THE SOUTH CAUCASUS: BATTLEGROUND OF GEOPOLITICAL AND ENERGY INTERESTS

The consequences of the recent decision regarding the Shah Deniz (Caspian Sea) natural gas’ supply route to Europe, as well as the evolution of the war in Syria and the Iran developments brought to attention the even more complex realities of countries in the South Caucasus, an area that always was situated at the crossroads of great powers’ interests.

As Stratfor analyst George Friedman mentioned, the Caucasus is a meeting point of three great powers – Russia, Turkey and Persia (Iran) – which have competed with each other along various borders for centuries. In the early 1990s, as the Russian border moved north, Armenia, Georgia and Azerbaijan were once more unveiled by history, with Azerbaijan becoming geopolitically critical in the emerging global system, since it borders all the three great regional powers and became a major energy producer.

The analyst linked that trend with his forecast[1] about the serious weakening of the European Union and the increase in relative power of Russia. Friedman notes that in spite of Russia’s own problems, Europe’s dependence on Russian energy and the fact that Russia had cash available to buy assets in Europe showed a decline of Europe and a more powerful Russia. The countries that would feel that power would be those bordering the former Soviet Union – a line from Poland to Turkey and then from Turkey to Azerbaijan, the eastern anchor of Europe on the Caspian Sea.

a) The choice of the southern alternative (the Trans Adriatic Pipeline-TAP, which would run about 900 kilometers through Greece and Albania, ending in southern Italy, over the EU’s “Nabucco West” project) was seen as finally influenced by Azerbaijani state company SOCAR’s decision to take a majority stake in the Greek gas distributor DESFA, thus giving Azerbaijan a direct supply relationship with Europe. The biggest loser in the deal is OMV, which did the major research and planning for “Nabucco West”, as well as the countries along the Nabucco route like Bulgaria, Hungary and Romania that had hoped to tap into the line and profit from transit fees as well as to reduce their energy dependence on Russia.

By this decision, Azerbaijan, as the “upstream country”, succeeded in acquiring significant asset and leverage in Turkey – where it operates the trans-Anatolia pipeline TANAP – and in Greece through the 66 percent purchase of DESFA. This deal has contributed to the TAP winning its bid for Azeri gas, against its competitor, thus consolidating Azerbaijan’s position in South East Europe.

The strategic importance of the Southern corridor (that is not controlled by Russia) was indirectly acknowledged by the U.S. in June 2013, when the Washington Administration decided to include an exception in the sanctions imposed against Iran. The new Executive Order to further tighten U.S. sanctions on Iran, issued on June 3, 2013, provides an exception for certain Iranian depository institutions and certain activities relating to the pipeline project to supply natural gas from the Shah Deniz gas field in Azerbaijan to Europe and Turkey.

b) Recent developments also point out to a worrying role of the South Caucasus countries as a possible part of a weapons’ supply route from Russia to Syria. According to media and human-rights activist reports, Georgia and Azerbaijan may be playing an indirect role in supplying diesel fuel, weapons and cash to the embattled government of Syrian President Bashar al-Assad. Although government employees denied the charges, details about the alleged shipments remain unclear.

The reports mentioned the two countries as among the “enablers” of al-Assad’s regime, claiming that small vessels from Georgia have shipped diesel fuel to Syria, and that Azerbaijan also allows Russia to use its airspace for shipments of weapons and cash to the Syrian government. Other reports claimed that the Georgian Black Sea port of Kulevi, majority-owned by SOCAR (State Oil Company of Azerbaijan), dispatched one diesel-fuel cargo to Syria in February and several in January 2013. SOCAR representatives rejected “any speculations about sales of Azerbaijani oil products to Syria” via the Georgian oil terminal of Kulevi. However, the possibility cannot be excluded that trading companies which buy fuel from SOCAR and ship it by rail to Georgia’s Black Sea ports might have Syria as a client.

The same situation applies to Georgia, which did not export fuel directly to Syria for the past four years, but exports diesel fuel to a range of other countries from which re-exports are possible, with the fuel would be marked with Georgia as the port of origin.

Officially, both Georgia and Azerbaijan condemned the actions taken by the Syrian government in its armed conflict with domestic opponents, and supported the United Nations’ resolutions against it.

c) Analysts also revealed that, starting with 2013, Russia increased the size and activity of its flotilla on the Caspian Sea and the readiness of its Gyumri base in Armenia, not only due to Moscow’ concerns about instability in Syria and Iran, but also in order to have a capability to play a larger role both in the South Caucasus and in a wider area.

Besides having transferred to the Gyumri base a large portion of the Russian equipment withdrawn from southern Georgia after the 2008 war, Moscow also extended the lease agreement for the base until 2044, a move that gives Russia a foothold in Armenia for years to come.

At the beginning of 2013, Russia’s Southern Military District (MD) announced the increase of the number and intensity of drills at the Gyumri base and that Moscow has continued to expand the size and capabilities of its Caspian Flotilla.

Specifically, the MD press office said that uniformed personnel at the base in Armenia had increased their target practice times by 25 percent over the year before, a significant intensification given the shortage of funds for such activities that many Russian units currently experience. Also, the Caspian Flotilla was enlarged with five surface combat vessels, and the expansion is continuing with a new corvette and plans to add landing craft and a floating harbor and repair ship over the next several years.

Such developments should be viewed within the context of the situation in the Near East, around Syria and Iran in particular, but also as a sign of Moscow’ intention to strengthen its positions in the “Transcaucasus” given the background of growing risks and challenges connected with the destabilization of the broader region. Among the challenges mentioned in this context were: the need for Russia to remain, militarily, in “the lead” across the region, since Azerbaijan acquired highly advanced systems on both land and water, with the assistance of the United States and Israel; Turkey’s overwhelming military supremacy in the region and the need for Russia to defend Armenia, not only against Turkey, but also against Azerbaijan or even NATO forces standing behind Baku.

As to the Caspian flotilla, its commander, Admiral Sergei Alekminsky, pointed out that tensions between Iran and Azerbaijan, on the one hand, and between Azerbaijan and Turkmenistan, on the other, over security issues and oil deposits on the Caspian sea floor intensified to the point that “there could be war” as a result.

 

I. At the crossroads of empires and civilizations

 

The South Caucasus (Transcaucasus or Transcaucasia) area is a part of the Caucasus geographical region that divides the Eurasian continent. The terms Transcaucasus and Transcaucasia are translations of the Russian “zakavkazie” (“the area beyond the Caucasus Mountains”).

Having borders with Turkey, Iran and Russia, the region has been an arena for political, military, religious, and cultural rivalries and expansionism for centuries. Throughout its history, the region has come under control of various empires, including the Romans, Byzantine, Mongol, Persian, Ottoman and Russian.

After two wars, at the beginning of the 19^th century, the Russian Empire conquered the South Caucasus, severing its historic regional ties with Iran. After the fall of the Russian Empire in 1918, the region was unified into a single political entity twice: the Transcaucasian Democratic Federative Republic (9 April 1918 – 26 May 1918), and the Transcaucasian Socialist Federative Soviet Republic (12 March 1922 – 5 December 1936). Later, the Soviet republics of Georgia, Armenia and Azerbaijan were formed, which became independent after the fall of the USSR.

The region is considered one of the most complicated in the post-Soviet area, since it includes unresolved territorial conflicts, between Georgia and Russia (over Abkhazia and South Ossetia), and between Armenia and Azerbaijan over the Nagorno-Karabakh region.

While it is part of a larger geographic mountainous area, the southern part of the Caucasus is seen as a separate region with its own geography, history, and its own social and political rules. Like the North of the Caucasus, it is made up of a mixture of ancient cultures with dozens of different peoples all insisting upon their ancient pasts and wanting to assert their longstanding rights. In politically sensitive situations, this often leads to rigid positions that are hard to negate. For this reason, it is obvious that deadlocks over disputed issues have always been and will remain a very typical scenario in the South Caucasus.

Not only is the South Caucasus separate from the rest of the region, but it is divided internally. It is their diverse religious, ethnic and linguistic backgrounds that make the different peoples of the three nations in this sub-region so disconnected from one another.  As a rule, each ethnic group of the South Caucasus sees itself as indigenous people with a natural und exclusive right to live in their own specific homeland and only there.

Throughout their histories, the titular nations of Armenia, Azerbaijan and Georgia have lived with one another and other ethnic groups in a permanent alternation of armed conflicts and longer or shorter periods between them.

Painful legacies: misgovernance, corruption and poverty

The three South Caucasus countries, Armenia, Azerbaijan and Georgia, are still at a cultural crossroad between the democratic West and the re-orienting East, between the prosperous North and the developing South. The collapse of the Soviet Union and the subsequent transition process were enormously disruptive, involving large-scale economic dislocation, serious social and economic deterioration, and major hardship.

Democracy and the market economy have been a huge disappointment and still raise doubts at all levels of the society. Present-day reality proves that there has been a rather pragmatic return to the earlier pattern of public and economic administration. There are still no convincing national economic visions.

Misgovernance is a conspicuous and painful condition of the economic life of all the countries of the region. Each has a large “second economy”, high levels of public and private corruption, and, a factor closely connected to the previous two, varying but still far from complete transitions to market institutions. According to recent estimates, the “second” or “shadow” economy amounted to 78% (Armenia), 85% (Georgia) and 90% (Azerbaijan) of the South Caucasus countries’ GDP.

In all three states, large amounts of national values have been slipping through state hands. The governments themselves and their civil servants have been party to unsanctioned activities. It is not exceptional that individual and corporate income is not reported. Informal business arrangements, corruption and tax evasion are common practice. Barter trade has, to a large extent, replaced payment for goods and services with money.

