Day: October 6, 2023

Pipeline development in the Caspian region comes with geopolitical complexity. The countries directly involved in the Southern Gas Corridor (SGC)—Turkey and Azerbaijan—as well as Turkmenistan, Russia, and Iran have diverging geopolitical goals. Turkey and Azerbaijan are trying to maintain relations with both Russia and the European Union (EU) and Turkmenistan is trying to balance gas supplies between China and the EU while avoiding deteriorating relationships with its northern neighbors: Russia, Uzbekistan, and Kazakhstan. Russia and Iran are trying to break geopolitical isolation, increase their influence in the region, and monetize locked-in gas reserves. Following an analysis of the economics of Caspian gas, in this Q&A, the author discusses how the challenge of balancing contradictory interests could be a risk for the EU, in terms of both the reliability of gas supply and instability in the region. 

Facing increasing pressure from the West, Russia has increased its efforts to reestablish a sphere of influence in Caspian and Central Asia. So far Russian authorities have taken the readiness of Azerbaijan and Turkey to increase gas supplies to the EU calmly, as they try to maintain friendly relations with the leaders of Azerbaijan, Turkey and Turkmenistan

There is no visible deterioration in relations between Russia and Azerbaijan[1] with presidents Vladmir Putin and Ilham Aliyev regularly meeting one another. Since 2022, Azerbaijan has provided an overland trade corridor between Iran and Russia, which has become extremely significant for Russia under sanctions [2]. There has also been a noticeable economic convergence between Russia and Turkmenistan in the past year and a half.[3] Amid frequent meetings, the two countries signed the Declaration on Deepening Strategic Partnership in June 2022. In particular, bilateral cooperation in the gas, oil and electricity sectors is growing, with Gazprom and Tatneft increasing their activities in the Turkmen market.[4]

Turkey has become a key Russian political and economic partner since the sanctions against Russia were introduced in 2022. Just before his re-election, Turkish President Recep Tayyip Erdogan had stated that “Russia and Turkey need each other in every possible field.”[5] Despite the country’s membership of NATO, Turkey has, in fact, stepped up its economic ties with Russia since the start of the war, increasing imports of Russian oil embargoed by European countries.[6] In 2022, 40 percent of Turkey’s gas imports came from Russia.[7]

For now, the benefits to Russia of maintaining good relations with Turkic countries outweigh any potential downsides, including competition with these countries in the EU gas market. As discussed in the previous article.   Russia need not worry too much about competition; Azerbaijan itself is importing gas from Turkmenistan to fill gaps at the moment, while Turkmenistan is limited by the challenges of building the Trans-Caspian pipeline and commitments to China. And Turkey is now the biggest net importer of Russian gas.

Amidst declining export revenue, Russia is interested in holding onto the remaining opportunities to generate at least some income from gas exports to countries like Azerbaijan and Turkey. But there are still some “red lines”; Russia makes it clear that it would obstruct any attempt to build a Trans-Caspian pipeline on environmental grounds.[8] 

Source: https://www.sgc.az/en.

Recep Tayyip Erdogan, re-elected as the President of Turkey in May 2023, has repeatedly announced his ambition to make Turkey a gas hub, while continuing to maintain special relations with Russia. He has frequently mentioned plans “to turn Turkey into a center in the energy sector of the Mediterranean, the Caspian region, and the Middle East.”[9] Putin echoes this rhetoric, but his statements seem to be motivated by the desire to send more Russian pipeline gas to Turkey, which can then be re-exported to Europe.[10] Putin observed in a meeting with Erdogan earlier this month that  Gazprom has submitted a road map for the hub to Turkish energy company BOTAS.[11] This suggests the likelihood of further strengthening of ties between Turkey and Russia. At the same time, since his re-lection, Erdogan has also been speaking about Turkey’s ambition to join the EU, although he has recently scaled back his ambitions.[12] Turkey believes it can leverage its existing and new trade relations to become a gas hub and is pushing its own gas exporting agenda to the EU. Although Turkey is trying to balance its relations with Europe and Russia, it`s becoming apparent that it will be difficult to build up such a hub without infringing on the interests of either Russia or the EU.

