BACKGROUND: Following the Georgian and Ukrainian velvet revolutions and the serious deterioration of Russia’s influence in these republics, Kremlin strategists have decided to increase the price of energy supplies to select former Soviet republics. This was done in an effort both to show to the former vassals where the real power center in their neighborhood lies, and to discourage their aspirations to join Western institutions such as NATO and the EU. The policy of using energy tools for geopolitical dominance over former Soviet republics began in earnest with President Putin’s presidency in 2000. Energy giants such as RAO-UES, Gazprom, Rosneft, and Transneft—most controlled by the Kremlin—became the harbingers of a new Russian “liberal empire” policy in the Caucasus, as Anatoly Chubais termed it. This policy consisted of obtaining as many local energy assets as possible across the CIS, thus placing the CIS republics into a position of economic and thus political dependence on Russia. The latest round of energy wars and price increases for gas deliveries signify a new step in Russia’s game of “carrots and sticks”. Although Ukraine and Georgia were the primary targets of this new “sticks” policy, it applied to several other CIS countries, including Azerbaijan. Azerbaijan currently has domestic gas consumption at the level of 10-11 billion cubic meters (bcm), but its own domestic production is only at half of that level, thus forcing the government to seek alternative sources of gas supply. During Soviet times, the country imported gas from Russia, which was halted by 1997. In 2000, harsh winters and severe shortages of electricity in Baku and the other regions of the country pushed the Azerbaijani government to again buy Russian gas for electrical power generation as well as for residential heating. This supply of gas steadily increased, and in 2004 Gazprom signed a new contract with the Azerbaijani government on the delivery of 4 bcm of gas annually for a period of 5 years. The contract was worth $208 million (at the price $52 per 1,000 cubic meters). Later the price increased to $60 per 1,000 cubic meters. At the end of 2005, Gazprom officials notified Azerbaijani government that they would reconsider the price of the delivered gas. This news did not come as a shock to the officials in Baku, as they already expected such moves. Yet it was unpleasant news for President Aliyev’s administration, which continuously claims that the lives of ordinary Azerbaijanis are improving. Although Azerbaijani-Russian relations have been on the rise since 2000, this recent move by Gazprom put that assumption at risk. Moreover, the move was perceived in the Azerbaijani capital as a breach of the initial contract signed the previous year. Nevertheless, unlike Georgia, Armenia and Ukraine, Azerbaijani officials decided not to make a diplomatic scandal of the new offer by Gazprom and quietly agreed to the new terms. The new contract was signed at the price of $100 for 1000 cubic meters. At the same time, the Azerbaijani government has decided to leave the price of gas for domestic consumers at the same level, subsidizing the price increase from the state budget.

IMPLICATIONS: The Azerbaijani government’s quick decision to agree to Russian demands for the price increase can be explain threefold. First and foremost, Azerbaijani officials understand that the purchase of Russian gas carries a temporary nature. The discovery of a major gas field at Shah Deniz (reserves estimated at 700 billion cubic meters) in 1999 by a BP-led consortium made Azerbaijan a potential net gas exporter. In March 2001, Azerbaijan signed a 15-year agreement with Turkey to supply gas to that country and for that purpose, construction began of a South Caucasus Gas pipeline connecting Baku to the Turkish city of Erzurum via Tbilisi. Thus, it is clear that within several years Azerbaijan will not need Russian gas any more and will be able to satisfy its domestic needs on its own. With this in mind, ruining the existing valuable and hard-built relations with the northern neighbor on eve of the widely expected progress in the Nagorno-Karabakh peace process was not in the national interests of the Azerbaijani government. Secondly, the beginning of the oil export from the Azeri-Chirag-Guneshli field in 1997 started supplying Azerbaijani government with much needed cash. The newly created State Oil Fund has already accumulated $1,2 billion. Thus, paying several million dollars from those coffers to satisfy Gazprom and the Kremlin suited President Aliyev’s agenda more than starting a brawl with President Putin and falling into the category of “unfriendly nations.” Finally, refusing to accept Gazprom’s terms and risking losing the supply of much needed gas during the winter time would spoil President Aliyev’s image domestically as the country moves away from contested parliamentary elections and the ruling party promises more wealth to the population. Despite these factors, the increase of the gas price by Gazprom will leave negative scars in the Azerbaijani-Russia relations. By acting in such monopolistic and unilateral ways, Gazprom and the Russian Government lose their image as a credible partner and energy supplier in the eyes of Azerbaijani government. This is important, because Gazprom, besides gas delivery, has expressed an interest in other projects in Azerbaijan, including offshore oil and gas field development. Gazprom officials have also advocated in the past the export of Shah-Deniz gas through the Blue Stream pipeline. These potential projects as well as the desire of another Russian energy giant, RAO-UES, to purchase electricity distribution networks and power generation facilities are now likely to be put on hold, as the Azerbaijani government realizes the potential danger of over-reliance on Russia for energy supply. Besides, there is a growing fear among members of the Azerbaijani ruling elite that outside powers have noticed the growing liquidity of the Azerbaijani government, and will try to use any reason to help themselves to these funds. In fact, Gazprom’s price increase is interpreted by many analysts in Baku simply as an attempt by the Kremlin to gain some of Azerbaijan’s petrodollars.

CONCLUSIONS: It is clear that Azerbaijan is not Ukraine, Georgia or Armenia when it comes to Russian gas policies. Though limited at the moment, Azerbaijan has its own sources of energy and unlike Georgia and Ukraine, it does not depend solely on its northern neighbor for energy supplies. At the same time, unlike Armenia, Azerbaijan does not have major debts to Russia and thus can not risk to be forced into a debt-for-asset type of deal that Russia has implemented to gain control over assets in other CIS republics. Thus, the energy tool as an instrument of Russian policy in Azerbaijan is doomed to failure. Not only will it prove unable to make the Azerbaijani government more pro-Russian than it currently is, but it will further deepen the distrust in Russian companies, built since early 1990s. The decision to increase gas prices for Azerbaijan failed to bring any political gains and only allowed Gazprom to extract extra commercial revenues from cash-rich Azerbaijan. With the way it was done, this will in turn bear serious negative consequences for the advancement of Russian economic interests in Azerbaijan in the long run.

AUTHOR’S BIO: Fariz Ismailzade is a Baku-based freelance writer.