Azerbaijan: Gassing Up for Georgia

With Kazakhstan's economy now ailing, Georgia is increasingly counting on Azerbaijan to help Tbilisi develop its energy-transit infrastructure.

Kazakhstan's economy has been battered by the global economic downturn, a fact that appears to have diminished Astana's foreign investment activities. [For background see the Eurasia Insight archive]. Underscoring this was a March 16 decision to place Tbilisi's indebted, Kazakhstani-owned gas company under the Georgian energy regulatory commission's temporary supervision.

Since 2006, when Kazakhstani companies invested over $152 million in Georgia, Kazakhstan has slipped from the top foreign investor in Georgia down to number three. In 2008, Kazakhstani investments in Georgia reached just $63 million. Aside from Tbilisi's gas distribution company (KazTransGas-Tbilisi), Kazakh companies hold Georgia's largest telecommunication company, United Telecom of Georgia, the Batumi Oil Terminal and Sea Port, a wheat terminal, a chain of gas stations, and a string of hotels in Tbilisi and Batumi.

Whereas Georgian government officials used to tout Kazakh investment and Kazakhstan's interest in delivering its gas and oil to Europe via Georgia, now those same leaders are pumping up Azerbaijan's potential as an export catalyst.

As a mark of Azerbaijan's growing importance, a statue to the late Azerbaijani President Heidar Aliyev, father of the current President Ilham Aliyev, stands in Tbilisi near an embankment named in the elder Aliyev's honor.

While Azerbaijan so far lags far behind Kazakhstan in terms of investment volume (just over $21 million in 2008), it appears to be moving abreast in terms of strategic investment decisions. Most recently, the State Oil Company of the Azerbaijani Republic (SOCAR) expressed interest in participating in Georgia's construction of underground gas storage units, Georgian Energy Minister Aleksandre Khetaguri announced in Baku on April 27. A tender for the project is ongoing.

Khetaguri predicted that the project would reach a "regional scale" by its second phase, when storage capacity will reach 1.5 billion cubic meters. The third phase will see that capacity rise to 5 billion cubic meters. "If SOCAR will need to store gas there, and also for subsequent transit to Europe, including via the South Caucasus railway and Nabucco [gas pipeline]," the facilities will exist, the Finko/ABC.az news website reported Khetaguri as saying.

Natural gas has come to dominate Azerbaijan's interests in Georgia of late. The storage investment, if pursued, would form part of a growing pattern.

After Georgia's 2008 war with Russia, SOCAR agreed to a five-year bulk-supply gas contract that envisaged preferential rates for residential customers starting in 2009. The company has also acquired 29 regional gas distribution stations to supply natural gas to 1 million people outside of Tbilisi.

In addition, SOCAR is considered a potential bidder for KazTransGas Tbilisi if the company's Kazakh parent company, KazMunaiGas, puts the troubled enterprise up for sale. In an interview with EurasiaNet, KazTransGas Tbilisi spokesperson Galim Tumakayev confirmed that the firm may be sold if the price is right. "We would sell KazTransGas Tbilisi if our investments, debt financing and financial assistance that we have been providing KazTransGas Tbilisi are compensated," Tumakayev said.

Mahir Mamedov, director general of SOCAR Energy Georgia, did not deny an interest in purchasing KazTransGas Tbilisi, but indicated that the expected asking price -- $100 million plus debt financing - was unrealistically high. The KazTransGas office in Astana declined to discuss the company's prospective sale, citing ongoing negotiations.

Dietrich Muller, an economic expert with the Georgian Investment Group, an investment management firm, said that Georgia offers an attractive investment opportunity for Azerbaijan because "it has a constant and secure (gas) consumer there."

"[D]emand for gas will only be increasing inasmuch as SOCAR Energy Georgia, now that it has acquired the regional distribution network, will be expanding. ? If the Tbilisi gas network [is] added to SOCAR's assets, its long-term and secure consumer is guaranteed," Muller added.

Georgian experts believe Tbilisi is eager to expand energy cooperation with Azerbaijan. "[A]gainst the backdrop of political tensions with Russia, Georgia needs the strong backup of an established strategic political and economic partner like Azerbaijan. It cannot rely on the faraway Kazakh neighbor, [which is] tied to Russia by strong economic and political strings," commented economist Soso Archvadze. "We should assume that Georgia will kind of bow [to Baku] and hand Tbilisi gas distribution to Azerbaijan in the end."

Azerbaijan, like Kazakhstan, has seen its economy suffer during the global financial crisis, but many observers believe that Baku, which has enjoyed one of the world's strongest economic growth rates, is better positioned to withstand the downturn. Archvadze, the economist, added that while both Azerbaijan and Kazakhstan are interested in expanding an East-West energy corridor to Europe, the route is more strategically important for Azerbaijan. Kazakhstan has alternative options of Russia or China. Azerbaijan has only one choice for fresh customers, he said, is Europe via Georgia.

The 500,000 ethnic Azeris living in Georgia act as "a very important bridge between our two countries," commented Shovgi Mehdizade, an attaché at Azerbaijan's embassy in Tbilisi. "In such a situation, whatever is the scale of the global financial crisis, Azerbaijan always will support Georgia in order to increase the country's welfare, including the level of development of the regions where our people are residing."

But a senior diplomat at Kazakhstan's Embassy emphasizes that Kazakh companies are not about to pull up all their stakes in Georgia - at least not anytime soon. The KazTransGas Tbilisi situation should not be seen as a sign of diminished investment interest from Kazakhstan, said Consul Marat Askarov. Nor do Kazakhstan's ties with Russia play a role. Rather, Kazakh companies are simply economizing during the downturn, Askarov said.

Whether money is flowing in from Azerbaijan or Kazakhstan, Tbilisi only welcomes all outside investors' interest, commented Mikheil Kobaladze, investor relations coordinator for the Ministry of Economic Development's National Investment Agency. "The government of Georgia views Kazakhstani and Azerbaijani investments as very important for its economic development and looks forward to more FDI [Foreign Direct Investment] inflows from these countries," Kobaladze said.