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James Durso

James Durso

James D. Durso is the Managing Director of Corsair LLC, a supply chain consultancy. In 2013 to2015, he was the Chief Executive Officer of AKM…

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Azerbaijan: A Crucial Energy Hub

Baku Flame Towers

The estate agent’s mantra is “Location, location, location,” which is also Azerbaijan’s challenge and opportunity. 

Recent developments in Azerbaijan’s neighborhood – the potential resolution of the status of the Caspian Sea; a more vibrant Central Asia due to Uzbekistan’s new openness towards its neighbors; and economic cooperation between Azerbaijan, Turkey, and Georgia - portend a greater political and economic role for the Republic of Azerbaijan. 

On 28 May 2018, Azeris will celebrate the 100th anniversary of the founding of the Azerbaijan Democratic Republic. The short-lived republic was invaded and subjugated by the Bolsheviks in April 1920 after several unsuccessful attempts to establish diplomatic relations with Moscow. The loss of their free republic left today’s Azeris alert to threats to their sovereignty, independence, and territorial integrity.  

Russia recently announced that an agreement on the status of the Caspian Sea is imminent. Final agreement on the status of the Caspian, as a lake or a sea, will determine the share out of the oil and gas wealth in the sea bed. If a lake, the five littoral states – Azerbaijan, Russia, Kazakhstan, Turkmenistan, and Iran - would divide the wealth equally among themselves; if a sea, each country can exploit the Caspian’s resources in their territory as they wish. 

Azerbaijan, like Turkmenistan and Kazakhstan, considers the Caspian a sea; Iran claims it is a lake based on an agreement with Soviet Union; and Russia is fuzzy on the issue with the Foreign Ministry calling it a lake, but the powerful oil and gas industry preferring it be a sea in order to maximize oil and gas exploration opportunities. 

Agreement that the Caspian is a sea would immediately benefit Azerbaijan as it could then work with international partners to determine the viability of a trans-Caspian pipeline to bring natural gas from the Caspian and Turkmenistan to Europe. This will avoid a Russian route which will never be free of Moscow’s tendency to “shut the taps” in its inevitable next dispute with the countries that are buyers or sellers of the gas. In any case, final clarity on the Caspian issue will allow the region’s leaders to set their political and economic priorities. 

Uzbekistan’s newly-elected President, Shavkat Mirziyoyev, has moved rapidly to normalize relations with the neighboring Central Asian states. Uzbekistan’s foreign policy, which will focus in its relations with states in the Central Asia region, has already shown economic benefits, and can encourage further cooperation in political and economic matters and prevent the states from being picked off by the regional hegemons, Russia, China, and Iran.  Related: $60 Oil Will Not Last Long

The Central Asia states can cooperate with the neighbors in the South Caucasus, also former Soviet republics, to resist the hegemons by cooperating and coordinating, and soliciting out-of-area allies from North America, Europe or Asia. These new states are each still deciding how to organize as a country, so will be prickly when lectured by outsiders, having finally escaped domination by the czars and the commissars. That said, they are all outward-looking with young, educated populations, and interested in advice, not direction, so it behooves potential allies to not make the perfect the enemy of the good. 

The just-announced “National Security Strategy of the United States of America” declares “…we seek Central Asian states that are resilient against domination by rival powers, are resistant to becoming jihadist safe havens, and prioritize reforms.” Azerbaijan and its neighbors should say “Me too” and demonstrate they agree that “…peace, security, and prosperity depend on strong, sovereign nations that respect their citizens at home and cooperate to advance peace abroad.” 

Azerbaijan, Turkey, and Georgia recently showed what cooperation looks like when their leaders commissioned the Baku-Tbilisi-Kars (BTK) railway, from the Azeri port of Alat, on the Caspian Sea, to Tbilisi, Georgia, ending in Kars, Turkey, where it joins Turkey’s rail line to Europe. The railway is expected to move 5 million tons of cargo a year at first, eventually rising to 17 million tons, and will carry goods from China to Europe in 12 to 15 days. Like the mooted trans-Caspian pipeline, the BTK railway will avoid Russia, ensuring goods from Asia, and Kazakhstan’s Caspian port of Aktau, can freely move to Europe avoiding pitfalls from the likely additional U.S. and EU sanctions against Russia. 

