Vol. 2, No. 13 (July 01, 2009)

The Azerbaijani-Russian gas accord: A ‘milestone’ on more than one road

Paul Goble
Publications Advisor
Azerbaijan Diplomatic Academy

Gazprom and SOCAR signed an agreement on June 29 under the terms of which the Russian company will purchase 500 million cubic meters of gas from Azerbaijan next year.  That gas will then pass through Russian territory rather than flow through one of the various pipelines projected to bypass Russia.  And consequently it was no surprise that visiting Russian President Dmitry Medvedev described the deal as “a milestone” in Moscow’s efforts to prevent Europe from diversifying its gas suppliers.  And while it is certainly that at least in the short term, the accord and the rapprochement between Moscow and Baku are equally important “milestones” on at least three other roads as well.

First, Azerbaijan was in a position to sign such an accord not only because it is a net exporter of gas rather than only an importer and transit country.  As recently as three years ago, Azerbaijan was importing gas from Russia, something it stopped doing when Moscow said it would dramatically increase the price.  And consequently, during most of that period, Azerbaijan approached the issue of sending gas to Western markets not as a producer but rather as a country through which gas produced by others would pass.

But in the intervening period, Azerbaijan had rapidly developed its own gas fields and is projected to produce 30 billion cubic meters in 2010.  Not only does that allow Azerbaijan to export a significant portion, but that level of production, which will rise even further by 2014 when the second phase of the Shah Deniz field will go on line, means that Baku under the terms of the agreement committed itself to sell to Gazprom less than two percent of its output and a relatively small portion of its projected exports by other routes.

Consequently, although he did not use the term, Azerbaijani President Ilham Aliyev could certainly have described the Gazprom-SOCAR accord as a “milestone” on his country’s plans to diversify the export of natural gas.  And while Baku’s willingness to do so may give Moscow more influence over the Europeans than they would like as well as reducing some of the enthusiasm for pipeline projects bypassing Russia, it is simply wrong to say as some Russian and Western analysts have that this accord will kill them.  Azerbaijan is producing too much gas and is selling too little of it to Russia to justify such apocalyptic conclusions.

Second, the Russian side was so interested in reaching this accord that it was willing to pay a premium for Azerbaijani gas, a premium that some are suggesting reflected the political as opposed to the economic intention of the agreement.  From Moscow’s point of view, it is certainly true that politics trumped economics in this interest, but from Azerbaijan’s, both factors not surprisingly were in play.

On the one hand, under President Aliyev, Azerbaijan has pursued what he calls a “balanced” foreign policy, one in which every move toward the West is matched by another toward Moscow.  In this case, Baku’s willingness to sign an accord with Moscow underscores its commitment to find and develop other routes and not, as some have suggested, a retreat from that commitment.  At the joint press conference with the visiting Russian leader, President Aliyev said as much.
 On the other, Baku was certainly pleased to be offered the higher price for its gas because it will now certainly argue that the Russian commitment represents the minimum other foreign purchasers should expect to pay.  Moscow may have assumed that it was worth paying the premium to get the political result it wanted, but Baku did not give the Russian side the total victory some have suggested Medvedev obtained and SOCAR is certainly going to profit financially as a result of the Russian president’s one-day visit to the Azerbaijani capital.

And third – and this almost certainly is the most important “milestone” of the meeting – President Medvedev’s coming to Baku to oversee the signing of this accord signals something else: the rise of Azerbaijan in the calculations of the Russian government.  From Russia’s point of view, Azerbaijan has always been the prize in the South Caucasus because of its location and natural resources.  But now both of those things have become even more important than they were only a few years ago, and Medvedev clearly felt that it was important that he rather than any other Russian official should come to Baku.