Where is the Oil? Where there is a WAR or a DEFAULT


The appearance of new states in Central Asia and the Caucasus region at the collapse of the Soviet Union caused a radical shift in the foreign policy of Turkey, and triggered a search for means of tactical political-economic penetration into these countries.(1) Turkey’s efforts in this regard have been motivated by a desire to spread the Turkish model of government and society — consisting of parliamentary democracy, relatively free-market economy, and secularism in a Muslim society — as well as to take advantage of the mutual development opportunities that cooperation can create. For Turkey these opportunities include guaranteed access to vital energy resources, lucrative oil transport revenues, as well as increased diplomatic clout and strategic importance. For the new republics these opportunities include the prospect of attracting investment and technological expertise, as well as of establishing a secure route for distribution of their products to the West.

Azerbaijan, a Turkic-speaking former Soviet possession that shares borders with Russia, Georgia, Armenia, and Iran, has attracted the greatest interest on the part of Turkey among the newly independent states. The source of this interest is not only the linguistic, ethnic, religious and cultural affinity shared by Turkey and Azerbaijan, but also the tremendous oil reserves possessed by the tiny Caucasian state.

It is not difficult to understand why Turkey has oil on its mind. It has been estimated that to maintain the present course of its economic development, Turkey will require the importation of vast amounts of crude oil in the coming decades — roughly 22 million tons annually by the year 2010.(2) But as the Turkish president said recently: “We see this rich region of oil and gas reserves not just as a source of energy, but as an element of stability. Just as the founders of the European community saw coal as a source of peace and stability for Europe, so we see oil and gas in our region serving the same role.”(3) Turkey knows that forging trade and investment links with Azerbaijan and throughout the region will facilitate good relations and create an atmosphere of cooperation which may go a long way toward preventing petty squabbling and opportunistic land-grabs among the ethnically and religiously diverse states that occupy the Caucasus and Central Asia.

Yet since Azerbaijan gained its independence in the early 1990s and the first talk of developing its phenomenal oil reserves began, multiple controversies have arisen which have delayed implementation of various strategies for exploitation, and that have at least temporarily frustrated both Turkish and Azerbaijani ambitions. These controversies are by no means limited in their implications to Turkey and Azerbaijan, or even to the region as a whole. Rather, they have caught up dozens of players — both at the national level and below — which stand to benefit, or lose, from the successful exploitation of Azerbaijani deposits.

This study addresses these controversies, discusses the players involved in them, and offers some limited suggestions for their resolution. In doing so we focus on the perspective of Turkey and its stake in the outcome of these controversies. In the first part of Section II, we discuss the first of the major oil controversies, namely the dispute over the legal status of the Caspian and the alternative approaches to dividing its resources that follow from that status. In the second part of Section II, we discuss the debate over the location of the route or routes to transport Azerbaijani oil to the West, which represents the second major oil controversy. Next, in Section III, we analyze the strategic regional policies of the two powers that pose the greatest obstacle to a resolution of these controversies in a manner favorable to Turkey: Iran and Russia. This is followed in Section IV with a limited blueprint for the successful contribution of the United States to the achievement of Turkey’s oil-related ambitions. Finally, in Section V, we offer some concluding thoughts on these controversies and the policies of the powers that have a stake in them.


Lake Caspian?: The Debate Over How to Classify an Enormous Inland Waterbody

For the last three years, the five littoral states of the Caspian — Azerbaijan, Russia, Kazakhstan, Turkmenistan, and Iran — have been involved in a dispute over whether this body of water should be legally designated as a “lake” or a “sea.” This arcane debate stems from the dramatically divergent methods of dividing the Caspian’s resources that follow from the choice of term. The Caspian contains some of the largest deposits of oil and natural gas in the world, and so billions of dollars ride on the outcome.(4)

Under the 1982 United Nations Convention on the Law of the Sea,(5) (U.N. Convention) if a body of water is a “sea,” those countries which border on it have the right to claim as their own the waters closest to their shores, with exclusive rights of resource exploitation within those waters. Technically, coastal states are entitled to claim as their sovereign territory only those waters within 12 miles of their shores,(6) but they are allowed to exploit as their “exclusive economic zone” those waters within 200 miles from the edge of their territorial waters.(7) Therefore, under the “sea” designation, those states in closest geographical proximity to the largest oil deposits will reap the greatest economic rewards from the exploitation of the water body’s hydrocarbon deposits. However, unfortunately the U.N. Convention never defines the term “sea,” and so this agreement is of no help in determining the Caspian’s legal status.

