Azerbaijan in the new geoeconomic environment

The increasing importance of oil and gas in both domestic and international affairs presents Azerbaijan with enormous opportunities—and equally enormous challenges. As a major oil and gas producer in its own right and an important transit country by virtue of its location, Azerbaijan has seen its own economy boom and its importance internationally rise dramatically over the last two decades. Precisely because of its importance as an oil and gas supplier, however, Azerbaijan must navigate among a variety of other power centers—including China and India, which with their rising markets are shifting the balance of the international order; the Russian Federation and the desire of its leadership to use oil and gas as the country’s most important foreign policy tool; Turkey and its interests as a rising power in its own right; as well as the European Union member states and the United States with their increasing energy dependence—in order to maintain its ability to define its own future. In this new geo-economic environment, Azerbaijan in particular—and the wider Caspian/Black Sea region more general—are far more significant than their collective four percent of the world’s oil and gas reserves would otherwise suggest. That is because the European Union, overwhelmingly dependent on Russia for its gas, now views Azerbaijan not only as a supplier, but as a transit country for gas that is not subordinate to Moscow. This new reality is underlined not only by the content of the EU’s 2006 Action Plan for Azerbaijan under the European Neighborhood Policy, but also by the European Commission’s Memorandum of Understanding with Azerbaijan on Energy Partnership and its current mandate to negotiate a treaty between the EU, Azerbaijan and Turkmenistan to build a Trans-Caspian Pipeline System.

From the point of view of the EU as a consumer, Azerbaijan is geopolitically important, because it can help limit European dependence on Russian fuel exports and thus serve as a hedge against Moscow’s use of “soft power” to promote its broader agenda in Europe and elsewhere. As Europeans are well aware, Russia’s August 2003 Energy Strategy bluntly states that “the role of the country in world energy markets to a large extent determines its geopolitical influence.” To that end, then-President Vladimir Putin nationalized the oil and gas sectors, gaining a near monopoly leverage in the European fossil fuel market by promoting two major pipeline projects bypassing Ukraine, North Stream and South Stream. Most seriously from the EU’s perspective, Moscow has effectively weakened the Union’s common front by pursuing bilateral arrangements with its member states on energy supplies.

The European Commission subsequently published a policy paper An Energy Policy for Europe (2007) and a Strategic Energy Review (2008) calling for a series of steps to loosen Gazprom’s grip on the European market. But to date, these steps have had little impact. Vladimir Putin signed deals with the major German energy companies and even secured the services of former German Chancellor Gerhard Schroder as Gazprom lobbyist-in-chief. As a result, the Baltic Sea pipeline project seems secure, despite Commission objections, and on the South Stream front, Vladimir Putin has made deals with Austria, Bulgaria and Greece, as well as Turkmenistan, clearly intending in this way to diminish the significance of the EU Commission-preferred Nabucco pipeline (Roubanis & Koppa 2010; Cameron 2010). Given this state of affairs, the EU has little choice but to expand its engagement with Azerbaijan.

Closely related to the importance of Azerbaijan for the EU in this regard is the European Union’s relationship with Turkey. At present, Turkey mediates EU-Azerbaijan relations in significant ways. First of all, Turkey is bounded to Azerbaijan geographically, and more often than not, Turkish analysts stress the centrality of Turkey as an energy hub, since it is the indispensable transit country connecting the EU market with the Russian Caucasus (Blue Stream Pipeline) and the Caspian basin (South Caucasus Pipeline, BTC). For Europe, the road to Baku goes through Ankara. However, Turkey is not single-mindedly committed to enhancing EU’s energy security. Instead, it is boosting its geopolitical significance as a complementary building block to Russia’s in the European energy-security architecture, even as it keeps its options open for future business ventures at variance with Moscow’s preferences.

“It can't be said often enough: Turkey is situated in a highly sensitive geopolitical location, particularly where Europe's security is concerned. The eastern Mediterranean, the Aegean, the western Balkans, the Caspian region and the southern Caucasus, Central Asia, and the Middle East are all areas where the West will achieve nothing or very little without Turkey’s support. And this is true in terms not only of security policy, but also of energy policy if you’re looking for alternatives to Europe’s growing reliance on Russian energy supplies. (…) Europe’s security in the 21st century will be determined to a significant degree in its neighborhood in the southeast—exactly where Turkey is crucial for Europe’s security interests now and, increasingly, in the future. But, rather than binding Turkey as closely as possible to Europe and the West, European policy is driving Turkey into the arms of Russia and Iran.”

