Azerbaijan: Between Russia and the EU Hydrocarbons, Foreign Policy, Interdependence, Balance

University of Amsterdam

Azerbaijan: Between Russia and The EU hydrocarbons, foreign policy, interdependence, balance

Msc Thesis Political Science: International Relations Research Project: The political economy of energy University of Amsterdam Graduate School of Social Sciences Amsterdam 2017

Author: Monika Maria Gyuris 11257296 Supervisor: Dr. M.P. Amineh Second Reader: Dr. H.W. Houweling

Abstract

Azerbaijan is located in a geopolitical region where Russia, Iran, Turkey and the European Union all seek to extend their influence. At the crossroads between East and West, describes not only Azerbaijan’s spatial location, but its foreign policy as well. It aims to emerge from under Russia’s shadow and orient toward the West. Europe’s hydrocarbon import is contingent on Russia. The European Union seeks to decrease this dependence. For this purpose, it has initiated the Southern Gas Corridor project, in which Azerbaijan has a leading role. Azerbaijan is bound to Russia by historic, economic, social and security ties, along with geographical propinquity. Russia’s economy, military and its energy reserves are significantly superior to Azerbaijan’s. It could cause serious damage to the country if it wanted to. The Azerbaijani state is burdened by economic and security hardships. Its oil based economy is injured by plummeting oil prices. Recession has begun in 2016. The conflict with Armenia over the territory of Nagorno-Karabakh is yet to be resolved. The EU and Russia are both present in efforts that wish to ease Azerbaijani hardships. Europe and Azerbaijan simultaneously strive to distance themselves away from Russia, but interdependences impede these goals. Interconnections call for opting toward cooperation. This thesis elaborates on economic, energy and security ties that connect Russia, Azerbaijan and the EU. It conducts a case-study of Azerbaijan’s external policy balance between Russia and the EU. It argues that Ilham Aliyev’s presidency is able to spark the interest of Western powers by using its energy reserves, while remaining cautious in order not to exasperate Russia. Hydrocarbons – Interdependence – Balance - Foreign Policy

Acknowledgement I would like to thank the incredible group of people who have supported me during my years in higher education. Being the first graduate in my family, I am thankful for their endless support that allowed me to pursue the education they did not have the chance to. Secondly, an acknowledgement to my professor, Dr. Mehdi Amineh, who always encouraged me to work harder. Last, but not least, I would like to thank the amazing group of friends I have made throughout these years. My friends back home in Budapest never fail to support and encourage me despite geographical distance. In Amsterdam, my Crash Course Group has extended a rare amount of genuine kindness toward me, that eased my transition to the lifestyle of Budapest to Amsterdam. In conclusion, I would like to acknowledge my one-year study experience at UVA, that gave me the academic confidence to finally pursue what I have always dreamed of: law school in the United States.

Contents Abstract ...... 3 Map of Azerbaijan’s Proximity to Europe (Worldatlas.com 2017) ...... 7 Map of Azerbaijan and Neighboring Countries(Stratfor 2015) ...... 8 List of Tables and Figures ...... 9 Abbreviations ...... 11 Chapter One: Introduction and Research Outline ...... 12 1.1 Introduction ...... 13 1.1.1 Objectives...... 14 1.1.2 Research Questions ...... 15 1.1.3 Social and Scientific Relevance ...... 15 1.1.4 Timeframe ...... 16 1.1.5 Literature Review ...... 17 1.2 Theoretical Framework ...... 19 1.2.1 Conceptual Framework ...... 21 1.2.4 Conclusion of theory ...... 23 1.3.Operationalization and Hypothesis ...... 23 1.4 Methodology ...... 26 1.5 Structure of the thesis ...... 27 Chapter Two: Setting the Stage- Azerbaijan’s & Russia’s Hydrocarbons ...... 29 2.1 Introduction ...... 29 2.2 Azerbaijan as a Producer Country ...... 30 2.3 Russia as a Producer Country ...... 37 2.4 Concluding Azerbaijan’s and Russia’s Natural Resource Settings ...... 41 Chapter Three: The Political Economy of Energy in Azerbaijan, Russia & The EU ……..43 3.1 Introduction ...... 43 3.2 The Political Economy of Energy in Azerbaijan ...... 44 3.3 The Political Economy of Energy in Russia ...... 47 3.4 Russia and Azerbaijan in the EU’s Energy Supply Security ...... 54 3.5 Concluding Chapter Three ...... 67 Chapter Four: Domestic and Geopolitical Challenges in Azerbaijan...... 70 4.1 Introduction ...... 70 4.2 Domestic Challenges in Azerbaijan ...... 70 4.5 Concluding the Security Challenges of Azerbaijan ...... 77 Chapter Five: Conclusion...... 80 5.1 Objectives...... 80 5.2 Research questions ...... 81 5.3 Theory and methodology ...... 82 5.4 Hypotheses ...... 83 5.5 Recommendation...... 87