Informal societies and economies

Reliance on informal kinship networks and circles of friends and acquaintances is a com­mon characteristic of post-communist societies in Armenia, Azerbaijan and Georgia. Two decades after the end of Soviet rule in the Caucasus, the great majority of the South Caucasus’s residents continue to depend on informal networks for all kind of resources and services. Informal networks in the South Caucasus are not only the main sources of social support, but also are tightly entangled in the web of cor­ruption and patron-client relations which are widespread throughout the region.

The spread of informal net­works also came as a result of persecution of the traditional social struc­tures by the communist rulers. Described by Soviet authorities as backward and archaic, traditional extended families and local commu­nities, such as the Armenian patriarchal family azg and Azerbaijan’s mahalla communities were forced into the informal sphere and inevitably became centers of net­working. Unlike in Russia, informal networks in the Soviet South Caucasus were not merely circles of friends and acquaintances but were rooted in family, kinship and clan structures.

Apart from their economic function, informal networks were also present in politics, favored by the Soviet policy of koreni­zatsia, aimed at elevating Moscow-chosen local elites to local leadership posi­tions. Kin­ship and clan networks ensured elite continuity even after the end of Soviet rule. The networks created and cemented by the South Caucasus elites in the 1970s and 1980s played a fundamental role in the post-Soviet governments of Eduard Shevardnadze and Heydar Aliyev.

In con­trast to the Soviet-period, the post-communist infor­mal networks in Armenia, Azerbaijan and Georgia were used to assist their members in securing jobs, cementing busi­ness ties, and receiving preferential treatment. To provide security for their members in societies gov­erned by ineffective and corrupt institutions, informal networks resort to bribery, corruption and patron-client relations.

A typical example is Azerbaijan, where analysts identified four main informal practices that became, in time, the basis for the economy: “monopoliya” (monop­oly and protection), “envelope salaries” (informal wage payments), “pripiska” (distortion of statistical data) and informal extortion. These practices have been conducive for creating an economy of “bureaucratic oligarchy,” in which the bureaucrats achieved control over and pos­session of large sums of capital and private businesses while also wielding influence over politics.

Monopoliya (inhisarçılıq) refers to a closed circle of traders who are linked to the highest bureaucrats and benefit from holding exclusive quota for importing and exporting all variety of cargos, commodities, and goods. The custom service employees oversee trade in the so-called monopolized goods, while the police and other agency officials close their eyes to such matters. The “monopolist” is someone who may secure, with his “long outstretched arms” into the governmen­tal circles, restriction on the import of foreign goods while being the main producer of similar goods on the domestic market. The influence of monopolists is guaranteed by their political power, since they provide protection and economical security to their clients, who generally are businessmen.

Another informal practice consists in paying employees part of their salaries in envelopes and off the books (zərfdə maaş), even in state institutions such as the State Committee on Property Issues, the Ministry for Taxation, and the Customs Committee. The impact of such informal salaries is high. The administration higher-ups benefit as they train employees not to deviate from their regular duties. In contrast to the official wage, the envelop salaries reflect market prices. While individual brib­ery strategies are blocked since they would reduce the level of trust between the chief and his subordinate, the informal payments create a mutual relation­ship.

Pripiska (distortion, a word borrowed from Russian) refers to the falsifica­tion of data, which was a standard practice during the Soviet regime’s planned economy. This practice is now used in order to make a profit from state contracts. The pripiska-dealers generate profit from multiplying the expenses of state projects by several millions or, in contrast, using less material or registering dummy corporations, which participate as subcontractors in state-financed projects.

Another practice is the extortion, since businesspeople have to pay illegally for receiv­ing commercial licenses and evade tax payments. Significantly, Rüşvət, the word for bribe in Azerbaijani, is mostly understood as “payment” or what is “due”.

Although condemned by the official populism, the informal practices that blur any clear distinction between rules and non-rules create the conditions which allow real power holders to maintain firm control. The regimes reach their goal to pre­serve the space of informal practices for its subjects in order to maintain a monopoly of power and economic autarky for self-enrichment.

 

II. Recent developments and trend assessment

 

The South Caucasus countries experienced significant political turbulences in the 1990s, but for years it looked as though people lost faith in public engagement and would tolerate any ruler who guaranteed some stability. Analysts of the region noted a trend of growing interest for politics, that led to surprising developments.

Armenia held a presidential election on February 18 in which serving president Serzh Sargsyan was elected to a new five-year term. Although an easy victory for Sargsyan appeared pre-ordained, in the last two weeks of the campaign, opposition candidate Raffi Hovannisian, independent Armenia’s first foreign minister, surged forward. In the context of the campaign, analysts pointed to some worrying aspects, such as a media heavily controlled by the government, as well as local officials serving the narrow ruling elite rather than the state as such. Opinion surveys show high levels of discontent in Armenia about corruption, poverty, and abuse of power. This manifests itself in mediocre economic performance and a continuing brain-drain from emigration.

In Georgia, President Mikheil Saakashvili surrendered most of his powers when the October 2012 election unexpectedly went against him, although he continues the political fight within the system. In the elections, for the first time a governing party lost and handed over peacefully to the opposition, the Georgian Dream coalition led by billionaire Bidzina Ivanishvili. Since then the country has been enduring a painful “cohabitation” between Ivanishvili’s government and President Mikheil Saakashvili until the latter steps down in October 2013. The new government doesn’t have yet a good grip on many issues and the economy has been performing badly. But a change of power is enabling it to correct unaddressed problems, such as a very punitive judicial system, hidden monopolies, or the state of agriculture.

Azerbaijan, the wealthiest of the three South Caucasus states, is also considered the least democratic: systemic opposition to President Ilham Aliyev has all but disappeared in the past decade. Azerbaijan is also considered insecure, partly because of its geopolitical situation, partly because of its relations with Russia, which are now in a new downturn, following a row over the Russian-operated Gabala radar station, where Aliyev has evicted the Russians after Moscow refused to meet his demands for higher rent. To the west is the still unresolved conflict with Armenia, which has left one seventh of Azerbaijan’s de jure territory under Armenian control.

Armenia: gas prices’ hike with political causes and implications 

Starting from July 2013, Armenia is facing a roughly 18-percent raise in the price of natural gas imported from Russia, as was announced in June by ArmRusgasprom, a joint venture between the Armenian Ministry of Energy and the Russian companies Gazprom and Itera. With Armenia dependent on Gazprom for gas supplies, the government had little leverage in the negotiations, and analysts estimate that prices for goods and services will soon be 20 to 50 percent higher.

The gas and utility price raises followed an earlier Gazprom announcement that gas prices for European customers would fall by up to 10 percent. The Commission’s decision means that Armenians could soon be paying more for gas than residents of Western Europe, marking a sudden reversal from previous years, when formerly Soviet republics could expect to get a big discount from the Kremlin.

With one-third of Armenia’s official population of roughly 2.97 million people living beneath the poverty line (according to official data – unofficial estimates are much higher), the gas price hike, along with the expected chain effect in raising costs for food and essential goods, is bound to trigger more dissatisfaction with the government. Aware of that risk, Prime Minister Tigran Sarkisian pledged that the government will subsidize the new gas price by 30 percent, as well as provide additional financial support for poor families. Many Armenians are skeptical that such measures will take the economic pressure off them. As of yet, the political opposition has not focused on alternative options, but many are asking what is the point of Armenia’s strategic alliance with Russia, if it results in such increases in gas prices.

Analysts point out that one of the reasons for the recent gas price raise might be the fact that, despite its strong dependence on Russia, Armenia seems to avoid joining a new Russian-led union of former Soviet republics. Over the past year, Armenian leaders have publicly objected to joining the Customs Union, arguing that their landlocked country has no common borders with Russia, Kazakhstan or Belarus. At a meeting of Armenian President Serzh Sargsyan with Russia’s President Vladimir Putin on March 12, 2013, the press announced that the talks would touch upon “integration processes” in the former Soviet Union (a clear reference to Armenia’s possible accession to the Customs Union of Russia, Kazakhstan and Belarus), but the talks did not appear to produce a breakthrough on the issue. Armenian media commentators speculated that the issue was also discussed during the three bilateral summits in 2012, but Armenian leaders gave no such promises in their public statements made after those talks, and Putin wants a final answer from Yerevan soon. Notably, President Sargsyan did not attend the informal summit of the Collective Security Treaty Organization (CSTO), on May 28, though the official explanation was that the meeting it clashed with Armenia’s independence day celebrations.

In fact, Yerevan is reluctant to acknowledge publicly a more important reason: joining the Russian-led union would essentially preclude the signing of a comprehensive Association Agreement between Armenia and the European Union. A key element of that agreement is the harmonization of Armenian and EU economic laws and regulations, which would be incompatible with Armenia’s entry into the Moscow-led Customs Union. The Armenian government expressed strong interest in concluding its association talks with the EU in time for a planned November 2013 summit in Vilnius on the EU’s Eastern Partnership program for six ex-Soviet states.

The Russian move to raise the price of natural gas for Armenia triggered interesting reactions from the neighboring countries. The ambassador of Iran announced that Tehran is ready to assist to Armenia in this difficult situation, a surprising announcement, even if no specifications have been made as to the specific assistance, currently impossible, at least in the short term. Armenia buys gas from Iran under a barter agreement by which, in exchange for gas, Armenia exports electricity. The existing technical capacity makes it impossible to supply a bigger quantity. Moreover, since the Armenian domestic energy market is controlled by ArmRusgasprom , owned with 80% Gazprom and only 20 percent by the Armenian government, the decision to buy more gas from Iran cannot be made by the Armenian government, but rather by Gazprom, and thus essentially by Moscow.

