Can Azerbaijan still afford not to choose a strategic alliance?

Essay written in March 2015 for the competition “Azerbaijan: European Taste of the Orient”.

Among the six countries covered by the European Union’s Eastern Partnership (EU EaP) – Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine –, Belarus is usually pointed out as the “black sheep”, being the only state of the group not bound by an EaP Action Plan, nor even by a Partnership and Cooperation Agreement (PCA)¹ with the EU. Due to “lack of respect for human rights, democracy and rule of law”², it must confront a policy of “critical engagement” which allows only participation in the multilateral track of the EaP and limited bilateral assistance under the European Neighbourhood Instrument (ENI)³. In the EU’s view, any upgrade of relations with Belarusian authorities is conditional upon improvement of their political record.

“Measuring” authoritarianism with international indexes such as Freedom House’s or Reporters without Borders’, one can find another EaP country that is considered “not free”⁴: Azerbaijan. In the realm of press freedom, Baku fares even worse than Minsk⁵. Yet it seems to enjoy a better treatment by the EU since it is still covered by a PCA and an EaP Action Plan and has so far escaped any kind of sanction despite a deteriorating situation in the fields of human rights, democracy and rule of law. While one may observe that it receives comparatively very little financial support from its ENI bilateral programme with the EU (cf. table below), it is worth recalling at the same time that thanks to its oil and gas resources, Azerbaijan is the richest of EaP countries.

Development of the Azerbaijani extractive industry dates back to the late 19th century. Nowadays, Azerbaijan is estimated to own the equivalent of 7 billion barrels of oil reserves and produces every day 877,000 barrels. Regarding gas, its reserves amount 900 billion cubic meters (bcm) for a yearly production of 16.2 bcm⁶. These figures may not sound very impressive in comparison with neighbouring energy giants such as Iran and Russia, yet for a country of this size they are sufficient to afford a certain level of economic and political autonomy. Moreover, Azerbaijan is located on the most direct route that can bring to European consumers oil and gas coming from the Caspian Sea or Central Asia without crossing the territories of Russia or Iran, two states that do not enjoy a very high level of trust in the West. Therefore, from an energy perspective, Azerbaijan is a significant player in terms of supply and even more as a transit country.

The best illustration of this importance is the Southern Gas Corridor project, a network of pipelines which aims at connecting the EU to gas fields exploited in the Caspian Sea and potentially Central Asia. Notably enough, this route is explicitly mentioned in the recent Commission’s communication on the Energy Union as a key instrument to “ensure the diversification in gas supplies”⁷ and receives EU financial support under the “project of common interest”⁸ label. Azerbaijani Shah Deniz field, in particular its “Stage 2”, should provide the bulk of the gas that will be transported through the Southern Gas Corridor, bringing additional 10 bcm to EU countries and 6 bcm to Turkey⁹. The latter has indeed experienced in recent years rising demand for gas and is expected to continue on this path¹⁰, in sharp contrast with the EU where gas consumption has decreased over the same period and is forecast to remain flat in the nearest future.

Can energy resources buy political stability and independence?

For Baku, the consequences of its energy ressources and its specific location are twofold. First, in the realm of domestic policy, Azerbaijan enjoys in comparison with other EaP countries a relatively high level of political stability, for better or worse. Since it became independent from the Soviet Union in 1991, it has been mainly ruled by two personalities: president Heydar Aliyev... and later his son Ilham. Opposition has been crushed by violent means, including torture, but the resource rent has also been an effective tool to lift people out of poverty, build up access to basic services and buy social peace, at least in the short run¹¹. As a result, putting aside the few years of uncertainty that have followed the end of Soviet era, Azerbaijan has not seen “colour revolutions”, mass protests or power vacuum episodes comparable in scope with those having taken place in Armenia, Georgia, Moldova or Ukraine. Only Belarus can boast a similar record, though also at the expense of political freedoms.

Nonetheless, there is a significant difference between Alexander Lukashenko and the Aliyev family. While the first owes to a large extent his longevity in power to his allegiance to Moscow which provides Belarus with economic benefits and security guarantees, Azerbaijani riches and geographical position have allowed the Aliyevs to pursue a skilful “multi-vector diplomacy”, whereby Baku tries to maintain good relations with all meaningful powers in the region (EU, Iran, Russia, Turkey, USA) and thus avoids to be overdependent on one partner. It has for instance adopted an “open door policy” in the energy sector to attract investments and technologies of international companies, in particular from the West, like BP, Chevron, Exxonmobil, Statoil or Total¹².