Following Russia’s invasion of Ukraine, Central Asian countries seemed to be distancing themselves from Russia. But Moscow, with an understanding of the energy and social problems of these countries, is drawing them into ever closer cooperation—and perhaps, even greater dependence in the future. Facing severe gas deficit and winter blackouts, these countries will likely continue to buy Russian gas. In addition to cooperation with Azerbaijan and Turkmenistan, Russia is also focusing on Kazakhstan and Uzbekistan. Agreements related to a tripartite gas union between Russia, Kazakhstan and Uzbekistan, proposed in November 2022 by Putin and involving the transportation of Russian gas through the territories of these countries,[13] are starting to materialize.[14] According to the officials, transit deliveries of Russian gas to Uzbekistan could reach up to 10 bcm per year.[15] Both Uzbekistan and Kazakhstan have obligations to supply gas to China and have significantly under-delivered in recent years due to domestic constraints. If Russian gas is supplied to Kazakhstan and Uzbekistan, at a favorable discount compared to the price of these countries’ exports to China, then Russia could somewhat make up for the loss of the EU market, while Kazakhstan and Uzbekistan could increase gas supplies to China, receiving much-needed export earnings.

Russia is simultaneously tightening ties with Iran—also struggling to monetize its gas reserves. In August 2023, Russia and Iran reached agreements on the creation of an energy hub, according to Majid Chegani, Iran’s deputy oil minister and general director of the National Iranian Gas Company.[16] The idea may be to deliver gas to Iran through Uzbekistan, Turkmenistan via the gas pipeline system “Central Asia – Center” using it in reverse mode and potentially via Azerbaijan.[17] This could lead to the implementation of a gas pipeline from Iran to Pakistan and India. Another possibility is for Iran to collaborate with evolving Russian competences in LNG plant construction. Although these plans sound farfetched and do not look economically feasible, they are important for Russia from a geopolitical point of view—and cannot be completely ruled out.

For years, the EU has supported the creation of SGC and has been looking at Caspian gas as a viable diversification option. However, with Russia working hard to reestablish its influence in the region, these supplies might come with increasing geopolitical risk.

The region is volatile, as shown most recently by Azerbaijan’s military offensive against Armenians in the breakaway region of Nagorno-Karabakh. Moreover, the countries participating in the SGC—Azerbaijan and potentially Turkmenistan—are authoritarian regimes lacking transparency.[18] Revenues from hydrocarbon exports are not used by the authorities to establish stable institutions. Instead, they primarily enrich the ruling elites.[19] This creates a risk that these countries may follow the path of other resource-based, unpredictable autocracies. Azerbaijan’s readiness to increase volumes through supplies from Russia and via Iran—while the Trans-Caspian is still in an early stage with questions about its future—adds additional risks to the expansion of SGC for the EU.

Despite the MoU signed by President Aliyev and president of the European Commission Ursula von der Leyen to double gas supplies from Azerbaijan by 2027, and Turkmenistan’s recent statement on its readiness to proceed with Trans-Caspian pipeline, the future expansion of the SGC remains uncertain.

It is questionable whether Azerbaijan can ensure the required gas volumes without increasing its reliance on Russia or Turkmenistan (via Iran or through a direct route). Participation of Turkmenistan is not guaranteed; challenges related to the financing of the Trans-Caspian project, as well as geopolitical tensions in Caspian remain in place.

The timing is critical; Europe needs this gas urgently, not in a decade’s time. In the next 2-3 years, substantial LNG volumes would become available globally, and by then the EU may have resolved its current energy supply crisis and moved further along on its energy transition path.

Still, the discussion on expanding supplies through the SGC will continue in the coming years, as the negotiating process itself is important for Azerbaijan, Turkmenistan, and Turkey from a geopolitical perspective.

[1] https://carnegieendowment.org/politika/88651

[2] https://www.stimson.org/2023/russia-iran-converge-in-attempt-to-build-a-new-eurasian-order/

[3] https://1prime.ru/state_regulation/20230120/839535364.html

[4] https://tdh.gov.tm/ru/post/34395/turkmenistan-rossiya-kurs-na-diversifikaciyu-dvustoronnego-partnyorstva

[5] https://www.politico.eu/article/turkey-special-relationship-russia-grow-recep-tayyip-erdogan-valdimir-putin/

[6] https://www.politico.eu/article/turkey-special-relationship-russia-grow-recep-tayyip-erdogan-valdimir-putin/

[7] https://www.osw.waw.pl/en/publikacje/osw-commentary/2023-03-10/turkeys-dream-a-hub-ankaras-wartime-gas-policy

[8] https://eurasianet.org/turkmenistan-smashing-time

[9] https://tass.com/economy/1556141

[10] https://www.dw.com/en/will-turkey-ever-become-a-russian-gas-hub/a-65053534

[11] https://www.reuters.com/business/energy/disagreements-delay-russian-gas-hub-plans-turkey-sources-2023-09-14/

