http://groong.usc.edu/news/msg32811.html Jane's: New directions in Caspian politics Jane's Intelligence Review May 1, 2001 Tamara Makarenko The recent discovery of substantial oil reserves in Kazakhstan has added a new urgency to discussions on establishing pipeline routes to export oil and gas reserves. Tamara Makarenko examines the political and economic implications of the 'new' Caspian game. The importance of resolving the legal status of the Caspian Sea and finalising pipeline routes for the export of Caspian oil and gas reserves has taken on a sense of heightened urgency from both littoral states and external actors. Renewed interest in prioritising Caspian issues follows the announcements made by the Offshore Kazakhstan International Oil Consortium (OKIOC) in mid- March, confirming that it had hit oil in the second of two wells drilled in the Kashagan oil field. Preliminary estimates suggest that the second well alone may be capable of producing 2 million barrels of oil a day in 15 years, making it the fifth largest oil field in the world, and the largest discovery in 30 years. The Kashagan finds, combined with significant deposits in Tengiz and Karachaganak, have ensured that Kazakhstan now represents an important key to future Caspian development. Renewed Russian and US attempts to win Kazakh loyalty can be attributed to the influential position enjoyed by Kazakhstan, which is recognised by all of the Caspian players. The 'new' Caspian game, however, also includes a string of additional players, which transforms regional politics into an intricate web of complex choices carrying political and security repercussions. In an environment where nothing is certain and alliances can change overnight, a constant analysis of the actions and policies of the most powerful actors is the only way to gauge whether or not the Caspian will ever represent a stable oil and gas producing region capable of supplying the world market. Moscow has two primary objectives in the Caspian region: first, to convince all littoral states to divide the Caspian seabed along a modified median line while keeping the surface water a common area; and second, to ensure that export pipelines continue to transit Russian territory. Since President Vladimir Putin came to power in May 2000, Russia has attempted to fulfil these goals through a change in official policy towards the Caspian littoral states. Moving away from former President Boris Yeltsin's undeclared policy of winning influence by regaining territorial control, Putin appears to be following a strategy which focuses on exploiting Russian economic influence via its trade relations. In many respects this strategy has already worked with Azerbaijan and Kazakhstan, and has the potential to influence the decisions Iran ultimately makes regarding Caspian Sea issues. Over the past few months the Russian-Azeri relationship has improved as a result of actions taken by both states. Azerbaijan significantly altered the environment in which bilateral relations were conducted by extraditing two Chechen rebels to Moscow earlier in the year. Russia has reciprocated by entering into official discussions about energy and security issues. However, despite the fact that Baku officially confirmed its decision to back Moscow's modified median line approach on Caspian division during Putin's visit to Azerbaijan in January, Russia has been unable to influence Azerbaijan's pipeline preferences. On this issue, President Heydar Aliyev, for obvious reasons, firmly supports the construction of a pipeline from Baku to Ceyhan (Turkey). This preference places an overarching strain on Russian-Azeri relations because the Baku-Ceyhan pipeline, bypassing Russian and Iranian territory, is favoured by the USA. For this reason Azerbaijan is always primarily regarded as a US ally and is therefore accorded careful treatment by the other Caspian states. Russian-Kazakh relations, on the other hand, remain considerably more complex. President Nursultan Nazarbayev and the government of Kazakhstan are continuously reminded of their economic dependence on Russia. Not only is Russia a leading trade partner but Kazakhstan depends on Russia to export the majority of its oil. These economic ties, however, are not entered into blindly - on the contrary, Astana openly favours increasing economic co-operation with Moscow. Furthermore, Kazakh officials have noted that they consider Russia an increasingly important partner in terms of maintaining regional security. These important links have thus made it somewhat unsurprising that Kazakh authorities tacitly agree with Russia's approach on dividing the Caspian Sea. Unlike Azerbaijan, this agreement also appears to spill over into Kazakhstan's choice of export pipelines. Viktor Kalyuzhny, the Caspian envoy to Russia, was recently quoted as saying, "Where to export oil is Kazakhstan's right. Russia must just do everything so Kazakh oil goes through Russia. And for