Less vulnerable to blackmail on energy prices or to threats of supply disruptions thanks to its own resources, Azerbaijan has also managed to maintain a relatively diversified portfolio of customers (see charts below). After the completion of the Southern Gas Corridor, the list of destinations for gas exports will also include the EU and Turkey, so that individual buyers will not have much political leverage on Baku using the “energy weapon”. Only if they group or if a shock impacts the whole Azerbaijani oil and gas business can Azerbaijan feel threatened, since its economy is very dependent on this sector. It accounts indeed for around 40% of Azerbaijan’s GDP, 75% of government revenues and 90% of exports¹³. A drop of oil prices as the world is experiencing at the moment has therefore a strongly negative effect on the Azerbaijani economy¹⁴ and may cause in turn domestic political instability were the situation of falling revenues to last and force cuts in social spending.

Limits of multi-vector diplomacy: the case of Nagorno-Karabakh

In addition to its overreliance on the energy bonanza, Azerbaijan has another Achilles heel: the “frozen” conflict of Nagorno-Karabakh. This unrecognized republic is officially part of the Azerbaijani state but is in majority populated by Armenians and Baku has never exerted effective authority over it. An autonomous oblast inside the Azerbaijan Soviet Socialist Republic, it became the object of a war between Armenia and Azerbaijan when both countries acceded to independence in 1991. A ceasefire was brokered in 1994 but the conflict has remained unsolved and the region still occupied by Armenian forces.

The Nagorno-Karabakh issue shows the limits of the Azerbaijani “multi-vector diplomacy”. While it has more of a symbolic and humanitarian character than vital importance for Baku – the area is not known for being rich in natural resources and does not pose serious obstacles to exchanges with the West since Baku is in good terms with Georgia –, it binds its hands in relation to Russia, which is Armenia’s closest ally. Besides Orthodox solidarity, this is demonstrated by Yerevan’s membership in the Moscow-led Collective Security Treaty Organization (CSTO), Eurasian Economic Union and the presence of Russian military bases on Armenian territory.

Russia is at the same time one of the co-chairs of the so-called Minsk Group, alongside with France and the United States. This structure has been established in 1994 by the Organization for Security and Co-operation in Europe (OSCE) with the objective of reaching a peace settlement in the issue of Nagorno-Karabakh. Its work has so far brought very limited results and privilegied relations between Russia and Armenia question the commitment and impartiality of the Minsk Group in striving to broker a compromise between Baku and Yerevan. As long as Armenia is under duress, it will remain loyal to Moscow, which is the only available security provider in the region considering historical animosity between Turks and Armenians and the mainly economic character of exchanges between Yerevan and Tehran. On the other hand, Russia can lure Baku with the perspective of a favourable agreement over Nagorno-Karabakh¹⁵ or scare it by strengthening Armenian forces in the area.

France and the United States, for their part, are torn between their energy interests – as seen above, some of their oil and gas majors are active in Azerbaijan – and influence of their Armenian diasporas on the domestic political scene. Indeed, together with Iran and Russia, France and the United States are home to the largest Armenian communities in the world, with respectively 600,000 and 1.5 million individuals¹⁶. As it is the case with many diasporas (Cuban, Iranian, Iraqi...), Armenians living abroad tend to be more hawkish than their fellows based in their homeland, among other reasons because they don’t directly suffer from the consequences of political isolation. Therefore, they take hard line in relation to Turkey or Azerbaijan, provide material and financial support to Nagorno-Karabakh and advocate its interests in Paris and Washington. Outcomes of these lobbying efforts include the creation of a France-Karabakh Friendship Circle, which groups dozens of members of Parliament or local politicians¹⁷, or resolutions regularly passed by local governments in the United States and calling for recognition of the Nagorno-Karabakh Republic¹⁸, a position that goes even further than Yerevan’s official line.

