YETT Young
Experts’ Think Tank
Erin
Brocklebank-Johnson
POLITICS OF OIL IN TRANSCAUCASIA
Introduction:
The newly independent states of the Transcaucasia region have recently found themselves to be
at the centre of a commercial triangle which involves the United States, Russia, and oil. This region which encompasses Armenia, Azerbaijan,
and Georgia
is important internationally because of its ‘virgin’ oil fields and its
‘vulnerable’ governments. Following the
collapse of the Soviet empire, these states gained a shaky independence from Russia. As a result of proximity and history, the
influence of the Russian
Federation is prominent and on going in this
area. The United States has found itself
trying to maintain a precarious balance between not stepping on the toes of the
Russian government and supporting (fiercely at times) its commercial interests
in the Caspian[i]
region. And not surprisingly, Transcaucasia has its own
policies regarding the extraction and transportation of oil. It looks to the US
for economic and military support, yet is also engulfed in the contradictory
foreign policies of the Russian
Federation.
This essay seeks to
examine the nuances of this triangle, particularly with reference to the
geopolitical obstacles to oil extraction and transportation and the shared
responsibilities of the three governments and various investors involved. I will argue that no matter how much money is
pumped into and how much oil is pumped out of the region, the geopolitical
problems in Transcaucasia
will still exist and may even worsen.
Therefore, the political problems, which investors call ‘obstacles’,
must be dealt with pre-investment. It is
not feasible to invest first, and look to the accumulation of wealth as a
precursor to solving complex ethnic conflicts.
It is certainly not the intent of this essay to say that investment must
be halted. Instead, these countries must
be given a chance, between now and the actual ratification of oil deals, to
work with non-governmental institutions, other governments, and international
organizations in an attempt to stabilize their governments and find suitable
arrangements for long term solutions to the ethnic conflicts in the area.
This discussion will
begin with an examination of the actual oil potential of the region. Contention prevails in international debates
regarding the amount and actual investment prospects. Next I will discuss the position and the role
of the three Transcaucasus states: Georgia, Armenia
and Azerbaijan,
and analyze the broad effects of oil investment from the mindset of their
respective governments. It is only
fitting that this be followed with an outline of the perspectives of both the US and Russian
foreign policies regarding the extraction and transportation of oil from this
region. What we will find is that although
this region may prove relatively lucrative in area of oil trade, there are many
geopolitical ‘obstacles’, which may become inflamed and/or cause a bottleneck
in investment. This part of the
discussion will lead us to realize that the most profound of these
complications is ethnic disputes in the oil trade area.
The essay will then turn to the complexities of
shared responsibility, between the interested states, both domestic and
foreign, and the investors involved regarding solutions to political problems
in the region, namely corruption and ethnic conflict. The essay will conclude with a discussion
regarding the present state of oil deals in the Transcaucasus
region, along with a prescription of possible ways to include outside
assistance pre-investment, in order to ensure a stable long term
investment climate which is both advantageous for all peoples of the region,
and the external governments and investors involved.
The Oil in the Region:
The Transcaucasus
region, snuggled between the Caspian and Black Seas,
is in an exceedingly oil rich area.
Although the actual numbers of potential oil barrels varies from one
source to another, it can be estimated that it might be as high as 200 billion
barrels[ii],
making it a close second to Iraq, or as low as 15 billion barrels[iii],
which questions the very profitability of investment in the area. Because of
the vast difference between these two numbers, there are various levels of
contention regarding the actual oil potentiality in the area. Some theorists believe that it would be
pointless to engage in an extremely expensive oil venture in the Caucasus, while others argue that it is significant
enough to be lucrative. For the purposes
of this essay, we will not spend much more time on this debate, and instead
settle that the amount of oil in the Caucasus
is high enough to be immensely profitable.
Throughout the
twentieth century the oil from this region played a vital role in supplying
many foreign countries during times of both war and peace. During the First World War, Germany became quite interested in exploiting
the oil fields of Baku
for their wartime effort.
