BACKGROUND: The main reason for the agreement was the decision on the construction of the Kars-Akhalkalaki-Tbilisi-Baku (KATB) railroad, linking Azerbaijan to Turkey and, potentially, to Europe. The sides also agreed to extend the linkage between their respective electricity transmission networks, and to expand the cooperation to encompass free the movement of people, goods, capital and services. The agreement builds on business partnership between the three states that started with the Baku-Tbilisi-Ceyhan pipeline project (BTC) that began to be constructed in September 2002 and was officially inaugurated on July 13, 2006. It then expanded to the Baku-Tbilisi-Erzurum gas pipeline currently being completed and coming online. If the previous projects relied on strong U.S. political backing and also the financial backing of the multinational oil companies, the new level of cooperation is almost entirely financed through local means. To finance the construction work on its territory, Georgia is receiving a 25-years loan from Azerbaijan, at US$220 million with a 1 percent annual interest rate. Turkey will invest the remaining part of the US$422 million. This financial windfall is linked with Azerbaijan’s stunning oil-fuelled economic growth, which is estimated to reach 34 percent this year. But Turkey and Georgia are also actively partnering bilaterally. On the same day, when the Presidents met in Tbilisi to sign the agreement, the Turkish company TAV completed construction of Tbilisi International Airport and started to operate it, as it will for the coming 15 years. The same company will modernize the airport in Georgia’s Black Sea port of Batumi, and the sides reached an agreement to operate it as a Turkish domestic airport as well. This is expected to cut travel costs for Turkish customers heading to nearby Turkish regions. IMPLICATIONS: The leaders of Azerbaijan, Georgia and Turkey, backed by the U.S. administration, have been at the forefront of the Baku-Tbilisi-Ceyhan pipeline project (BTC). Some analysts lambasted the BTC as a return to the Great Game, and the operating companies made sure to tone down its political aspect – which does not cross Russian territory, and firmly ties Georgia and Azerbaijan to world markets. However, the successful launch of BTC and the near-fininshed Baku-Tbilisi-Erzurum gas pipeline seem to have created a level of confidence among the participating states that enables them to deepen their partnership. This is good news for Europe as it is seeking stability on its expanded borders, and also craves for improved energy security following the consecutive Russian gas scares of the past two years. At least some European states seem to be taking note. On 18-20 February, the German Minister of Foreign Affairs, Frank-Walter Steinmeier, visited the three South Caucasus countries for the first time. Germany, which holds the EU presidency, works relentlessly to diversify EU energy sources. Symptomatically, his visit started in Azerbaijan whose President Ilham Aliyev had just returned from an official visit to Germany. The EU is actively trying to diversify its energy supplies in a drive to reduce its dependency on suppliers such as Russia (gas) and the Middle East (oil). A discussion on a possible future common EU energy policy was launched in March 2006, a key part of which seeks to raise the EU\'s profile in foreign energy policy. The Nabucco pipeline project, which plans to supply Southeastern and Central Europe with gas from the Caspian region (Azerbaijan, Turkmenistan and possibly Iran) received the political backing of key transit countries in mid-2006 in a move aimed at easing the EU’s dependency on Russia. Austria is leading a consortium of companies backing the project through its energy company, OMV. The pipeline is due to be fully completed in 2012. It is ironic that through closer cooperation in transport and energy fields, the countries of the region in fact are taking ownership of the TRACECA (Transport Corridor Europe Caucasus Asia or “New Silk Road”) project that the EU launched in 1993, but which never actually lived up to expectations. Now, with cash from natural resources, Azerbaijan and Kazakhstan are bringing the idea of linking China and Central Asia to Europe back to life. Indeed, Astana is becoming an important player in the region and inches closer to the alliance of the three. In June 2006, Kazakhstan committed to ship oil through BTC. According to the Azerbaijani transportation minister, Astana also expressed interest in participating in the KATB railway project. Kazakh businessmen already invested around US$350 million in tourist infrastructure in Tbilisi and in the Black Sea resorts of Georgia’s Ajaria province on the Black Sea. Kazakh companies manage Georgia’s largest telecom company, as well as Tbilisi’s gas distribution company. Tbilisi is profiting handsomely from the availability of cash in neighbouring states and improves its infrastructure to become a reliable transit state. While many European states still consider it risky to invest in Georgia and Russia is only hinting at winding down a politically motivated economic war, President Mikheil Saakashvili and Prime Minister Zurab Noghaideli successfully shopped for capital in the Gulf States last week. Saakashvili signed an US$817 million deal with one of the Arab emirates to go into Georgia’s real estate and trade. Prime Minister Noghaideli returned from Kuwait with a preliminary agreement to invest US$720 million in a cascade of hydro-power plants and an additional US$100 million in expanding the major East-West motorway – also a part of the transportation corridor. CONCLUSIONS: The post-Soviet space has seen many politically-fuelled grand alliances bite the dust. The CIS is a textbook example and the pro-western GUAM has not fared much better. A cordial alliance between Georgia and Ukraine seems to have fallen victim of Ukraine’s political in-fighting. But the economy-led project between Azerbaijan, Georgia and Turkey seems thriving, attracting additional funds from outside the immediate region and thus gaining momentum. The partnership is still vulnerable. It continues to exclude Armenia, and thus its contribution to improving the political climate in the South Caucasus region is limited. Moreover, as the momentum of regional co-operation builds, it will be more and more difficult for Armenia to integrate itself as an equal partner. Azerbaijan’s resistance to the recent Russian pressures has proven that the country became more assertive, but its political system still seems insufficiently stabilized through checks and balances. It is feared that the economic glut will only gloss over the underlining problems. In Georgia, conflicts in South Ossetia and Abkhazia are still glowing, giving Russia a strong political lever. Georgian observers fear that Saakashvili’s administration will find it harder to reconcile popular demand for finding solution to the conflicts with the need to preserve the stable security environment so direly needed for further economic integration and growth. But if the linkage between Azerbaijan, Georgia and Turkey remains vulnerable to internal and external pressures, it does hold great promise for regional cooperation and integration. This makes the region more secure, more reliable for the EU as a partner, and potentially extremely valuable for opening new avenues of cooperation between China, re-emerging Central Asia and Europe. AUTHORS’ BIO: Jaba Devdariani is the founder of Civil Georgia (civil.ge) and works at the OSCE mission in Belgrade. Blanka Hancilova, Ph.D., specializes in international development. The article reflects the opinion of the authors only.