BACKGROUND: On December 6, the lower house of the Russian parliament approved in a first reading the draft law that would legalize economic sanctions against politically unfriendly countries. The sanctions have already been in force against Moldova, to block wine imports and, more heavily against Georgia – including the cutoff of the transport and postal links. The Kremlin-dominated gas giant, Gazprom, has also announced plans to almost double the gas price for Georgia and Azerbaijan, while keeping considerably lower rates for Armenia in exchange for a sell-off of its gas transit network to Gazprom. High-handed policies by Russia are triggering a regional response. Georgia, which has unequivocally announced its intention to move away from the Russian sphere of influence, has been in talks with Azerbaijan, Turkey and Iran to find alternative energy supplies. Following Russian threats of cutting both gas and electricity deliveries to the country, Azerbaijan’s President Ilham Aliyev in a marked departure from the traditional balancing policy between Russia and the West announced plans to reduce or even cease oil deliveries through the Baku-Novorossiysk oil pipeline. Instead, these will flow through the newly inaugurated Baku-Tbilisi-Ceyhan (BTC) route. Aliyev also tasked the government to explore possibilities for switching energy consumption to internally produced reserves. Gazprom’s pressure on Azerbaijan has, according to analysts, been used by the Kremlin to seek to thwart potential transfers of Azerbaijani gas to Georgia, after Aliyev refused to join Moscow’s energy blockade of Georgia. Witnessing the increasing westward drift of Georgia and Azerbaijan, landlocked Armenia has been forced to re-evaluate its “policy of complementarity” by seeking closer co-operation with the NATO. An agreement on transit of NATO personnel and equipment has been signed. The country began to work on its Individual Partnership Action Plan (IPAP), and announced its intention to upgrade its NATO-compatible peacekeeping battalion to the size of a brigade. Armenian deputy Foreign Minister Arman Kirakosian said cooperation with NATO is “one of Armenia’s top foreign policy priorities and one of the bases for Armenia’s relations with the EU.” Armenia seeks the diversification of its energy sources and before the end of this year, a gas pipeline connecting Armenia with Iran should become operational. However, as a part of a package deal, Russia’s based Gazprom has bought this infrastructure in exchange of keeping the price of gas for Armenia at US$110, about 50 percent of the cost of gas in Georgia. The European Commission in a report on December 4 unveiled an upgrade to its European Neighborhood Policy, saying that if the EU cannot contribute to resolution of the “frozen conflicts” in the South Caucasus, it will fail in one of its key purposes. The plan also offers deeper economic integration and a more relaxed visa regime to the South Caucasus states. These developments are a testament to policy developments within the EU, which are likely to lead in the future to a more pro-active EU role in the South Caucasus. IMPLICATIONS: Energy security and the political tactics of the Russian government increasingly push its neighbours to revise their policies to minimize risks. Close ties with Russia become a liability even to its staunchest allies – including Belarus and Armenia, who are strong-armed into inefficient and expensive energy deals, but receive little long-term political benefits in return. In spite of earlier skepticism, the EU also starts to slowly drift towards offering a complementary track to Russia’s neighbours, while continuing to appease Russia in formal occasions. While Georgia has been most vocal in decrying Russian pressures, the government of Azerbaijan has been mostly keeping on par with Tbilisi in preparing the ground for closer integration with NATO and for closer economic cooperation with the EU. Pressure from Gazprom and the Kremlin is an affront to economically buoyant and increasingly self-confident Baku. President Alyiev in Brussels advocated the idea of wider usage of the energy reserves from the Caspian. Despite the pressure, the Kremlin still lacks a long-term vision regarding its neighbors. Moscow is in fact implementing a temporary, stop-gap policy in the Caucasus which aims at checking fast-growing Azerbaijan and preventing the stable pro-Western Georgian and Azerbaijani alliance, which could eventually drag Armenia more clearly into the pro-European orbit. The only trump-card the Kremlin holds against Azerbaijan is the lingering Nagorno-Karabakh conflict. Should Baku feel compelled to drift away further from Russia and embrace closer ties with NATO and the EU, Armenia will be forced to adjust by forging closer ties with the EU and NATO and possibly concessions to Turkey. The EU policy towards the region is unlikely to become more pronounced and pro-active in the short term. But the opinion is solidifying in the Brussels that Russia is a part of a problem, rather than of the solution in South Caucasus. The EU special representative to the South Caucasus, Peter Semneby, acknowledged that recent events have added weight to the Georgian argument that Russia is not a neutral participant in the peacekeeping arrangements and negotiation format. The EU is currently unable and unwilling to offer a membership perspective to the South Caucasus states, but the few carrots it can offer – a better trade regime, limited financial support, and improved visa regulations – are far more attractive than the persistently negative incentives from increasingly bullying Russia. CONCLUSIONS: By following a tough foreign policy line in its immediate neighborhood, Russia may have overplayed its hand. The energy scare forces the countries of the South Caucasus to focus on alternative supplies, while the political pressures make alternative alliances more desirable. The “frozen conflicts” remain the only lever Russia currently has to pressure the leaderships in Tbilisi, Baku and Yerevan. All three capitals look set to try – separately or in concert – to break Moscow’s monopoly on managing these. AUTHORS’ BIO: Jaba Devdariani is the founder of Civil Georgia (civil.ge) and works at the OSCE mission in Belgrade. Blanka Hancilova, Phd, specializes in international development. The article reflects the opinion of the authors only.