Another surprising announcement was made by the president of the Azerbaijan State Oil Company (SOCAR), who declared in an exclusive interview with local ANSTV on June 7 2013 that Azerbaijan will be able to supply Armenia with gas. Azerbaijan’s offer to supply gas to Armenia was clearly politically and not commercially motivated. The main reason was to gauge public opinion in both Azerbaijan and Armenia, where the gas crisis provoked public dissatisfaction with Russia. Baku was also motivated by a desire to stimulate the Nagorno-Karabakh conflict negotiations, which have stagnated. It remains unknown whether Baku’s offer will be considered by Yerevan. What is clear is that Russia’s principle that “gas is politics” remains as powerful in Armenia as everywhere else.

Georgia: regime change and “reset” policies

The 2012 election victory of Bidzina Ivanishvili, a reclusive businessman who made his first fortune in Russia in the 1990s, broke Mikheil Saakashvili’s monopoly on power and opened up the political system. But, according to most analysts, so far it has not addressed the country’s problems with a coherent program or even a coordinated government.

On the other hand, it was noticed that from its first days in power, the new government set out to improve relations with Russia, and it has taken some unilateral steps toward that end.

Ivanishvili’s “Georgian Dream” electoral campaign held President Mikheil Saakashvili’s government largely responsible for Russia’s anti-Georgian policies, and the new government set out to demonstrate a clean break with the policy of its predecessor. More recently, Ivanishvili’s team threatened the outgoing President Saakashvili and former government officials with criminal investigations on several issues, including policy toward Russia.

On the regional level, Georgia’s new government could not ignore the need to adapt to a shifting balance of power in Russia’s favor, to the detriment of the United States and the North Atlantic Treaty Organization (NATO). On the global level, the Obama Administration’s “reset” of the U.S.-Russia relations helped set the stage for Georgia’s regime change and the new government’s own “reset” of policy toward Russia. The U.S. administration had facilitated Ivanishvili’s rise to power in 2012 so as to encourage a Tbilisi-Moscow rapprochement, which would, in turn, supposedly ensure that Georgia ceases to be an irritant to US-Russia relations.

One major assumption behind the new Georgian government’s Russia policy holds that Georgia might regain its Russian-occupied territories in the future through a negotiated solution that would necessarily involve Russia. President Vladimir Putin’s statements on June 11, 2013 seem to imply that this issue may eventually be reopened. The idea was mentioned in a TV interview given to Moscow-based journalist Sophie Shevardnadze, granddaughter of the former president of Georgia.

While acknowledging the existence of two “red lines” that neither side could cross – the Russia-recognized “independence” of Abkhazia and South Ossetia and, respectively, the territorial integrity of Georgia –, Putin seemed to strike a pose of equidistance, insinuating that nothing is non-negotiable and the ultimate status of Abkhazia and South Ossetia is not necessarily a closed question.

At the same time, Putin proposed a “full-scale restoration of Russia-Georgia relations”, proceeding gradually and starting with cooperation between law-enforcement and security services. That Moscow would seek to control Georgia’s security services as a prerequisite to any “normalization” was a predictable demand, since Georgian Presidents Eduard Shevardnadze and Mikheil Saakashvili also faced it (Shevardnadze accepted under duress and could never fully extricate from that situation; Saakashvili rejected this outright). For Putin (as for his predecessors), such cooperation undoubtedly means Russian control of the Georgian security services.

Putin’s statements came soon after the construction by Russian border troops from South Ossetia of barbed-wire fences in Georgian territory beyond the occupation line, which proved again that the “new geopolitical realities” in this region carry negligible risks of a concerted Western response to Russia.

For all its vagueness and ambiguities, Putin’s interview amounts to an unprecedented overture to Tbilisi. By hinting that nothing is non-negotiable, Moscow seeks to nudge Tbilisi into choosing between its two sets of objectives: those associated with the Western orientation, NATO and the European Union, on one hand; and, on the other hand, improving relations with Russia and re-creating Georgia’s territorial integrity in some new form, through negotiations requiring Russia’s cooperation. So far, Georgia’s incumbent government seems to take the position that those two sets of objectives are mutually compatible and can be pursued on parallel tracks. However, if Western support is seen to be faltering, the Georgian government would have to make decisions about prioritizing one set of objectives over the other.

Azerbaijan: a difficult year ahead and the rise of political Islam

In spite of the recent success in developing the European part of the Southern corridor for its natural gas, most analysts say that 2013 will be a difficult year for Azerbaijan, marked by a troubled oil sector, an upcoming presidential election, and the potential for rising tensions with Armenia and Russia.

According to the national oil company, SOCAR, the Azerbaijani oil output declined by 7.25 % in 2012, anticipating a trend towards the end of the so-called “oil boom”, which is worrying since Azerbaijan’s extraction economy accounts for approximately 53 percent of GDP and 92 percent of exports, according to Transparency International. For 2013, Azerbaijan’s sovereign oil-wealth fund will run a deficit in the billions of dollars, posing a severe problem for a government that depends on the fund for almost 60 percent of its total budget. Last year, president Ilham Aliyev accused British Petroleum (BP), a vital partner in pipelines and Caspian oil fields, for reduced oil revenues at the giant Azeri-Chirag-Guneshli energy fields (which comprises about 80 percent of total Azeri oil production), and held the company responsible for “grave errors” and “false promises”, as well as for an $8 billion government budget shortfall.

The oil revenue decline comes as the country prepares for an election, with Ilham Aliyev – whose father was the last Soviet-era president of the republic and widely thought to be the successor to Mikhail Gorbachev – intending to run for a third term. Previous parliamentary and presidential elections have seen the ruling Yeni Azerbaijan Party, at times brutally, roll over the fractured and flawed opposition parties, and it could do so again, but popular consternation about oil revenue and frustration over corruption and public sector mismanagement could create, however unlikely, a more combustible election outlook.

Baku’s relations with Russia are seen as being on a deteriorating trend, since President Aliyev stated that Azerbaijan has no interest in joining the Eurasian Economic Union, an organization actively promoted by Vladimir Putin.

Stalemated negotiations between Azerbaijan and Armenia concerning a Nagorno-Karabakh peace settlement have added to mounting tension. Aliyev, who in the past would meet with ex-Russian President Dmitry Medvedev at least twice a year, is the only Commonwealth of Independent States member-state leader who has not yet held a sit-down with Putin since the latter returned to presidency in 2012.

Since the Baku regime’s perception is that Western institutions are ill-prepared to deal with a major crisis in the South Caucasus, Azerbaijan also adopted a new military doctrine, which emphasized the development of infrastructure and improvement of the defense and military industry. The military doctrine also approved the strategic importance of the co-operation with foreign partners.

After 2011, Azerbaijan has signed or enhanced defense industry co-operation agreements with governments and companies from South Korea, Israel, South Africa and Turkey. Bilateral relations with Turkey were developed further in 2011, through a joint venture between the Azerbaijani Ministry of Defense Industry and Turkey’s state-owned Machinery and Chemistry Enterprise, focused on developing small arms and ammunition. Similar to Turkey, Israel took an important place in Azerbaijan’s defense co-operation. Since 2011, Israeli Aerospace Industries (IAI) has been involved with Azerbaijan in establishing a joint venture on unmanned aerial vehicles (UAVs). The Israeli Aerostar and Orbiter 2M UAVs are being manufactured by Baku’s Azad Systems Co., a joint venture between Azerbaijan’s Defense Ministry and Israel’s Aeronautics Defense Systems.

An interesting development is the growing military cooperation between Azerbaijan and Georgia. From a strategic perspective, both countries would like reduce their dependency on foreign military suppliers and better provide for their armies, and the development of their defense industries may allow them to sell their own weapons to foreign countries. From a military perspective, the short-term aim for both countries in terms of the defense industry is to produce drones, tanks and different kinds of artillery. From an intelligence perspective, Tbilisi, with its more modernized military intelligence service, could provide military cadre training. The two countries can also share military intelligence more frequently and cooperate to combat common military/non-military threats. Defense cooperation between the two countries is likely to become stronger, especially after Georgia’s Defense Minister Irakli Alasania took office and declared that one of the country’s priorities will be enhancing and strengthening its defense cooperation with close strategic allies, namely Azerbaijan and Turkey. On March 18, Alasania visited Baku and signed a bilateral cooperation plan for 2013. The details were not disclosed but cooperation is likely to include upgrading the military factories in both countries and jointly producing equipment.

*

Although Azerbaijan is among the Muslim countries where support for secularism is the highest, and where radical ideologies have met only very limited interest, recently a rising trend of the political Islam was noted.

Azerbaijan is one of the historic Islamic countries, being invaded by Islamic armies only decades after the death of the Prophet Muhammad, and subsequently gradually Islamized. It was an Azerbaijani dynasty, the Safavids, who made Shi’a Islam the state religion of Iran.

Islamic revival in Azerbaijan was a generally benign and positive factor, providing a reconnection to values and traditions for a nation liberated from seventy years of atheism and Russification policies before that. However, a rise of radical Islamic groups was noticed, many of which guided by external influences. So far, Radical groups remain weak, but have a potential to grow under the current domestic and international circumstances.

Iran, Saudi Arabia and the Gulf region, Turkey and the Russian North Caucasus are the main sources of external influence on Islam in Azerbaijan. Among these, Iran has particularly supported radical Shi’a groups. The Arab Middle East, particularly Saudi Arabia, and the Russian North Caucasus, primarily Dagestan, have been equally important in fostering radical Salafi Sunni groups in Azerbaijan.

Iran’s religious activities in Azerbaijan were initially conducted openly, and concentrated on the more conservative southern regions of Azerbaijan that border  Iran; the Nakhichevan Autonomous Republic bordering Iran and isolated from the rest of Azerbaijan by Armenian territory; and several villages on the Apsheron peninsula where Shi’a Islam is traditionally influential.