If a body of water is not a “sea” and thus not regulated by the U.N. Convention, then by default it falls under the classification of a “lake.” While no international convention defines the term “lake” or establishes a rule for dividing such a body’s resources, precedent has established that those countries which border on a lake are to divide its resources equally between them, as has been done with the American Great Lakes on the U.S.-Canada border and with Lake Chad in Africa.(8)

The positions taken by each of the five littoral states of the Caspian over the water body’s legal status are predictable when one considers the geographical distribution of deposits beneath its waters. Azerbaijan and Kazakhstan both assert firmly that the Caspian is an inland sea, and it is these states which have the richest deposits within what would be their “exclusive economic zones” under the U.N. Convention.(9) Azerbaijan is the most vocal of the two, and has even written into the text of its Constitution the assertion that the waters off its shore are within its exclusive sovereignty.(10)

Russia, whose waters have perhaps the most meager deposits, has been the most outspoken in advocacy of the “lake” characterization. For example, Russia sent a document to the United Nations General Assembly entitled “The Position of the Russian Federation with Regard to the Status of the Caspian Sea,” in which it asserted that the U.N. Convention is inapplicable to the Caspian. Russia pointed out that the legal status of the water body was previously defined by treaties negotiated between the Soviet Union and Iran in 1921 and 1940, which cast it as a salt-water lake whose resources were to be divided communally.(11) Russia has demonstrated some willingness to compromise; at a regional conference in November 1996 Foreign Minister Yevgeny Primakov came forward with a settlement offer which would have allowed each littoral state exclusive economic rights within 72 kilometers (45 miles) of its shore, as well as in those hydrocarbon fields beyond where extraction had already gotten under way.(12) This was not considered seriously by Azerbaijan, as 45 miles of exclusive ownership is a far cry from the roughly 212 miles contemplated by the U.N. Convention.

Iran also adjoins an area of the Caspian with relatively meager mineral deposits, and not surprisingly its position is very close to that of Russia. Teheran supports the Russian suggestion that the U.N. Convention has no application, adding that all issues related to the Caspian’s exploitation should be settled by the five states which touch its shores, without any external interference.(13)

Turkmenistan has swung back and forth on this issue. Initially it supported the “sea” characterization, but at the end of 1996 it began to move toward the Russia-Iran camp. Yet early this year, Turkmenistan again switched back as Turkmen President Saparmurad Niyazov came forward with the assertion that two oil fields previously claimed by Azerbaijan, both among the richest deposits in the Caspian, lie in the Turkmen sector.(14) Again, we see the correlation between the extent of mineral deposits over which each country claims a territorial association, and the legal designation for the Caspian which it advocates.

The countries involved in this dispute are all convinced that the anticipated revenue from the exploitation of the Caspian’s mineral reserves will provide a significant boost to their economies and bring in much needed foreign currency. But due to its small size and relatively low level of economic development, perhaps the country that stands to gain or lose the most is Azerbaijan.

The Azerbaijani government has asserted that development of Caspian shelf deposits will turn around its lagging economy and allow it to alleviate the suffering caused by the ongoing conflict that began in the early 1990s with neighboring Armenia over the disputed Nagorno-Karabakh enclave. Doubtless Azerbaijan also hopes that the ownership of massive energy deposits will bring it into a position of greater strategic significance, thereby boosting its currently weak diplomatic bargaining power vis-?-vis energy-hungry states around the globe, including the U.S. and members of the European Union. The ideal outcome from the perspective of Azerbaijan would surely be to induce these countries to pressure Armenia into settling the Nagorno-Karabakh dispute in a manner favorable to Azerbaijan, ending the Armenian occupation of some 20% of its territory.(15)

The people of Azerbaijan simultaneously suffer from despair over the Armenian occupation of Nagorno-Karabakh and feel burgeoning confidence in the country’s future as a major oil producer.(16) The Azerbaijani government has vigorously set about trying to realize the country’s oil ambitions. Its first move was to begin negotiations through the State Oil Company of the Azerbaijani Republic (SOCAR) with a group of foreign oil companies in 1993, culminating in the signing of a deal on June 4, 1994 that has been widely dubbed the “Contract of the Century,” worth around $7.4 billion.(17)

Officially named the “Agreement on the Joint Development and Production Sharing for the Azeri and Chirag Fields and the Deep Water Portion of the Gunashli Field in the Azerbaijan Sector of the Caspian Sea,” the contract called for the establishment of a business entity known as the Azerbaijan International Operating Company (AIOC), whose purpose is to exploit some of the richest oil reserves over which Azerbaijan claims sovereignty. The shares of the AIOC consortium are currently divided between the SOCAR and foreign companies as designated in Table 1.

Table 1. The Oil Companies and Their Shares

Nation Shares in AIOC (%)
BP UK 17.12

USA 9.8

USA 9.52

Originally SOCAR was to have a 20% share, which would have given it a majority interest, but it subsequently transferred 5% of the total shares to TPAO state oil company from Turkey, and an additional 5% to Exxon when SOCAR proved unable to come up with the necessary capital.(18)

In addition to this monumental project, SOCAR has since signed a separate deal to extract and distribute the oil and gas of its Karabakh field, an agreement purportedly worth $1.7 billion over 25 years. Ownership of the Caspian International Petroleum Company (CIPC), an entity formed pursuant to this agreement, is divided as follows: 32.5% to LUKoil of Russia, 30% to Pennzoil, 30% to Italy’s Agip and 7.5% to SOCAR. CIPC began drilling in the Karabakh field on August 6, 1997, and has set a deadline to complete all prospecting in the field by February 1999. (19)

As a Russian expert has pointed out, the Azerbaijani policy with respect to its oil reserves has been “to move ahead on existing projects even before all of the outstanding issues, including those related to legal matters, are resolved.”(20)

