Publication: Eurasia Daily Monitor Volume: 5 Issue: 206

Azerbaijan’s reelected president Ilham Aliyev was inaugurated on October 24 for a second five-year term (, October 24, 25). As had been expected, voters gave Aliyev a strong mandate for continuing his policies. International observers noted clear improvements in the electoral process and practice on this occasion, compared with previous electoral cycles (see EDM, September 23, October 20).

If it were situated in a less dangerous neighborhood, Azerbaijan would undoubtedly be firmly set on the road to success as a rapidly modernizing Muslim society. Political ingredients of success—internal stability and security, statesmanship at the top, a secular path of development, and external orientation toward the West as matters of national consensus—were already in place before the country’s oil revenues started flowing in. With its oil-driven economic growth averaging a world-record of 30 percent annually in the last three years, some 700,000 jobs created, a rapidly growing oil fund open to international auditing, vast reserves of gas just barely tapped, a key location on intercontinental transit routes, and new investment priorities in non-oil sectors planned for Aliyev’s second presidential term (, October 13, 25), Azerbaijan is rapidly moving from inherited structural poverty to modernization, while contributing to the West’s energy security. The basis is also now in place for more effective institution-building during the second presidential term.

Azerbaijan`s prospects for further advances, however, look suddenly fragile in the wake of Russia’s aggressive resurgence and invasion of Georgia, the consequences of which are casting shadows on Azerbaijan at the start of Aliyev’s second presidential term. That invasion exposed a vacuum of Western power and political presence in the South Caucasus generally. Few international observers had noticed and warned against that developing vacuum, and those who did were scarcely heeded. The United States essentially disengaged itself strategically from the region after 2005, with medium-level officials and rhetorical flourishes substituting for high-level strategic policy. The European Union never engaged seriously with Azerbaijan, nor could Brussels have done so in the absence of EU common policies on Caspian energy and the South Caucasus conflicts.

However neglected, Western energy security policy remains a common agenda with Azerbaijan and Georgia, its prospects linked to these countries` national independence and security. Azerbaijan`s potential as a producer of gas— the commodity more critical than any other to Euro-Atlantic energy security—is materializing slowly, however. The reasons behind this include the paralysis of the Nabucco pipeline project; lagging development of the Shah-Deniz offshore gas field (in turn delaying capacity expansion of the Baku-Tbilisi-Erzurum pipeline); and Turkey’s ambitions to take a portion of Azerbaijani gas for possible resale at a profit to itself, instead of providing transit service for that Azerbaijani gas via Turkey to Europe.

Exploiting this situation, Russia is offering to buy the entire volume of gas available for export from Azerbaijan at European netback prices. Russian President Dmitry Medvedev and the Gazprom monopoly have both made that attractive proposal to Baku. The government there, as well as the BP and Statoil companies, may soon find themselves facing the choice of either selling their gas export volumes to Gazprom or delaying a production ramp-up at Shah-Deniz while waiting for a non-Russian outlet to become available. Azerbaijan`s EU and U.S. partners must therefore try seriously to kick-start Nabucco and work politically with Turkey to remove its obstacles to the transit of Azerbaijani gas.

Meanwhile, portraying Azerbaijan as capable of supplying Nabucco’s first phase by itself is unconvincing to investors (in view of Azerbaijan`s other, already existing commitments), and it exposes Azerbaijan to Russian pressures, instead of sharing that burden among several potential supplier countries. For its part, Azerbaijan is actively engaged in political bridge-building with Turkmenistan, encouraged by Baku’s Western partners. But only the formation of a Western consortium, with an attractive commercial offer to Turkmenistan, could open access to that country’s gas supplies for the planned trans-Caspian pipeline that would connect with Nabucco through the Baku-Erzurum link.

Continuing internal debates within the EU reflect an incipient understanding that Brussels needs to subsidize pipeline projects for supply diversification. At present, however, the EU has only limited tools available and even fewer resources earmarked for this. Unless it moves quickly, EU policy will miss an opportunity yet again to take full advantage of Azerbaijan’s potential as a gas producer and transit country.

Baku feels surprised and puzzled by the idea of replacing Georgia with Armenia as a transit route for Nabucco gas. Under this option, gas earmarked for Nabucco would be pumped from Azerbaijan to Turkey through a pipeline to be built via Armenia, instead of Georgia. This suggestion has recently emerged in the context of a possible package deal in the Karabakh conflict. The position of Azerbaijan’s government, however—as summed up in Brussels by Deputy Minister of Foreign Affairs Araz Azimov—is that it would make no sense to bypass the already existing Baku-Tbilisi-Erzurum pipeline, the designated conduit for Caspian gas via Georgia and Turkey to Europe (EUobserver, October 8).