The Juma Mosque, which is believed to be the first Islamic prayer venue in the entire South Caucasus, built in 743, and its Imam, Ilgar Ibrahimoglu, have become in the past several years the forefront of unofficial Shi’a movements in Azerbaijan. Ibrahimoglu has been called the “Muqtada al-Sadr of Azerbaijan”, reflecting the similarities between two young, radical Shi’a clerics able to capture the public mind. Following the Presidential elections of October 2003, Ibrahimoglu was arrested in December of the same year and charged with using religious avenues to cross the border into politics and also for his participation in the opposition’s post-election violent demonstrations, which resulted in clashes. Ibrahimoglu was sentenced to a five-year suspended sentence and forbidden to leave the country. His followers were evicted from the Juma mosque under the excuse that the Mosque is not officially registered as a religious community in Azerbaijan, and that the actual building of the Mosque is an ancient architectural building, which was supposedly in need of urgent repair work. In May 2013, Azerbaijan announced the completion of the renovation work of the Juma Mosque. The mosque is expected to be officially opened in a ceremony attended by President Ilham Aliyev.

Arab and Middle Eastern religious activities in Azerbaijan are considered to be potentially the most dangerous. Since 1991, Arab countries like Kuwait and Saudi Arabia have funded mostly Salafi religious groups and foundations in Azerbaijan.

The Salafi/Wahhabi propaganda in Azerbaijan is concentrated primarily in the northern Sunni areas of Azerbaijan as well as the capital city. There are two mosques in Baku that are known for the Salafi/Wahhabi activities. Among the two mosques, Abu Bakr remains the strongest in terms of the number of visitors and the quality of Islamic service.

The influence of Turkish Islam is less radical and less aggressive. The Turkish activities are aimed at a more educated layer of Azerbaijani society. These activities tend to be accommodating toward the state and to follow Azerbaijani laws and requirements. The major non-governmental movement in Azerbaijan is Nur (Light) or Gulen movement also known as Nurcular. The Gulen movement’s educational activities in Azerbaijan are led by Çağ Öğretim işletmeleri A.Ş., a private Turkish company that runs a network of Turkish high schools and one university.

 

III. Unresolved local conflicts

 

The South Caucasus region is home to decades long unresolved conflicts originating in disputes over autonomous legal entities. Armenian-Azeri relations are overshadowed by the conflict over Nagorno-Karabakh[2]. Georgia suffers from disputes between the central government and the autonomies of Abkhazia and South Ossetia. More than one million people in the South Caucasus are still displaced from their homes from the three conflicts, meaning that around six per cent of the entire population is made up of refugees.

Among the different explanations for the conflicts that broke out in the region in the late 1980s and 1990s were mentioned the grievances which the Soviet system had not resolved; ethnic nationalism rushing into the ideological vacuum left by the collapse of socialism; the ambitions of new elites; the manipulations of neighboring powers, especially Russia.

All the three conflicts ended with massive loss of life and flight of refugees. In each case a territory broke away from its parent-republic of Soviet times, but did not achieve recognition for its independence aspirations by most of the world. Moreover, each side has a negative power of veto on the other. The Abkhaz, Ossetians and Armenians have a power of veto on the return of refugees and internally displaced people. Tbilisi and Baku have a power of veto on the world giving the breakaway territories international legitimacy.

Unresolved conflicts, closed borders and high military budgets have also stunted development in this region. Also because of the local conflicts, the South Caucasus missed out on the chance of regional projects, north-south and east-west railways, roads and communication projects.

Nagorno-Karabakh

The local conflict considered as the most difficult to solve and with most chances of renewed interstate fighting in the South Caucasus is the one between Armenians and Azerbaijanis over Nagorno-Karabakh. The year 2013 marks 25 years since the dispute first broke out in its modern form (at the end of the Soviet era in 1988), and 2014 will mark 20 years since the ceasefire that halted armed hostilities in 1994 but did not resolve the conflict. In time, the conflict has grown much more serious, with currently some 20,000 Armenian and 20,000 Azerbaijani soldiers in trenches on either side of the ceasefire line of more than 200 km. The Armenians have built up elaborate defenses, the Azerbaijanis used the oil and gas revenues for military build-up, and there is no international peacekeeping force on the line.

The war for Nagorno-Karabakh, a region inside the territorial borders of Azerbaijan that is populated primarily by Armenians, ended with a cease-fire in 1994 and with Armenian control of Nagorno-Karabakh (which in principle is independent) as well as a swath of Azerbaijani land connecting Armenia to it. It is generally agreed that any settlement would require the return to Azerbaijan of the land outside of Nagorno-Karabakh occupied by Armenia, as well as some sort of land bridge to Nakhichevan, an Azeri-populated territory that is administratively part of Azerbaijan but located on Armenian territory, on the border with Iran. A fragile ceasefire signed in 1994 remains the only tangible achievement of diplomacy.

Since then, a mediation effort led by the OSCE “Minsk Group” (France, Russia and the United States) sought for a solution, but many analysts consider that the mediators did not make substantial efforts to resolve this conflict and the process was more about managing the conflict, coming up with a solution on paper and urging the two parties to accept it. So far, the two sides involved did not accept any solution and there is very little the three mediators can do to force them.

The international mediation effort, though complex, envisions a final settlement involving an exchange of land for peace. In earlier years, diplomats and politicians in Baku and Yerevan privately acknowledged that a settlement would involve Armenian withdrawal from lowland territories to the east and south of Karabakh, as well as Azerbaijani acceptance of an Armenian identity for Karabakh and a link with Armenia to the west. Today, the “land-for-peace” concept is essentially dead on both sides. Armenia demands “comprehensive security” in the captured lands around Karabakh, while Azerbaijan believes its new weaponry and support from Turkey can restore its full Soviet-era territorial control. Consequently, some analysts consider that the dispute might evolve from a phase of post-war to a pre-war one.

Armenia, the supposed winner of the Nagorno-Karabakh war, still counts on Russia’s support, which aimed to limit Turkish influence as well as to counter a Russophobic Azerbaijan (in the early years of independence). Russia’s positioning has given it a powerful lever of influence over Armenia and Azerbaijan, as well as external parties. However, its backing of Armenia’s stance has changed in recent years: during his presidency, Dmitry Medvedev invested more effort in mediation than his predecessors. However, forces deriving financial profit and political leverage from continued tension and the status quo, as well as Russia, which sees its mediation over Nagorno-Karabakh in terms of its influence, may not be genuinely interested in a resolution.

At the trilateral summit in Kazan in June, Azerbaijan expressed skepticism about the Russian-led peace initiative. It still considers Russia to be a dishonest broker, perhaps partly owing to the Armenian background of Russian foreign minister and chief negotiator Sergei Lavrov, but probably mostly from fear of a pax Russica in Nagorno-Karabakh, which Azerbaijan considers to be its territory.

In fact, although Armenia is part of the Russia-led Collective Security Treaty Organization (CSTO), which would be obliged to intercede on Armenia’s behalf in case of a military action against its internationally recognized territory, there are few guarantees for Armenia’s security, since no state has recognized Nagorno-Karabakh as a part of Armenia, so Russia and the CSTO have a get-out clause. Moreover, military intervention would not be easy, since Russia and Armenia do not share a border, being separated by Georgia, and the Central Asian CSTO states would not offer military assistance.

Other analysts point out that intervention in support of Armenia’s rule over an internationally unrecognized territory could greatly damage the CSTO’s standing, but equally, perceived impotence might also lead to its death. This would be a considerable loss of face for Russia, especially in Central Asia where the organization is its multilateral tool of choice.

On the other hand, the growing gap between Azerbaijan’s position as the losing side in the conflict of 1994 and its ambitions and self-image as a rising successful power increases the local frustration. The rhetoric grows every year on the Azerbaijani side, and there is a growing fear that Baku might make a war move, which will be a disaster for everyone, not just Armenians and Azerbaijanis, but Georgia and the wider region as a whole.

The tension is fueled by Azerbaijan’s oil and gas wealth and by Armenia’s support from Russia. Azerbaijan is acquiring a distinct advantage in military technology and firepower, but Armenia retains major advantages of terrain and operational skill. Azerbaijan has a patron in Turkey, which feels a fraternal commitment, but Armenia has a treaty-based security alliance and historical partnership with Russia.

Azerbaijan’s intensifying cold war with neighboring Armenia is also fuelled by the fact that both countries face presidential elections in 2013, which is seen as precluding any high-level negotiations between the two sides and adding more worry to a distressing conflict.

A future Karabakh war will engage Armenia and Azerbaijan against each other directly, with greatly expanded arsenals. Both sides plan on this basis and both threaten to target civilian infrastructure, such as pipelines.

Another danger lies in the patron-client relationships of the regional powers, Russia with Armenia and Turkey with Azerbaijan. Ankara and Moscow would not actually come to blows in a new Karabakh war, but both can be dragged into dangerous circumstances by their clients. For the time being, Iran plays a marginal political role, but provides vital energy and trade links to Armenia. However, Tehran’s relations with Baku are not good, and, in a new Karabakh war, Iran might seek to settle accounts.

Moscow and Ankara, working together, can restrain their clients from renewed war and compel them to real negotiations. This kind of traditional great power is seen as a possible working one, by far preferable to another war. Ankara and Moscow share broadly similar views on Black Sea, Caucasian and Caspian issues. They both want to avoid a war between Armenia and Azerbaijan while not allowing their clients to compromise their own wider interests.

Abkhazia

The status of Abkhazia is a central issue of the Georgian–Abkhazian conflict. The wider Abkhaz region formed part of the Soviet Union until 1991. The conflicts opposing the secessionist movements in Abkhazia and Georgia started as the Soviet Union began to disintegrate, towards the end of the 1980s, when ethnic tensions grew over Georgia’s moves towards independence. This led to the 1992-1993 war in Abkhazia that resulted in a Georgian defeat, de facto independence of Abkhazia[3] and the mass exodus and ethnic cleansing of the local Georgian population.

