Azerbaijan’s Foreign Policy and the New Silk Road Tarek Shehata (April 2013)..

Motivation Two years ago, I didn't know what 'Azerbaijan' was; except that I guessed that it was a country. It all

started after my friend applied to the same contest, and won. From there on, picture and information

about Azerbaijan started to flow in. The same friend sent me the details of this year’s contest, and I

decided to write about Azerbaijan's foreign policy. I read the Wikipedia article –of course– and I was

surprised: “was Azerbaijan the first democratic Muslim state?!” “Azerbaijan is rich with natural

resources?!” Or “Iran and Russian on its boarders?!”

As a Muslim, an Egyptian, and an engineering student who loves Egypt and numbers; Azerbaijan was a

model. I then decided to write about energy's influence in Azerbaijani's foreign policy, because it

seemed relevant to my studies. Of course I found out later that it was not relevant. Not as I imagined it

at least. But I was too late already. I liked the topic.

Introduction A year after the collapse of the Russian Empire, the Azerbaijani National Council established the first

democratic republic in the east. It had been only two years before the Red Army takes over and turns it

into a Soviet republic. In 1991, Azerbaijan proclaimed itself independent of the Soviets. Since then, oil

played a crucial role in boosting the economy, developing the country’s infrastructure, and shaping

Azerbaijan’s foreign policy. (University of Michigan)

Azerbaijan is a small state surrounded by powerful neighbors, like Russia, Iran and Turkey, with

complicated relations. In such a case Azerbaijan’s foreign relations become an important tool for the

country’s survival. Additionally, being a secular state with Muslim heritage, a gateway connecting

Europe and Central Asia, and an energy exporting country, gives Azerbaijan a strategic importance for

world powers, which is an advantage, but harmful sometimes. Regional neighbor and international

players, like US and EU, definitely have conflicted interests in Azerbaijan. (Cornell, 2011; Makili-Aliyev,

2013)

In 2009, the conflicts between Russia and Ukraine on natural gas transit issues made natural gas prices

go high, as a result Europe suffered. It is due to this, along with political problems with Iran over their

nuclear program, Europe showed a lot of interest in Azerbaijan, as an energy supplier as well as a corner

stone of the ‘Southern Gas Corridor’ project to transport energy from the Caspian region to Europe. A

project such as the Southern Gas Corridor –or the New Silk Road as politicians like to call it– will shift

Azerbaijani’s economy. However, orbiting around the western powers is not the very good choice,

especially for a country surrounded by Russia and Iran. Any Azeri foreign policy strategy should take into

account possible impacts by different players. (Cornell, 2011; Makili-Aliyev, 2013; Ratner, 2012)

Due to the Southern Gas Corridor project, Azerbaijan is facing challenges to balance its foreign relations,

and realize its national interests. Some of these interests can be: resolving the Nagorno-Karabakh

dispute, resolving the Caspian Sea legal state dispute, developing a stronger economy, and preserving

regional stability and national security.

The essay will analyze European needs, and Azerbaijani potential as an energy supplier and transporter.

In the second section, four Azerbaijani’s interests will be discussed, and strategies will be suggested for

each one. Finally the interests of regional and international players will be discussed to be considered

when developing a foreign policy strategy.

European Energy Needs and Azerbaijan’s Potential During the Soviet republic, Azerbaijan experienced an industrial and infrastructural development. But it

was useless after 1991 independence because of the soviets’ strategy of integrating republics economy,

which made Azerbaijan and its neighbors from the collapsed Soviet Union dependent on Russia to

coordinate between their economies. Additionally, Azerbaijani’s oil industry was fluctuating during the

soviets. Oil production peaked in the World War II when Azerbaijan used to produce half a million

barrels per day. That record was not exceeded until 2006. Production, then, declined due to lack of

soviet investment, which affected Azerbaijani’s economy badly especially in the 80s. After the soviets,

the United States realized the geopolitical importance of Azerbaijan, and started projects to develop

Azeri’s energy infrastructure; Azerbaijan welcomed this partnership. (Cornell, 2011; Makili-Aliyev, 2013)

