BACKGROUND: The uncertainty created by the deteriorating relationships between the Georgian central government in Tbilsi and the Ajarian leadership in Batumi has caused producers and shippers from the Caspian to seek alternative transportation routes. This process has accelerated since the “economic blockade” of Ajaria in March. Although it was in theory a blockade of Ajaria only, its impact was felt from Caspian producers to European refineries. After a slight reduction of transshipping in March (from an expected 850,000 MT to 750,000 MT), volumes have plummeted in April as producers and shippers have been attracted to other routes. The Batumi oil terminal will transship close to 300,000 MT in April and May respectively, assuming there will be no further escalation of tensions. This is the worst figure in the last four years. This development is seriously affecting energy development in the region. For more than a century, since the late nineteenth century, Batumi has been a major export outlet for oil produced in the Caspian. Following the construction of Baku-Supsa early oil pipeline in the late 1990s, and particularly after completion of ChevronTexaco-led CPC pipeline, which ships oil from Kazakhstan to the Russian port of Novorosiisk, volumes shipped to Batumi seemed to be declining. However, privatization of the Batumi oil terminal in 2001 and substantial investments in the reconstruction and renovation of those facilities helped Batumi to reemerge as a major port for the export of Caspian oil and oil products. In 2003, the terminal shipped almost nine million tons of oil and oil products, delivered to the port by the Georgian Railway system. Those shipments brought substantial revenues to the Georgian economy through railway tariffs and other revenues.

IMPLICATIONS: The direct impact of the decline in volume will be a combined loss of tens of millions of dollars of tariff revenues to the Georgian Railway and the Batumi terminal. Investors in Batumi terminal will scale back their investment plans to double the current capacity of the terminal up to 18 million tons a year. It will be extremely hard for Georgian Railways to maintain last year’s scale of operations, make required investments, or make a substantial contribution to the state budget. The direct beneficiary of Ajarian instability has been Iran. The Iranian government has invested heavily to expand its Neka port in the South Caspian. Volumes through Neka have doubled in comparison to last year’s shipments and with the doubling of Iran’s pipeline capacity from the Caspian to Northern refineries, due to be completed in the next few months, volumes will continue to increase at the expense of the Azerbaijani-Georgian route. Another beneficiary of the developments in Georgia is Russia. Tensions in Ajaria serves multiple objectives of Russia: First, Russia is not interested in Georgia’s integration into Euro-Atlantic structures, and clearly, additional serious internal conflict distances Georgia from this declared goal. Secondly, Russia is not interested in the resolution of conflicts in Georgia. The conflict in Ajaria gives Russia an additional chance to play the role of arbiter and peacekeeper, and to move the attention of Georgia and International community from Abkhazia to Ajaria. Third, the serious conflict in Ajaria will put in doubt Georgia’s ability to serve as a reliable transit country for Caspian hydrocarbons, and while it will not affect the development of the Baku-Tbilisi-Ceyhan oil pipeline project, it may substantially reduce shipments of Caspian oil and oil products via the Azerbaijani and Georgian rail system. This is clearly in the long-term interests of Russia, whose policy toward Georgia is unlikely in the long term to be smoothed by the departure of Eduard Shevardnadze from power. Russia’s policy towards Georgia is determined by Georgia’s pro-Western orientation and its growing transit potential, which helps to transport Caspian oil and gas outside Russian control, and which contributes to alternative energy supplies to Central and Eastern European markets, currently dominated by Russia.

CONCLUSIONS: Georgia and its Western allies already made a strategic mistake in Summer 2003 by allowing Russia’s UES to take over Tbilisi’s electricity distribution company Telasi, power-generation facilities near Tbilisi, and part of the strategic high voltage transmission lines. In addition to direct threats to energy security of Georgia, that decision created major obstacle for East-West gas transit project from Azerbaijan to Turkey, since a critical element of Georgia’s natural gas market, the Gardabani Power Station, ended up in Russian hands and most probably will continue using Russian natural gas in the future. It also helped Russia consolidate its energy position in Armenia and in the South Caucasus in general, which mitigates the energy independence of those countries. To balance the Russian influence in Georgia, it will be necessary to allocate considerable time and resources to defuse the situation in Ajaria, and to bring control over the power sector back to the Georgian government, with the aim to privatize it later, once the power system will be more stable and less dependent on a single source of import of electricity and natural gas. The stability and energy independence of Georgia will contribute to full-scale utilization of East-West energy corridor, where Batumi will always play the critical role of a maritime gateway.

AUTHOR’S BIO: Mamuka Tsereteli is the Executive Director of the America-Georgia Business Council and Adjunct Professor of international relations and Political Risk Analysis at American University in Washington, D.C. His areas of interests include economic security, political and economic risk analysis and mitigation strategies, and Business development.