that Russia must establish all economic and political conditions and create a 'green channel' for Kazakh crude." Despite officially voicing an interest in diversifying its export routes to bring Kazakh oil to the international market, actions taken by Astana suggest it continues to prioritise its relationship with Russia. This loyalty to Russia is highlighted by Nazarbayev's decision to support the construction of a pipeline from the Tengiz oil field to the Russian port of Novorossiysk. Although the Tengiz-Novorossiysk pipeline was the only viable option in 1998 capable of offering a large-scale export option for increasing Kazakh oil production, it also showed Astana's deference to Russian priorities. Inaugurated at the end of March 2001, the Tengiz- Novorossiysk pipeline is the first international pipeline dedicated to taking Caspian oil to the international market. Not only does it promise to bring Russia significant revenues as a transit country but it also gives Moscow additional political leverage in terms of influencing future Kazakh pipeline decisions. Given that the Tengiz-Novorossiysk line is not sufficient to export a projected 67 million tones of Kazakh oil per year, it is recognised that Kazakhstan must seek additional export routes. Astana has two viable options: the first is to support Baku-Ceyhan (with an estimated price-tag ranging between US$2.4 and $3.7 billion), the second is to back the construction of a pipeline from Kashagan to Kharg, Iran (with an estimated cost of $1.2 to 1.5 billion). Taking into account economic, political and security considerations, the latter option appears to be Kazakhstan's clear, if unstated, choice. The fact that Agip of Italy was chosen as the official operator at the Kashagan structure, to the distaste of the USA which preferred ExxonMobil, suggests it is becoming increasingly likely that Astana will eventually choose a route through Iran. Agip is known to prefer the Iranian option, and unlike the US company ExxonMobil, which cannot operate in Iran because of the Iran-Libya Sanctions Act, Agip faces no operational restrictions. Furthermore, in light of recent developments in Russian-Iranian relations, the Kashagan-Kharg pipeline would represent continued Kazakh deference to Moscow at a time when Astana is reassessing the importance of its Russian relations. Iran and Russia draw closer Despite disagreeing about many issues, Iran and Russia have found a number of interests in common, drawing the two states closer together over the past few months. The most notable being their mutual distrust of US influence in the region, and mutual frustration over Washington's attempts to dictate Russian and Iranian policy. Iran therefore views Russia as a path leading away from international isolation, and Moscow has realised the potential benefits associated with supporting a regional power outside the US sphere of influence. Thus the landmark meeting held between Putin and President Mohammad Khatami in March may be seen as an important turning point in Caspian and international politics. Although the two countries did not agree on how the Caspian should be divided, both parties concurred on three basic points: - that the construction of pipelines under the Caspian should be blocked for environmental reasons; - the status of the Caspian would not be finalised until all five littoral states are in unanimous agreement; and - that the non-littoral states should be forbidden from using the Caspian Sea to deploy their naval forces. Many analysts have suggested that Russia and Iran's failure to agree on the division of the Caspian is a ploy to sabotage the Baku-Ceyhan pipeline. In order to make Baku-Ceyhan feasible, the large oil reserves in Kazakhstan would have to be used to fill the pipeline because Azerbaijan does not have enough reserves of its own. In the absence of a legal status it is unlikely that investors would agree to build the required trans-Caspian pipeline connecting Kazakh reserves in the north-east of the Caspian to Baku in the south-west. This would inevitably result in reserves having to continue to go north through Russia, and south through Iran, guaranteeing both states transit fees and the accompanying regional influence associated with dependence on these countries to export Caspian oil and gas reserves internationally. The most important aspect, however, arising from the meeting held between Putin and Khatami in March, was Moscow's agreement to resume sales of conventional arms to Iran, in addition to suggesting that it would help complete the Iranian nuclear power plant at Bushehr. Instead of directly focusing on Caspian issues, the arms trade has become the cornerstone of future Russian-Iranian relations. Estimates suggest that within the next few years Iran will become Russia's third largest arms buyer, after China and India. This move initiated by Russia is not as erratic as the West would like to believe. On the contrary, it