All competing scenarios for the emerging European energy architecture are built around the notion of Turkish centrality. However, and this is the key point, that outcome is the result of Turkish diplomacy, rather than the country’s location alone. Turkey only reluctantly endorsed the official Russian offer for the Blue Stream II project in 2005, giving priority to the US-EU sponsored Nabucco project. In response, Russia turned to the Balkans, established an alliance with Italy, and pursued the design of an alternative route from the Russian Black Sea coast via an offshore pipeline to Bulgaria (Yurdakul 2010). Bulgaria, however, is stalling the project either on the basis of economic or environmental considerations, which seems to be favoring the Nabucco project (EuroActiv 2009). Until a final investment decision is made, neither Russia nor the EU can afford to exclude Turkey from their fossil fuel grand strategy (Roubanis & Koppa 2010).

The second reason that Baku’s relationship with the EU is mediated by Ankara is political, and—like the first—reflects Turkish arguments rather than underlying realities. Starting from the premise that the ENP is a system intended to foster progressive integration with its neighbors on the basis of (EU) values, norms and practices, Turkish analysts are at pains to suggest that this is not possible in Azerbaijan or the wider Caspian region. For example, Turkish commentator Unar Eris (2010) routinely argues that Azerbaijan will fail to meet the Action Plan because, he says, European standards and values are not “shared values.” But his argument is undercut by his equally frequent assertion that Turkey as the only secular Muslim democracy in the region can somehow help “these countries,” including Azerbaijan, to meet these standards.

Many in Turkey share Eris’ views, although none of them has made it clear how Turkish proximity will help “bridge the gap” between the two political cultures they point to. Indeed, as Katharina Hoffmann (2011) argues, the Azerbaijani culture of multilateral engagement is informed by structural realities not uncommon to former CIS countries: Projects directly and immediately benefiting Azerbaijan are welcomed, with little attention to those devoted to long-term structural integration projects and steps toward supranational structures. Hence, a cooperation practice within a regional Organization is preferred, which does not limit the sovereignty of Azerbaijan on any issue.

Viewed in broadest terms then, the EU-Azerbaijani relationship is an independent variable in the equation of EU-Russian relations and, a dependent variable in the EU-Turkish relationship. As a result, there is a compelling need to address the theme of threats and opportunities for Azerbaijan in the current geopolitical environment. Recently, Philip Hanson (2011) prepared a briefing paper that helps us do just that. He examines the shifting dynamic of EU-Russia-Turkey relations and discusses how the transformation of this geopolitical environment should inform Azerbaijani foreign policy. Hanson argues that the EU remains for both Russia and the EU an unparalleled economic and gravitational force both politically and economically. At the same time, he suggests, the dynamics of these two relationships are neither homogenous nor necessarily parallel to EU’s objectives.

In fact, Hanson continues, the European Union is losing its gravitational pull in the region for two reasons. On the one hand, its economic clout is increasingly uncertain. Both Turkey and Russia doubt that European recovery, if and when it occurs, will sustain their current growth and are “hedging their bets” by cultivating relationships with other markets. And on the other, the EU’s community-building policies have been discredited, because there is ever less belief that the acquis provide a common basis for ties and because many countries, especially Russia, favor bilateral ties over multilateral ones.

In this environment, what is Azerbaijan to do? There is no right theoretical framework in diplomacy. More often than not, the theoretical perspective or “diplomatic culture” of a state tends to operate as a self-fulfilling prophecy. The spill-over of a human rights agenda to energy decisions is obviously daunting for many states that engage with the EU; it is less of a concern for Russia. The differences in style and traditions of diplomacy are linked to the self-perception of individual “actors.” And quite obviously, as an ever-closer union founded on theoretical assertions of functionalism, the EU has emerged as a post-state actor that regards itself as one of the most advanced organizations of multilateral governance in the world. Russia in contrast has always perceived itself as a post-imperial Great Power of global or regional gravity, as Russians themselves admit. In sum, rather than opting for one paradigm or another, it is worth noting that different diplomatic cultures are applicable in a different context.

If Hoffman’s (2011) assessment is right, Azerbaijani diplomatic culture is informed by a realist or actor-centered perspective. This has not prevented Azerbaijan from creating “an impressive list” of Regional Organization (RO) memberships: the Commonwealth of Independent States (CIS), the Black Sea Economic Cooperation (BSEC), the Economic Cooperation Organization (ECO), the Organization for Security and Cooperation in Europe (OSCE), the Organization of Islamic Conference (OIC), the Organization for Economic Development and Democracy (GUAM), the Council of Europe, the Non-Alignment Movement and, since 2004, a corporate relationship with the EU within the framework of the European Neighborhood Policy. In short, even though Azerbaijan has a culture oriented toward the fortification national sovereignty, it has established a nexus of RO memberships which—as Hoffman notes—fortifies its sovereignty. But, the question is of course how.

