Strategic Analysis: Russian Business Activity in Azerbaijan (Abstract)

Of all the countries in the South Caucasus region, Azerbaijan has arguably taken on the greatest strategic significance to the West due to its potential role as an alternative supplier of oil and gas to Europe as well as a transit country for oil and gas emanating from other parts of Central Asia. At the same time, the countrys leadership has arguably been among the most hedged in the region with regard to its strategic alignment between Europe and Russia.

Azerbaijan broke new ground among the former Soviet states following its independence in aggressively courting Western investment to unlock their energy assets and take on major regional energy infrastructure projects (even over strenuous Russian objections). That said, there is growing evidence that President Aliyev (and his confidantes) have become uneasy with their commitment to the West, particularly facing persistent criticisms over their track record on human rights and democracy.

The December 2013 decision not to pursue a more ambitious natural gas pipeline project, termed Nabucco, connecting the countrys natural gas fields to Europe, versus a more conservative, piecemeal strategy of enhancing existing infrastructure, developing select new regional pipelines and ultimately traversing the Adriatic Sea to Italy (via a pipeline termed the Trans-Adriatic Pipeline) was viewed as a disappointment. There are a number of explanations behind this particular decision, ranging from those that are purely economic to others that involve a strategic balancing act.

Moscow has played on Azeri leaderships fears and pressured Baku not to overstep its boundaries in challenging Russias commanding position in the European gas market. The trend in Bakus relationship with the West since the Nabucco-West decision in December 2013 has been marked by a number of symbolic reproaches of the West and gestures towards Moscow.

Beyond mere political influence and pressure tactics, however, there is ample evidence of Russian efforts to undermine or outright sabotage the viability of Western-favored projects involving Azerbaijan. The cumulative effect of these measures and the influence over Azeri leadership attained by threatening the relationship more broadly has resulted in decisions by Azerbaijan that make it appear undependable as a truly independent actor capable of aligning itself with Western strategic interests. Unfortunately, Russia has powerful incentives to disrupt Azerbaijans various pipeline projects linking the country and its neighbors to Western markets.

Russia appears intent on avoiding the problematic, strategic repercussions of these projects, including Europes efforts to diversify away from Russian gas as well as the strengthened independence and accumulating wealth that countries in the South Caucasus and Central Asia (e.g., Azerbaijan, Turkmenistan, Kazakhstan, et. al.) would likely attain along with these pipelines becoming operational. Accordingly, it is likely that Azerbaijans further development of oil and gas fields and pipeline projects, will result in interventions by Moscow at a number of key junctures.


Excerpted Deals and Transactions:

  • The Baku-Tbilisi-Ceyhan (BTC) pipeline came on-stream in 2006 (over Moscows objections) transforming the dynamics of the oil markets in the region. The BTC pipeline delivers Azeri oil to European markets via a pipeline that, for the first time, circumvented both Russian territory and the congested Turkish straits. Today, this pipeline serves as the main non-Russian, westward oil transit route out of the region and delivers 80% of all Azeri oil exports. Since its launch, the pipeline has been a target for sabotage (including, many suspect, by Russia). The pipeline runs through territory that is only some 100 km from the Nagorno-Karabakh ceasefire line and the Turkish portion passes through Kurdish separatist territory (which has been subject to various suspicious attacks since its construction).
  • In August 2008 (just two days before the war in Georgia), the Kurdistan Workers Party (PKK) claimed responsibility for an explosion at part of the BTC pipeline near the eastern city of Erzincan that rendered some of the BTC non-operational for three weeks. It was later reported that the explosion was possibly caused by a cyber attack suspected to have originated in Russia.
  • In May 2014, Russias LUKOIL began shipping roughly 5,000 bbl/d of oil from its Yuri Korchagin offshore Caspian field through the BTC pipeline, which it had previously rebuked. Some analysts posited that the sudden interest was Moscow attempting to entangle yet more countries in its energy policies to blunt the potential impact of future international energy sanctions. LUKOIL was considering expanding oil shipments through the BTC to 30,000 bbl/d this year.
  • The Baku-Tbilisi-Erzurum (BTE) pipeline presently serves as Azerbaijans main gas export pipeline, running parallel to the countrys BTC oil pipeline for roughly 429 miles. As with the BTC pipeline, the BTE pipeline runs close to both Nagorno-Karabakh and Georgias breakaway region of South Ossetia. During the August 2008 war between Russia and Georgia, BP opted to suspend shipments through the pipeline. In August 2015, a segment of that pipeline in northeastern Turkeys Kars province exploded in what was reported by the Turkish media as a terrorist attack. That same week, militants attacked two other pipelines traversing Turkey. This followed an explosion on the BTE in late May 2012 and another in October of that year, which Turkeys Ministry of Energy and Natural Resources stated was the result of a terror attack.