In summer 1918, the New York Times argued that
safeguarding Caucasian oil field should be a priority
for the Allies, and that they had to be prepared to devote
a significant military force to this project.[iv]
During the Second World War, Hitler also tried to use oil from the Caucasus to facilitate his ambitions of
expansionism. As a result of the Nazi-Soviet
Pact of 1939, Caucasian oil made up one third of the energy resources imported
by Nazi Germany.[v] In times of peace following the Second World
War, the oil fields of Transcaucasia
became the pawn in the games between the Turkish and Armenians, eventually
falling under Soviet control. With the
collapse of the Soviet Empire in 1991, Armenia,
Azerbaijan and Georgia found
themselves newly independent, with almost exclusive rights to their own
resources. I say almost exclusive because it must be understood that although they
had claimed independence from the Soviet Empire, they were still greatly
influenced and pressured by their former ‘mother’ country.
The biggest oil fields
in the Transcaucasus region are in Azerbaijan. While Georgia
and Armenia are much less
significant in terms of reserves, Georgia has a very important role
to play in oil transport. Most of the
large pipelines which have either been started or are planned for the future
will run through each of these countries.
The Baku-Supsa pipeline which begins at the port of Baku
in Azerbaijan, ends at the port of Supsa
in Georgia. Ports such as these have become extremely
profitable for the host countries. The
infamous Baku-Ceyhan pipeline runs from Baku again, through Georgia
and ends up in the port of Ceyhan in Turkey. Much of the oil in the Caspian region is
found off shore, which raises interesting questions regarding ownership rights,
which due to the brevity of this article cannot be delved into. Some of the largest offshore Caspian oil
basins are in the Kyapaz and Gunashli
fields of Azerbaijan
which is now under development.[vi] Georgia
plays a more important role than Armenia
in the transport of oil, because most present and proposed pipelines actually
go around Armenia. However, Armenia does have some small, yet
commercially viable oil deposits.
[vii]
Perspectives of Transcaucasia:
The countries of Transcaucasia have found
themselves in a sort of boom or bust situation.
As a result of the oil reserves both offshore and onshore, states such
as the United States and Russia have
taken an intense interest in the area commercially. For example, the United
States has invested large amounts of money in Azerbaijani
development, while situating itself militarily in Georgia. There are two main aspects of oil trade which
the Caucasus considers as imperative to their
own political and economical development: increased sovereignty, and European
integration. All three governments claim
that the oil trade will reduce their dependence on the Russian Federation, while simultaneously
offering increased acceptance into NATO and Europe. However, on the negative side, it becomes
clear that too much dependence on foreign investment can collapse a domestic
economy which is as vulnerable as those in the Caucasus.
The Caspian Sea states,
having survived the first harsh
years
of independence, are seen as being fully committed
to
developing their resources in partnership with international
energy
companies in order to solidify their sovereignty
and
secure their future as fully independent and prosperous
states,
at peace with their neighbours and integrated
into
the global economy.[viii]
Resulting from the
collapse of the Soviet Union in 1991, the three countries, although formally
independent, were left heavily dependent on Russia because of their centrally
planned economies. The revenues of oil trade are a
hopeful way of being able to wean themselves off of Russia’s influence, to gain
domestic stability and control over their own foreign policies. Each of the three governments want to
diversify their energy investors in order to achieve this. Georgia
hopes to allow many different pipeline operations to go through its territory,
while Azerbaijan has oil
trade deals with, among others, the United
Kingdom, Europe, Japan,
Russia and the United States. The question is whether the accumulation of
wealth from this diversified investment portfolio will really lead to any sort
of tangible change in the infrastructure or domestic political policies of
these nations.
The competition over
oil resources in Transcaucasia
has attracted the interest of many NATO countries.[ix] Governments in Georgia
and Armenia
in particular are extremely interested in the attention from these countries,
and hopes that it will further their plight for European integration. Azerbaijan
has asked that NATO bases become permanent on Azeri soil in order to exert
pressure on Russia, and to
help in maintaining a relatively peaceful situation with its neighbours,
particularly Armenia. Georgia has also asked that UN or
NATO peacekeepers replace the Russian troops in Abkhazia. Both Georgia
and Azerbaijan
stated in 1999 that they wish to leave the CIS Collective Security Treaty.[x] This definitely caused an uproar in Moscow as Russian
influence would be reduced dramatically if it did not have any sort of
guaranteed security presence in the region.