In order to get a feeling of how much can Azerbaijan supply Europe with energy, and natural gas

particularly, we need to consider figures about production, needs, and future projects. We will start with

a brief on European energy outlook. Europe has many challenges concerning future energy needs. An

important part of the European strategy is shifting to natural gas to address climate change policies;

which is, along with domestic production decline, going to increase EU gas demand. “The European

Commission forecasts that the EU will import over 80% of its natural gas needs by 2030.” (Ratner, 2012)

European Union states imported 11.6 trillion cubic feet of natural gas in 2011, 36% (4.2 tcb) of them

came from Russia. The following figure explains why some countries are more enthusiastic about finding

alternative gas suppliers than others. (Ratner, 2012)

As for Azerbaijan, the proven reserves are about 30 trillion cubic feet, making it the 26th in the world.

Production reached 589 billion cubic feet in 2010, while consuming about 350 bcf. Most exports goes to

Europe. A volume of natural gas production is transported to Russia. A small portion of production is

exported to Iran; in exchange Iran supplies Nakhchivan exclave with energy. By 2017, phase two of

developing Shah Deniz field should be completed, adding production of 560 bcf. As a result Azerbaijan

will be able to export about 800 bcf, which could replace 19% or the European gas imports from Russia if

Azerbaijan exports it all to Europe. In October 2011, Azerbaijan and Turkey signed accords to transport

700 bcf of natural gas through Turkey, of which Turkey will take 210 bcf for domestic use. (Azerbaijan-

EIA, 2012)

Transporting Azerbaijani’s gas to Europe, away from Russian and Iranian influence is a European priority.

Many proposals were suggested to transport gas through Turkey or the Black Sea; most of which was

rejected except the Trans-Anatolian Gas Pipeline (TANAP), the Trans Adriatic Pipeline (TAP), and the

Nabucco West Pipeline. Azerbaijan and Turkey signed accords in Jun 2012 to build the first stage of the

TANAP pipeline with capacity of 565 bcf, and to be completed in 2018. This leaves about 350 bcf of Shah

Deniz gas production for either Naboccue or TAP pipeline, to be decided in mid 2013 according to the

Shah Deniz Negotiation Team. On the other hand, Russia started construction of the South Stream gas

pipeline with a very small capacity (2.2 bcf) and to be completed in 2015. “According to some analysts,

the pipeline is not economically viable, but is being built by Russia to counter proposals to build the

Nabucco West pipeline and perhaps a trans-Caspian pipeline, so that Russia may maintain a dominant

gas presence in Europe.” (Ratner, 2012)

Azerbaijan is a strategic partner to Europe and the US. Europe needs natural gas and a reliable non-

Russian, non-Iranian gas transport. To the US, Azerbaijan has a geopolitical importance to reduce

Russian influence on the post-soviet states as well as Europe, the major Russian oil importer. In the next

section we discuss Azerbaijan interests and key causes that help defining Azeri’s foreign policy.

Azerbaijani’s Interests As we stated earlier, foreign policy is crucial to Azerbaijan survival, and Azerbaijan has been doing very

well at this. Azerbaijan is a member in the Organization of Islamic Cooperation, the United Nations, the

Commonwealth of Independent States, NATO's Partnership for Peace, and many other international

organizations. It is worth mentioning that Azerbaijani’s President was the chairman of a high level

United Nations Security Council meeting on terrorism in May 2012. In this section we will analyze

Azerbaijani’s interests that shape its foreign policy. (Newtimes.az, 2012)

Nagorno-Karabakh Conflict

By 1994, the Armenian military was occupying Nagorno-Karabakh region, leaving 600,000 internally

displace Azeri. (CIA World Factbook, 2013) The Nagorno-Karabakh conflict was the major driving force of

Azeri’s foreign policy in the past decade. According to a paper published by the Institute of International

Affairs (IAI) by Elizabeth Fuller:

“Azerbaijan’s motivation for prioritizing a solution to the Karabakh conflict is two-fold. First, to

remove the long-term security threat posed by the existence on Azerbaijani territory of an

Armenian-populated enclave with a highly trained military. And second, to enhance Azerbaijan’s

international prestige and further its aspiration to parlay its Caspian hydrocarbon wealth into

the status of the dominant power in the South Caucasus.” (2013)

