Analysis: Turkish-Armenian political thaw could have major impact on Caspian energy exports

By JOHN C.K. DALY, UPI International Correspondent  |  April 27, 2009 at 6:23 PM
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WASHINGTON, April 27 (UPI) -- During the past year, at a time of record-high energy prices, many European officials have decried what they see as Russia's state-owned Gazprom natural gas company being used as a tool to promote the Kremlin's policies by indulging in hardball "pipeline politics." Gazprom's favored tool is variable prices being used to send political signals to recalcitrant former Soviet republics such as Ukraine and Georgia, with the pressure ramping up in direct proportion to a government's inclination to look westward.

Of all the former Soviet republics, Armenia receives the most preferential pricing; effective April 1, Armenia pays a mere $154 per thousand cubic meters for Russian gas. In contrast, three months ago Gazprom Deputy Chairman Alexander Medvedev noted, in reference to Gazprom's intention to ramp up Ukraine's cost from $179 per tcm to $250 per tcm, "The rest of Europe pays more than $400 for each thousand cubic meters of gas it gets from Russia."

However, great political changes are moving in the southern Caucasus under one of the region's last "frozen conflicts," which may well spell the end for Armenia's cozy arrangement for subsidized Russian gas. The longstanding triangular dispute between Turkey, Azerbaijan and Armenia over the 1988-1994 Azeri-Armenian conflict, during which Turkey in 1993 closed its border with Armenia in a show of solidarity with Baku, has recently seen Ankara and Yerevan tentatively moving toward normalizing relations.

On April 24, the Turkish and Armenian foreign ministries announced, "The two parties have achieved tangible progress and mutual understanding in this process, and they have agreed on a comprehensive framework for the normalization of their bilateral relations." After the implosion of the Soviet Union, Turkey was the first country to recognize Armenia's independence, but the positive relations were short-lived, and they were subsequently subsumed into the Azeri-Armenian conflict. After the Armenian-Turkish road map was announced, the Azerbaijani Foreign Ministry said, "The normalization of Turkish-Armenian relations must proceed in parallel with the withdrawal of Armenian troops from the occupied lands of Azerbaijan."

Should the framework result in full normalization of relations, it will represent yet another turn in the kaleidoscope of Caucasian politics, and Baku, worried about potential abandonment by its erstwhile ally Turkey, is making its displeasure widely known. If the discussions result in normalization, then it will prove a major step toward resolving a 20-year-old dispute, the longest remaining "frozen conflict" on former Soviet territory, which predates the collapse of the Soviet Union by three years.

A shooting war between Armenia and Azerbaijan broke out in February 1988 as both nations claimed the Nagorno-Karabakh enclave, then administered by Baku. By May 1994, when Azerbaijan and Armenia signed a cease-fire agreement ending active hostilities, the conflict had caused thousands of casualties, created hundreds of thousands of refugees on both sides and left Armenian armed forces occupying swaths of Azeri territory, including Nagorno-Karabakh and seven neighboring districts.

The conflict was used by Russia as a bargaining chip to retain influence in the Caucasus, liberated from Soviet control by the 1991 collapse of the Soviet Union. As both Georgia and rising petro-state Azerbaijan drifted out from under Moscow's control, Armenia by default became Russia's major Caucasian ally. A thaw between Turkey and Armenia would recast this strategic reality, but, as with most issues in the Caucasus, they remain complex as Azerbaijan remains deeply unhappy with the recent Turkish-Armenian rapprochement.

Last but hardly least, a normalization of Turkish-Armenian relations, if Azerbaijan could be mollified, could have a dramatic impact on any potential future export routes for the rising volumes of Caspian oil and natural gas, as routes transiting Armenia would be far shorter and less expensive than those developed up to now.

The crown jewel of Western investment in the Caspian is the $3.6 billion, 1,092-mile, 1 million-barrel-per-day Baku-Tbilisi-Ceyhan pipeline, which became operational in May 1996. BTC transits high-quality Azeri crude from Azerbaijan's Caspian offshore Azeri-Chirag-Guneshli fields to Turkey's deepwater Mediterranean terminus at Ceyhan.

Given the state of relations between Armenia and Azerbaijan at the time of BTC's construction, Armenia was excluded from hosting the pipeline, but Azerbaijan in turn was forced to pay a price for its unwillingness to negotiate, as BTC was forced to take a lengthy detour around Armenia, adding substantially to the project's cost and construction delays.

The pipeline's contorted geography dovetailed nicely with Washington's support for multiple pipelines, so long as they avoided both Russia and Iran. BTC proved a financial windfall for both producing nation Azerbaijan and transit nations Georgia and Turkey. In the first half of 2007, BTC revenues boosted Azerbaijan's gross domestic product growth to an astounding 35 percent, while Georgia received annual transit fees averaging $62.5 million. Given that BTC covered 155 miles of Georgian territory but 669 miles across Turkey, Ankara's share of transit revenues was projected at approximately $200 million per year. Yerevan could only sigh and watch from the sidelines.

Not that Western pipeline schemes have ended; following the recent Gazprom-Turkmenistan dispute, interest is reviving in a Trans-Caspian Pipeline from Turkmenistan passing through Azerbaijan. While TCP was initially proposed as running through Georgia, a thaw in Turkish and Armenian relations could divert it southward, cutting many miles and millions of dollars off construction costs.

Such a change would not be without political risk, however. The BTC could afford to divert around Armenia since it was not, in any military sense, a significant threat to the project or the states involved, but in the case of the TCP, it is most unlikely that either Russia or Iran would stand idly by while the TCP was built.

Azeri displeasure with "blowback" from the discussions is already evident. Gazprom is on the verge of new deals with Azerbaijan that promise to bring Azerbaijani gas back into Russian pipelines, specifically its envisioned South Stream pipeline, which, if constructed, would transit under the Black Sea from Russia to Bulgaria and then split into two pipelines -- one through the Mediterranean to Italy, the other through Serbia and Hungary to Austria.

Not wishing to be left out in the cold, Azerbaijani and Armenian Presidents Ilham Aliyev and Serzh Sargsyan have agreed to meet in Prague, Czech Republic, on May 7 to continue the direct negotiations to settle the Nagorno-Karabakh conflict.

Russia's reaction to the Turkish-Armenian thaw? For those reading ulterior political motives into Gazprom policies, ArmRosGazprom spokeswoman Shushan Sardaryan announced last week that gas supplies to Armenia would be halted from April 23 to 26 for "maintenance work."

Baku is not above sending an energy signal to Ankara, either, as Azerbaijan decided to the raise the price of the natural gas supplied to Turkey as of April 15. Turkish Prime Minister Recep Tayyip Erdogan responded that for Baku to raise natural gas prices when oil prices were falling was "bizarre."

Throw in Armenia's insistence that Turkey recognize the events in eastern Anatolia in 1915 as genocide, and the adjective seemingly best suited for prospects for a final pacification of the southern Caucasus, despite its energy potential, would seem to be "murky." As geopolitical alliances thaw and shift, the only apparent certainty is that Caspian energy producers will signal their displeasure to neighboring client and transit nations with more "bizarre" behavior.

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