Fallout From Greece’s Financial Crisis May Negatively Impact Azerbaijan’s European Energy Strategy

The Greek government’s wide-ranging efforts to prevent the country’s financial collapse finally culminated in an agreement with the European Union, on July 13 (see EDM, July 14). The bailout deal provides new concessions regarding Greece’s debt. While the EU may have saved Athens from financial turmoil for now, Greek Prime Minister Alexis Tsipras’ “geopolitical dance” with Russia continues. Notably, back in June, Tsipras signed a memorandum on the construction of a Greek extension to the so-called Turkish Stream project, due to start in 2016, and scheduled for completion by 2019 (APA, June 19; see EDM, July 13).

For Azerbaijan, the Greek debt crisis poses a threat to its the energy strategy in Southeastern Europe, in addition to its more direct negative financial effects.

The financial impact of the Greek debt crisis on Azerbaijan has mostly been ignored by officials in Baku. The executive director of the State Oil Fund of Azerbaijan (SOFAZ), Shahmar Movsumov, stressed that SOFAZ has not invested in Greece because of that Mediterranean country’s poor financial rating (Trend, July 6). However, unlike the government in Baku, local economists have voiced serious concerns about the situation. According to Azerbaijani economist Vugar Bayramov, the director of the Centre for Economic and Social Development, about a quarter of SOFAZ assets are held in euros, and 40 percent of its assets are invested in EU countries. The Greek financial crisis may weaken the euro, which, in turn, will damage the value of Azerbaijan’s assets (Anspress, July 6). Additionally, an early concern for Azerbaijan was that the Greek crisis could cause a sharp decline in the price of oil in the world market, threatening Azerbaijan’s energy revenues. The other potential consequence of this is a devaluation of the local currency: a few months ago, the Azerbaijani manat was devalued by 33.5 percent, driven in part by the sharp fall in global oil prices (Economist Intelligence Unit, February 23).

At the geopolitical level, the major concern has been that Athens’ disappointment or frustration with European creditors could push the country toward Russia, thus strengthening Moscow’s energy leverage regionally. Indeed, before the EU-Greek debt agreement was reached, Moscow saw several opportunities to attract Greece, and Athens used Russia’s advances to put pressure on the EU. Notably, Russian Energy Minister Alexander Novak declared Moscow’s readiness to support the recovery of the Greek economy by developing cooperation in the energy sector (TASS, July 12). And on June 19, Russia and Greece signed a memorandum on cooperation for the construction and operation of the Greek section of the Turkish Stream natural gas pipeline (TASS, June 19). In this regard, a key issue for Baku becomes Athens’ position on the Trans-Adriatic Pipeline (TAP).

Firstly, by questioning the previously concluded agreements on projects to supply Azerbaijani gas to Europe (principally, through TAP, a key pipeline link in the planned Southern Gas Corridor), the Tsipras government has considerably strengthened Russia’s energy hand. Baku is beginning to worry about the reliability of the Greek government, which has asked for revisions to the signed contract under which Baku had acquired the Greek gas transmission system operator DESFA (APA, June 2). The contract, notably, remains under investigation by the European Commission on its compatibility with EU law. The Azerbaijani government has previously criticized the investigation and the delay in its conclusion (APA, March 11).

Following a tender process, the contract allocated 66 percent of DESFA shares to Azerbaijan, but since coming to power, the Tsipras government has sought to reduce this to 49 percent. Yet, Baku sees no reason to amend the contract. In a subsequent development, Environment and Energy Minister Panagiotis Lafazanis declared that the Greek government is seeking to halt the privatization of the national gas company and its transportation system, DESFA (RIA Novosti, June 17). Thus, Athens now wants the European Commission to rule against Azerbaijan’s 66 percent acquisition. The changes in Athens’ position have increased Azerbaijan’s concerns. Russia’s hand is clearly visible here: Moscow is pushing the Turkish Stream project, and for geopolitical reasons, Baku is unwilling to engage in any kind of clash with Moscow.

Azerbaijan is unhappy with the EU’s response to Greece’s financial crisis, but has not expressed its disappointment to the Tsipras government directly. Azerbaijani President Ilham Aliyev recently stated that Baku has no problems with any European countries at the bilateral level (Azernews, July 14). But Azerbaijan’s Energy Minister Natig Aliyev has implicitly expressed disappointment with Greece, noting that Azerbaijan is fulfilling all of its contractual obligations in relation to energy projects, and citing the Baku-Tbilisi-Ceyhan (BTC) oil pipeline (completed in 2005) as evidence that political support is important in implementing any major energy project (News.az, July 8). This can be interpreted as a veiled call for Western intervention in favor of the TAP project.

Secondly, Azerbaijan is worried that Greece could delay the construction of the Greek section of TAP, giving priority to Turkish Stream. The June agreement between Russia and Greece indicates that Moscow is pushing this sequence, with the aim of weakening the prospects of TAP as an alternative energy source in the eyes of European consumers. Previously, Baku had viewed Turkish Stream as a “virtual pipeline” that lacked real investment, in contrast to the Southern Gas Corridor (SGC). Vitaly Baylarbayov, the deputy vice president of the State Oil Company of Azerbaijan Republic (SOCAR), has said before that it is “impossible” to stop the implementation of the SGC (EurActiv, May 26). Now, however, Athens is capitalizing on its new energy leverage in order to gain better contractual terms for implementing its TAP commitments. Greece’s position will also weaken faith in the prospects of accessing Azerbaijani gas via Greek interconnectors among other European countries, such as Bulgaria.

In sum, for Azerbaijan, the Greek debt crisis is far more than a financial issue, and complications are likely to continue in relation to Greece’s changing position on its commitments to the Trans-Adriatic Pipeline versus its growing support for Russia’s so-called Turkish Stream project. The EU will need to complete its investigation decision on DESFA in order for all parties to have a clearer picture of the future. Moreover, in observing Greece’s reaction to the outcome—whatever it may be—its partners will gain a better understanding of where Athens is headed in terms of its energy strategy.