Who Gets to be Middleman?: The Debate Over Alternative Routes for Oil Transport

Further development of Azerbaijani oil reserves will necessitate the establishment of adequate methods by which to transport the oil to consumers in Europe and beyond, and various alternatives are currently under consideration. From the perspective of Azerbaijan and the companies extracting the oil, the factors of principal importance in selecting the optimum route are of course cost, available financing, and security. But such business factors alone will not determine the outcome of the debate, as the economic, political, and environmental interests of the countries through which the oil would pass have largely come to eclipse such factors.(21)

Before it fully realized the politically-charged nature of the debate and the complexity of the factors to take into account, the AIOC consortium initially decided to transport its oil to Western markets via an existing pipeline to the Russian port of Novorossisk in Russia, then by tanker through the Black Sea and into the Mediterranean via Turkey’s Bosphorus Straights.(22) However, this proposal raised objections from Turkey due to the grave environmental threat posed by the increased shipping volume that this alternative would entail.(23)

Ankara intends to issue a tender for a Vessel Tracking System to facilitate safe passage through the Straits,(24) but no technology can completely eliminate the potential for a spill. 19 miles long and a mere 700 meters wide at its most narrow point, the Bosphorus is one of the most difficult waterways in the world to navigate, with tankers having to change their course at least 12 times due to abrupt shifts in topography.(25) According to Turkish figures, nearly 45,000 vessels pass through the Straits each year, and there are frequent accidents. The Bosphorus witnessed 167 large scale accidents in the decade between 1983 and 1993, with the average annual rate of accidents having increased 35% since 1988.(26)

The International Maritime Organization (IMO) warned in 1994 as follows: “Navigation through the Bosphorus straits… presents an increasing potential risk to shipping, safety, the environment and the well-being of the local community.”(27) The 1994 Nassia tanker accident is an unforgettable example of the threat that shipping poses to the 12 million residents living on both sides of the Bosphorus. In March 1994, the Greek Cypriot tanker Nassia collided with another ship, killing 30 seamen and spilling 20,000 tons of oil into the ocean. If this accident had occurred a few miles to the south, Istanbul itself would have faced a major urban disaster.(28)

The Convention of Montreux, adopted in 1936, still regulates the passage of cargo ships through the Bosphorus. It requires the Straits to be kept open to merchant ships of all nations, regardless of the nature of their cargoes. This agreement greatly restricts the ability of the Turkish government to adopt the regulations required to ensure safety of passage through the Bosphorus, but on July 1, 1994 Ankara did what it could under the circumstances. Turkey issued a new set of regulations designed to promote safer traffic, one key objective being the establishment of a traffic separation scheme to maintain safe distance between vessels.(29)

Russia and some other states that border on the Black Sea have complained that Turkey’s unilateral interference with shipping in the Straits is illegal(30) — despite the fact that “[f]reedom of passage [required by the Montreux Convention] does not mean uncontrolled passage,” as pointed out by the Turkish representative to the IMO.(31)

Following the Turkish government’s expression of hesitancy to allow the massive increase in shipping volume that would be involved if the Black Sea route for Azerbaijani oil were used exclusively, the AIOC began to contemplate various alternative routes. One such route would involve transport of oil from the Azerbaijani capital of Baku to the Turkish port of Ceyhan on the Mediterranean near the Syrian border.(32)

A few other options have also been put forward. The first of these is that of shipping oil from Azerbaijan to the Black Sea port of Poti in Georgia, then on to Odessa in Russia, where the oil would channel into the Druzhba pipeline that extends across Russia and the Ukraine and on to Europe.(33) Gunes Taner, the Turkish Minister of Economy, has proposed yet another alternative called the Novorossisk-Samsun route, which would involve shipping oil by tankers to Turkey’s Black Sea Samsun port and then transporting it south across the Anatolian Peninsula to Ceyhan via a pipeline that would have to be constructed in part. He argues that since there is already a pipeline from Kirikkale — a city in Central Turkey — to Ceyhan, the construction costs would be manageable.(34)

The options that have been the subject of the most serious consideration are the Baku-Ceyhan route, and either of the northern routes going through Russia, with Turkey and Russia each fervently advocating the route passing through their respective territories. Ankara supports the direct Baku-Ceyhan alternative because this route would protect the Bosphorus from the dangers of tanker shipping, still allow Turkey to reap the financial rewards of being a conduit for the oil, and would be more direct than the vertical trans-Anatolia alternatives. However, since Turkey has no border with Azerbaijan, for the direct Baku-Ceyhan route to be viable a stretch of connecting pipeline through a neighboring country would have to be constructed.

The shortest route from Azerbaijan to Turkey would be through Armenia. However, ongoing conflict between Armenia and Azerbaijan over Nagorno-Karabakh makes this option unrealistic for the near future for security reasons. The U.S. government objects to the transport of oil through Iranian territory pursuant to its general policy of limiting the international trade and investment prospects for the fundamentalist republic. This factor seriously diminishes the likelihood that this alternative will be chosen. Recently the White House announced that it would not oppose transportation of oil from Turkmenistan through Iran to Turkey,(35) which can be taken as an indication that the Iranian route through Azerbaijan is not out of the question after all. But until Washington actually gives the nod, its acquiescence cannot be counted on.