While Azerbaijani “multi-vector diplomacy” has overall succeeded in balancing all influential powers of the region, despite Iran and Russia’s pro-Armenian leanings and difficulties to maintain manageable relations at the same time with Tehran and Washington, it cannot by definition develop a strategic partnership with one country that could be then ready to take more resolute steps in support of Baku. True enough, Azerbaijan is not overdependent on one partner, but it does not matter enough to any of them, so that none has strong incentives to flip the table. As said earlier, the Nagorno-Karabakh region does not have per se a strategic character and the frozen conflict between Armenia and Azerbaijan has barely any repercussion beyond the two countries.

Azerbaijan has understood this and has been trying to resolve the problem on its own by heavily investing in the military. Thanks to the resource rent, between 2002 and 2013, defense budget has increased nearly tenfold, amounting to 3.4 billion US dollars. This is a jump from 2.2% GDP to 4.7%, so that nowadays military expenditure absorbs around 12% of government spending¹⁹. By comparison, Armenia dedicates “only” about 0.4 billion dollars to its defense.

Pragmatism of both Azerbaijan and its partners is well illustrated in the field of military cooperation. Although Baku has an active relation with NATO (existence of an Individual Partnership Action Plan, participation in KFOR in Kosovo and ISAF in Afghanistan), it imports hardware from Turkey, Israel – thus angering Iran – and most of all from... Russia, which is visibly not too bothered supplying weapons to its Armenian ally’s enemy. The fact that Moscow equips both sides gives it the power to keep the balance between them or to tip it in favour of one or the other part. In consequence, Azerbaijan’s military buildup is not likely to be able to challenge the status quo in Nagorno-Karabakh, especially that this policy may not be sustainable in the medium term due to falling energy prices.

The game changers: Ukraine, cheap oil and Iran

Indeed, one may wonder whether current political or economic evolutions will not force Azerbaijan to revise its foreign policy and make a clearer choice instead of pursuing a “multi-vector diplomacy”. Though it has been successful in preserving internal political stability and a certain level of external autonomy during the last twenty-five years, it has failed to solve Azerbaijan’s main problem of Nagorno-Karabakh and might lose effectiveness in the future due to three game changers: the war in Ukraine, slumping energy prices and the possible restoration of relations between Iran and the West.

The current Ukrainian “crisis” started in November 2013, when hundreds of thousands took the streets to pressure then president Viktor Yanukovych to sign the Association Agreeement with the EU. His unexpected U-turn and his decision to disperse protesters by force alienated him an important part of the country and in February, he secretly fled to Russia. One month later, the Autonomous Republic of Crimea voted for its incorporation into the Russian Federation, thus encouraging certain territories in the Donbas region to demand enhanced local autonomy or even to break away from Ukraine.

The Euromaidan movement itself has had little resonance in Azerbaijan for reasons mentioned above, however the secession of Crimea and “Donetsk and Lugansk People’s Republics” have been of higher concern for the Azeri, who cannot but see a parallel between these regions and Nagorno-Karabakh. Logically, Baku has stood for the respect of the principle of territorial integrity and accordingly voted resolutions passed at the United Nations or the Council of Europe, however it has been careful not to voice too harsh words against Moscow for fear of a bold move in Nagorno-Karabakh²⁰.

By contrast, Armenia refused to condemn the annexion of Crimea at the United Nations General Assembly and joined this way an exotic band of countries that include Russia, Belarus, Bolivia, Cuba, North Korea, Nicaragua, Sudan, Syria, Venezuela, and Zimbabwe²¹. This decision confirmed the direction showed one year earlier, when Armenia resigned from its intention to enter into an Association Agreement with the EU and became instead a member of the Moscow-led Eurasian Economic Union. Increasing distance between Armenia and the West²² may be beneficial for Azerbaijan and Russia’s growing isolation on the international stage questions the relevance of the Minsk Group format to resolve the Nagorno-Karabakh, especially considering its poor record. Yet for Azerbaijan to come closer to the West, its government would probably have to revise its practices in the fields of democracy, human rights and rule of law.