Bibliography ...... 88

Map of Azerbaijan’s Proximity to Europe (Worldatlas.com 2017)

Map of Azerbaijan and Neighboring Countries, Indicating Neutrality Toward Russia (Stratfor 2015)

List of Tables and Figures

1., Map of Azerbaijan’s Proximity to Europe (Wordlatlas.com 2017) 7

2., Map of Azerbaijan and Neighbors (Stratfor 2015) 8

3., Azerbaijan Natural Gas Consumption and Production

(U.S. Energy Information Administration 2016) 26

4., Key Energy Infrastructure in Azerbaijan

(U.S. Energy Information Administration 2016) 28

5., Azerbaijan Total Petroleum Consumption and Production)

(U.S. Energy Information Administration 2016) 30

6., Azerbaijan’s Proven Oil Reserves (Map: Enchanted Learning 2016, Number: U.S. Energy Information Administration 2016) 32

7., Russia’s Proven Oil Reserves (Map: Enchanted Learning 2016, Number: U.S. Energy Information Administration 2016) 33

8., Russian Oil Production by Company (U.S Energy Information Administration 2016) 38-39

9., Russian Export by Destination (U.S Energy Information Administration 2016) 44

10., Russian Export by Destination (U.S. Energy Information Administration 2016) 45

11., Southern Gas Corridor Timeline (Delegate.com 2016) 48

12., Southern Gas Corridor Pipelines (Bankwatch Network 2015) 49

13., Southern Gas Corridor Stakeholders (Delegate.com 2016) 50

14., Distance between Nagorno-Karabakh and Western Oriented Pipelines (Radio Free Europe 2016) 56

Abbreviations

ACG: Azeri-Chirag-Gunashli fields

BP: British Petroleum

BTC: Baku-Tbilisi-Ceyhan Pipelines

BTE: Baku-Tbilsi-Erzurum pipeline

EC: European Council

EITI: Extractive Industries Transparency Initiative

CoE: Council of Europe

The EU: The European Union

GRECO: Group of States Against Corruption

IFSWF :International Forum of Sovereign Wealth Funds

SCP: South Caucasus Pipeline

SGC: Southern Gas Corridor

SOCAR: State Oil Company of Azerbaijan Republic

TANAP: Trans-Anatolian Pipeline

TAP: Trans-Adriatic Pipeline

OECD ACN: Organization of Economic Cooperation and Development Anti-Corruption Network

USSR: Union of Soviet Social Republics

Chapter One: Introduction and Research Outline 12

1.1 Introduction Azerbaijan is squeezed in a geographic location where Russia, Iran, Turkey and the European Union all seek to extend their influence. The most active participation comes from Russia and the EU. This region is frequently regarded as a grey area of influence between these two actors (Moga 2012:389). Since independence, Azerbaijan’s foreign policy has been characterized by a wish toward European integration. Historic, economic and social ties bind it to Russia. This competition of actors for influence produces a misalignment of political, ideological and strategic interests (Galitsky 2017). Its hydrocarbon reserves allow it to play a role in the energy supply security of Europe. However, Azerbaijan’s energy reserves are not enough to substitute for EU import from Russia. The latter views the South Caucasus as part of its traditional sphere of influence. Azerbaijan has managed to stay neutral between the two parties without exasperating Russia. Empirical examples will underpin the country’s capability of maintaining cooperative relations with both.