In spite of the 1994 ceasefire agreement and years of negotiations, the dispute was not resolved, and despite the long-term presence of a United Nations monitoring force and a Commonwealth of Independent States (CIS) peacekeeping operation, the conflict has flared up on several occasions. In August 2008, the sides fought during the South Ossetia War, which was followed by the formal recognition of Abkhazia by Russia, the annulment of the 1994 ceasefire agreement and the termination of the UN and CIS missions. On 28 August 2008, the Parliament of Georgia passed a resolution declaring Abkhazia a Russian-occupied territory.

2013 marks five years since the Georgia-Russia war and Moscow’s recognition of Abkhazia as an independent state. Though the de facto Abkhaz authorities and Russia declared that recognition essentially settled the conflict, in fact it further entrenched the deadlock.

Russian influence in Abkhazia has increased. The entity is fully dependent on Russia, whose military presence is backed up by a number of measures: the issuing of Russian passports, encouragement of tourism, investment in healthcare and culture promotion, extensive contracts and agreements with the separatist governments, barriers to cross-border travel to Georgia (while access to Abkhazia and South Ossetia is facilitated), Russian purchases of real estate, etc.

The latest Abkhaz ‘president’, Alexander Ankvab, has both a Soviet background and modern-day Siloviki (security and power ministry) connections. The Russian control has not been as smooth as might have been expected in South Ossetia, where former President Eduard Kokoity had frequent disagreements with the Russian leadership and the Kremlin was not keen to endorse him for another term. An overtly pro-Russian candidate, former KGB officer Leonid Tibilov, did win but only in a fixed second-round run-off, suggesting waning Russian traction even here, and a suspicion that what works north of the Caucasus mountains does not work as well to their south.

The costs and problems associated with Abkhazia and South Ossetia are estimated for Russia at about Rs7.7 billion ($250 million) each year, but the annexation and recognition of “independence” of the two regions have given Russia control in a part of Eurasia that its great-power nationalists could only have dreamt of after the end of the Soviet Union.

Currently, officials and analysts agree that Abkhazia remains “in a grey zone”, with Russia its only ally. Russia says there is no chance it will rescind its recognition or reconsider its troop presence in the highly strategic South Caucasus. The Abkhaz officially say the only major issue left to be decided is how Tbilisi will acknowledge their sovereignty. Georgia rules that out and has won diplomatic victories in the form of declarations by governments and international bodies describing the Russian military presence as an illegal occupation. However, Tbilisi has received little tangible support to reverse that presence.

The Abkhaz hoped, unrealistically, to replicate the success of Kosovo, which has been recognized by more than 90 countries. Five years on, Moscow’s and Sukhumi’s efforts have quieted, and it is highly unlikely that Abkhazia will be recognized by any large states in the near future.

In terms of military presence, there are clear signs Moscow plans to stay in Abkhazia indefinitely. Russian officials say there are roughly 5,000 Russian personnel in Abkhazia: 3,500 military and 1,500 Federal Security Service (FSB) officers and “border guards”. Moscow allocated $465 million over four years to the rehabilitation and construction of military infrastructure.

In economic terms, Abkhazia’s government is overwhelmingly dependent on Russia for budget and development funds. The International Crisis Group reported recently that a quarter of the budget comes from direct Russian transfers, and that’s separate from a massive Russian-funded infrastructure program for roads, schools, government buildings and agriculture. Also, Russia pays the pensions of Abkhazia’s retired. The economy remains unhealthy, thanks in part to the government’s big Ottoman-style bureaucracy, much larger than a political entity of around 250,000 people can afford.

Critics complain of a dependency syndrome, and both Abkhaz and Russian officials have alleged the funds have fuelled corruption. However, some areas of discord exist, the main one being the fact that Abkhazia’s laws prohibit private ownership of land and fears privatization would result in it being overrun by wealthy Russians. As an Abkhaz politician said, “two oligarchs can buy the whole of Abkhazia”.

South Ossetia

The situation in South Ossetia has significant parallels with that in Abkhazia. South Ossetia enjoyed less formal autonomy than did Abkhazia under Soviet rule, and it is a more ethnically homogenous region (fewer than 20 percent of Abkhazia residents are ethnic Abkhaz, while over 60 percent of those in South Ossetia are Ossetian). Moreover, North Ossetia, which shares the same ethnic, is across the border in Russia. Even before Georgian independence, South Ossetian leaders expressed a desire to secede and join Russia (and North Ossetia). This led to violence in 1990, in which Russia supported Georgian efforts to prevent secession. But in the winter of 1990-1991, an effort to impose direct rule from Tbilisi over the region resulted in outright civil war, and Russian forces intervened.

In the context of the South Ossetia conflict between Georgia and Russia, analysts noted that the two countries still lack a border agreement, accusing Russia of “territorial nibbling”. The 894-kilometer long Georgian-Russian border is largely delineated, but the map line, based on Soviet-era documents, has not been confirmed by both sides. Before the 2008 war, 86 percent of the border had been agreed upon, according to Georgia’s Ministry of Foreign Affairs, but the topic has not been addressed since then and with both sides divided over the status of Abkhazia and South Ossetia, further discussion in the near future is unlikely.

According to Georgian officials and analysts, over the past two years Russian forces within South Ossetia have taken over hundreds of meters of land, at times dividing Georgian villages in half. The Russian efforts to push the frontier forward is seen by Georgia as part of Moscow’s campaign to propagate the idea of a ‘new political reality’, that of the two independent states, South Ossetia and Abkhazia.

While reports about Russian border guards allegedly trying to seizing strategic spots along the border are worrying Georgians, Tbilisi is essentially powerless to prevent such acts, due to the enormous difference in strength between Georgia and Russia. A special commission was created in 2006 to finalize the border agreement, according to the Georgian Foreign Ministry. The process is also underway with Armenia and Azerbaijan. Georgia’s only fully demarcated border is with Turkey.

Chances and initiatives to end the conflicts

Everyone understands that Abkhazia and South Ossetia are protracted conflicts: the irresistible force of Russian protection collides with the immovable object of widespread international recognition that Georgia holds sovereignty over the republic. More than two decades after the Soviet collapse, the conflicts are long way from any solution. Significant progress is seen as likely to occur when not only Georgia-Abkhaz/Ossetian but also Georgia-Russia relations improve.

Analysts note that Georgia now has its most progressive government team dealing with the two breakaway territories of Abkhazia and South Ossetia. The minister responsible, Paata Zakareishvili, has two decades of experience in working with Abkhaz and Ossetians in the nongovernmental sector. The results have been small but significant. Covert Georgian military units operating on Abkhaz soil were disbanded. There is more commercial traffic across the border, and two new crossing points were opened (although there is a fear that the border will be tightened ahead of next year’s Sochi Olympics). The two sides are finally working together properly on the important issue of the missing, both the dead from the war and the living who are detained. These measures are a considered a good start, especially with the Russian troops still stationed in South Ossetia. In the current situation, no one expects a new armed conflict over Abkhazia or South Ossetia.

Another proposed incentive was the re-establishing by Georgia of the railway through Abkhazia to Russia, along the Black Sea coast. The Georgian government was criticized by Azerbaijan for announcing the initiative without prior consultations with Baku, since it has its concerns that the railway could be an overland conduit for Russia to supply arms to its adversary, Armenia. In fact, since the Georgia may apply restrictions for railway cargo traffic, such a project is seen as being of benefit to everyone in the Caucasus, including Azerbaijan.

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As far as the unresolved conflicts are concerned, there is no discernible desire on the Abkhaz, Ossetian or Karabakh side to enter a common state with Georgia or Azerbaijan. It is difficult to convince their leadership and populations that anything might be gained by this, given the economic and social turmoil in Georgia, and the poverty in Azerbaijan. The common perception is that, if incorporated back into their original states, the separatists would have much to lose: their security and their dominant political position. Moreover, neither the Georgian nor the Azerbaijani army is likely to pose a credible military threat in the immediate future. While Georgia and Azerbaijan seem unlikely to reconcile themselves to the loss of these territories, they are also unable to re-incorporate them by peaceful or military means.

 

IV. Powerful and competing geopolitical actors

 

The Caucasus is a political priority for many countries in the geopolitical arena, including, Russia, Turkey, Iran, the United States and the European Union. The stability of the region has great implications for the security situations in the Middle East and Black Sea regions, as well as for Russia. Furthermore, challenges and unpredictability in the region also have the potential to influence strategic partnerships of the United States in the region.

Although the United States plays a smaller political role in the Caucasus than Russia, several factors prompted the U.S. interest in the region, including the aftermath of September 11, 2001, as well as the growing activity of Turkey and Iran. The Iran-Russia relationship supports the U.S. political opinion that Russian policy in the Caucasus should be regarded with skepticism. However, analysts agree that if Russia moves away from the Caucasus, it could provoke instability throughout the region as well as beyond it.

The main interests of the geopolitical actors involved in South Caucasus include:

• Access to natural resources. This mainly affects access to the oil and gas resources of the Caspian Sea basin. Oil and gas are the issue invisibly directing regional security planning. Other natural resources play a role too, but are far from being of similar global importance. Within the immediate neighborhood of the region, access to water resources is beginning to gain significance.
• Military presence. This mainly affects the strategic role of the South Caucasus in how it influences security-building in the sub-regions of the Commonwealth of Independent States (namely, the North Caucasus and Central Asia), Iran and Turkey. Furthermore, the South Caucasus has become subject to military planning in and around Afghanistan.
• Trade and commerce. Apart from the oil and gas business, the South Caucasus is a subject of interest in other trade and commerce. Potentially, it represents a market with a total of some 16 million consumers, although the purchasing power is currently at low levels and the economic capacities are rather limited. Besides, the South Caucasus is a transit region connecting Iran and Turkey with South Russia. It links the Black Sea region to the Caspian Sea and Central Asia.