Basically, all three
countries of Transcaucasia
yearn to completely release themselves from the yolk of Russian influence,
while developing normal inter-state relations with the help of Western
countries. These countries are likely to
receive considerable monetary attention from the West due to their large oil
reserves, and the potential of their oil transport corridors. However, we must realize that what these
countries actually need is developmental assistance in the way of political
advice and education in order to move their economies away from the centrally
planned Muscovite version, to a more internationally feasible liberal market
model. If this does not happen
pre-investment, then the governments will find themselves no longer under the
Russian sphere of influence, but instead, extremely dependent on Western
countries economically. This would be
detrimental to any sort of independent development in the near, or even far,
future for Transcaucasia.
Interests of the United States:
As can be gathered from
the above information, the United States
has definitely been a large player in oil extraction and trade in Transcaucasia. Since the dissolution of the Soviet Empire in
1991, the US
has become increasingly interested in the potential for profitable resource
extraction in this area. The US has
established a recent policy goal of diversifying oil partners in order to
better guarantee a steady uninterrupted supply of oil to maintain American
consumption patterns. The American
government wants to get away from dependence on Persian
Gulf oil, especially during what has been labelled the war on
terrorism. Also, the US is always interested
in new resource investment opportunities which are almost guaranteed to yield a
high return.
Diversifying oil
partners has been on the American agenda for quite some time, and although the US has invested
in Canadian, Russian, Middle Eastern and African oil, none of these oil
exporting countries have the potential for as high a profitability margin as
does the Transcaucasus. In this region the US has shown particular interest in Azerbaijan, which has been illustrated by the
high amounts of foreign aid the US
plugs into the Azeri government every year.
Perhaps one reason which may account for the high aid amounts is that
the government of Azerbaijan
is vulnerable to outside pressures, especially those which are exerted by the United States. The United
States senses the Azeri disillusionment towards Russia, and is
glad to step into a country which has such open arms to Western liberal
capitalism. The only problem is that Azerbaijan has an unstable government which will
not only find itself influenced by Western pressure, but which may actually
bend completely to the needs and policies of the United States.
The United States has recently shifted its
multi-pipeline oil trade policy to one which supports single large projects
such as the Baku-Ceyhan Pipeline which would link Azerbaijan to Turkey.[xi] This seems a bit surprising, considering that
the original policy of multi-pipeline support was intended to lower
environmental and geopolitical risk factors which may impede the extraction and
transport of oil in this region.
Interestingly, the Caspian states also support the multi-pipeline ideal
as it helps to ensure that no one country can exert too much pressure on the
area.[xii]
Laurent Ruseckas states that the chief stated objective of the US toward the newly independent nations of Transcaucasia is “to encourage
their evolution into strong, independent states based on democracy, the rule of
law and market economics.”[xiii]
The US seeks to help
maintain a balance of powers in the area, by protecting the Caucasus region
from its main external pressure, Russia. Although the US states that it does want to
encourage the development of these states into strong, independent nations, it
is an objective which is complex, and needs more than high investment amounts. The American government, if truly concerned
about the stability of these states, needs to support them pre-investment with
administration assistance, in order to help in making the situation for both
the Transcaucasian peoples and American investors
advantageous.
Interests of the Russian Federation:
Russian foreign policy
regarding the Transcaucasus region and oil trade is
one which is rife with contradictions.
One group of government officials, including past foreign minister Yevgeny Primakov, argued that oil
is a way of keeping power in the post-soviet republics of Georgia, Armenia
and Azerbaijan.
This group convinced past President Boris Yeltsin to sign the secret directive
‘On Protecting the Interests of the Russian
Federation in the Caspian Sea’
which states that one of the chief foreign policy goals is to maintain a strong
sphere of influence in the region.[xiv] This group sees any large investment by
Western countries as a direct threat to the influence of Russia in the
area. They usually don’t support any
joint ventures regarding oil trade, although that is beginning to change. The other side of the coin is represented by
the Prime Minister, and oil-industry officials who argue that Western
participation in the extraction and transport of oil in the Transcaucasus
region is actually beneficial to Russia because it ensures access to
technological advancements.[xv]
They have worked for Russian inclusion in Western
consortia
in order to improve their own technology,
to
establish a foothold in world oil markets, and to
share
in the profits available to those on the markets.[xvi]
An unsurprising result of the Russian perspectives being so
diametrically opposed to one another, has been that the response to issues
regarding oil trade has been disjointed.