appears to be a well thought out policy by Putin to demonstrate Russian influence in the region at the beginning of the newly elected Bush administration, and to gain more influence vis-a-vis Iran, which may eventually be used to persuade Khatami to compromise on the Caspian. Despite being adamant about receiving an equal 20% share of the Caspian, as opposed to 14% it would receive by agreeing to Russia's median line approach, Iran may increasingly feel obliged to compromise its position on the Caspian as a result of expanding political and military co-operation with Russia. Given that Moscow appears willing to give Tehran the option of accepting the median line approach, plus one or two per cent, it is difficult to envisage Iran continuing to disagree with Russia over the legal status of the Caspian. For the sake of building on current relations Iran may see greater benefit associated with following Russia. As French analyst Olivier Roy has stated on numerous occasions, Iran would prefer that Russia dominate the region, as opposed to the USA or any of its allies. A statement made by Sergei Blagovodin, deputy director of the Russian Academy of Sciences Institute of International Relations and the World Economy, exemplifies the newly accorded importance of Iranian relations for Russia. "It would be strange for Russia to ignore a country such as Iran, with its growing economic potential, and which plays such an important role in the Caspian," he argued. However, it will not be long before Russia expects Iran to show signs of gratitude. US responses Since the election of President George W Bush, US policy towards the Caspian has seemingly been driven by reactions to Russian initiatives. As Russia placed greater efforts on addressing the security and economic concerns of the region, US officials closely followed by initiating parallel efforts. For example, as Russia entered into military co-operation agreements with Azerbaijan and Kazakhstan, the USA showed a renewed interest in resolving the Nagorno-Artsax conflict, ultimately inviting the leadership of Armenia and Azerbaijan to peace talks in Florida in early April. As far as US interests are concerned, the resolution of Nagorno- Artsax is essential to ensure the future security of pipelines required to connect Caspian oil to refineries in Europe and ultimately in the USA. The Florida peace talks may also partially be seen as a US response to the opening of the Tengiz-Novorossiysk pipeline. Losing influence to Russia as a result of the successful opening of Tengiz- Novorossiysk, the USA is now placing greater efforts in pushing for construction to begin on the Baku-Ceyhan pipeline. Ensuring pipeline security is an important factor in pre- construction decisions. As it currently stands, despite praising Baku-Ceyhan, US action has merely proven that this pipeline is primarily supported for political reasons. Instead of going forward and investing a significant amount of money in the project, the USA is trying to involve Kazakhstan in the pipeline. Given the large oil finds on Kazakh territory, US officials have suggested that Washington could find the required credits to finance the construction of Baku-Ceyhan if Kazakhstan guaranteed it would use the line. Regardless of signing an agreement suggesting it would use Baku-Ceyhan were it to be built, it is unlikely that Kazakhstan will be willing to spend its oil profits on a project that would immediately alienate Russia and damage its relations with Iran. For these reasons the project will never be economically viable and will therefore remain a political enterprise. Washington's unease over developments in the Caspian can be partly attributed to Moscow's decision to renege on the secret agreement signed between vice-presidents Chernomyrdin and Gore in 1995, blocking Russia from exporting conventional weapons to Iran. US Secretary of Defense Donald Rumsfeld was quoted by UK newspaper the Sunday Telegraph as stating that Russia has become a "chief distributor of weapons of mass destruction to rogue-states". In response to these attacks, Russian officials have focused on what they regard as US hypocrisy by questioning Washington's military contacts with Pakistan and the large amount of weapons it supplies to Saudi Arabia. In attempting to promote itself as a moral alternative to Russia, the USA is merely damaging its own reputation in the region. Instead of easing sanctions and allowing US companies to become part of Iranian pipeline projects - thereby regaining a degree of the influence it has lost in the region - the Bush administration is caught up in replaying Cold War politics, forever attempting to prove its superpower status. The historic statement made by former US Secretary of Energy Bill Richardson in 1998 during an interview with the New York Times continues to shed light on US priorities in the Caspian: "This is about America's energy security; which depends on diversifying our sources