Azerbaijan energy capabilities are an important tool in this conflict. First, these capabilities attracted

world powers intentions and increased Azerbaijani’s geopolitical weight. Second, energy cash can be

directed to strengthen Azerbaijani’s armed force for possible long-term objective of military act. Finally,

raising energy prices could be used to threaten political actions against Azeri’s efforts to resolute the

conflict, like the case of unfavorable development of Turkish-Armenia relations in 2009. (Fuller, 2013)

Legal status of the Caspian Sea

The conflict on the Caspian Sea borders goes to the 8th century. Caspian boarding states couldn’t decide

whether it is a lake or a sea, which will define each state’s share of the Caspian. In 2002, Russia,

Kazakhstan and Azerbaijan signed an agreement defining the share of each state; Iran however wants a

larger share. Solving this conflict will easily allow the construction of a pipeline connecting Azerbaijan

and Turkmenistan, and transport Turkmen’s gas to Europe, which will add to Azerbaijani’s economy.

Additionally, it will also allow Azerbaijan to explore for new oil and gas reserves in disputed territories of

the sea. (Kapyshev, 2012) In April 2013, a new Azerbaijani seaport was announced to be the largest

seaport in the Caspian. The International Sea Trade Port will receive goods from central Asia as well as

China, and transport to Eastern Europe. (AzerNews, 2013)

Iran is a significant potential supplier to the southern gas corridor, if only the political conditions allows.

(Commission of the European Communities, 2008) Until then, ending the dispute with Iran is going to be

hard, bearing in mind the poor relations history between the two. Azerbaijan negotiations with Iran over

the Caspian legal statue will be supported by the raise of Azerbaijani’s influence in the region as a result

of the project.

Strengthening Azerbaijan’s Economy

From 2002 to 2006, Azerbaijani’s GDP doubles, and growth rate peaked at 30% making Azerbaijan the

fastest growing economy in the world, thanks to oil industry and foreign investments from the US, UK

and Turkey. However, in 2008 the economy experienced a slowdown that is “temporary and linked to

technical problems in the oil industry” according to Jens Hölscher. Azerbaijan needs to maintain a

diversified economy, and to be careful from dependency over energy industries. Similarly, Azerbaijan

needs to be careful from dependency on a single power bloc, due to its geopolitical status. (Hölscher,

2012)

To strengthen Azerbaijan’s economy, policy makers have use the southern gas corridor to attract more

investment. They also need to plan and encourage countries, other than the US and EU, to invest in the

sectors that will grow as a result of the project, counties like regional friends. Additionally, energy

revenue can be directed to focus on new industrial sector or increase the efficiency of the economic

system.

Regional Stability and National Security

Nagorno-Karabakh conflict is vital to national security; however it is not the only one. Other threats may

include: ethnic and religious extremism, terrorism, and weapons of mass destruction. Azerbaijan faces

such threats by the contribution to international security, participation in international organizations,

strengthening defense capabilities, and more importantly, regional cooperation and bilateral relations.

These efforts will be supported by the increase of Azeri’s importance in the region if the southern gas

corridor project was implemented. The project will wills also integrate Azeri’s economy with other

regional potential suppliers, such as: Georgia, Turkmenistan, Kazakhstan, Iraq, Egypt and other eastern

countries.

Key Players and Their Interests This section will discuss key players and their interests in the Caspian and Caucasus regions, to get

understand the challenges that may face Azerbaijan when planning its foreign policy strategy.

Turkey’s relation with Azerbaijan can be concluded in “One nation, two states.” The two countries are

ethnically and historically related. Turkish dream of becoming an energy hub is another motive for the

brotherly relations between the countries. Additionally, Turkey views Azerbaijan as a link to central Asia

states which are ethnically and historically linked too. On another level, Azerbaijan supports Turkish

military action against the PKK. (Makili-Aliyev, 2013)

Russia, the successor the Soviet Union, feels the duty to keep Azerbaijan, a post-soviet state, in the area

of influence. Areas of cooperation include economic and military cooperation. “Russian is Azerbaijan’s

number one trade partner in the non-oil sector” claims Kamal Makili-Aliyev. In the region, Russia wants

to deepen its influence and maintain regional security. (Makili-Aliyev, 2013)

Relations with Iran always experienced tension. Iran is concerned about Azerbaijani’s relations with US,

Israel, and NATO. Additionally, it fears the separation of the northwestern part with Azerbaijani large

minority living there. On the other hand, Iran wants to increase its influence and spread its ideology in

Azerbaijan.