Falling energy revenues may add domestic pressure to liberalize to some extent the regime. The price of the oil barrel has indeed dropped by more than half since middle 2014, costing nowadays around $50 while the Azerbaijani state drafted its budget on a forecast of $90 per barrel²³. As a consequence, in February, the Central Bank of Azerbaijan devalued the manat by 33.5% against the US dollar. SOFAZ, Azerbaijan’s sovereign fund fueled by oil and gas revenues, has also stepped in to limit public deficit. Yet this is not sufficient to balance the budget and the government must also use other instruments such as tax increases or cuts in welfare or defence expenditure. For the moment, it has opted for the introduction of new taxes which, on top of inflation resulting from the devaluation, is already generating social discontent²⁴. Were the situation of depressed energy prices to last until the end of the decade and the economic prospects of Azerbaijan continue to deteriorate, the authority of the Aliyev regime may become more and more challenged by the population.

As mentioned before, in energy trade, Azerbaijan has been of particular importance not only thanks to its own resources but also because it proposes a route between Europe, the Caspian Sea and Central Asia that circumvents both Iran and Russia. Moscow’s decision to overthrow the European security architecture built after the end of the Cold War (war in Ukraine, total withdrawal from the Treaty on Conventional Armed Forces in Europe) cannot but accelerate the EU’s efforts to reduce its dependency on Russian energy, especially gas, and this is why the Southern Gas Corridor and Azerbaijan have gained weight for instance in the Energy Union proposal. At the same time however, improving relations between Iran and the West, i.e. the EU and USA, can create for Baku a new competitor both in terms of supply and route.

It is worth recalling that despite their religious similarities – Shi’a Islam is the dominant faith in Azerbaijan as well as in Iran –, the two countries have rather fresh relations. The first reason behind this is the presence in Iran of a very large Azeri minority, estimated at 15 million individuals in a country of 76 million. Azeris are considered well integrated in Iran and voices calling for unification with the Azerbaijani state are marginal, nonetheless appeals for greater cultural autonomy exist and Tehran tends to see them as an American plot against the Islamic Republic²⁵, all the more since Baku cooperates with the United States and Israel, including in military affairs²⁶.

Azerbaijan’s “Western” orientation is also visible in the secular character of the state. Probably due in part to the Soviet legacy, Azerbaijan is usually described as tolerant in the field of religion, although the authoritarian nature of the regime and fight against Islamic extremism have put some limits to religious freedom²⁷. Nevertheless, Azerbaijan doesn’t share Iran’s proselytic and theocratic aspirations and has been very wary of Teheran’s attempts to export revolution through activist groups or media²⁸.

Another bone of contention is the dispute over the legal status of the Caspian Sea, an energy-rich body of water that borders both Azerbaijan and Iran as well as Kazakhstan, Russia and Turkmenistan. According to whether it should be treated as a lake or a sea, the applicable rule to delimit respective economic exploitation zones will be different. The question emerged after the end of the Cold War, when the disintegration of the Soviet Union gave birth to new states claiming for rights to exploit the riches of the Caspian Sea. Iran, having the smallest coastline, advocates for the lake status in opposition to all post-Soviet republics. Yet any final settlement on the matter must be taken unanimously by all the five adjacent countries and after twelve years of negotiations and four summits, it remains to be agreed on.

Before the Islamic Revolution in 1979, Iran was one of the West’s best partners in the Middle East and though it is currently under international sanctions most of all because of non-compliance with the Treaty on the Non-Proliferation of Nuclear Weapons, the Western business community has repeatedly shown its interest in restoring trade relations with this large and energy-rich country²⁹. Iran’s regional influence in Iraq, Syria and Yemen, to mention but a few examples, also makes it an indispensable interlocutor to stabilize the zone, especially having in mind the threat of the Islamic State. Today, a nuclear deal seems “close”³⁰ and were it be to struck and to lead to an easing of sanctions against the Iranian economy, the return of its oil production on world markets, combined with the possible development of new gas transactions with the EU and Turkey, are likely to confirm the decreasing trend of Azerbaijan’s energy revenues and to diminish the importance of its location for the West.

Conclusion

Having analysed these game changers, what conclusions can be drawn for Azerbaijan’s foreign policy? First, business as usual would be a bad option because falling resource rents, even if temporary, will put Baku under pressure both from inside and outside and might put into question what it has managed to achieve since its independence. What can therefore be the alternatives?

Stronger American commitment in the region is not very probable due to lack of vital interest, all the more since the USA are becoming more and more self-sufficient for their energy needs. Competing priorities (Ukraine, Islamic State and before all East Asia) should not either leave a lot of attention in Washington for Caucasus. In parallel, multiplication of human rights violations committed by the Aliyev regime has provoked both in the EU and USA calls for sanctions³¹.

