The January 14 meeting by east European leaders in Batumi, Georgia, marked an important step toward the realization of the southern energy corridor. Among them, Ukrainian and Azerbaijani participation is of utmost importance. Both countries demonstrate a certain degree of pragmatism in their relations with both Russia and the West, trying to reap the benefits of partnerships on both sides. Azerbaijan’s duality is shown by its agreement to sell 1 bcm of gas to Russia while still supporting the southern corridor. During the 2010 Presidential elections in Ukraine, Viktor Yanukovich spoke of mending Ukraine’s relations with Russia while simultaneously integrating with Europe.

BACKGROUND: Azerbaijan surprised the international community in the summer of 2009 by holding negotiations with Russian energy giant Gazprom on supplying 500 million cubic meters (mcm) of gas annually. Since this agreement did not include a cap on the amount of gas to be sold, Azerbaijani gas sales to Russia went up to 1 billion cubic meters (bcm) annually. At the same time, Azerbaijani representatives declared the readiness of Azerbaijan to supply crude oil through Georgia and then by ships to Ukraine for further use in the Odessa-Brody-Plotsk-Gdansk pipeline (OBPG). Moreover, President Aliyev made statements supporting the Nabucco gas pipeline as well as providing crude oil for the OBPG pipeline. Azerbaijan can use its Georgia-based oil terminal Kulevi, which can handle 10 million tons of crude oil annually (ca 73 million barrels) to ship oil to Odessa. Given Russia’s key position in regional energy security, this was a good way for Azerbaijan to remind Europe that Azerbaijani oil and gas might be sold elsewhere.

Ukraine is also starting to apply a pragmatic approach to energy issues, and will most likely stick to it with Viktor Yanukovich as president. It is widely discussed whether Yanukovich’s ascent to power will steer Ukraine away from Europe, whereas Yuliya Timoshenko’s victory would have brought Ukraine closer to the Euro-Atlantic community. Yanukovich’s speeches during the 2010 Presidential campaign, however, implied that Ukraine would adopt a different strategy by looking for a niche role as a bridge between Russia and the EU, that Ukraine will be integrating with Europe and resume its partnership with Russia.

The EU and Russia are becoming increasingly interdependent economically. Therefore, for Ukraine to become more integrated with the EU, it needs to maintain stable and cooperative relations with Russia. This would bolster its image of a reliable energy and trading partner. In addition to playing the Russia–EU card, Ukraine is also taking independent steps towards energy supply diversification. The OBPG pipeline demonstrates Ukrainian support for the southern energy corridor and shows its aspirations to play the role of a key transit country. The importance of this move should not be overlooked: according to the U.S. Special Envoy for Eurasian Energy Richard Morningstar, stability in the region, cooperation among neighbors, and economic growth in Ukraine and the South Caucasus represent significant interests on part of the U.S.

IMPLICATIONS: Russia’s importance is very well understood in both Ukraine and Azerbaijan. Russia is a large trading partner and the biggest energy provider to the EU. Warmer relations between Russia on the one hand and Ukraine and Azerbaijan on the other would ease some tension in the region and bolster the sovereignty of Ukrainian and Azerbaijani foreign policy. It will give them an opportunity to benefit from trade with the largest player in the region, Russia, while pursuing independent energy projects aimed at providing energy security for the EU. Such stabilization would also create strong interdependency between Russia and the two countries, which would allow for increased maneuverability of all parties in the region. Energy policy and energy security is now an important issue for Ukraine.

Ukraine and Azerbaijan are important countries in Eurasia due to their strategic location and, in Azerbaijan’s case, large energy resources. Their partnership with Russia will lessen the division within the EU over whom to support with respect to Russia or other energy transit states in the CIS. If both Ukraine and Azerbaijan continue to show pragmatism toward Russia as well as the West and also seek to maintain a role in diversifying the EU’s energy security, the OBPG oil pipeline will have great chances for realization. So far, there have been five business plans for the OBPG pipeline initiated by Ukraine, Azerbaijan, Georgia, Lithuania and Poland. All five business plans concluded that the pipeline project is feasible both economically and technically. The pipeline’s chances also became stronger with the presence of the representatives from Kazakhstan, which is another potential supplier of oil to the region, at the conference in Batumi.

Besides political benefits, supplies of Caspian oil across Georgia to the OBPG pipeline will provide an additional boost for the economies of Azerbaijan and Ukraine. Economic growth in important yet economically disadvantaged transit countries like Ukraine is necessary in order to mend its relations with international organizations such as the IMF and the World Bank. Currently Ukraine has a very high budget deficit, which is partially covered by the subsidies of the IMF. Ukraine’s participation in new energy corridors and exploitation of its location between the EU and Russia, however, would help it achieve sustainable levels of economic development. Economic development, regional cooperation, and deeper regional interdependency will have a positive effect on political stability in both Azerbaijan and Ukraine. Domestic as well as regional stability will create a favorable investment climate in these countries. The inception of projects like the OBPG oil project will also set the pattern for further development of Ukraine’s gas transit capabilities by helping it to attract cash inflows to revitalize its gas transportation system. One such opportunity is for processed Azerbaijani liquefied or compressed gas to be transported from Georgia to Ukraine. Georgia is already support the plans. According to Georgian Prime Minister Nika Gilauri, it intends to build an LNG plant with the capacity for processing 30 bcm of Azerbaijani gas annually.

The OBPG with Caspian oil can also become a compensation for the southern ‘Druzhba’ oil pipeline that crosses the territories of Ukraine, Belarus, Slovakia, and Poland. Russia’s construction of the Baltic Transportation System – 2 will divert oil resources from the southern branch of ‘Druzhba’ to Primorsk to the Baltic Sea, which will have negative economic consequences for Ukraine as a transit country.

Moreover, Ukraine has seen a gradual decline in the volumes of oil transported via pipelines crossing its territory. Therefore, in order to revitalize its oil transportation industry, the newly elected president of Ukraine will need decisive measures to find alternative oil supplies, which could be Azerbaijani and Kazakh oil.

CONCLUSIONS: Given the balanced approach to regional foreign policy demonstrated by Azerbaijan and Ukraine, the EU and the U.S. should not lose the momentum to engage with the region. Ukraine’s and Azerbaijan’s pragmatism toward Russia facilitates their sovereign pursuit of alternative energy corridors such as the OBPG oil pipeline. A new government in Ukraine could provide a fresh start for Eurasian energy projects, as well as a revision of relations with Russia. Azerbaijan has also repeatedly confirmed its support for the southern corridor. These initiatives should be noted and endorsed by both the EU and the United States.

AUTHOR’S BIO: Tamerlan Vahabov is a Research Associate at the International Management Institute, Kyiv.