As Ronald Reagan would have said, “Trust, but always have an alternative route.” 

An additional joint opportunity is military-technical cooperation to standardize equipment in the region or jointly develop equipment. In 2017, Turkey launched an aggressive defense export campaign and has scored sales to Turkmenistan and recently inked a joint venture with Uzbekistan. Azerbaijan has also made a push to develop its own weapons for export and for use against the Armenia-backed separatist forces in the Nagorno-Karabakh region. Cooperation and planning now will ensure there isn’t a glut of unproductive defense facilities draining finance ministry coffers in the future. 

Friendly countries should encourage cooperation that strengthens these economies and make them more confident and self-reliant, and less likely to succumb to Russian, Chinese, and Iranian political pressure. Azerbaijan, Turkey, and Georgia should declare that all traffic on the BTK will move without hindrance because the more countries that use the BTK corridor, the more will be alert to the need to keep it free of political interference. And as efficient transport routes attract smugglers, the states can use this to gain intelligence and law enforcement cooperation with Europe and the U.S., further shielding them from Chinese, Russian, and Iranian meddling, though in Iran’s case the meddling in Baku’s Shia community has started

China is eyeing the region as the Central Asia-West Asia Economic Corridor part of its Belt and Road Initiative. Local participation in building the infrastructure will build the skills of

local firms and encourage investment in non-energy exports, but only concerted joint action and a refusal to be split can guarantee local work share and participation in the initiative and, most importantly, avoid losing control of natural resources and infrastructure to China’s “creditor imperialism”.  Related: Rig Count Shoots Up As Oil Nears $70

Azerbaijan has two strategic challenges and they’re connected: First, the dispute with Armenia over the Nagorno-Karabakh region has festered since 1988 and, in 2016, the danger of full scale hostilities escalated. This dispute, which isn’t just a post-Soviet border scrap requiring some diplomatic elbow grease for resolution is, to Azeris, rooted in the belief that the dispute is a last phase of the deportation of ethnic Azeris from Armenia, which was started in 1918 by the First Republic of Armenia, taken up by Stalin, and continued in fits and starts to the 1990s. The second challenge is the large number of internally displaced persons (IDPs), almost 600,000 and due to the Nagorno-Karabakh dispute. The Azeri government has dedicated significant resources to the displaced, but it now has one of the highest  numbers of IDPs per capita in the world and integrating them into the economy of the “mainland” will become more critical if the Nagorno-Karabakh dispute isn’t soon resolved. 

And progress in resolving the Nagorno-Karabakh dispute has lagged, but development of local transport corridors for rail shipments, the BTK railway, and crude oil, the Baku–Tbilisi–Ceyhan pipeline, has apparently forged ahead of the political process. But it is more likely that infrastructure development is key to the politics as the investments have isolated Armenia, and its traditional ally, Russia, hasn’t done anything about it, probably because Russia is working on its own deal, a trans-Azeri pipeline to Iran. Whether this isolation makes Armenia more amenable to a deal with Azerbaijan remains to be seen, though it may be that Armenia hopes conflict near so many valuable assets will draw in the U.S., Russia, China, and the EU to force a settlement.

Azerbaijan is the hinge of Europe and Asia, and like any hinge it requires some maintenance in order to operate freely. Events are conspiring to make it a center of attention – not always a good thing when the U.S. and EU are concerned. It is incumbent on outsiders to restrain their improving impulses to “enough”, and on Azerbaijan’s administration to make continued improvements in the economy and public participation so all Azeris share in the free and prosperous future they can make together.

By James Durso for Oilprice.com

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  • Nemesis1915 on January 14 2018 said:
    Sir the doomsday scenario that you have drawn up for Armenia is almost childish and story like.
    Armenia may seem isolated but has freinds in places you have no clue about . Like Israel which has the samson option . Armenia has options as well . I say to you and your readers be weary a scortched earth scenario will not fair well for those who commit or think of Armenias destruction. Next war in Karabakh the ancestral homeland of the Armenians will not only be a threat to the pipelines but the the entire region and a intrusion into Armenia will see the entire region inhabitable for a thousand year. Do not underestimate a people who have survived a millennia from far worse scenarios.

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