First of all, by gaining access to a number of international policy forums, Azerbaijan has managed to transcend the nexus of bilateral relations, sidelining their inherent asymmetry. It has been able to attract Foreign Direct Investment in the energy sector through projects like Nabucco, by dealing simultaneously with the EU and Turkey; which has vastly increased the negotiating leverage of Azerbaijan more generally. Moreover, this variable membership has allowed Azerbaijan to capitalize on its strategic significance as an energy producer in order to promote a greater foreign policy agenda. As Hoffman notes, within the realms of OIC and GUAM alone, Azerbaijan has managed to gain a legal or ethical upper hand in the Nagorno-Karabakh conflict.

Thus, multilateral engagement has clearly benefited Azerbaijan. The “unprecedented commitment” of the European Commission to elevate the status of diplomatic engagement with Azerbaijan and Turkmenistan to a bilateral Treaty—committing all parties to the construction of a Trans-Caspian pipeline system—for example, is especially promising. And on the other hand, because such infrastructure promises to offer Caspian nations a more substantial alternative to the Russian pipeline network (Tsereteli 2008), it will help smoothen relations with other states in the region.

Of course, a treaty calling for infrastructural development is not a substitute for real infrastructure, and given the current decline in EU’s economic weight, there are entirely reasonable doubts as to whether envisioned projects can actually materialize. If that proves to be true, Azerbaijan and Turkmenistan are being asked to potentially alienate Russia for a project that is still on the drawing board with no certain financial foundations. Moreover, as Turkey distances itself from the EU over Cyprus, Azerbaijan risks becoming a hostage to this collision. Meanwhile, as promising and flourishing the relations between Ankara and Moscow are, the solidity of this relationship for the future to come should not be taken for granted.

At the same time, on the part of the EU, “upgrading” the framework of bilateral relations to a treaty status probably signals that the Turkish “political argument” for a politically mediated relationship between Baku and Brussels is also currently loosing currency. In the near future, the EU will be able to negotiate with Azerbaijan without a rigid set of value/normative demands. In addition, Azerbaijan and other Caspian nations cannot really afford to invest either Moscow or Ankara with an effective veto over market access.

In this situation, Azerbaijan faces a difficult task of hedging its strategic policy risks. Any grand strategy policy recommendations by analysts need to be treated skeptically, because analysts usually lack the kind of critical intelligence available only at the highest levels. However, as Azerbaijan-EU relations are structurally tied to EU-Russian and EU-Turkish relations, it is clear that the road toward the realization of much needed investment in the energy sector of the Black Sea/Caspian region will remain filled with uncertainty, even though at least at a tactical level, the combination of relatively high fossil fuel prices—that has kept Azerbaijani growth going at a healthy pace—combined with the unfolding public debt crisis in the EU, may indeed offer significant opportunities for Azerbaijan.

On the one hand, following the Kazakh example, Azerbaijan is now presented with the unprecedented opportunity for asset acquisition in Southern Europe and the Balkans at low prices. Such “strategic acquisitions” would allow for the replenishing of know-how reserves of the Azerbaijani energy industry. At the same time, direct access to transit infrastructures and the European retail market would “enlarge the pie” of negotiation with regional energy powers, transcending the seemingly inescapable determinism of geographic location. SOCAR could even expand the scope of this strategy. That would provide Azerbaijan with the opportunity to make a qualitative leap in the diversification of its economic foundations and limit its dependence on FDI and foreign know-how.

On the other, Azerbaijan could pursue a more active engagement in the political process at sub-state level, that is, a self-referential capacity to be present, lobby and gather intelligence in major energy-decision power centers: Moscow, Ankara, Washington, and Brussels. This will enable Baku to participate in strategic policy development, rather than simply face a series of either/or dilemmas. Baku has a competitive advantage in this particular power-game, which is non-other than its traditional cultural ties with the former FSU space, the Turkic communities of the Black-Sea/Caspian region and the close ties with the Euro-Atlantic community that it has so laboriously cultivated.

Source: http://biweekly.ada.edu.az/vol_4_no_20/Azerbaijan_in_the_new_geoeconomic_environment.htm