AZERBAIJAN AND RUSSIA INK TENTATIVE GAS AGREEMENT
by Roman Kupchinsky

Jamestown Foundation
April 1 2009

On March 27 Russia's state owned gas monopoly Gazprom signed a
memorandum of understanding with Azerbaijan's state-owned oil and Gas
Company, SOCAR, which would provide for deliveries of Azeri gas to
Russia starting in January 2010. The report in the Russian newspaper
Vedomosti on March 30 did not disclose any details, merely confirming
that Gazprom Chief Executive Alexei Miller signed the memorandum in
Moscow with the president of SOCAR, Rovnag Abdullayev, and that the two
sides will begin talks on importing Azeri gas in 2010. Vedomosti mooted
that the deal was part of Gazprom's plans to buy all the export gas
produced in Central Asia and the South Caucasus in order to terminate
the pro-Western Nabucco pipeline project, intended to supply the EU
with non-Russian gas via a new route by-passing Russian territory.

The vagueness of the memorandum's wording suggests however, that Baku
might be using the rather nebulous agreement to maximize pressure
on the indecisive Europeans to finally make a firm commitment to
Nabucco. Azerbaijan is the only gas producing country in the former
Soviet Union besides Ukraine, which does not export gas, with which
Russia does not have a gas purchase contract. Gazprom's talks with
SOCAR began last year while it was negotiating the 2009 gas price with
Turkmenistan, Kazakhstan and Uzbekistan. These negotiations ended with
Gazprom offering to pay these producers the "European price" of gas,
based on the price of petroleum products. In the case of Azerbaijan,
Russia has apparently made a similar offer and the Azeri's are
reportedly weighing their options between Gazprom's firm offer and
the EU's wavering stance on Nabucco.

In June 2008 Gazprom offered to buy the projected production of 16
billion cubic meters of gas annually from the second phase of the
giant Azeri Shakh Deniz gas field. (Kommersant, March 30). However,
the second output phase of gas from Shakh-Deniz, estimated to cost
$10 billion, will only come online in 2014 at the earliest, two years
later than previous estimates.

Gazprom's approach to Azerbaijan is not limited to buying its gas,
even if it costs substantially more than in previous years. The
geopolitical and strategic factors tangential to the deal are of
critical importance to the U.S. Ballistic Missile Defense (BMD) system
in an effort to prevent Iran from potentially deploying a missile
delivery system capable of delivering nuclear warheads to Central
European, Central Asian, Caspian and potentially Russian cities.

Azerbaijan's Gabala radar station, currently used by Russia is a
case in point. The Russian military is concerned that the station
could fall into U.S. hands and be used against Moscow. According to
Michael Coffey, a California-based specialist on BMD:

Moscow's air and missile defense systems have lost significant overseas
assets in recent years. The breakup of the Soviet Union curtailed the
Kremlin's access to numerous BMD ground sites, many of which landed
in newly independent nations. In any case, insufficient resources
were available for the support and maintenance of the system and many
sites simply went offline (www.sras.org, August 28, 2007).

Russian support of the embryonic Caspian Economic Cooperation
Organization (CECO) is yet another factor behind Gazprom's seduction
of Azeri President Ilham Aliyev. On December 24, 2008 the Azeri
Constitutional Court ruled to allow a referendum in which the
possibility of unlimited presidential terms would be put to the
public thus allowing Aliyev to extend his time in office beyond the
constitutional limit of two consecutive terms. "The chairman of the
Constitutional Court, Farhad Abdullayev, said there were no legal
obstacles to parliament agreeing to sanction a referendum that would
approve or reject the constitutional change" (www.rferl.org, December
24, 2008). Aliyev duly won the referendum on March 18.

If Moscow is convinced that Aliyev will remain in office for the
duration, the plan appears to be to draw his country into the CECO
along with Iran, Turkmenistan, Kazakhstan and Russia in order to
consolidate Russian control over the Caspian region and it vast
resources.

Aliyev, in the meantime, has been playing off Russia against the West
in order to put leverage on the United States and Europe which have
been backing off in their support for Nabucco. It is no secret that
he is upset by Russian arms deliveries to Armenia and has publicly
opposed this. The issue of Karabakh is sensitive for most Azerbaijanis
and he cannot afford to been seen as "soft" on this issue. And while
he has posed as being closer to the West than to Russia, it appears
that in the final analysis he might go where the money is -Gazprom
and the Kremlin.