If U.S. resistance to the Iranian route remains strong, the only alternative for the transport of Azerbaijani oil into Turkey would be through Georgia, in a deviation from the Novorossisk-Samsun route proposed by Gunes Taner. Again, this route would take the oil from fields in Azerbaijan to Georgian ports, and from there by tanker to Turkish ports on the Black Sea, then by pipeline across Turkey to Ceyhan.(36) Another Georgian option is a route from Baku directly across Georgia, then down through Turkey to Ceyhan, thus bypassing the Black Sea altogether. The length of the pipeline from the Georgian border to Ceyhan would be about 1,900 kilometers, and the cost of construction of the pipeline would be an estimated $3 billion. The Turkish government has declared that it is ready to finance the entire cost of any pipeline that would pass through its territory.(37) Turkish President Suleyman Demirel and Georgian leader Eduard Shevardnadze expressed their joint support for a route through Georgia during a visit by Demirel to Tbilisi in November 1994.(38)

Ankara is quick to point out that Ceyhan can handle many times the capacity of the Russian port of Novorossisk. In addition, Ceyhan is open all seasons of the year due to the calm climate of the Mediterranean, whereas Black Sea ports are shut down in the winter by dangerous weather conditions.(39) As expressed by Ahat Andican, a state minister and an influential figure in shaping Turkish policy toward the Turkic republics of the former Soviet Union: “With new the oil field development project under discussion, the total output from the Caspian and Central Asia will eventually be 50 to 60 million tones a year, but the Baku-Novorossisk and Baku-Supsa routes have a combined capacity of 16 million tones [a year]. Therefore the Baku-Ceyhan pipeline is the most inevitable and stable option.”(40)

Some critics of the Baku-Ceyhan route have attempted to bring the Kurdish insurrection in Eastern Turkey to the forefront of the debate, portraying it as a potential threat to the security of the pipeline. Yet as we near the end of 1997, this argument seems to be losing its force, given that the Turkish army and security forces have had considerable recent success in suppressing Kurdish military activity.(41)

Turkey is far from alone in its advocacy for the Baku-Ceyhan route. The president of the AIOC, Terry Adams, has thrown his weight behind this proposal as well.(42) Jim Norosky, vice-president of the U.S. petroleum company Amoco (which holds a 17.01% stake in the AIOC), has also suggested that the Baku-Ceyhan route is preferable, despite the extra cost imposed by its greater length. Such extra cost, he suggests, should be offset by tax breaks or other measures on the part of the relevant authorities.(43) Turkey has also succeeded in gaining the support of Azerbaijani President Aliev, who has stated that he is in favor of giving priority to the direct Baku- Ceyhan alternative. He expressed this position during a visit to Turkey, and then later during a visit to the U.S.(44)

At this point the most significant obstacle that Turkey faces in its efforts to establish the Baku-Ceyhan pipeline is Russian opposition. Russia has a deep fear that if any route for transporting Azerbaijani oil bypasses Russian territory, Russia will not only lose a lucrative source of revenue, but will also experience the diminishing of its economic and political influence in this resource-rich region.(45) It is for this reason that the Turkish decision to restrict tanker passage on the Bosphorus was received so bitterly by Russia.

As part of their efforts to ensure that a northern route through Russia is selected by the AIOC consortium, foreign policy officials in Moscow have recently entered into a series of agreements. First, on July 11, 1997, Boris Nemstov, the Russian Deputy Prime Minister and Minister for Fuel and Energy, signed a five-point agreement with the heads of the Chechen and Azerbaijani state oil companies. The following day Russian and Chechen representatives signed an agreement setting out a plan to fix a war-damaged pipeline that crosses Chechen territory on its way to the Black Sea.(46) This was followed by a third agreement on September 9, 1997, also between Russia and the Chechen government, which provided that Russia would pay Chechnya 43 cents per ton of oil transported, plus a surcharge of $768,000; these terms are to apply for the first 200,000 tons transported.(47) It is apparently hoped by Russia that these agreements will ensure the viability of the first leg that would have to be followed by any of the possible northern routes — the journey from Azerbaijani oil fields to Russia.

Russia’s efforts in this regard will be in vain if the Chechens attempt to use the pipeline as a bargaining chip in future conflicts with Moscow and do not respect the letter of the agreements. As the Sevodnya daily newspaper in Russia quoted a Russian government source as saying: “For Chechnya, the pipeline is a political instrument, which is why it is impossible to resolve questions over the transit of Azeri oil separately from political, customs, border and other issues.”(48)

Due to this concern, the Russian government has threatened to build a bypass pipeline through Daghestan, an ethnic-majority state within the current borders of Russia, to the Black Sea port of Novorossisk.(49) But Russian oil companies have not been willing to commit to the investment for several reasons, including the factors discussed above that Novorossisk has such a limited capacity for conducting oil, and that weather conditions on the Black Sea result in it being closed to tanker shipping at least a third of the year.(50)

If a northern route for Azerbaijani oil were selected, the only alternative to the use of tanker transport to convey the oil from Novorossisk to Western ports would be the use of the antiquated, decrepit Druzhba pipeline network inherited from the Soviet Union. That this network is in a dangerous state of decay is illustrated by a rupture that occurred recently in Novorossisk, which resulted in the spilling of 386 tons of oil into the Black Sea.(51) As of yet Russia has not been able to obtain the financing necessary to address the network’s deficiencies, and it is doubtful that the will exists to come up with it in the foreseeable future. Accordingly, Russian efforts to resist alternative transport possibilities for Azerbaijani oil, if successful, could result in the indefinite postponement of the exploitation of the Caspian’s rich reserves.(52)


