Azerbaijan: Weakening Russia’s Oil Dominance
Highlights – Azerbaijan’s strategic importance increases due to its location and energy resources – Europe expected to look toward Baku as viable alternative to Russian oil dominance – Russia unlikely to welcome European intervention in Caucasus In recent years, Azerbaijan has experienced significant growth due to its large oil reserves. The large amount of energy resources has enhanced the geopolitical importance of the small Caucasus country, causing several nations in the region and around the world to reassess their ties and future trade relations with Azerbaijan. There is growing evidence that Russia and Europe are involved in a so-called “tug of war” over Azerbaijan’s natural gas. Russia wants to exert more control over the country’s energy supplies, while Europe hopes to strike an agreement with Baku that allows pipelines to directly supply Europe, ultimately operating outside of Moscow’s control. The competition between Russia and Europe is testing the former Soviet republic’s ability to maintain its political balance. In the near to mid-term, we expect Azerbaijan’s primary goal to be to attempt to maintain a balanced and positive relationship with both Europe and Russia. However, maintaining a balance will prove to be difficult for Azerbaijan, as the country wants to parlay the international interest into the resolution of its conflict over the separatist region of Nagorno-Karabakh, which would require Russian involvement and assistance. At the same time, Azerbaijan wants to improve ties with Europe without angering Moscow, something that is likely to prove problematic. Resolving Nagorno-Karabakh The separatist region of Nagorno-Karabakh has been occupied by Armenia since a bloody ethnic war ended in 1994 and has caused strained relations between the two countries. Azerbaijan has made solving the conflict a major objective and came closer to its goal in a November 2, 2008 meeting, where the two countries agreed to resolve the dispute through Russian mediation. Armenia and Azerbaijan signed a five-point document saying both countries will step up efforts to find a peaceful solution over Nagorno-Karabakh. However, while the declaration is the first such document signed by the two heads of state since 1994, it does not contain any significant commitments nor does it mention controversial issues at the heart of the conflict. As such, the outcome of the meeting is unlikely to result in any near to mid-term agreement to resolve the conflict. However, it did signal that Russia is now willing to play the role as mediator in the dispute, potentially increasing Russian influence in Azerbaijani affairs. Easing tensions in the region is important for Azerbaijan, as several of its oil-export routes travel through neighboring countries. Any potential flare up in tensions or the outbreak of conflict negatively impacts the country’s oil industry, as in the case of the August 2008 war between Georgia and Russia, where two Azerbaijani oil-export routes were disrupted. In the near to mid-term, Azerbaijan is likely to leverage some of the interest in its energy resources to try to end the conflict over Nagorno-Karabakh, primarily by enlisting the help of Moscow. A “Tug of War” Since becoming independent in 1991, Azerbaijan has sought to minimize reliance on Soviet-era pipelines that traverse through Russia. Baku has reached out to European customers and the United States (US) to diversify its oil market and further reduce its reliance on Russia. In recent months, Azerbaijani leaders have conducted negotiations with high-level officials from the US, Europe, and Russia regarding its energy resources. The discussions have mostly dealt with Shah Deniz II, the site where reserves are estimated to be between 1.5 billion and three billion barrels of oil, and 50 to 100 billion cubic meters of gas.