The interests of Turkey, Russia and Iran clash in the Caucasus. The Soviet legacy still shapes the strategic landscape and Russia retains a dominant role. Ankara seeks to promote interdependence among the three South Caucasus states in order to strengthen their sovereignty and to expand commercial and energy links to Turkey, though following the rejection of its 2009 efforts to normalize relations and open the Turkish Armenian border, Turkey has moved more firmly behind Azerbaijan. Iran’s engagement to the region includes deepened ties to Armenia, efforts to intimidate Azerbaijan, but caution with respect to Nagorno-Karabakh. Iran does not want Russia heavily involved in the South Caucasus, but has avoided confronting Moscow and has benefitted from a mistrust of Turkey in the region.

Russia: soft, but still most important power

Russia’s 19th-century expansion into the South Caucasus and Central Asia remains an important legacy for its 21st-century foreign policy decision-makers. It sustains a belief that Russia has a natural right to pre-eminence in both regions: one ‘legitimized’ by tradition as well as present-day mutual interest. The Kremlin reluctantly accepts that things will never be as they were in the Soviet Union and is at times aware of its own limitations, but it retains the ambition to arrest the decline of its influence and to reconstruct it in more modern and acceptable terms.

Moscow regards the post Soviet states as its “zone of privileged interests” (former president Medvedev, 2008). South Caucasus is seen as more important strategically for Moscow than Central Asia, because of its proximity to the North Caucasus and its dual role as an energy-producing and key transit region to Europe and the Middle East.

Russia suffers from its still shrinking authority in the post-Soviet area, including the South Caucasus, where Russia’s cultural influence (Russian-language, Soviet-style administration, national defense, education, art, TV, commercial thinking, etc.) is visibly diminishing. Russia’s regional ascendancy is gone. With great skepticism, Russia looks at international competitors in the region, first of all, the U.S. and Turkey.

If for China and the West, influence in the South Caucasus and Central Asia is a means to achieve other domestic and foreign policy objectives such as securing energy resources, for Russia, influence might be considered an end in itself. What also sets Russia apart is that ambition is not matched by capability. If Russia was not able to prevent the revolutions and the loss of the Caucasus countries, the West’s disinclination to invest substantially in the region afforded Russia some opportunities to reassert its position. While the West may not approve of Russia’s behavior, it often sees no compelling interest in opposing it either.

Russia pays careful attention to political and military stability in this region due to its strong economic interests in the region, including the oil reserves of the Caspian Basin, other natural resources and the three national energy markets. Also, Russia is one of the main arms suppliers to the three South Caucasus countries.

The South Caucasus, with its potential interstate conflict, presents a complex arena for Russian soft power. The levers of Russian influence here vary. They are economic and military in Armenia, scarcely present in Azerbaijan, and essentially related to negative publicity as well as economics with regard to Georgia.

The governments in Azerbaijan and especially Georgia, where there is less Russian soft power at work, have more traditional security concerns about Russia. Armenia does not share these concerns (at least openly). But it is also worth noting that while Azerbaijan and Georgia have very different ways of dealing with their former overlord, they also have a common problem: they consider approximately 20% of their territory as occupied.

Kremlin was and is often accused of playing Abkhazian, Chechen, Ossetian or Karabakh cards as a means of increasing Moscow’s influence on the internal developments in Armenia, Azerbaijan and Georgia. Russia appears to have adopted a “carrot and stick” approach – with the stick usually reserved for Georgia, and the carrots for Armenia. Indeed, regardless of the legality or otherwise of its actions during the 2008 Russia-Georgia war, Russia clearly set out to teach Georgia a lesson.

Russian influence in Armenia is so great that some think that lack of sovereignty should be Armenia’s number one concern.

The first step was taken in 2003, when the then CEO of United Energy Systems (UES), Anatoliy Chubais, outlined plans to integrate the South Caucasus into a Russia-led energy-supply network through ten former Soviet republics, as well as plans to ensure electricity outflows from Armenia to Turkey and Azerbaijan. Chubais denied that UES sought political gains but he has been a leading proponent of the concept of a Eurasian ‘liberal empire’ and his actions gave Russia almost total control of Armenia’s energy market. It was Robert Kocharian, Armenia’s president from 1998 to 2008, who effectively sold off Armenia to Chubais and other Russian commercial and political interests. Through Gazprom’s ownership of its Armenian subsidiary, ArmRusGasprom, 80% of Armenia’s energy structure is Russian-controlled, including the majority of the Iran-Armenia gas pipeline, thus ensuring that Armenia cannot become an independent transit country should Iranian gas ever reach European markets. Russia has also bought up all but two of Armenia’s hydroelectric and nuclear power stations, in exchange for writing off Armenian debt.

The extent to which Russia has acquired concrete political gains from energy and infrastructure ownership is a source of debate within Armenia. Kocharian’s successor, Serzh Sargsyan, is ostensibly less pro-Russian but by the time of his election in 2008 much of his country had already been sold. Despite Yerevan’s attempts to balance a pro-Western and a pro-Russian position, Russia remains Armenia’s main trading partner and source of economic and military support.

The most turbulent and problematic relationship for Russia has been with Georgia, coming to a head in the 2008 Russia-Georgia war over South Ossetia. At their core, Russia’s objectives in Georgia are to retain its influence by curtailing Tbilisi’s pro-Western ambitions, and by exerting pressure on its domestic sphere by supporting the independence movements in Georgia’s two secessionist enclaves: Abkhazia and South Ossetia. It also seeks to prevent any future NATO-expansion that would include Georgia.

Analysts note that direct Russian influence in Georgia has diminished considerably since it effectively took control of Abkhazia and South Ossetia (the parts of Georgia where it had traditionally the most influence). However, the October 2012 election of Bidzina Ivanishvili, a wealthy businessman with strong connections in Russia, as Georgia’s prime minister seems to be seen by Moscow as a potential window of opportunity for regaining some of its influence.

In contrast, relations between Russia and Azerbaijan have ebbed and flowed over recent times. Particularly tense in the 1990s with frictions over Russia’s support of Armenia over Nagorno-Karabakh and the energy and pipeline issues, more recently, relations did not improve. Azerbaijan was able to use its energy resources to craft a more independent foreign policy. And while relations with Russia have broadened in recent years, Moscow does not have much leverage over Azerbaijan.

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President Vladimir Putin’s project to create a Eurasian Union by 2015 is being carefully considered in the region, since it highlights potential future trends that might have a direct impact on the South Caucasus. First, the region now plays a greater role in Russia’s foreign policy ambitions than in the mid-2000s. Second, Russia’s goals are now geographically much narrower and more defined than in the 1990s. Third, in the South Caucasus, these projects really only involve Armenia, since neither Georgia nor Azerbaijan currently fit within Russia’s long-term regional integration agenda. Armenia is already an observer state in the Eurasian Economic Community and its leadership has already expressed its interest in the idea of a future Eurasian Union, particularly in economic terms.

Analysts note that the new foreign policy concept for Russia, launched in February 2013, is not a new phenomenon, since Vladimir Putin had such a doctrine during each presidential term since 2000. In the early 2000s, this was an alliance with the United States, coupled with the “European choice”. In the mid-2000s, this gave way to a policy of defensive self-assertion, manifested in the 2007 “Munich speech” in which Putin lashed out at the George W. Bush administration’s preference for taking international law into its own hands. Medvedev’s presidency, which was in practice Putin’s third term, was marked by a reset with Washington and a search for “modernization resources” in the West that was designed to facilitate the flow of investment and advanced technology to Russia. Putin’s formal return to the Kremlin has ushered in yet another iteration of his foreign policy, which might be called “sovereignization.”

Many observers question the manner in which the proposed regional institutional arrangements might work in the event of a conflict between Armenia and Azerbaijan over Nagorno-Karabakh, which is considered a scenario more likely than a repeat of the 2008 Russia-Georgia conflict.

Over the last few years, Russia has been progressively beefing up the Collective Security Treaty Organization (CSTO), which includes Armenia. Consequently, in the event of future conflict in the South Caucasus, Russia and the CSTO might have no choice but to provide military assistance to Armenia. Therefore, Russia’s aspiration to build stronger regional institutional arrangements at this stage might not have any impact upon Azerbaijan or Georgia since they would suffer from indirect spill-over effects. In the case of Abkhazia and Ossetia, these entities are long-standing de facto members of Russian economic space, although their status will remain impaired until a full-scale peace settlement is concluded with Georgia. For the time being, Sukhumi and Tskhinval have only used Moscow’s assistance to gain independence from Tbilisi. Georgia, which left the CIS in 2009, it is seen as likely never to return in Moscow’s orbit, and there is broad consensus within Georgian society on this point. Supported by its hydrocarbon-filled treasury, Azerbaijan will remain on the margins of any CIS integration plans, as will resource-poor Armenia which lacks a common border with Russia.

Turkey: forging an East-West axis?

Russian officials and analysts see the potential for more intense competition for influence with Turkey in the Caucasus. If Turkey’s bid to become a leading player in the Middle East fail, they think that Turkey will redirect their energy to the Caucasus. They also assess that Turkey is becoming more Islamist under the AKP and fear that Turkish cultural, religious and educational activities in the Caucasus, Crimea and Central Asia with Circassian and other Muslim communities could, over time, foster radical Islamist movements in Russia and neighboring states.

Russian analysts already speak of a North-South strategic axis (Russia, Armenia, Iran) as opposed to an East-West axis (Turkey, Georgia, Azerbaijan). This is already evident in the energy sector, with Turkey and Georgia covering most of the transit distance of the Azeri oil and gas production to Europe.

The “East-West axis” is also supported by the fact that Turkey is interested to cooperate with Georgia and Azerbaijan in the defense industry, since its defense programs encompass the full spectrum of military operations and include major areas across land, air, sea and space. As stated by Georgia’s defense minister, Tbilisi is interested in the trilateral format cooperation. Meanwhile, defense cooperation between Turkey and Azerbaijan dates back further than Turkish-Georgian ties and both countries are interested to cooperate with Turkey in the defense industry.