Iran: The Pragmatic Radical
Iran is one of the most prominent players in the first Azerbaijani oil controversy, and a principal obstacle to Azerbaijan’s ambition of becoming one of the world’s great energy producers. Given that Turkey hopes to continue to play a significant role in the extraction of Azerbaijan’s oil reserves through participation in international consortia, and expects to become host to at least one of the pipelines that will carry oil to the West, Turkey’s interests in the resolution of the dispute over the Caspian’s legal status are closely aligned with those of Azerbaijan. For this reason the Caspian policy of Iran is watched closely not only by Azerbaijan, but also by Turkey.

Iran’s policy with respect to the Caspian is currently characterized by a marked hostility to investment in the region by Western businesses. For example, Ali Akbar Nateq-Nouri, the speaker of Iran’s parliament, was recently quoted as saying that the U.S. should be restricted from participating in Caspian ventures since any involvement by U.S. companies would simply represent an effort by the U.S. government to satisfy its “historical dream” of establishing influence in the region.(53) Nateq-Nouri added that Azerbaijan’s President Aliev is “making a historic mistake by laying grounds for U.S. interference.”(54) In August, Iranian Vice-President Mahmoud Vaezi stated that “certain states have caused unrest in the sensitive region by signing unilateral contracts with foreign companies.”(55) Vaezi did not mention Azerbaijan by name, though it was obvious that it was the target of the barb due to its demonstrated willingness to do business with Westerners.

One might conclude from such heated expressions of disapproval of Western participation that Iran’s Caspian policy has been dictated by ideology, and rather predictably so given Iran’s general hostility toward the West rooted in fundamentalism since the 1979 Revolution. However, it is our opinion that such an interpretation of events would be flawed, and that on the whole Iran’s Caspian policy has been decidedly pragmatic and driven by economic concerns.

When the idea of joint Western and Central Asian oil ventures was first proposed, Iran demonstrated approval — or at least acquiescence — and expressed a willingness to participate in any such venture. Indeed, Iran sought to obtain a 5% share in the AIOC consortium called for under the “Contract of the Century.” However, Teheran quickly saw this ambition frustrated by U.S. pressure to exclude Iranian interests.(56) The official excuse put forward was that U.S. law forbids American companies from doing business with Iranian companies, and so the American interests that were already part of the consortium would have to pull out if Iranian participation were allowed.(57) So it was the West that sought to exclude Iran from the divvying up of profits, rather than vice versa. It is this event, this inflicting of an economic wound, that one can identify as the trigger of Iran’s vocal opposition to Western investment activity in the Caspian.

Iran’s position with regard to the legal status of the Caspian is also indicative of its pragmatic, economics-oriented approach. As mentioned in Section II, Teheran has sided with Russia in its stance that the Caspian is a “lake” rather than a ‘sea.” If the former classification is ultimately agreed upon and the water body’s resources are divided up communally rather than territorially, Tehran stands to gain a much larger share of the Caspian pie than it would under the alternative arrangement.(58)

The fact that Iran and Russia both stand to benefit from the “lake” classification has provided an incentive for Iran to align its overall regional policy with that of Russia where possible, so as to create an atmosphere of solidarity and cooperation between the two countries. Thus, for example, Iran joined Russia in support of Armenia in its conflict with Azerbaijan over Naborno-Karabakh(59) — despite the fact that Armenia is a Christian country, while Azerbaijan is a Muslim one. This is solid evidence that the Islamic Republic’s Caspian policy is dictated by pragmatism rather than ideology. Other evidence of the growing alignment between these two powers include a series of arms sales by Russia to Iran, and an avowed mutual desire to see a change of leadership in Afghanistan.(60)

In contrast, relations between Iran and Azerbaijan have been worsening over the last few years. Iran’s act of siding with Azerbaijan’s enemy on the Nagorno-Karabakh issue is only one manifestation of the ill-will between these neighbors. Another came two years ago when Iran virtually closed its border with Azerbaijan and temporarily cut off electricity to an Azeri enclave dependent on Iranian power.(61)

The break-down in relations apparently stems from three factors. First is the obvious fact that Azerbaijan has as of yet refused to accept the Russian-Iranian position with regard to the legal status of the Caspian. Second is Azerbaijan’s eagerness to do business with Western companies despite the exclusion of Iran, as demonstrated by Azerbaijan’s continued blessing of the AIOC deal. Third is Iran’s fear that a prosperous, independent Azerbaijan would be an unwelcome role model to the enormous Azerbaijani minority that makes up a quarter of Iran’s population, and which constitutes a majority in multiple northern Iranian provinces.(62) Iran surely fears that increased affluence and international strategic clout will embolden tiny Azerbaijan and give it the courage to incite nationalistic sentiment in its ethnic brethren across the border.

Azerbaijan has made some efforts to placate Teheran, as when it granted Iran a 10% share in a separate oil venture to develop fields in the Shakh Deniz area(63) — a move which Baku was able to manage without unduly raising the ire of Washington because no American companies were involved in the Shakh Deniz deal, and thus no violation of U.S. law would follow from Iranian participation. However, such efforts have not brought about much of a thawing of relations between the two neighbors.

