AZERBAIJAN - The Political Background

Azerbaijan had an oil boom in late 19th century. That it will have another boom in the early 21st century remains to be seen. It has become one of the focal points of the so-called "Great Game", a game involving the US and Russia, with the Caspian Sea being a zone of high strategic importance. Investments to develop the oil and gas reserves of this zone, including Russia, could exceed $350 billion by 2010. The capital would include up to $14 bn for oil and gas pipelines and related infrastructure facilities, if all projects under negotiation materialise. Azerbaijan is a country where the geo-political and economic interests of Russia, the US, Europe, Turkey, Iran and other countries are inter-meshed. Their interests reflect a balance between two power blocs competing for influence in the Caspian: the US and Turkey on the one hand and Russia and Iran on the other. Europe leans towards the US-Turkey bloc, but it is not averse to partnerships with Russia and Iran. Each of the countries are vying for influence in Azerbaijan in its own way. Russia is using Soviet era connections and tactics to prevent Baku from going too far in favour of the US. Among other things, it is using the disputed legal status of the Caspian as a lever to make sure Russian energy companies are involved in key ventures. Moscow has been somewhat successful in this. The giant company LUKoil, which has rights to develop most of the Caspian Sea's Russian sector, is involved in several oil development projects in Azerbaijan. The US is equally, if not more, aggressive in pursuing its business interests in Azerbaijan. American companies, with Washington's backing, are using their financial and technological muscles to become the biggest presence in the Azeri sector. Among US companies involved in oil development projects in the country are Exxon, Mobil, Chevron, Texaco, Amoco, Unocal and Pennzoil. US companies would have been represented in all of Azerbaijan's big E&P projects, had it not been for Washington's ban on involvement in any business which includes Iran. A unit of the National Iranian Oil Co. (NIOC) is participating in two ventures. Turkey is building links to Azerbaijan based on its racial and cultural ties. Azeris are ethnic Turks and speak a Turkic language. Ankara perceives the predominantly Turkic region of Central Asia to be its natural preserve in strategic terms and for business. In this sense, aside from being part of the US power bloc, Turkey has its own ambitions to revive pan-Turkism and its Ottoman legacy over the long-term. Turkey and Azerbaijan have signed a

military agreement on technical, scientific and educational co-operation. The Turkish state company TPAO is a partner in AIOC and the Shah Deniz consortium (see Gas Market Trends). Iran, too, has sought to capitalise on its cultural and religious links with Azerbaijan. But its approach so far has been largely pragmatic, with the emphasis being on business rather than religion. On the official level, Azerbaijan has not been receptive to Iran's notions of Shiite solidarity and anti-US rhetoric. Tehran has had to contend with US pressure on Baku to avoid links with Iran, which led to the exclusion of NIOC from the AIOC consortium. But through careful diplomacy Iran has managed to carve out a niche for itself in the Azeri hydrocarbon sector, with its Oil Industries Engineering & Construction Co. (OIEC), partly owned by NIOC, to participate in developing the Shah Deniz and Lenkoran-Talysh Deniz projects. Mobil had to opt out of the latter project because OIEC joined. Azerbaijan, which shares a common border with Iran, does not want to antagonise the Tehran regime; ethnic Azeris in the Iranian province of East Azerbaijan far outnumber the 7.2 million population of Azerbaijan. Companies from Britain, France, Germany, Japan and Saudi Arabia are also involved in Azerbaijan. BP leads the two top oil consortia in the country, AIOC and Shah Deniz. Itochu of Japan is involved in AIOC as well as in the North Apsheron ridge project to develop the Dan Ulduzu and Ashrafi fields. Delta and Nimir of Saudi Arabia are partners in this venture as well. Elf and Total of France and Deminex of Germany are members of the consortium formed to develop the Lenkoran-Talysh Deniz offshore zone. President Aliyev is careful to maintain a good balance in satisfying the two power blocs. His approach has resulted in 13 PSAs signed since 1994. The country now appears more stable and the economy is recovering, albeit gradually. These achievements compare favourably with the period between 1990- 1993, when Azerbaijan was hit by a war with Armenia over the disputed enclave of Nagorno-Karabakh. At the same time, it was wracked by civil strife which was seen as the result of previous Azeri leaders leaning too much in favour of one of the two blocs. Under previous presidents Ayaz Mutalibov and Abulfaz Elchibey, Baku had refused to join the Commonwealth of Independent States (CIS) set up by Russia after the collapse of the Soviet Union. Aliyev reversed this policy and ties with Moscow began to pick up. Aliyev has not leaned too much towards either bloc. He tries not to offend any of the smaller players jockeying for influence over his country. His focus now is to turn Azerbaijan into a wealthy country rivalling the rich oil producing states of the Middle East. He knows this cannot be achieved without political stability. He has imposed stability by a combination of patronage, carefully nurtured nationalism, and the same tough tactics he used to apply when he was KGB chief for Baku in the 1970s.