EurasiaNet Business & Economics - Russo-Azerbaijani Deal on Caspian Encourages Putin's Ambitions

BUSINESS & ECONOMICS

RUSSO-AZERBAIJANI DEAL ON CASPIAN ENCOURAGES PUTIN’S AMBITIONS
Sergei Blagov 9/25/02

On September 23, Russia and Azerbaijan signed an agreement concerning the Caspian Seabed boundary that paves the way for dividing the two countries’ rights to Caspian oil and gas. Such agreements matter intensely to Azerbaijan, which has based its economic strategy on future oil and gas payments from Western nations. And Russia, which had once tried to discourage the growth of a Caspian export industry, now apparently intends to use bilateral deals to gain bigger stakes in that industry.

The deal between Russian President Vladimir Putin and Azerbaijani President Heidar Aliyev gave Russia momentum as it seeks to persuade all five Caspian nations to adopt its approach to the sea. Russia advocates dividing Caspian exploration rights along a "modified median line," which would give countries with long shorelines broader claims. Kazakhstan has endorsed this idea. Iran, which has a relatively short shoreline, insists on dividing exploration rights equally, and Turkmenistan has provisionally sided with Iran. When Aliyev signed the border agreement with Putin, three of the five littoral states officially endorsed Russia’s proposal. Putin described the deal as a vindication of Russia’s idea "to share the seabed but not the water itself." Azerbaijan’s balance-tipping acquiescence so gladdened Russia that Russian foreign minister Igor Ivanov announced on September 24 that he now considered the country � a geopolitical rival of Russia’s long-time ally Armenia � to be Moscow’s "strategic partner." Aliyev, who became an honorary fellow of Moscow’s State Institute of Foreign Relations on September 24, reportedly expressed hope that the deal may influence Turkmenistan and Iran.

Russia appears to be working hard to make Aliyev’s prediction come true. According to the Kremlin’s press service, Putin spoke by telephone on September 23 with Turkmen President Saparmyrat Niyazov "to discuss bilateral ties in the energy sector." Russian media outlets have speculated that Niyazov did not change his opposition towards bilateral Caspian deals. At the failed Caspian Summit in the Turkmen capital of Ashgabat in April, Niyazov had warned that the sea "smells of blood."

Compared to a deal with the mercurial Niyazov, the contract with Azerbaijan was relatively easy to delineate. The agreement between Russia and Azerbaijan proposes to divide national sectors approximately according to the length of each country’s coastline and to end at a median line drawn down the middle of the sea. This should not be controversial, as the two countries have no disputed oilfields. Nonetheless, Azerbaijan balked at signing such a deal as recently as June � suggesting that Putin’s negotiators will need to work more inventively to win over Niyazov and Caspian strategists from Iran, which maintains its own interest in oil revenues and regional security.

In the wake of the failed Caspian summit, Putin stated that Moscow could push for a series of bilateral deals, instead of waiting for all five littoral states to reach accord. Russia is trying to blossom as a major energy exporter, and the much poorer Kazakhstan and Azerbaijan are anxious to draw revenue from whatever hydrocarbons they can sell as soon as possible. Russian partisans blamed Iran and Turkmenistan for the impasse at the April summit. [For background, see the EurasiaNet Business and Economics archives.] Less than a month after that summit ended, Putin and Kazakhstani President Nursultan Nazarbayev signed a bilateral agreement dividing the Northern Caspian. The deal implies that the two countries would exploit three hydrocarbon fields � Kurmangazy, Central and Khvalynskoye � on a parity basis.

For such gerrymandered joint ventures to benefit both Russia and Azerbaijan, which claims roughly 21 percent of the shoreline, the two countries may base their strategies on the total oil reserves at their disposal. Under the five-way equal division that Iran advocates, Azerbaijan and Kazakhstan would claim 2.84 billion tons of the sea’s estimated hydrocarbon reserves, compared with 2.34 billion for Russia and slightly less for Turkmenistan and Iran. Under the "modified median line" approach, Azerbaijan would control access to 4 billion tons of reserves, twice Russia’s allotment and more than four times Iran’s share. Azerbaijan has invested considerable hope and credibility in the Baku-Tbilisi-Ceyhan pipeline, which would bypass Russia on a 1,760-kilometer course from the Azerbaijani capital through Georgia to a Turkish port in the Mediterranean. Workers laid foundation for that pipeline on September 18.

Russian officials and oil executives have repeatedly claimed that the BTC will probably fail. But now that its construction has begun, according to the RIA-Novosti news service, Russia may tone down its rhetoric and seek a bigger share in the development and export of Caspian oil via an existing venture, the Caspian Pipeline Consortium (CPC), in which it plays a part. At his signing ceremony with Aliyev, Putin noted that Azerbaijan funneled 2.3 million tons of oil through the CPC pipeline in 2001 and 2.5 million tons so far in 2002. Putin also pledged to supply more natural gas to Azerbaijan in exchange for more oil transit via the CPC. Moscow will continue promoting existing pipelines, one of which runs from Baku to the Russian port of Novorissisysk on the Black Sea. And it will continue opposing American support for BTC; as recently as September 20, the Web site rusenergy.com quoted a Russian energy official as saying that "with assistance [in] construction of the Baku-Ceyhan oil pipeline, the United States is going to weaken the position of the Caspian Pipeline Consortium."

With those suspicions fixed, Putin may have decided to simply extract whatever value he can from whatever oil Russia can claim. Russia has been arguing that bilateral agreements, such as its deals with Azerbaijan and Kazakhstan, could serve as a model for deals between other pairs of littoral states. However, the challenges of the Caspian resist facile models. For all the warmth of the September 23 ceremony, Russia and Azerbaijan could see their ties fray amid competition between pipeline projects. If that happens, Iran and Turkmenistan will presumably feel less motivation to follow the bilateral-deal model.

Editor�s Note: Sergei Blagov is a Moscow-based specialist in CIS political affairs.

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