Wednesday, 13 February 2013

Azerbaijan Breaks Through into Eastern Europe

Published in Analytical Articles


Stephen Blank (02/06/2013 issue of the CACI Analyst)

On December 7, 2012 Russia began construction of its South Stream gas pipeline. Earlier in 2012 the European consortium behind the Nabucco pipeline formally submitted a revised scenario called Nabucco West to Azerbaijan and Azerbaijan and Turkey announced plans to build the Transanatolian pipeline or TANAP from the Shah Deniz gas field to Turkey’s border with Bulgaria. Nabucco West would then take gas all the way into Central Europe. Hence, Azerbaijan is now emerging as a potential major gas supplier to Eastern European states, whose governments are now eagerly courting Azerbaijan. This also means that Azerbaijan is emerging as Russia’s rival in this market.

BACKGROUND: Russia’s efforts to dominate Eastern Europe, isolate Ukraine from Europe or from leverage over Russian gas shipments, and control Caspian producers through the South Stream pipeline are well known and longstanding. Hitherto the only rival plan was the EU’s Nabucco project which has never gotten off the ground and may never do so. Instead in late 2011 the Turkish and Azerbaijani governments buried their differences and agreed to build the TANAP line which would be the first dedicated pipeline bringing Azerbaijani and potentially Central Asian natural gas to Europe through non-Russian means. If TANAP does become a reality, it will then be possible to connect Azerbaijan to Europe through several existing or planned interconnectors like the Italy-Turkey-Greece Interconnector (ITGI) or the TAP, or potentially Nabucco West which represents a substantially scaled down version of Nabucco and therefore a much less costly variant. Although only 10 billion cubic meters per year (bcm/y) is currently available from Shah Deniz to Europe through these pipeline plans, Azerbaijan’s increasing importance is fully on view. Indeed, Azerbaijani officials like SOCAR President Rovnag Abdullayev claim that by 2025 Azerbaijani gas exports will reach 40-50 bcm/y, thereby putting it fully in competition with South Stream.

Since the announcement of TANAP, Russia, already under pressure from the EU, the discovery of shale gas, and Europe’s ability to import liquefied natural gas (LNG), has accelerated construction of South Stream to preempt all competitors and preserve its hegemonic position in the CIS. But while Russia is still trying to acquire a dominant leverage in the Balkans, those governments appear ready to deal with anyone, while the EU now sees TANAP as a key element of its projected southern gas corridor. Ukraine has expressed an interest in buying into it to escape dependence on Russia, and SOCAR has become the major distributor of gas in Georgia.

Beyond that, Hungary’s State Secretary for Foreign Affairs and External Economic Relations, Peter Szijarto, called Azerbaijan a guarantor of European energy security, while many Eastern European governments are actively soliciting Azerbaijani gas and investments. Latvian Prime Minister Valdis Dombrovskis met with Azerbaijani President Ilham Aliyev and Prime Minister Artur Rasizade, urging them to consider investing in Latvia’s ports and infrastructures as well as aviation and energy. Romania’s Foreign Minister has discussed energy and transport cooperation with Azerbaijan’s ambassador. Bulgaria has publicly indicated its desire to develop bilateral energy relations with Azerbaijan and has indicated that it is interested not only in South Stream within which it participates, but also in the EU’s Southern Energy Corridor and in obtaining gas from Azerbaijan and TANAP either through Nabucco West or through the TAP, depending on which one is implemented. In Montenegro SOCAR is investing over 250 million Euros in resort areas.

Albania’s Foreign Minister Edmond Panariti announced in August 2012 that Albania, Italy, and Greece would sign an accord on the TAP to enhance their chances of getting the projected Southern Gas Corridor for Europe from Azerbaijan’s Shah Deniz gas fields routed through their territories, linking up with the TANAP project. Albania is clearly seeking to upgrade its relations with Azerbaijan, presumably in the hope that it becomes a favored junction for the TANAP pipeline. For his part, Prime Minister Sali Berisha hailed the TAP pipeline accord and Memorandum of Understanding among the parties, as did EU Energy Commissioner Günther Oettinger. That will presage further multilateral economic and energy cooperation among the parties.

