Publication: Eurasia Daily Monitor Volume: 3 Issue: 39

Russian President Vladimir Putin paid an official visit to Azerbaijan on February 21-22, presumably to inaugurate the “Year of Russia in Azerbaijan 2006” celebration, following the “Year of Azerbaijan in Russia 2005.” While cordial, the atmosphere was far more sober than the love fest of Armenian President Robert Kocharian’s Moscow visit last month to inaugurate the “Year of Armenia in Russia” (see EDM, January 16). Azerbaijan’s President Ilham Aliyev described the bilateral relationship as an “example of relations between neighbors, practical good-neighborly relations” (Azertaj, February 21). Far from eroding Azerbaijan’s reliance on the United States to advance common energy and security interests, Putin’s visit inadvertently underscored how little Russia can offer Azerbaijan in those regards.

Oil: Azerbaijan declines Russian proposals to increase its reliance on the Baku-Novorossiysk pipeline for export of Azerbaijani oil. Azerbaijan uses this pipeline only as a backup option while committing almost its entire export volumes to non-Russian routes. In 2005, Azerbaijan’s State Oil Company pumped 4.1 million tons of oil to Novorossiysk, up from 2.5 million-2.7 million tons annually in the preceding years. This temporary increase was necessitated by delays in commissioning the Turkish section of the Baku-Ceyhan pipeline, even as Azerbaijan’s oil extraction grew on schedule, requiring an outlet. Transneft, owner of the Russian section of the Baku-Novorossiysk pipeline, charges a transit fee of $15.67 per ton of oil. The charge is exorbitant, though relatively tolerable as long as oil market prices remain high. However, Transneft cuts further into Azerbaijan’s profits by mixing the low-quality Russian Urals blend with high-quality Azerbaijani oil before the latter reaches the world market. A compensation mechanism known as “oil quality bank” is standard international practice, but Russia refuses to use this mechanism with Azerbaijan and other Caspian oil producers.

In 2006, Azerbaijan intends to scale back its oil export to Novorossiysk to 3 million tons, provided that the Baku-Ceyhan pipeline’s Turkish section is commissioning by May 27 as now rescheduled. Once that problem is resolved, Azerbaijan may reduce its export to Novorossiysk even below the pre-2005 level of 2.5 million tons, unless the Russian side agrees to use the oil quality bank mechanism. In Baku, Russia’s Industry and Energy Minister Viktor Khristenko renewed a proposal to Azerbaijan to move from annual contracts to a long-term contract for using the Baku-Novorossiysk pipeline. However, this is clearly not in Azerbaijan’s interest (Interfax, February 21, 22; Trend, February 23).

Gas: Azerbaijan is extricating itself from dependence on Russian-delivered gas. Azerbaijan imports gas from Russia in order to save fuel oil, which it previously used for electricity generation. It imported 4.5 billion cubic meters of gas in 2005 from Russia and has contracted for the same volume in 2006, despite the price hike to $110 per one thousand cubic meters, up from $60 in previous years. According to Industry and Energy Minister Natig Aliyev, this year’s price is reasonable, but the import volumes after 2006 will depend on the price of Russian gas — i.e., that import may decline. Azerbaijan’s State Oil Company plans to raise gas extraction to 4 billion cubic meters annually from the Guneshli field and 9 to 10 billion cubic meters from the Shah-Deniz field by 2008, sufficient to cover internal consumption and some export (Turan, February 21, 22; Trend, February 23).

Military Issues: The two presidents’ joint communiqué mentions the possibility of “cooperation in military industry,” implying procurement of Russian equipment by Azerbaijan. The country is creating a new Ministry for Defense Industry in charge of military procurement. According to First Deputy Prime Minister Abbas Abbasov during Putin’s visit, Azerbaijan will cooperate in that regard “not only with Russia, but with various countries, not excluding Russia” (Trend, February 21; Interfax, February 22).

Two contentious issues in the military and security sphere were not publicly addressed during Putin’s visit to Baku. The first is Azerbaijan’s concern over the transfer of some Russian heavy weaponry from bases in Georgia (which are slated to be closed) to Armenia. The other issue is Moscow’s proposal for the creation of a joint naval force of the five Caspian countries, Casfor, under de facto Russian control. Minister of Foreign Affairs Sergei Lavrov again raised this issue in a curtain-raiser interview on the eve of Putin’s visit (Zerkalo [Baku], February 21). Azerbaijan, however, has resisted this proposal since its inception in 2005 and continues to do so.

At the presidents’ joint news conference, Putin announced that he has made a “promise” to invite Kocharian to Russia in the near future to discuss a resolution of the Karabakh conflict. The move seems intended to catch up with the United States, which currently leads the effort to settle that conflict. While it may play spoiler, Moscow has few resources to drive that process.