The United States realized Azerbaijan importance since its independence in 1991, mainly because its

location and natural resources. The US then invested in Azerbaijan starting economic and military

cooperation, which was welcomed by Azerbaijan. US’s main interests in the region are reducing Russian

influence and countering security threats by Iran. (Makili-Aliyev, 2013)

Conclusion Azerbaijani's energy reserves play an important role in shaping its foreign policy strategy, which has to

be balanced in order to survive in a location such as Azerbaijan's. In recent years, the development of an

Azeri natural gas reserve promised additional 560 billion cubic feet of production. This discovery drew

Europe's attention as part of EU's energy supply diversification strategy. Russia supplied Europe with

36% of their natural gas needs in 2011, whereas Azerbaijan can replace 19% of Russian natural gas

exports to European states. This added to Azerbaijan geopolitical influence in the region.

In the light of this new influence and export, Azerbaijan can realize its national interests by one of two

ways: use their influence to solve disputes, or use energy revenue to develop military capabilities or

support new economy sectors. Policy makers have to be careful however. They should consider possible

impacts by different players.

Acknowledgment I would like to thank my friends Khalid Gomaa and Abdelrahman Hesham for their help and support.

References An EU Energy Security and Solidarity Action Plan. (2008). Brussels: Commission of the European

Communities.

Azerbaijan - Analysis - U.S. Energy Information Administration (EIA). (2012, January 9). U.S. Energy

Information Administration (EIA). Retrieved April 15, 2013, from

http://www.eia.gov/countries/cab.cfm?fips=AJ

Azerbaijan’s new seaport to become largest in Caspian Sea. (2013, April 8).AzerNews. Retrieved April 15,

2013, from http://www.azernews.az/azerbaijan/51894.

CIA. (2013, April). The World Factbook – Azerbaijan. Retrieved April 15, 2013, from

https://www.cia.gov/library/publications/the-world-factbook/geos/aj.

Cornell, S. E. (2011). Azerbaijan since independence. Armonk, N.Y.: M.E. Sharpe.

Fuller, E. (2013, April 12). Azerbaijan’s Foreign Policy and the Nagorno-Karabakh Conflict. IAI. Retrieved

April 15, 2013, from www.iai.it/pdf/DocIAI/iaiwp1312.pdf

Hölscher, J. (2012, July 20). Azerbaijan in Transition. IAI. Retrieved April 15, 2013, from

www.iai.it/pdf/DocIAI/iaiwp1220.pdf

Kapyshev, A. (2012). Legal Status of the Caspian Sea: History and Present.European Journal of Business

and Economics, 6, 25. Retrieved April 15, 2013, from

http://economics.journals.cz/documents/Vol6/09%20Ardak%20Kapyshev.pdf

Makili-Aliyev, K. (2013). Azerbaijan’s Foreign Policy: Between East and West....IAI Working Papers, 13.

Retrieved April 15, 2013, from http://www.iai.it/pdf/DocIAI/iaiwp1305.pdf

National Security Concept of the Republic of Azerbaijan. (2007). Azerbaijan. Retrieved April 15, 2013,

from http://www.un.int/azerbaijan/pdf/National_security.pdf

Newtimes.az. (2012, December 5). Azerbaijan’s foreign policy: priorities and realities | Newtimes.az -

Analytical Information Portal. Newtimes.az – Analitik-informasiya portalı. Retrieved April 15,

2013, from http://newtimes.az/en/organisations/1079/#.UWxpX7X-GSp

Ratner, M. (2012). Europe's energy security options and challenges to natural gas supply diversification.

Washington, D.C.: Congressional Research Service.

Turkish Studies - Azerbaijan: Brief History. (n.d.). University of Michigan. Retrieved April 15, 2013, from

http://www.umich.edu/~turkish/links/turkic