Azerbaijan bears an estimated 7 billion barrels of crude oil (National Resource Governance

Institute) and 35 trillion cubic feet of natural gas (U.S. Energy Information Administration 2016). Since gaining independence from the Soviet Union, the Azerbaijani ruling elite has aspired to maintain cooperative relations with the West, namely the European Union. The EU is critically dependent on Russia for its energy import. Azerbaijan has introduced itself to Europe as a partner in the EU’s attempts at diversifying its import away from Russia. It plays a leading role in the EU’s Southern Gas Corridor initiative, which was established for the aim of orienting European energy import away from Russia. Still, severe economic and security interdependence between Europe, Russia and Azerbaijan can be observed.

Being one of the largest hydrocarbon bearing countries in the world, Russia has maintained a prominent position in international politics. The bulk of its influence remains particularly large in

the ex-USSR South Caucasus. As legal successor of the Soviet Union, Russia is capable of dominating the region. The size of its economy and military shows that it would be capable of severe damage. It is also home to millions of Azeris. This causes Azerbaijan to opt for good relations with its neighbor. Blessed with its own hydrocarbons, Azerbaijan is able to use them to promote its geopolitical importance in the eyes of Western partners, sliding out of Russia’s firm grip. This thesis connects Azerbaijan’s hydrocarbons to its foreign policy. It conducts a case- study of Azerbaijan’s external policy balance between Russia and the EU. It argues that Ilham Aliyev’s presidency is able to spark the interest of Western powers with its production capabilities, but is cautious not to exasperate Russia, keeping up a balanced foreign policy between these two actors. Social, economic, security and energy interdependencies between Europe, Azerbaijan and Russia were identified while conducting this research. They corroborate the second hypothesis, that due to their economic and security interdependence, opting for cooperative relations in the European-Azeri-Russian triangle is necessary.

1.1.1 Objectives Primarily, this thesis studies Azerbaijan’s foreign and energy policies. Azeri diplomacy toward Russia and the EU will be analyzed, along with the challenges that rise from its policy balance between the two actors. Russian and EU policy toward the country will be assessed. My thesis attempts to prove that the Azeri ruling elite uses hydrocarbons to maintain their foreign policy balance between the EU and Russia. It does so by boosting the country’s geopolitical importance in the eyes of the EU by emphasizing its producing and exporting capabilities, while using diplomatic means to maintain cooperative relations with Russia.

1.1.2 Research Questions The central question this thesis follows is: Do Azerbaijan’s hydrocarbons help the ruling elite balance their foreign policy orientation between the European Union and Russia? A backbone of Azerbaijan’s and Russia’s energy production capabilities is provided in Chapter Two. This is done by answering the research questions: How is the natural resource stage set in Azerbaijan? How is the natural resource stage set in Russia?

Chapter Three reports on the external energy policies of the three chosen actors. The following research questions are used: Who are the main decision-making forces in Azerbaijan’s energy policies? Who are the main decision-making forces in Russia’s energy policies? What role do hydrocarbons play in Azerbaijan’s policies regarding Russia? What role do hydrocarbons play in Russia’s external policies? What Russian tactics are identified toward Azerbaijan? What role do Russia and Azerbaijan play in Europe’s energy security?

Chapter Four analyzes the hardships the Azerbaijani state faces. The EU and Russia’s role in rehabilitating Azerbaijan’s struggles will be assessed. The research questions it uses to do so are: What is the contemporary context for geopolitical influence in Azerbaijan? What are the socio- economic and political challenges the country faces?

1.1.3 Social and Scientific Relevance Azerbaijan’s location makes it a country where several great powers seek to extend their influence. Moreover, its expanding natural gas production and existing oil reserves add to its heightened presence in international politics. The study of Azerbaijan’s energy policies is of utmost importance, as one of the main goals of the European Union is to decrease its dependence

on Russian energy. Azerbaijan acts as a partner for the EU in this endeavor, showing significance of my research. This thesis will be an addition to the academic field of international relations as it will address the subjects of the political economy of energy and diplomacy.