IMPLICATIONS: Once South Stream is completed, it is supposed to ship 63 bcm/y of gas to Europe from Russia and Central Asia although there are reasons to doubt the availability of such quantities and Russia’s ability to produce it. Moreover, the costs will likely far exceed what has already been announced. For now Azerbaijan can only export 10 bcm/y of gas through the TANAP pipeline but that is the only game in town. If indeed, Azerbaijan can increase its gas production to the figure mentioned above or if the West can actually persuade other Caspian producers like Kazakhstan and Turkmenistan to ship gas through a Trans-Caspian pipeline and bypass both Iran and Russia, then there will be a competition in Southeast Europe from which European gas consumers and non-Russian producers such as Azerbaijan can only gain. Turkey will then be able to realize its cherished dream of being a real energy hub for all gas coming from the Caspian and for South Stream. It is also clear that Azerbaijan is gaining influence among East European states who are soliciting its investments as well as its gas and is in a position to contribute to this process of mutual strengthening of their economies and polities against Russian efforts to dominate them.

But for this virtuous circle to come into being and realize its full potential, major Western diplomatic support for Azerbaijan and associated other Caspian producers to thwart Russia’s likely efforts to intimidate them, as well as major investments in those countries, are equally necessary. Russia is clearly doing everything in its power to subordinate states throughout the CIS to its dictates, whether through the Customs Union (EURASEC), the Collective Security Treaty Organization (CSTO) and the emplacement of Russian bases in Ukraine, Armenia, Georgia, and Central Asia, or obstruction of any independent Trans-Caspian pipelines. Nevertheless, Russia is feeling the strain. It will now leave the Gabala air defense base and radar station in Azerbaijan and is apparently under similar pressure in regard to the Baikonur space center in Kazakhstan. At home, Gazprom is now forced to lower prices to European consumers who have other outlets from which to buy and there are signs of difficulties in maintaining production levels or oil and gas.

These pressures along with the EU’s investigation of Gazprom’s price fixing activities and efforts to impose the Third Energy Directive on EU members, which would bar Gazprom from owning both the sale of gas and its distribution throughout individual European countries, have led Russia to accelerate the construction of South Stream. The advent of the TANAP project undoubtedly plays a role in this too. But it is also entirely possible that as Azerbaijan becomes more capable of meeting European energy demands, Moscow will attempt to take action against it. This energy rivalry is at heart geopolitical because energy is the main export weapon of these countries and an instrument for acquiring lasting political and economic influence abroad. At the same time, Russia can only conceive of operating a monopoly and suppressing the independence of CIS producers, dreams which are far removed from Azerbaijan’s horizons. Moreover, Azerbaijan’s plans coincide fully with long-standing Western goals of diversification of producers and the ensuing enhancement of consumers’ energy security. Thus the question is whether or not the West will recognize what is now happening and finally step up to meet the challenge of defending its own interests and those of non-Russian energy producers like Azerbaijan in furtherance of its interests.

CONCLUSIONS: We must understand that it is not only Azerbaijan whose future depends on its ability to meet European and other consumers’ demands for energy, but also states like Kazakhstan and Turkmenistan. Russian pressure forced Turkmenistan to go into debt to the tune of US$ 8 billion to China to escape Russian hegemony. Given the successful obstruction to date of any viable outlet for its gas to Europe, it has announced a new emphasis on the Asia-Pacific. But it should not be hard to imagine what Ashgabat’s reaction would be if the road to Europe became open. In these efforts Azerbaijan has now become a trailblazer and much depends on the outcome of its newfound inroad into Eastern Europe.

AUTHOR’S BIO: Stephen Blank is Professor at the Strategic Studies Institute, U.S. Army War College. The views expressed here do not represent those of the U.S. Army, Defense Department, or the U.S. Government.

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