Russia: Government Policy at Odds with Industry Prerogatives

The second significant obstacle to the achievement of the aligned ambitions of Azerbaijan and Turkey is Russia. This former world superpower faced the humiliation of losing its historical possessions earlier this decade, but is beginning to have something of an economic resurgence and seems to be flirting with the notion of reembracing its old imperialist ways on a regional scale.

Not satisfied with presenting legal arguments at regional and international fora in support of its call for a communal division of Caspian resources, Russia has also reportedly attempted to force the outcome by direct interference in Azerbaijani domestic politics. According to The Economist, Russia has “left its fingerprints on one or two past attempts to unseat Azerbaijan’s president, Heidar Aliev,”(64) who has stood unwavering in his resistance to anything but a strictly territorial division of the Caspian.

Russia has also amassed troops on its Caucasian borders in excess of the limits established by the 1990 Conventional Forces in Europe treaty (CFE), asserting that Russia’s current security needs require an even greater presence in the region than was necessary during the Soviet period.(65) Russia previously expressed the desire to increase its forces in the area to 2,000 tanks, 5,000 armored vehicles, and 2,500 artillery pieces, an amount well over the threshold set by the CFE.(66)

While events in the last few years in Chechnya and Nagorno-Khabarakh suggest that Russia is not unreasonable in recognizing a security concern in the Caucasus, it is not unlikely that Russia has overstated the concern, and is attempting to use its still- formidable military might to intimidate its recalcitrant former possession to the south into ending its resistance to Russian ambitions in the Caspian. Indeed, Russia has not tried to hide that it is keeping the option of military intervention open. Russia stated in the document sent to the United Nations that it “reserves the right to take necessary steps at any time that it considers appropriate in order to restore law and order and liquidate the consequences of unilateral actions”(67) on the part of any of the littoral states with regard to the Caspian’s reserves.

Russia has also been accused by Azerbaijan of feeding the ongoing conflict over Naborno-Karabakh by transferring large amounts of sophisticated weaponry to Armenia free of charge.(68) Even if such allegations are unfounded, at least some weapons deliveries are taking place. This is confirmed by the fact that a Russian official recently admitted to an arms sale to Armenia in the amount of $1 million.(69) Again, such weapons transfers may be a method of intimidation designed to bring Azerbaijan into line.

Yet another example of Russian pressure on Azerbaijan was its act of closing their only land border in 1995 — a move that virtually cut off trade between the two countries.(70) Moscow’s aggressive posture toward Azerbaijan, while obviously motivated by a desire to increase Russia’s economic opportunities in the Caspian, may end up hurting Russian economic interests in the long-run. This is because Azerbaijan has sizable oil reserves on land as well as in the 45 kilometer coastal strip that it would be allowed to exploit exclusively even under Foreign Minister Primakov’s settlement offer mentioned in Section II; if ill-will prevails between the two countries, then Russian oil interests will likely be excluded from participation in future ventures to develop these deposits. Indeed, Russia’s relentless efforts to guarantee a larger exclusive share of the Caspian output has already cost the principal Russian private oil companies one major deal in Azerbaijan. This occurred in August when the Russian Government forced the “cancellation” of a contract signed by the LUKoil and Rosneft companies, forcing them to renounce participation in an international consortium organized to develop the Kyapaz offshore oil field.(71) The Kyapaz field is claimed by Turkmenistan, which views its exploitation under Azerbaijani supervision as an illegitimate appropriation. Accordingly, in making this calculated move Russia was hoping to win Turkmen favor and draw that country over to its side as an advocate for the “lake” characterization of the Caspian.

But even beyond missed opportunities in Azerbaijan, Russia’s aggressive policy runs the risk of alienating other countries in the region who may view Russia’s efforts as a return to its old imperial ways. Without goodwill and amiable relations with the newly-independent countries of Central Asia and the Caucasus, they are less likely to encourage the development of stronger trade ties with Russia, or to incentivate Russian investment in their economies by offering tax breaks and other carrots. Indeed, they may even put up barriers to Russian investment, as long as alternative sources of technology and capital are forthcoming. These new republics are likely to be pushed farther from their historic trading partner to the north, into the increasingly eager embraces of the capital-rich West and an ever-more-developed Turkey, or even pressed into closer affiliation with Islamic Iran.

There is growing evidence that private oil interests in Russia are becoming disenchanted with Moscow’s strong-arm approach to the Caspian dispute. Upon being forced out of the Kyapaz consortium by the Kremlin, a LUKoil representative reportedly expressed “bewilderment” over the move.(72) Moreover, oil interests seem mindful of the risk of alienating other new republics south of Russia’s borders. As related by Yuri Federov, an official in the Russian Ministry of Foreign Affairs, “the oil people want to respect national aspirations of other new independent states, while at the same time expecting that those states would decide to make maximum use of the scientific, technological, human potential still possessed by Russia.”(73) Respect for national autonomy in exchange for government facilitation of economic relations seems to be shared only nominally by the Kremlin at this point, and it is the private sector in Russia that stands to lose from this posture.