Usually it comes down to the first school condemning, usually publicly,
the actions of the second. The
government officials who argue against including Russian firms in consortiums
condemn the actions of the country’s gas giants; LUKoil
and GAZPROM.
Recently, the position
of the Russian Federation
has begun a bit of a turn around.
Although Russia
yearns to maintain control in the region, it is realizing that turning its back
on Transcaucasia oil
ventures, in order to maintain distance from Western influence, is
ill-advised. Russia
has a very fragmented investment climate of its own, with countries like the United States
pulling out of oil deals because of lengthy and confusing negotiation
processes. Russia simply cannot afford to not
be part of the consortiums which are investing in Caspian oil.
‘Obstacles’ to Oil
Export:
There are many
geopolitical obstacles to oil export in the Caspian region. It must be understood that many of these are
results of Transcaucasia’s communist past.
With the collapse of the Soviet Union in 1991, Armneia, Azerbaijan and Georgia were left
with a communist infrastructure and democratic dreams. Obviously, the two do not mix well. There are two main constructions which must
take place before a post-communist nation can be open to high foreign
investment:
• The construction of viable market economies.
•
The establishment of working institutions of representative democracy.[xvii]
As can be surmised from the above political description of Transcaucasia, none of the
three nations is truly a positive example of a post-communist nation.
Corruption has always been a particular problem of not only communist, but also
post-communist governments. The problem
tends to lie in the fact that accountability is greatly diminished in a nation
which has no representative democracy.
Due to the necessity of brevity, this portion of the
essay will study only one of the many political problems which serves as an
obstacle to oil trade in all three countries, that of ethnic conflict. For a better understanding, I will use the
territorial dispute, between Armenia
and Azerbaijan,
in Nagorno-Karabakh[xviii]
as a case study. Upon studying the
complexities, the multiple alliances, and the historic underpinnings, it will
be clear that this dispute will not fade with the onset of foreign investment,
but must instead be dealt with pre-investment by international organizations,
non-governmental organizations investment companies. This will help the host nation become stable
and confident as it develops policies regarding separatism and ethnic
disputes. If these struggles are not
sufficiently managed pre-investment, they will only become more acute as
accumulated wealth is not properly disbursed in the region. As we will see
later in this paper, assisting newly independent nations is a shared
responsibility.
Ethnic Conflicts and
Obstacles to Pipeline Development in Caucasus:
[xix]
Issue and Location
|
Parties Involved
|
Description
|
Obstacles to Pipeline
|
War
over Nagorno-Karabakh, in Western Azerbaijan
|
Armenia and (diaspora), Azerbaijan, Russian military,
OSCE.
|
Long
standing ethnic dispute between Armenia
and Azerbaijan
over Nagorno-Karabakh region
|
Planned
pipeline going through northwest Azerbaijan
and SW Georgia could be attacked from
Armenian controlled territory.
|
War
over status of Abkhazia in North western Georgia.
|
Ethnic
Abkhaz in Georgia and Turkey, Georgia, Russian military,
Armenians.
|
Separatist
movement which escalated into war during 1992-1994. Involvement of Chechen and Russian
military.
|
Potential
for long term instability due to refugee problem and localized terrorist
attacks.
|
War
over status of South Ossetia
in North Central Georgia.
|
North
and South Ossetia, Georgia, Russian Military.
|
Separatist
movement which escalated into civil war early 1990s. Situation remains one of ‘frozen
instability.’
|
Potential
problems for West routes, and high potential for disruption of northern bypass to Novorossysk or Southern bypass to Medit.
|
As the above chart
illustrates, the situation in Nagorno-Karabakh is one of numerous ethnic
disputes which has ravaged the Transcaucasian
region. The NK dispute is exemplary of
many similar situations in the area, in that it arises from a similar avenue:
“newly independent Soviet successor states or their internal autonomies
challenge the artificial borders imposed on them by the Kremlin during the
Soviet era.”[xx] The land of NK
as shown below in the map, is situated in western Azerbaijan, even though this region
is predominately made up of ethnic Armenians.
