however, one recourse Georgia has to minimize the Russian state’s plans: its own comparative advantages in international trade.

While Russia has control of natural gas pipelines throughout the post-soviet region, Georgia is not lacking in energy sources of its own. The country is replete with water resources that, matched with the low costs of energy production, make it optimal for hydropower development. Locally spearheaded development of Georgian hydropower potential could undercut Russian companies’ strong ownership stakes within Georgia’s energy sector and reduce the ability of the Russian state to exert economic pressure on its southern neighbor.

Despite the potential for alternative energy sources such as these, Georgia produces less than 25 percent of its total potential capacity of 40 billion kW/h of hydropower — some estimates are as low as 18 percent. For perspective, 40 billion kW/h represents enough energy to have powered the state of Kansas in 2013. Today, Georgia consumes approximately 8.1 billion kWh total per year. With its potential to produce 40 billion kWh in hydropower alone per year, the country stands to develop its export capacity for hydropower throughout the region. There are neighboring export markets — particularly Turkey, Armenia, and Azerbaijan — that could absorb excess electric power that Georgia’s population does not consume. Turkey, for example, has 50 percent higher energy generation costs than those in Georgia and is also facing projections of a significant external energy deficit by 2020, strengthening Georgia’s position as a possible energy exporter. This potential has not escaped the attention of both private investors and the Georgian state itself — the government-owned Partnership Fund’s recently invested $628 million in the Nenskra Hydropower Plant and the Georgian Co-investment Fund’s Greenfield and Brownfield projects.

The Russian state, however, currently plays an influential role in Georgian hydropower. The Georgian government is partnered with Inter RAO — a Russian company — on a joint venture, Sakrusenergo, to develop the country’s electricity transmission system. After the Russian invasion in 2008, Inter RAO and the Georgian government signed a memorandum of understanding over the management of the Enguri Hydropower Plant, a major power plant with a projected 3.8 billion kW/h annual capacity. The plant is partially located in Abkhazia, a province of northwestern Georgia that Russia has occupied since the 2008 war. Inter RAO also owns 75 percent of Telasi, a major electricity distributor in Georgia’s capital. While Inter RAO is purportedly a private company, like many firms in Russia, the line between politics and business is a murky one. Courtney Doggart, an energy expert at the Council on Foreign Relations, has asserted that “Inter RAO cannot be seen as anything other than a state controlled company with the ability to pursue state interests, be they economic, political, or both.” Such sway is ample cause for concern.

Russia’s use of energy as leverage for political ends is even stronger in general energy politics. The state maintains its weight as a ‘liberal empire’ through its immense resources in oil, gas, and other raw materials and commodities. Notable Russian companies with oligarchic owners that form part of Putin’s “Power Vertical,” such as Lukoil, have business interests in the Georgia, and Russia uses these business interests to manipulate, and more often punish, Georgia for policy measures unfriendly to its own interests. In 2001, Russia cut gas and electricity to Georgia allegedly as punishment for allowing Chechen terrorists to operate out of the Pankisi Gorge. Then, in 2006, after Georgia refused to give Russia control over gas pipelines, a mysterious explosion took place on the Mozdok-Tbilisi pipeline, prompting accusations that Moscow had sabotaged the pipeline as punishment. Russia placed an embargo on Georgian agricultural products that same year, supposedly over quality issues. In reality, it seems more likely that political motives were central, as the embargo occurred shortly after four Russians were detained in Georgia on espionage charges. The presence of companies in the region that are in thrall for the Russian state in the region only further the Kremlin’s supremacy over Georgia.

As such, Georgia must choose carefully how it approaches the realization of its hydropower potential. While it cannot feasibly go toe-to-toe with Russia or oil-rich Azerbaijan over regional energy primacy, Georgia’s comparative advantage in hydropower gives it the ability to deepen ties with regional markets of its choice and to attract investment from a diversified, global group of financiers. While measures employed for strategic purposes, such as diversification, can undermine policy otherwise dictated by purely economic interest, this particular measure would actually improve Georgia’s position in global markets by widening the pool of buyers and thus allowing them to charge a higher price. Additionally, the more hydropower is integrated into Georgia’s economy as a domestic energy source, the less the country has to depend upon oil and gas. This undercuts the leverage Russia currently has over Georgia’s energy sector, and it would reduce the hit taken to Georgia’s GDP and energy consumption in the event of events like a fishy gas explosion in the North Caucasus. Such relative independence is possible so long as the state and Georgian companies spearhead this initiative.

Integrating hydropower as a domestic energy source is particularly vital to reducing Russia’s influence over Georgian energy policy. Firms like Alliance Group Holdings, a domestic up-and-comer in the midst of building a hydropower plant, are emblematic of what native firms can bring to the table. Moreover, this type of development can be done without outsourcing influence to a foreign, hostile government. Developing local human and financial capital is necessary to make sure that the country itself is reaping the benefits of its labor and is not obliged to look to its powerful northern neighbor for economic leadership.

But geopolitical concerns aren’t the only ones that plague Georgian aspirations for hydropower. One potential problem is the process of building the hydropower plants themselves. Such difficulties have become apparent with the resistance to the construction of one hydropower plant that would necessitate the forced resettlement of 2,000 locals. Some claim, more broadly, that Georgian business development and overly zealous privatization exacerbates income inequality and poverty in the country — issues  that would likely cause concern for some in the face of hydroelectric development. Though Georgia will reap strategic benefits from hydropower expansion, those benefits do not reduce the seriousness of any adverse effects on local communities.

It’s clear that Georgia faces a precarious juggling act of immense proportions in bolstering its energy independence while also making sure not to antagonize its aggressive neighbor or exacerbate inequalities within its borders. Nonetheless, if the country wants to move towards a more self-sufficient energy policy that will enable it to come out from behind the long shadow cast by an ever more recidivist Russia, developing its domestic hydropower potential is a critical step in that direction.

 

 

About the Author

James Janison '16 in an international relations concentrator and staff writer for BPR.

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