1.1.4 Timeframe The timeframe of this thesis begins in 2008, the year of the Southern Gas Corridor Project proposal. This is the main project aiming to diversify EU imports away from Russia. To remain as current as possible, my research will be conducted until 2015. The latest joint declaration reaffirming the Southern Gas Corridor, was signed in February 2016 (The Second Ministerial Meeting of the Southern Gas Corridor Advisory Council Joint Declaration 2016).

Ilham Aliyev is in power in Azerbaijani politics throughout the entire timeframe of this thesis. In Russia, there were two presidencies in this time-period: Medvedev’s until 2012, followed by Putin’s presidency. In order to assess the Russian-Azeri-European triangle in its current form, studying Putin’s policies will be prioritized as opposed to Medvedev’s.

Other major powers apart from Russia and the European Union have geopolitical interests in Azerbaijan. This thesis limits itself to Russian and European Union policies. While addressing the delineation of actors in my thesis, the exception of Britain must be mentioned. As of 2016, the United Kingdom is no longer a European Union member state. However, the mention of Britain as a European investor will be made several times. Great Britain (U.S Chamber of Commerce 2017), namely through British Petroleum, is the largest foreign investor in the

country. Regarding geopolitical competition, a further issue Azerbaijan faces is the ambiguous legal status of the Caspian sea. The European Union does not play a key role in the solution finding process surrounding it, thus it does not fit under the scope of my thesis.

1.1.5 Literature Review There is substantial literature analyzing Azerbaijan’s external policies toward both Russia and the EU, and vice versa. This thesis will be an addition to existing literature by connecting the chosen actors and investigating the issue through the selected timeframe. The selected timeframe is innovative to international relations research, as the majority of research conducted on this topic falls under previous timeframes. Literature will be used in four groups: assessing Azerbaijan’s domestic energy stage and its external policies, studying Russia through the same indicators and, EU policies toward both Russia and Azerbaijan.

The background of Azerbaijan’s and Russia’s production and export capabilities was provided based on qualitative data gathered from the U.S. Energy Information Administration and the International Energy Agency. A fundamental piece academic of literature connecting Azerbaijan’s natural resources to its foreign policy is: Power Games in the Caucasus by Nazrin Mehdiyeva. The book illustrates how Azerbaijan’s natural resources helped diversify its external policies away from Russia (Mehdiyeva 2011). She assesses the bargaining power of small states, namely Azerbaijan, when opposing large states, such as Russia (Mehdiyeva 2011). The majority of the book falls under a time frame that the scope of my research does not cover, however it is needed for a thorough understanding of Azeri foreign policy. For profiling Azerbaijan and its energy sector in my thesis, the U.S. Energy Information Administration’s country analysis brief was used. (U.S. Energy Information Administration 2016).

To understand Azeri-Russian diplomatic correspondence, articles such as: “Azerbaijan’s Pursuit of Successful Balanced Foreign Policy” by Shamkhal Abilov and Ismayil Isayev were used. This

is a successful historical article describing Russian-Azerbaijani relations in detail until 2012. It also touches upon Azerbaijani-European deals creating tensions with Russia (Abilov and Isayev 2012). For understanding solely the Russian attitude toward Azerbaijan, my research relies on sources such as: “Putin’s Grand Strategy: The Eurasian Union and Its Discontents” ed., Frederick Starr and Svante Cornell 2012.

For the European-Azerbaijani angle, sources such as “EU and The South Caucasus” by Leila Alieva are used (Alieva 2006). Alieva provides a thorough description of EU policies toward the region.

For understanding the European-Russian relationship, “Invisible but not indivisible: Russia, the European Union, and the importance of “Hidden Governance,” by Morena Skalamera is an article my research profits from. The central question of Skalamera’s work is why there is no supranational institution governing over the EU-Russia energy relationship. This topic does not fit under the scope of my own research. Albeit, this article proves to be useful for two reasons: it gives an in depth analysis of the European-Russian relationship, and it touches upon the Southern Gas Corridor (Skalamera 2016). Her article is a reliable source, as she has based it on over twenty in-depth qualitative interviews in Brussels and Moscow between 2012 and 2015 (Skalamera 2016).In “The interdependence of European-Russian energy relations”, Oistein Harsem and Dag Harald Claes provide a thorough analysis of European-Russian energy geopolitics. This article is particularly useful to my thesis as it studies the EU at the supranational level, the same way my thesis does so (Harsem and Claes 2013).

