Vol. 4, No. 15 (August 01, 2011)

East-West energy cooperation and its consequences for Georgia and Azerbaijan

David Aptsiauri, Amb., Prof.*
Head of Risk Management Service
JSC “International Bank of Azerbaijan—Georgia”
Tbilisi, Georgia

The development of east-west energy cooperation in the Caspian region not only has involved a wide range of participants in the region but has promoted the development of infrastructure, the improvement of the macro-economic environment and the international integration of both Georgia and Azerbaijan into the international community.  This development has especially benefited Georgia which is a transit country rather than a producer, but it has also been important for Azerbaijan which is both.

Thanks to Azerbaijan and contracts for the transit and supply of gas and oil for ten and twenty years respectively, Georgia has been the only country in the region without its own domestic supplies that has not been adversely affected by the energy crisis which hit in January 2009.  Indeed, Tbilisi has been able to increase the export of electricity to its neighbors including both Turkey and Russia.  But perhaps especially important, for the first time since gaining independence, Georgia has had a permanent and stable supply of electricity which has allowed its industries to operate with greater predictability and helped to ensure that economic reforms are irreversible.  

The State and Oil Gas Company of Azerbaijan as represented in Georgia by its subsidiary entity SOCAR-GEORGIA is thus one of the largest contributors to the energy security of Georgia.  The company’s activities include the trading of oil products, importation of natural gas and fuel, and the construction of the refineries and patrol stations.  From the very beginning, SOCAR-GEORGIA has assumed the leading position in energy sector of Georgia, and its investments in Georgia now stand at more than 470 million US dollars.  

The gasification of Georgian regions is proceeding successfully.  By January of next year, the number of new gas customers will reach 100,000.  The company also plans to increase the number of patrol stations to 100 by the end of 2011.  At the same time, SOCAR-GEORGIA allocates significant funds for charitable reasons contributing to the development of sport in Georgia and promoting the cultural cooperation between two neighboring countries. 

In a related development, the positions of the Azerbaijani banks have been strengthened in the Georgian market.  The activity of International Bank of Azerbaijan-Georgia, a subsidiary of the International Bank of Azerbaijan, has become a major component part of the banking sector in Georgia and is helping to finance such large-scale projects as the Baku-Akhalkalaki-Kars railway. 

The benefits of east-west energy cooperation have been far broader than this because they have helped to strengthen the state independence of Georgia and Azerbaijan and have promoted market-oriented economic reforms.  Revenues from oil and natural gas extraction and the transit of these commodities are creating a strong foundation for economic stability and even prosperity for majority of countries of South Caucasus and Central Asia.  Indeed, significant financial flows have permitted governments in the region to support national educational programs and send their talented young people abroad to be trained on international standards, an absolute precondition for better integration into the world science and business community and successful completion of the reforms at home.

Given instability in the Middle East, the role of the Caspian basin as an energy supplier is only going to increase, because it represents the most secure and shortest supply route for the development of both the countries in the region and those further afield.  In addition to the region’s states and adjoining ones like Afghanistan, the development of the east-west energy corridor benefits Turkey not only by allowing it to expand on its traditional regional role, but by developing its own economy.  And Turkey’s growth will allow it to play a major role as a partner with the countries of the South Caucasus and Central Asia. 

Other countries are benefitting as well.  The United States has acquired new opportunities to influence this landlocked region, allowing that region to once again become a major crossroads for trade.  In addition, the US, as a player on global energy market, is interested in appearance of new business opportunities since it has direct impact on world oil prices.  In geopolitical and geo-economic terms, Russia and in certain degree Iran were forced to abstain from monopolistic domination on the market, nevertheless, the Western presence in the region had always been and still is a matter of their special concern. 

Especially important is the role of this east-west energy cooperation for the countries of the European Union.  The EU is very interested in ensuring a reliable flow of oil and gas to its population and thus works to minimize the risk that it will be dependent on Russia alone.  As a general rule, the EU is valuable partner for all the countries of the region, because it represents a balancing factor in relations with Russia.  That role increases the overall importance of the EU and opens the door to greater European involvement in the political realm, including on such contentious issues as conflict resolution.

But despite all these positive developments, the situation in the east-west energy sphere is not without its problems.  Russia continues to try to maintain its dominant position often beyond the limits of the permissible as with its actions against Georgia in August 2008.  Moreover, the US role in regional energy matters has weakened in recent years despite the commitments of Washington and the need for reliable transit in support of the mission in Afghanistan.  And the European Union has moved far more slowly than one might have expected in the region, apparently concerned that any rapid shifts could trigger an unwelcome Russian response.  Moreover, both the current economic crisis around the world and natural disasters such as the one that hit Japan are slowing the kind of cooperation which the countries of the region had hoped for. 

All these developments almost certainly mean that the countries of the region will be affected more by bilateral or trilateral agreements rather than multilateral partnerships, and that shift will change not only the economics but the politics and geopolitics of the South Caucasus in fundamental but still unknown ways.

* The above article is a summary of a speech delivered to the Azerbaijan Diplomatic Academy’s Energy Summer School, July 15, 2011.