The EU does not enjoy the same level of autonomy in the realm of energy but Azerbaijan cannot yet boast to be a major supplier or transit country for it. Oil is easily traded worldwide so that small producers can hardly dictate the terms of the deal and for gas, even after Shaz Deniz Stage 2 comes online, its 10 bcm remain very little in the total of 300 bcm the EU-28 imports every year.

The EU can provide support to Azerbaijani authorities in modernizing and diversifying the economy – and it has already been doing, for instance in the field of rural development³² –, however enhanced assistance is likely to be conditional upon improvement of the political situation. So far, Baku has displayed no interest for such a deal since it could rely on energy revenues and the question remains open whether the ruling government is ready to take the risk of power shift for the sake of modernization, which would also include fight against corruption.

Another problem is that the EU comes almost empty-handed in the Nagorno-Karabakh issue. France is one of the co-chairs of the Minsk Group but does not officially represent the EU, which is keen on not preempting the role of the OSCE and the Minsk Group. At best, the EU proposes to alleviate the effects of the conflict at the civil society level, a task rendered difficult by political limitations in Azerbaijan and a “siege mentality” in Armenia. It would be unable to give any security guarantee to one or the other party, therefore it can hardly be more than a trading partner for Baku.

In this area, Moscow seems to have more to offer but as seen above, its strong alliance with Armenia and neo-imperalist ambitions would probably make the solution very expensive. Russia has been buying Azerbaijani gas for years in order to prevent the EU from diversifying transit routes³³ and is trying to convince Baku to join its Eurasian Economic Union, a membership which would prevent Azerbaijan from entering a Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU – supposing they would have someday such a plan. However, Baku would have very limited power in such an organization, considering the differential in size between Russia and Azerbaijan and the absence of significant allies or Western counterweights. For this reason, Baku would rather not find itself in a tête-à-tête with Moscow, unless it relinquishes its aspirations of political and economic autonomy in favour of uncertain gains in Nagorno-Karabakh.

Regarding Iran, the list of diverging interests may be too long to make possible a strategic rapprochement with Azerbaijan. The two countries can already pragmatically cooperate when needed – for instance, Iran supplies the Nakhchivan Autonomous Republic, a region of Azerbaijan separated from its mainland by Armenia – but while Iran remains in a fragile position as long as it is under international sanctions, its expected return to the international community will not leave Baku with a lot of leverage over its Persian neighbour. Moreover, although Tehran has been willingful to mediate in the Nagorno-Karabakh conflict, it is not likely to have the capacity to provide security guarantees for example through a peacekeeping mission.

Turkey has in common with Azerbaijan Turkic origins, unfriendly relations with Armenia and a certain proximity with the Western world. Turkey is also craving for energy and is turning into a hub for the EU, both for Azerbaijani or potentially Iranian oil and gas. Being located on the shortest and safest way out for Iranian resources to be brought to the UE, it has the potential to partly preserve Azerbaijani interests in the energy business. Close cooperation between Ankara and Baku in this area may even lead soon to the creation of a “Eurasian Energy Union”³⁴ following the recent groundbreaking ceremony of the Trans-Anatolian Natural Gas Pipeline Project (TANAP), a part of the Southern Gas Corridor.

Turkey is also a major player in defence, is a NATO member and takes active part in missions like SFOR or ISAF. It supports the Nakhchivan Autonomous Republic, though they have only a 11 kilometers long common border³⁵. No surprise in these conditions that last month, some Azerbaijani politicials proposed to upgrade Turkey and Germany, already members of the Minsk Group, to the rank of co-chair³⁶. This proposal will certainly be rejected by Yerevan but it shows the level of trust Azerbaijan puts in Ankara.

True enough, Baku is likely to always come second when the “Turkish big brother” acts regarding its closest interests (attempt to normalize relations with Armenia in 2009, crisis with Israel following the death of Turkish citizens on the Mavi Marmara ship one year later), however with its size, neighbourhood and current political situation, Azerbaijan can hardly pretend to be a “policy maker”. In this context, Turkey seems to be the best affordable horse. For the EU, this would again raise the question of the role of non-EaP countries (Turkey, Russia) in the Easternship Partnership and more generally in the European Neighbourhood Policy.

Footnotes