The main Azeri policy papers my research analyzed were the State Program for Development of Fuel and Energy Sector in Azerbaijan and the 2007 National Security Concept of Azerbaijan. The premier document is the base of the country’s energy policies. The National Security Concept encloses the aims of the country’s external relations. It highlights orientation toward both Russia and the EU. It includes an energy security policy provision. The main Russian policy paper relevant for this research is: the Energy Strategy of Russia for the Period up to 2030. The European Union policy papers most relevant to my thesis are regarding the Southern Gas Corridor and the Eastern Partnership. Examples include: The Second Ministerial Meeting of the Southern Gas Corridor Advisory Council Joint Declaration 2016 and EU-Azerbaijan Eastern Partnership: Supporting reforms, Promoting Change.

The main journals my research relied on were: Caucasus Analytical Digest, Energy Policy, Journal of Eurasian Studies, Journal of Energy & Natural Resources Law and The Oxford Institute for Energy Studies. Empirical examples were collected from news sources such as: Azernews, Bloomberg, Business Insider, Eurasianet.org and Stratfor.

For a rich analysis of Azerbaijan’s balanced foreign policy between Europe and Russia, European and Russian policies toward the country and each other must be studied. There is substantial literature to base my research on, from each perspective. My thesis will use literature to analyze Azerbaijan, Russia and the EU separately, later connecting them in my essay. The timeframe and triangulation of actors in my paper will be an addition to the existing literature analyzing Azerbaijan’s foreign policy parity.

1.2 Theoretical Framework To study the political economy of energy in Azerbaijan, the theory of critical geopolitics is applied. The theory will be connected to empirical examples of contemporary geopolitical

competition between the EU and Russia for influence in Azerbaijan. Critical geopolitics connects geography, State behavior and economy. Energy is the core of all economies. Resource-rich Azerbaijan and Russia depend on income from their energy sector for economic health. Russia’s geographical proximity to Azerbaijan plays a key role in shaping their foreign policies toward each other. Post-Soviet political geography connects the ex-USSR countries in the region by the common Russian language and mutual history. Furthermore, Azerbaijan’s geographically strategic location, crossing between East and West, boosts the geopolitical value of the country in the eyes of major powers. The most active Western power in the geopolitical region of the South Caucasus is the European Union. This shows that critical geopolitics is the adequate theory to apply to my research.

Robert Cox’s critical theory is based on three concepts: ideas, material capabilities and institutions (Cox 1981). My thesis argues that Azerbaijan’s material capabilities, its natural resources, shape the ideas, the foreign policy of its institutions. Critical geopolitics connects power with economy. It is a combination of geopolitics, the global political economy and geo- economy (Amineh 2017). Critical geopolitics is based on geography, as it implies that policy makers resort to actions based on calculations around significance of location. Azerbaijan’s geographical location is of strategic interest to both Europe and Russia.

The main units of analysis under critical geopolitics are national and transnational governmental and non-governmental institutions and organizations (Amineh 2017). Examples include states and firm (Amineh 2017). My thesis analyzes The European Union as a whole. Azerbaijan and

Russia are studied at the state level, followed by studying their national energy corporations: The State Oil Corporation of Azerbaijan, Gazprom, Rusneft and Transneft.

1.2.1 Conceptual Framework This thesis uses several concepts frequently. They are explained below. Energy supply security is defined as the availability of demanded energy volumes at a reasonable price (Le Coq and Paltseva 2009:2).