of oil and gas worldwide. It's also about preventing strategic inroads by those who don't share our values. We're trying to move these newly independent countries towards the West. We would like to see them reliant on western commercial and political interests rather than going another way. We've made a substantial political investment in the Caspian, and it's very important to us that both the pipeline map and the politics comes out right." The USA's strategy in the Caspian is not very different from Russia's - both states are attempting to gain control over lucrative Caspian developments. However, the difference between the two states lies in the fact that the Caspian is in Russia's neighbourhood, whereas the USA is only a guest. Considering this very important distinction, Washington needs to come to terms with the fact that there is an inherent danger in trying to sideline Iran and Russia. Furthermore, the view that Caspian states will turn to the USA as a buffer against Russia is no longer entirely viable because Washington is losing influence in its relations with most littoral states. Even Azerbaijan, known to be a staunch US ally, appears to be rethinking its relations with the other Caspian states. In addition to the noticeable improvement in relations with Russia, the relationship between Baku and Tehran has thawed since the beginning of the year. In late January Iran agreed to restore electricity supplies to Nakhichevan, an enclave and autonomous republic of Azerbaijan. In February Iran sent aid packages to Azerbaijan's poor. Security considerations In light of recent Caspian Sea developments, a number of security considerations have received significant attention from analysts and media observers. The most dire have focused on the repercussions of Russian initiatives. However, it is equally important to note the security implications of US pressures on Caspian states and foreign investors. The most serious concern suggests Russia will engage in gunboat diplomacy should it make inroads in the Caspian. It has been argued that the primary reason why Russia wants the surface waters of the Caspian Sea to be treated as common territory is because it would benefit militarily. According to this argument Russian naval control of the Caspian would significantly alter the development of Caspian resources and would threaten western investment in the region. The notion of Russian gunboat diplomacy in the Caspian is overstated. Russia is interested in gaining influence over Caspian resources but Putin appears to have realised that the most effective way in which this can be done is through less threatening bilateral economic and security co-operation arrangements. The Putin government is also aware of the need for western investment to exploit Caspian resources. More practically, Russia knows it cannot afford to become a Caspian naval power. Most damaging in terms of short-term regional security are the priorities the USA is following. The fact that the Baku-Ceyhan pipeline would pass by or through the unstable areas of Dagestan, Chechnya, South Ossetia, Abkhazia, Adjaria and Kurdish territory, places Baku-Ceyhan on par with proposed pipelines that travel through Afghanistan. Should Baku-Ceyhan be built, it will cost foreign investors a considerable amount of money to ensure pipeline security from bands of armed militias and gangs. Foreign investors, however, would not be the only actors to lose from US Caspian policy. Washington's determination to act in ways which alienate Russia and Iran is likely to backfire in two ways. First, by forcing Russia to take more decisive steps to secure its influence in its own backyard - Moscow's decision to engage in arms sales to Tehran could therefore be seen as the beginning of a more forceful and confident Russia - and second, by fostering tensions in the Central Asian states with an interest in Caspian development through preventing them from gaining economic incentives associated with the most economically viable pipeline options. Attempting to persuade Kazakhstan to choose Baku-Ceyhan over an Iranian alternative, for example, would eliminate significant transit revenues for Turkmenistan and Uzbekistan - profits which could be used to alleviate internal tensions caused by deteriorating socio- economic conditions. Tamara Makarenko is an independent political and security consultant specialising in the Russian Federation and Central Asia. GRAPHIC: Photograph 1, A worker passes by a section of the pipeline opened on 26 March 2001 set to carry crude oil from the Tengiz oil field in Kazakhstan to the Russian Black Sea port of Novorossiysk. (Source: PA News); Photograph 2, Iranian navy cadets march during a graduation ceremony in the northern city of Now Shahr on the Caspian coast. Iran and Russia are developing a military and economic relationship which takes into account Caspian oil issues and aims to minimise the influence of the USA in the region.