The nation of Armenia
supports the actions of NK because it believes that it was ambiguously
separated from its mother country (Armenia) during the Soviet era. The
NK military forces have occupied large amounts of Azeri territory between Armenia and NK
in order to create a sort of land bridge which would eventually link them to
their ‘mother’ country.[xxi]
Besides intense fighting which was only recently, although dubiously, halted by
ceasefire, the dispute has caused a refugee crisis with over a million
displaced persons in the area. This
situation has also involved in the United States,
because the US
supports the Azeri government through large amounts of investment and foreign
aid. The US,
France and other Western
countries as well as Russia,
want the NK area returned to Azerbaijan,
which is absolutely intolerable to the Armenians. The war in Nagorno-Karabakh is the longest
running conflict in the post-Soviet republics.[xxii]
[xxiii]
Ethnic conflicts, such
as the dispute in Nagorno-Karabakh, are considered ‘obstacles’ to oil
investment because they are unpredictable, which may cause unplanned
disruptions in oil extraction and transportation. The area of Nagorno-Karabakh is important to
both the Baku-Ceyhan and Baku-Supsa
Pipeline Projects because the actual route of both pipelines transverse quite
close to NK and surrounding territory.
The major threat to the pipeline is that extremist Armenians, may attack
the pipeline and disrupt the flow of oil out of Azerbaijan.[xxiv] One of the biggest problems with potential
pipelines going through Armenia
and present pipelines going near Nagorno-Karabakh is that the Armenians in both
places do not share in the accumulation of wealth. This leaves them feeling embittered towards
their neighbours of Georgia,
Azerbaijan and Turkey. It is impossible for the Transcaucus
region to cooperate financially in any oil dealings, because of this and other
historic animosities. Although the
problem of disbursement of wealth is not really considered a pressing
‘obstacle’ to development by major investors, it should be. Investors are more concerned about the actual
security risks along pipeline corridors.[xxv] Because security risks result from unsolved
conflicts and unfair wealth disbursement, preventative action must be
taken. The investor countries must first
prepare the host country with effective conflict management skills in order to
aid in making the investment opportunity in Transcaucasia more beneficial for everyone
involved.
A Shared Responsibility
Investing states,
non-governmental organizations and international organizations need to work
together to come up with satisfactory conflict management policies which would
enable the Transcaucasian area to cooperate
financially. This would be beneficial to
all involved because it could dramatically lower the risks to oil investors,
while at the same time aiding in a sort of peace process in the region. This is by no means a ‘new’ theory[xxvi]
but what is novel about this thesis is that intervention must happen
pre-investment in order to set the climate for high profitability and low
geopolitical risk before disruptions happen along pipeline routes which cause companies
enormous amounts of money to fix.
Prescriptions for
intervention pre-investment include: [xxvii]
•
investment companies must initiate a web of commercial agreements beforehand
which would facilitate increased regional cooperation.
•
the US
should expand its efforts through multilateral institutions such as NATO’s
Partnership for Peace program to help stabilize the region pre-investment.
•
an organization, such as ASEAN, with a neutral mediator, must be implemented in
the region to control regional security issues, making possible an open
dialogue between disputing parties, which may aid in creating ceasefire
agreements prior to investment disruptions.
•
careful analysis and attention must be paid to statements made by observer NGOs
such as Human Rights Watch, Greenpeace,
Amnesty International and local/regional organizations which specialize in the
geopolitics of this area.
•
aid in building infrastructure, such as transportation links and communication
technology in order to benefit the local people of the area.
•
responsible and accountable action by investment companies regarding such
issues as upholding international law, human rights and environmental issues
must be committed to pre-investment in order to establish an environment which
is fair for people and the living earth.
As can be deduced from the above
prescriptions, there is a role for interested parties in making the investment
climate in Transcaucasia
one in which the benefits are felt by all people involved. This calls for increased action by
international organizations and non-governmental organizations, as well as
increased accountability by companies.
It is no longer satisfactory or accepted practice to simply extract resources
from a vulnerable state, and then leave the floundering government to deal with
the results. This shows that the
responsibility must be shared before actual heavy investment begins.