The supply scarcity model, developed by Amineh and Howeling aids the explanation of supply security scarcity. They identify three types of scarcity: demand-induced scarcity, supply-induced scarcity and structural scarcity (Amineh and Houweling 2007). Demand-induced scarcity is the lack of supplies for economic well-being (Amineh and Houweling 2007: 375). It is due to its demand-induced scarcity that the European Union is contingent on Russian energy import and seeks cooperation with Azerbaijan. Supply-induced scarcity occurs when there is an uncertainty of reserve sizes, along with limited producing and refining capacities (Amineh and Houweling 2007: 375). There is supply-induced scarcity in Azerbaijan. The country has limited producing and refining capabilities. Structural scarcity comes about when there is geopolitical competition between the consumer countries, and one actor intentionally causes disruptions to supply security (Amineh and Houweling 2007:375). My case-study builds up on two elements of the scarcity model: demand and supply induced scarcity. The European Union suffers from demand-induced scarcity, which it must compensate for by importing from Russia and Azerbaijan. Azerbaijan, however has limited reserves and suffers from supply-induced scarcity. This thesis defines power as a political currency or asset a country possess that help it gain influence to promote its national interests. Relational power entails physical characteristics of territory, inhabitants, military and size of GDP (Kirvelyte 2012: 202). Structural power is defined as a state’s international prestige, its importance for other geopolitical players and the ability of it to act in the international arena for the sake of its natural interests. (Kirvelyte 2012: 202) Even if

the state has fewer resources, if it directs its actions in the appropriate direction, it can achieve strong structural power despite modest relational power. (Kirvelyte 2012: 202) The usage of its natural resources to strategically maneuver on the international arena shows Azerbaijan’s structural power. The derivative power of a small state enables it to align with a powerful state without antagonizing the opposing great power to a military confrontation (Mehdiyeva 2011:25- 30). This is called strategic maneuvering (Mehdiya 2011:25-30). Azerbaijan is able to align with the European Union in projects such as the SGC, without antagonizing Russia to a military confrontation. This shows the usage of its hydrocarbons in foreign policy strategic maneuvering.

In Chapter Four of this thesis, the mention of corruption as a security issue in Azerbaijan will be made. It is defined as the abuse or misuse of inherent state office power for personal gain as opposed to serving the nation as a whole (Nichols 2017).

1.2.2 Delineation of theory In the study of the international political economy of energy, there are three main theories: liberalism, realism and critical geopolitics (Amineh 2017). Liberalism cannot be applied my thesis, as in liberalism cooperation is driven by private market actors such as corporations (Amineh 2017). In both Russia and Azerbaijan, the state has a monopoly over natural resources, showing that the government’s role is superior to that of private corporations. Liberalism also expects interdependence between countries to decrease security tensions (Amineh 2017). In all sides of this foreign policy triangle, tension can be seen. Realism cannot be applied as there is no

open military conflict between the chosen actors. Furthermore, my thesis analyzes the European Union as a whole, and the main realist unit of analysis is the State.

1.2.4 Conclusion of theory Azerbaijan’s geographical location, liaison between East and West, is of strategic importance. Geopolitics connects geography with political behavior. It is Azerbaijan’s geographical location that has boosted the importance of the country in the eyes of foreign powers. Critical geopolitics connects economy, geography and politics. My thesis is a conjunction of these topics. Energy is at the core of all economies, this is a case-study of political behavior surrounding hydrocarbons. Material capabilities of a country are a key element of critical geopolitics. The basic argument of this thesis states that Azerbaijan’s material capabilities, its hydrocarbons, enable its foreign policy behavior. Competition for influence in the geographic location of the South Caucasus and Azerbaijan between Europe and Russia is observed. It can be deduced that the adequate theory to conduct this research is that of critical geopolitics.

1.3.Operationalization and Hypothesis To connect hydrocarbons and external policies, the units of analysis for the Azeri and Russian parts of my case-study are the ruling elite. President Aliyev and his cabinet along with the State Oil Company of Azerbaijan Republic will be studied. Two Russian Presidents held power under the timeframe of my thesis. President Medvedev until 2012, and current President Putin. A stronger emphasis will be put on Putin’s policies for the sake of keeping this thesis up to date. The Russian corporations studied will be Russneft and Gazprom, who are also closely tied to the Kremlin. For the European angle the institution of the European Commission will be studied. Their behavior are analyzed based on policy papers, secondary academic sources and

contemporary empirical examples collected from news agencies. The theory of critical geopolitics will be supported by present-day empirical events.