Beyond the possible trilateral format cooperation in defense industries, all sides agreed to jointly strengthen military exercises. Since September 2006, under the framework of a NATO program, trilateral cooperation between Azerbaijan, Georgia and Turkey in pipeline security has taken place annually. Moreover, under the trilateral format, Azerbaijani, Georgian and Turkish special forces conducted the Caucasus Eagle 2012 military exercises for the first time and will conduct these every year. The next steps seem to be Azerbaijan and Turkey’s attendance at a joint US-Georgian military exercise in 2014, which Georgia’s defense minister suggested joining during his visits to Baku and Ankara.

Analysts do not exclude the possibility of an improvement in the trilateral format of cooperation in the defense industry and military training with the signing, in the near future, of a trilateral defense industry cooperation agreement.

Iran: complex relationship with fellow Muslim country

According to recent experts’ testimonies before the U.S. Congress, Iran also regards the South Caucasus region as the “near abroad” and believes that it has a natural right to dominate the Caucasus economically, politically, and diplomatically since the territories of Azerbaijan, Armenia, and Georgia belonged to Iran until the 1828 Treaty of Turkmenchay, when they were lost to the Russian Empire.

However, Iran’s posture toward the South Caucasus is closely related and influenced by Iran’s relations with Russia. The regime in Tehran appears to be conscious of Russia’s interests in the South Caucasus, a region that Moscow also considers to be part of its “near abroad” and, since Russia is considered by the ruling clerical-military elite in Tehran as the periodic (albeit unreliable) supporter of Iran, Tehran chose not to challenge Moscow’s policies in the South Caucasus.

Throughout the 1990s, one of Tehran’s key objectives across the Caucasus and Central Asia was to prevent an increase of U.S. influence. This is still an objective, but Tehran’s resources are limited and it is now far more likely to out-source to Russia and China and regional collective organizations – such as the Shanghai Cooperation Organization – to realize this objective.

Iran’s relations with Azerbaijan are considered the most complex, since Tehran sees that country as being of a less sensitive interest for Russia, but also because Azerbaijan is closest to Iran on ethnic and religious terms.

Azerbaijan is one of only three countries beyond Iran (Bahrain and Iraq being the others) which is majority Twelver Shi’ite. Millions of Azerbaijanis reside in Iran, more than twice as many as live in Azerbaijan. Ali Khamenei, Iran’s Supreme Leader, is ethnically Azerbaijani. But Azerbaijan’s rejection of religious populism and its mosque-state separation contrast sharply with Iran’s theocracy and authorities in Baku consider Iran as a strategic adversary.

The Islamic Republic has employed a number of strategies to undercut Azerbaijan’s pro-Western and secular orientation. Even prior to Azerbaijan’s independence from the Soviet Union, Iranian missionaries operated in rural Azerbaijan. Iranian authorities helped support the Islamic Party of Azerbaijan in the early years of Azerbaijani independence, and, after its crackdown by the Azerbaijani authorities, Iran arranged scholarships to bring young Azerbaijani students to Qom. Iranian authorities also utilize charities to expand their influence. Of myriad Iranian charities, the Imam Khomeini Relief Committee (IKRC) is the regime’s chief aid organization abroad. At the height of the Armenia-Azerbaijan war over Nagorno-Karabakh, Iranian authorities sought to exploit and radicalize many Azerbaijani refugees seeking refuge in Iran. Azerbaijani authorities also accused Iran of promoting separatist ambition among Azerbaijan’s Talysh minority.

Apart from the territorial problems, Baku also has an unresolved oil dispute with Iran in the Caspian Sea, which remains a major irritant in bilateral relations. The Azerbaijani people remain largely pro-Western and unwilling to accept Iranian domination, turning instead not only towards Turkey but also to Iran’s great enemies, Israel and the U.S.

Regarding the territory, it is worth noting that, at the beginning of April 2013, Iran’s hard-line “Kayhan” daily, which is said to reflect the views of Supreme Leader Ayatollah Ali Khamenei, called for a public referendum in Azerbaijan to decide whether the country should join the Islamic republic. The call followed a March 30 conference in Baku organized by groups seeking independence for Iran’s sizable Azeri minority, which includes prominent figures such as Ayatollah Khamenei and opposition leader Mir Hossein Musavi. Speakers at the conference, reportedly said that Iran faced a dire political future because of sanctions and international pressure, and predicted that the northwestern provinces, which they referred to as “Southern Azerbaijan” will become independent. Although Azerbaijani government officials were reportedly not present at the conference, the Iranian Foreign Ministry summoned the Azerbaijani ambassador to Tehran and warned him that such provocations could “seriously” damage relations between the two countries.

Also last April, Iranian lawmakers threatened Azerbaijan, insinuating that it, like Israel, might be “wiped off the map” as an independent country. Mansour Haqiqatpour, deputy chair of the Security and Foreign Policy Committee in the Iranian parliament, said that “a movement has started for the annexation of seventeen cities” to Iran’s north, including Azerbaijan’s capital, Baku. He claimed that ethnic Azeri Iranian citizens are ready to “take back the Iranian cities which were separated from Iran under the rule of Qajar dynasty”.

While it is not uncommon for Iranians to speak of Iran’s northern neighbors in the Caucasus and Central Asia as historical Iranian territories (implying that the independence of states such as Azerbaijan is only possible due to Iran’s current geopolitical weakness), Tehran’s move comes in a new regional context, since Azerbaijan became an important regional player, having established close relationship with the United States and NATO, as well as with Israel with which Azerbaijan has both defense-procurement and defense-cooperation agreements.

In 2012, Azerbaijan bought $1.6 billion worth of Israeli arms. Israeli defense firms also are advising the Azerbaijani defense-industry ministry on an Azerbaijani-made weapon. Moreover, even if it was not recognized officially, the U.S. and Israeli military experts discussed the idea of using Azerbaijani territory as a staging ground or refueling point should it come to a war with Iran. In this manner, Baku seeks to protect its own strategic energy infrastructure – namely the U.S.-backed oil pipeline that stretches from Baku to the Mediterranean – which, as Iranian cabinet members have stated, would be one of its first targets in the event of conflict with the West.

The 21-24 April 2013 visit of Azerbaijani Foreign Minister Elmar Mammadyarov to Tel Aviv was considered a crossing of Azerbaijan’s self-imposed “red line” in its relations with Iran. No documents were signed, but Mammadyarov met with Israeli President Shimon Peres, Prime Minister Benjamin Netanyahu and Defense Minister Moshe Yaalon, and a statement that Baku would consider opening an embassy in Israel concluded the mission. This was soon followed by a visit to Tehran on April 29, of Azerbaijani National Security Council Secretary Ramiz Mehdiyev, who met with Iranian (former) President Mahmud Ahmadinejad and other senior Iranian officials. Although the government did not specify the agenda, Azerbaijani observers believe the trip was taken to assure Tehran that Baku is not going to host Israeli military bases or provide its territory for attacks on Iran.

Iran has a totally different relation with Armenia, with which ties run deep and predate Iran’s Islamic Revolution. Armenians form the bulk of Iran’s sizeable Christian community. Armenia provides the central pivot for a Russia-Iran Axis.

Given that its borders with Turkey and Azerbaijan have been closed since 1993, Armenia has become reliant on Iran and Georgia as its sole avenues to world markets. Iran is also a principal trading partner for Armenia and Yerevan’s economic interests are already harmed by the sanctions imposed on Iran.

In the case of Georgia, since 2010, Iran-Georgia relations have warmed and a visa-free regime has been established between the two countries. The greater Iranian access to Georgia is highly likely to be exploited by Iran’s intelligence services for operational purposes.

According to most analysts, the South Caucasus countries will increasingly become targets for Iranian influence. Not only will the Islamic Republic continue to target the Republic of Azerbaijan and exploit its warm ties with Armenia, but Iranian authorities will also increasingly try to leverage leadership changes and ideological solidarity in Georgia and Turkey.

The United States: calls for more involvement in the region

The South Caucasus is seen by many analysts and politicians as pivotal for the United States’ interest to limit Russian influence around its periphery and to stabilize the pro-Western states there at a time when Europe is weak and disorganized, as well as to limit Iranian power projection.

Among the three South Caucasus countries, Azerbaijan is seen as having the characteristics of an American ally. It is strategically located and provides options for both influencing events in Iran and limiting Russian power in Europe by providing an energy alternative. It is also disposed to acquire and pay for weapons, and all these factors may incline the balance in Baku’s favor, despite its poorer record on democracy and human rights.

The pro-Baku lobbies also stress that whatever criticism might be made of the regime the alternative would not be more liberal or transparent. An Iranian-sponsored alternative would look like Iran, and a Russian-sponsored alternative would look like Russia.

 

V. Energy: making geopolitical actors move

 

The energy factor – represented in the South Caucasus by the oil and gas fields in Azerbaijan, as well as by the transit routes in the area – is considered as having the major influence over the regional actors’ strategies and policies.

At the end of the 19th century, half of the oil in the world was produced in current-day Azerbaijan. Between 1898 and 1901, Russia and America roughly split global production of around 500,000 barrels/day (b/d) between them, with Russia out-producing the United States on occasion. The early oilfields were found on and off the Aspheron Peninsula, in Azerbaijan which was annexed by Russia in 1813 by Alexander I. The first well was drilled in 1847, with ongoing activity there ever since. By 1904, the Baku region was producing 73 million barrels a year.

The Azerbaijani fields’ history is linked to the wealth they produced for the Nobel family (the developers of the oil fields around the capital, Baku), then for the Rothschilds, who sold them to Royal Dutch Shell. Baku oil also underwrote the career of Mr. “Five Percent” Calouste Gulbenkian[4].