Conclusion:
As this paper comes to a
close, it is important to remember that oil investment is a positive endeavour
in developing countries, as long as certain rules of conduct and procedure are
followed. All interested parties must
make an effort to understand the perspectives of each other, and to establish
stable policies before actual investment begins. Countries such as the United States and Russia must continue to act in
joint ventures or consortiums in order to balance the effects of foreign
influence in the area. Oil investment is
definitely part of the solution in Transcaucasia
because it will bring considerable wealth to the area, as long as the
governments have assistance in developing long-term policies to deal with
distribution.
As I write this, oil
deals are being negotiated in Azerbaijan,
and the construction of pipelines is taking place near Armenia and through Georgia. Although it seems as though the pace of
development in this region makes it impossible for any intervention
pre-investment, we must remember that there is always time to aid those that
need it the most. Environmental
assessments need to be fully complete before extraction, human rights abuses by
security personnel need to be criminalized, and international law, such as that
of contracts, needs to be properly interpreted and negotiated with the help of
a neutral mediator.
In conclusion, I will
remind the reader that the point of this paper was to illuminate the fact that
regional problems, namely ethnic conflicts, will not go away with the simple
idea that money from oil investment will eventually help Transcaucasia work out its disputes. It is not enough to throw money at the
problem. Instead of investing directly
into resources, we must begin by investing into people and governments. Only then will the oil politics of Transcaucasia be truly
profitable.
ENDNOTES
[i] For the purposes of convenience I will use the terms Caspian, Transcaucasus and Caucasus interchangeably to refer to the
countries of Armenia, Azerbaijan and Georgia and the directly
surrounding areas.
[iii] Dr. Bahman Aghai
Diba, Baku-Ceyhan Pipeline: The Biggest Development, in Alexander’s
Gas and Oil Connection, Volume 7, Issue 19, Oct 01 2002. Also
Amy Jaffe, Unlocking the Assets: Energy
and the Future of Central Asia and the Caucasus at www.rice.edu. 1
[vi] Amy Jaffe, Unlocking
the Assets: Energy and the Future of Central Asia and the Caucasus, at www.rice.edu.
[viii] Sheila N. Heslin, Key Constraints to Caspian Pipeline Development: Status, Significance
and Outlook, at www.treemedia.com.
3.
[ix] Dr. M.A. Smith, Geopolitical Challenges to Moscow in the Transcaucasus,
the UK Ministry of Defence at www.fas.org.
2.
[xii] Shiela N. Heslin,
Key Constraints to Caspian Pipeline
Development: Status, Significance and Outlook, at www.treemedia.com. 3.
[xvii] Both of these are courtesy of Jeffrey S. Kopstein
and David A. Reilly’s Geographic
Diffusion and the Transformation of the Postcommunist
World in World Politics 53 (October 2000), 1.
[xviii] Nagorno-Karabakh will be referred to as NK or Nagorno-Karabakh
interchangeably.
[xix] This chart is altered from the original by Sheila N. Heslin, Chart: Political Constraints to Pipeline Development
at www.treemedia.com
[xx] Richard H. Solomon, Nagorno-Karabakh:
Searching for a Solution, USIP Peaceworks 25.
[xxv] Sheila N. Heslin, Key Constraints to Caspian Pipeline Development: Status, Significance
and Outlook at www.treemedia.com ,
6.
[xxvi] See authors such as Sheila N. Heslin and
Amy Jaffe.
[xxvii] The first three of these were inspired by Sheila N. Heslin’s work.
Bibliography
• Cornell, Dr. Svante
E., US Policy in ‘Caspian-Asian’:
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•
The following documents are from the website www.rferl.org (Radio Freedom Europe)
◦
Russia Oil Firms Trying to Step up
Exports to US
◦
Georgia: Javakheti
Armenians Call for Autonomy has Tbilisi
on Guard
◦
• The following articles are from www.newyorktimes.com :
◦Why US Oil Companies and Russian Resources Don’t Mix.
• The following Country Briefs are from the
website www.eia.doe.gov
◦ Caucasus
Regional Country Brief
◦ Azerbaijan Country Analysis Brief
• The following description of the
Nagorno-Karabakh conflict is from www.wws.princeton.edu.
◦ Nagorno-Karabakh