While Russian businesses may suffer in the long run from their government’s Caspian policy, Turkey may well stand to gain from it. Turkey has already benefited from the development of Azerbaijani oil reserves, as the state-run Turkish oil company, TPAO, received a 6.75% in the consortium developing the Azeri, Chirag and Guneshli oil fields, and a 9% stake in the consortium developing the Shah-Deniz field. Moreover, any shares in future projects that would have gone to Russia but for Moscow’s alienation of Azerbaijan may be picked up at least in part by Turkish entities.

Even apart from participation in the direct exploitation of oil deposits, Turkey would benefit from Azerbaijani enmity toward Russia when it comes to the making of a final determination on the pipeline route for the transport of Azerbaijani oil to the West. As mentioned in Section II, Part B, prominent figures in the AIOC (which is highly responsive to the dictates of the Azerbaijani government due to the large profit share of the state oil company and the AIOC’s dependence on official recognition for its very legal existence), has recently expressed tentative approval of the Baku-Ceyhan route through Turkey.

Finally, the more alienated from Russia that Azerbaijan and the other new republics of the region become, the more likely they will be to seek out the support of Ankara and to elicit Turkish participation in their economies. With relations between Turkey and Russia increasingly strained over the pipeline controversy and CFE violations, the old adage that “an enemy of my enemy is a friend of mine,” may come to the minds of the region’s new republics, with Turkey seeming increasingly attractive as a partner in diplomacy and trade.

Indeed, Turkish companies have already set up operations in Azerbaijan, including such industrial giants as TPAO, Bayraktar Holding, Ko?’s Ram Division and Borusan Makina’s Caterpillar Division, not to mention many smaller firms.(74)


From Turkey’s perspective, its long-time ally the United States has the potential to play a very constructive role in the region, as a counterweight to the ambitions of Russia and Iran and as an advocate of Turkish interests to which the AIOC is likely to be responsive given the substantial stake of U.S. businesses in the consortium. The effectiveness of any U.S. efforts in this regard will be commensurate with the extent to which Washington can manage to avoid raising nationalistic ire in Russia when promoting Turkish interests, and contribute to stability and prosperity in Azerbaijan, the country that is the key to Turkish oil ambitions.

Some nationalist-minded individuals influential on Russian foreign policy view the prospect of any U.S. influence within the territory once controlled by the Soviet Union as a security challenge, and have proposed serious measures to resist it. Russian military expert Anton Surikov is one such figure. He has argued as follows: “We are witnessing U.S. intensive efforts to create a sanitary cordon around Russia in Ukraine, Georgia, Azerbaijan and the Central Asian states. The euphemism for this plan is creating a so-called “Eurasian transport corridor.” Our duty is to counteract these plans.”(75) A report prepared by the Russian Institute of Defense Studies calls for Moscow “to take concrete steps, including, if necessary, the use of force in order to stop any activities of foreign companies in the former Soviet part of the Caspian until its legal status is defined.” Such threatening words, while not voiced by the Kremlin itself, should not be taken lightly. The U.S. government will have to tread carefully if it is to avoid doing anything Russian nationalists could misconstrue as aggressive intent and point to in their efforts to raise the bristles of those who wield power in the Russian government and military.

Every effort should be made to convey the image that the players in the oil controversies are not involved in a zero-sum game, that everyone will win in the long run if cooperation and moderation prevail. But Washington should not be so timid in response to Russian blustering that American businesses will be denied the opportunity to share in the profits to be reaped in the Caspian, and so that Russia will gain exclusive control over the distribution of Azerbaijani oil. Such a development would allow Russia not only to price gouge on a day-to-day basis but even to hold potential consumers of Azerbaijani oil hostage if an oil crisis like those which occurred in the 1970s and early 1980s should ever again arise. A country like Turkey, which is expected to become increasingly dependent on fuel imports in the coming decades, would be particularly vulnerable to such maneuvers.

Aware of the threat that Russian monopolization of oil transport would pose, U.S. Energy Secretary Federico Pe?a recently stated that the U.S. supports “the concept of multiple pipelines and multiple pipeline routes through the region as oil and gas are extracted.”(76) Washington has advocated the selection of the Baku-Ceyhan pipeline route, among others, in tune with its multiple-pipeline policy. Indeed, President Clinton personally lobbied Azerbaijani President Aliev to consider the Turkish pipeline.(77) Such advocacy of the Turkish position is a prudent one for Washington, as the Baku- Ceyhan route is not only likely to prove viable and secure, but should bring significant revenues to Turkey to finance future development projects. This is in the interests of American foreign policy, because a strong Turkey represents a positive, secular model for the newly independent Turkic republics of the region who are always being courted by fundamentalist Iran. Yet Clinton also wisely encouraged Aliev to consider the northern route through Russia in addition to the Turkish route,(78) a move which was well calculated to avoid the appearance that Washington stands in opposition to Russian interests.

A second way that the U.S. can further Turkey’s interests is to lend greater support to Azerbaijan than it has previously offered. Such efforts would not simply represent gratuitous favors to Turkey, but would be in the interest of American oil companies given that Azerbaijan has demonstrated consistent eagerness to deal with Western businesses even in the face of stolid Iranian and Russian opposition — two powerful neighbors with a presence much more tangible than that of the U.S. on the other side of the globe.