[12] https://www.reuters.com/world/middle-east/turkeys-erdogan-says-country-could-part-ways-with-eu-if-necessary-2023-09-16/

[13] https://www.uzdaily.uz/ru/post/73735

[14] https://podrobno.uz/cat/uzbekistan-i-rossiya-dialog-partnerov-/gazovyy-soyuz-rossii-uzbekistana-i-kazakhstana-mozhet-rasshiritsya/

[15] https://www.rbc.ru/business/15/08/2023/64db4b429a79477e12def06c?from=newsfeed

[16] https://news.day.az/world/1587706.html

[17] https://itek.ru/analytics/trojstvennyj-gazovyj-sojuz/

[18] https://freedomhouse.org/explore-the-map?type=fiw&year=2023

[19]https://www.transparency.org/en/news/azerbaijani-laundromat-grand-corruption-and-how-to-buy-influence

As EU leaders gather in Granada on Thursday, their most publicised agenda item is the situation with Armenia after Azerbaijan took control of Nagorno-Karabakh following a 24-hour military operation that ended almost four decades of tension, writes EURACTIV.

The international press has focused on Azerbaijan’s strongman, Ilhan Aliyev, who snubbed the five-way talks planned on the sidelines of the summit with the leaders of France, Germany, and Armenia, hosted by Council President Charles Michel.

Such a snub is embarrassing for the hosts. But Aliyev is the EU’s favourite dictator. After Russia attacked Ukraine, Azerbaijan’s gas became precious as Russian supplies dwindled.

Aliyev has so far accepted all the invitations by the EU’s Michel to discuss Karabakh, and there were many photo opportunities with his Armenian counterpart Nikol Pashinyan, despite the total failure of the exercise.

Now Aliyev took Karabakh as a low-hanging fruit because he could.

He can also claim there is no ethnic cleansing: The population of 120,000 left to seek refuge in Armenia, not because Aliyev’s army drove them out but because they feared this would happen. There is no damage to civilian infrastructure such as hospitals, schools and housing or to cultural and religious sites in Karabakh, the UN said.

So everything is fine, the EU’s favourite dictator has accomplished the perfect war – without casualties, without destruction, without war crimes.

Moreover, under international law, Nagorno-Karabakh is the territory of Azerbaijan, so one may argue that this was going to happen sooner or later.

Aliyev succeeded, it seems, because Europe has forgotten how things went down in Munich in 1938.

Appeasing the dictator (Hitler in that case) was the basis of the 1938 agreement between France, the UK, fascist Italy, and Nazi Germany. It essentially provided for the German annexation of a part of Czechoslovakia called the Sudetenland, where more than three million people, mainly ethnic Germans, lived.

Giving Hitler “what he wants” to appease him was of course a shameful and wrong move.

Aliyev is suspected of gearing up for another war, whose aim is to establish a land corridor between the Azeri enclave of Nahichivan and mainland Azerbaijan – by grabbing Armenian territory.

And he has the support of Turkey, which has megalomaniac dreams about a bigger Turkic corridor, all the way from Anatolia to the Uigurs in China. The only piece of land lacking to complete this puzzle is Armenian territory.

Aliyev knew he would be under pressure in Granada, alone against four at the five-way talks, so he turned down the invitation. As a pretext, he used “pro-Armenian statements” by French officials and an alleged French decision to supply Yerevan with military equipment.

French Foreign Minister Catherine Colonna was the first Western official to visit Yerevan after the fall of Karabakh. But she didn’t announce a decision to supply Armenia with French armament. What she said was:

“France has given its agreement to the conclusion of future contracts with Armenia, which will allow the delivery of military equipment to Armenia so that it can ensure its defence.”

Giving “an agreement” for the conclusion of future contracts does not mean military supplies would start anytime soon. And France doesn’t have much to send anyway, as the supplies sent to Ukraine have dried up the stocks.

The real context: France is home to half a million ethnic Armenians and Colonna needed to visit Yerevan and say something that would sound nice and appropriate. Aliyev knows that, but the pretext was just too good to pass up.

The EU made a major mistake by not inviting Turkish President Recep Erdoğan to the five-way mediation talks in Granada. The Turkish president is a major player in the region, and a strong backer of Azerbaijan, and should not be absent from such talks.

If the Granada meeting was expected to be a milestone, indeed, it will be one, in terms of failed European policies.

The gathering will likely encourage Aliyev and Erdoğan to go ahead and grab from Armenia what they want. The Armenians can try to fight – but perhaps they had better surrender. It seems no one is really prepared to help them.