The oil from the Baku reservoirs was considered a critical factor in governing many battles of the Eastern Front in the Second World War. When advancing in Russia in the World War II, Hitler was trying to reach Baku and its oil, being stopped by the Stalingrad defeat. Failing to reach the oil supplies is seen as one of the factors that brought Hitler’s defeat. Both Hitler and Stalin understood that control of Baku meant control of the Eurasian landmass. The realities of energy added to the strategic importance of the South Caucasus.

In the last decade, the Azerbaijani oil production raised from 283000 b/d to more than 1 million b/d. In the short term, production of oil from Azerbaijan is estimated to continue at roughly current levels.

The region is also important for its natural gas fields, and the perspective of transit routes to Europe that are not under Russian control recently added even more importance to the region’s strategists, since Azerbaijani company SOCAR charged (in 2011) an average $191 per 1,000 cu m (kcm), undercutting the price of Russian gas, which was, at the same period, $446 per kcm.

The Russian strategy has been to maintain and deepen European dependence on Russian energy, on the theory that this would both increase Russian influence and decrease the risk to Russian national security. The second phase of this strategy has been to limit alternatives for the Europeans, including Turkey. The complex tension over oil and natural gas pipelines boils down to the fact that the Russians do not want significant energy sources that are outside of Russian control to be available to Europe. A main point of concern is the prospect of Russia being deprived of the position as a regional oil and gas carrier monopolist.

Another important goal for Russia is to prevent any agreement between Azerbaijan and Turkmenistan that would lead to a Trans-Caspian pipeline that would bring Turkmen gas west. Russia will go to great length to prevent it since large quantities of Turkmen gas to Europe will further erode Gazprom’s hegemony in Europe. Turkey’s and Russia’s interests clearly do not coincide. Russian policymakers also remain concerned that Iran could emerge, over a long term, as a major competitor for the European gas market.

Some analysts suggest that, in order to prevent the flow of Caucasian and central Asian oil and gas to the Western world, Russia – with the help of Uzbekistan, dominated by factions close to the Muslim Brotherhood – acted to eliminate the traditional leaders and maintain a state of insecurity in the area, including the North Caucasus’ Chechnya.

Another power interested in disrupting the South Caucasus stability and cooperation trend is natural gas producer Qatar. Qatar’s involvement in the 2004 elimination by the Russian services of Chechen leader Zelimkhan Yandarbiyev [5] was seen as a clear sign of this interest.

On the opposite side, the regional actors, as well as Turkey, are building hopes on the so-called “Southern Corridor” seen as essential for stabilizing a volatile region. It will also bring new supplies to Turkey, the fastest growing gas market in Europe, helping it to decrease its dependence on Iran and Russia. Just as the Baku-Tbilisi-Ceyhan pipeline solidified Azerbaijan’s and Georgia’s Western links, the Southern Gas Corridor is also expected to contribute to cementing their Euroatlantic orientation.

The Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the Baku-Tbilisi-Erzurum (BTE) gas pipeline were considered a success of regional cooperation and fostered the achievement of Azeri-Turkish joint Trans-Anatolian gas pipeline project (TANAP), as well as the BTK railway project, aimed to connect the Eastern and Western worlds.

The BTC system transports crude oil from the offshore Azeri-Chirag-Guneshli oil field in the Caspian Sea to Ceyhan on Turkey’s Mediterranean coast via Tbilisi. In the 1990s, the BTC was a game changer for two reasons. The first was the flow of crude oil from the Caspian Sea of a landlocked Caucasus republic to the Mediterranean Sea. The second was that the BTC was the first hydrocarbon transport project not to be controlled by Russia, Iran, or a country in the Gulf.

The BTE gas pipeline also transports natural gas from the Shah Deniz gas field, crosses Azerbaijan and Georgia, and joins Turkish grids at Erzurum. This gas pipeline uses the same corridor as the BTC. The BTE is the first gas pipeline running from Central Asia and the Caucasus to the Western world without relying on Gazprom.

The BTK railway project aims to build a new “silk road” between Central Asia and Europe – considered the shortest, most effective, and most clean-carbon transit route between China and the Western world, as well as a strong basis for deeper regional integration and political consolidation.

Currently, Iran and Armenia are not included in these projects, being affected by embargoes (Turkey’s embargo on Armenia after the secession of Nagorno-Karabakh in 1988, and the U.S./EU embargo on Iran since 1996). Nevertheless, some concessions have already been made.  The Iranian National Oil Company, NIOC, owns 10 percent of Azerbaijan’s Shah Deniz gas field (this joint venture between a Switzerland-based subsidiary of NIOC and BP is not subject to international sanction).

As for Armenia, rowing regional cooperation prompted Azerbaijan’s foreign minister, Elmar Mammadyarov, to declare that cooperation between the three states is a “message to our neighbors in Armenia that it would be better for them to join the club rather than getting out of the club”.

Turkey sees the Shah Deniz development, TANAP and TAP as the initial steps for a “Southern Corridor” energy highway that will eventually carry Central Asian, Caspian, Iranian, Iraqi and East Mediterranean gas flows via Turkey to the high value international markets. The recent selection of TAP as outlet of gas towards the Southern Gas Corridor is considered a strategic one, since it managed to create an intergovernmental legal structure to secure and free flow of gas. Moreover, Azerbaijan has succeeded in acquiring significant asset and leverage in Turkey through TANAP and in Greece, through the 66 percent purchase of its natural gas grid operator DESFA. Azerbaijan consolidated its position not only in Turkey but also in South Eastern Europe including Italy at a time when there are so many competing gas projects.

VI. Conclusion

Analysts estimate that the region of South Caucasus will continue to be of growing interest for the main global powers, since its main features as a cross-border space and an energy source are of more and more importance.

Russia will maintain and even increase, if possible, its multi-dimensional presence in the South Caucasus more than any other country, and this may be its greatest asset in the more complex and pluralistic international order that is emerging. President Vladimir Putin clearly seeks to enhance Russia’s geopolitical standing in relation to its two biggest neighbors in Eurasia: the European Union to the west and China to the east. This is a far cry from Moscow’s policies of the early 2000s, which prioritized Russia’s integration into the European Union.

However, with regard to Putin’s “Eurasian project”, analysts note that during the third decade since the split, the exclusiveness in relations between Russia and the former border republics will continue to diminish. Russian policies toward individual CIS countries will be shaped not by nostalgia or grand geopolitical strategy, but by Russian leaders’ practical interests and needs. As to the South Caucasus, it is seen as becoming one of the various separate regions in the former Soviet space, along with Eastern Europe (Belarus, Moldova and Ukraine), and Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan). Despite major differences country-to-country, states within each group share many common economic, political and cultural characteristics.

Russia’s ability to retain its influence in the South Caucasus is seen to be directly linked to its ability to settle the conflicts that emerged in the 1990s after the collapse of the Soviet Union, i.e. to build and not destroy. The normalization of relations with Georgia and, accordingly, the settlement of the Georgian-Abkhazian and Georgian-Ossetian conflicts are the key to Russia’s security in the Caucasus. Finally, achieving a lasting peace in Transcaucasia will to a great extent depend on the efficiency of multilateral efforts, involving Russian participation, regarding the Nagorno-Karabakh conflict.

On the other hand, the U.S. is seen as becoming more interested in the region, if it wants to limit Russian influence around its periphery in order to stabilize the pro-Western states there at a time when Europe is weak and disorganized. It is also in the United States’ interest to limit Iranian power projection and to retain a platform for influencing the Azeri population in Iran. For the U.S., the loss of Azerbaijani oil to either Russia or Iran would increase the pressure on Turkey and eliminate energy alternatives along the periphery of Russia.

As to the energy sector, new challenges surface as the dynamics in the international gas industry are changing. The shale gas revolution, the EU gas glut due to the Eurozone debt crisis, and the determination of Russia to construct the South Stream pipeline, are among the new primary challenges that Shah Deniz consortium and the South Caucasus countries involved are facing.

A serious challenge relating to the Shah Deniz gas and the opening of the Southern Corridor is the “shale gas revolution”, which, in less than five years, transformed the U.S. into a net exporter of gas led to an international over-supply and to the decline of prices.

Another challenge comes from other new gas suppliers that will target the European markets and compete with Shah Deniz. Gazprom also has been forced to change its domestic strategy and to contend with plummeting market value and a new EU anti-trust investigation. These trends give the non-Russian suppliers an unprecedented opportunity to advance broad natural gas diversification and break Russia’s control over European gas markets. It remains to be seen how competitive the price of gas transported through the Southern Corridor projects will be, but as the EU sees it, Europe needs secure supply of gas from non-Russian sources to protect it from geopolitical concerns about Gazprom’s role in Eastern Europe.

Although Brussels considers that a Trans-Caspian gas pipeline would be the easiest for implementation, Moscow and Tehran, following their economic and political interests, are blocking construction of the pipeline on the bottom of the Caspian Sea and are not ready to let a major player as Turkmenistan come to European markets directly.

Russia might also step up the pressure on the Shah Deniz consortium members, which have sizeable stakes (and vulnerabilities) in Russia, mainly BP, which has over 20 years in Russia with exploration, refining, marine products and trading operations and which became the second-largest shareholder in Rosneft. Financial constraints might also affect adversely BP’s ability to invest in Shah Deniz-2 and TANAP. It is also likely that BP, as well as Statoil (which is in Russia since the late 1980s), and Total (the main international partner on the Yamal LNG project and a shareholder in Novatek) might find it difficult to resist pressure if Moscow decides to thwart further development of Shah Deniz.

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South Caucasus analysts agree that strategic and economic interests will cause foreign states to be increasingly active in the region diplomatically, economically, and militarily.  Because there is room for many states to gain from the region’s potential and because regional stability is a shared goal as well, there will be high incentives to cooperate as well as compete.