The first step that Washington should take in this direction is to lift Section 907, a provision of U.S. law enacted in 1992 as part of the Freedom Support Act.(79) This Section forbids direct U.S. aid to Azerbaijan, including humanitarian assistance.(80) It was passed by Congress at the insistence of a powerful Armenian lobby, and it has been the continued advocacy of this group that has kept it in place. According to The Washington Post, Section 907 “was enacted over the opposition of the Bush administration and now is opposed by the Clinton administration.”(81) At this point Armenia clearly has the upper hand in the conflict between the two countries, considering that it still holds 20% of Azerbaijan’s territory,(82) and so the concern over aggression against Armenia or ethnic Armenians in Nagorno-Karabakh which was used to justify the measure now lacks foundation. The lifting of Section 907 would allow Washington to provide a much needed infusion of funds to this impoverished nation. Specifically, funds could be provided to buttress attempts at electoral reform and supplement programs for democracy-building, a project which has taken on a vital importance given the centrality of President Aliev in the Azerbaijani political system and the fragile quality of the prevailing stability that such centrality entails.(83)

The movement to scrap Section 907 seems to be picking up speed. U.S. Congressman, Lee Hamilton (D-Indiana) recently argued that “Congress should lift the ban on Azerbaijan to give us maximum leverage on behalf of peace. A better relationship with Azerbaijan serves the U.S. national interest, the interest of peace, and the long-term interests of Armenia as well.”(84) Deputy Secretary of State Strobe Talbott has pointed out that “[w]e want to see all the responsible players in Central Asia and the Caucasus be winners,”(85) Azerbaijan included.


The staggering magnitude of Caspian hydrocarbon deposits represents a tremendous economic boom to each of the five littoral states which border on that body of water, as well as for those states such as Turkey which may benefit indirectly from them. The discovery of resources on such a terrific scale offers the potential for every one of these nations to increase its overall level of economic development, raise the standard of living of its population, and carry itself into the twenty-first century with a newfound strategic importance and international prestige. Yet mutual enmity and distrust have stemmed from controversies born from this fabulous potential, and such bitter emotions have eclipsed the excitement and optimism that it should have inspired. Indeed, neighbors that stand only to gain from their fortuitous proximity to such rich deposits are faced with the prospect of economic blockades, severed diplomatic relations, or even military clashes in a region peppered with nuclear weapons left over from the Soviet Union. The latter is a prospect that threatens not only those with a direct stake in the controversies but also their allies and those unfortunate disinterested countries that might suffer the spill-over of refugees or other combat externalities merely because of their location on the map.

Given these facts, each of the countries with a stake in the controversies should strive to maintain at all times an atmosphere of cooperation, patience, and goodwill. The respective governments should do their utmost to maintain the lines of communication through elaborate diplomatic channels and regular regional and international conferences, and should move slowly and avoid any unilateral action which could be perceived as attempts to preempt resolution of these debates.

As for the first major controversy — the debate over the legal status of the Caspian — Russia and Iran need to recognize the enormous stakes that Azerbaijan has in its outcome. From the perspective of Azerbaijan, something approaching an equal distribution of the Caspian’s resources would mean giving up its ambitions of becoming a player in world energy markets and of making a pervasive impact on its backward economy. While revenue from the Caspian’s exploitation would be substantial even to such large powers as Iran and Russia, their futures will not be made or broken over the outcome of this issue. If Azerbaijan is to be shaken from its staunch advocacy of a territorial division of the water body’s resources, it will be only by the extension of a settlement offer that will not require it to give up such ambitions — or by force. But in this day and age only the former option is a viable one. Western capital interests are becoming entrenched in the region, just as they were in Kuwait at the time of Iraq’s invasion in 1990, and while Russia is a nuclear power and a far cry from Iraq militarily, the fact remains that the West would not respond kindly to any overt aggression and might well be inclined to cut off financial assistance to Russia, and perhaps even call for an embargo.

As for the second major controversy, the principal rivals in the dispute should accept the notion that both can play host to pipelines to transport Azerbaijani oil. Yet in the short-term Russia must come to terms with the fact that absent an affirmative effort on the part of the Kremlin, the Russian private sector, and international capital interests in addressing the deficiencies of Druzhba pipeline network, Russia cannot safely be a conduit for the huge volume of oil that increased exploitation of the Caspian will entail. Russia may have to step aside for the time being and devote itself to developing its carrying capacity, rather than holding up the process indefinitely and alienating all of its neighbors with aggressive behavior. It may well prove to be the case that once Russia concedes that the northern route will not be the exclusive avenue for the oil and turns its attention to developing a modern network, the financing will materialize and the wait will be shorter than currently expected.

Outside powers such as the U.S. should step in and encourage progress along the lines outlined above, extending an olive branch to Azerbaijan in the form of technical and financial assistance, and maintaining Russian goodwill through incentivation of investment by American businesses in the development the country’s pipeline network.

The key for Russia, Azerbaijan, Turkey and each of the other states with a stake in the outcome of these controversies is to view one another as partners rather than as rivals, and to realize that when another country among them benefits from an economic opportunity and furthers its prosperity, this does not represent a loss to the others. Rather, the domestic stability that prosperity on the part of one country facilitates will ensure every other country in the region the opportunity to develop and prosper in its own right, free from the threat of opportunistic aggression.



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