The primary hypothesis of this paper is that Ilham Aliyev’s presidency is able to spark the interest of Western powers with the country’s production capabilities, but is cautious not to exasperate Russia, keeping up a balanced foreign policy between these two actors. Challenging Russia would be costly, as the grandiose actor is a direct neighbor of the country. It is superior to Azerbaijan in economic, military and energy reserve size. It manages to hold Azerbaijan in check with supporting Armenia in the conflict over Nagorno-Karabakh. Nevertheless, the EU is Azerbaijan’s largest trading partner, accounting for 42% of the country’s total trade (European Commission 2016). Azerbaijan acts as a partner in Europe’s endeavor to decrease its energy dependence on Russia. The country plays a leading role in the EU’s Southern Gas Corridor initiative. Despite the competition for influence in Azerbaijan, Russia, the EU and Azerbaijan remain interconnected. This thesis argues that Azerbaijan is able to secure its European partnership due to its energy reserves, but is cautious enough not to isolate itself from Russia. This hypothesis is corroborated when Azerbaijan engages both the EU and Russia in its energy policies. Empirical examples support the hypothesis when diplomatic or trade relations are identified connected to the energy sector between Azerbaijan and either Russia or the EU. It is important that Azerbaijan’s energy relations with either party do not spark open confrontation with the other party. The empirical example of most weighty substance is the Southern Gas Corridor. It is the EU’s initiative to decrease its energy import dependence on Russia. Azerbaijan is the protagonist hydrocarbon supplier of the Southern Gas Corridor. This shows that it is able

to use its production capabilities to partner with the EU. However, Russian presence in the SGC can be identified. Lukoil, for one, is a stakeholder in the Azerbaijani Shah Deniz field. This shows that Azerbaijan still maintains economic ties with Russia. This postulates my hypothesis. This thesis will elaborate on Azerbaijan’s foreign policy balance, supported by several empirical examples. A counterargument to this hypothesis could be impediments in European-Azeri relations, primarily EU critiques on Azeri human rights circumstances. In defense of my hypothesis, I cite the delineation of this thesis. My thesis is limited to relations surrounding and connected to energy. Actions that fall outside of this scope, mainly human rights crackdowns, do not fit under the scope of my thesis, thus do not undermine my hypothesis.

The second hypothesis of my research is that due to their economic and security interdependence, opting for cooperative relations in the European-Azeri-Russian triangle is necessary. It is important to note that this interdependence is imbalanced. In the post-Soviet geographical region, Russia is a dominant actor that could cause severe damage to its inferior neighbor. This hypothesis is postulated when linkages are identified between the three actors where possible cutting off ties would harm one actor. Azerbaijan is able to provide a part of the import needed for the EU, however it is unable to provide the amount of resources that would be needed to completely diversify away from Russia. Azerbaijan is dependent on Russia in economic relations and security relations alike. Azerbaijan’s SOCAR discussed purchasing between 3-5 billion cubic meters of gas from Gazprom a year in May 2016. There is no contract yet. The import would be needed for the Azeri-Chirag-Gunashli oil and gas fields to maintain a stable oil production (Babayeva 2016). Azerbaijan’s economy is based on its energy sector. Russia is needed for maintain the well-being of stable oil production, thus the well-being of its economy. This shows the weight of Azerbaijan’s dependence on Russia. Further, Azerbaijan’s geographical proximity to Russia creates the need for good relations between the two countries. This size of Russia’s military and economy is superior to Azerbaijan’s. It could do serious damage to the country if it wanted to. Furthermore, the EU depends on import from both Russia

and Azerbaijan. Russia also depends on the EU’s energy market. This shows multipolar interdependence between the actors. Moreover, Russia supplies Azerbaijan with over 80% of its weapon import. If Russia were to stop selling arms to Azerbaijan, the country would become vulnerable in its conflict with Armenia. This would disrupt Azerbaijan’s security, thus postulates my hypothesis, that due to their interdependence, cooperation in the European-Azeri-Russian triangle is necessary. A rebuttal would be that the EU is not affected by Azerbaijan’s possible military vulnerabilities. To rejoinder, I bring the fact that the main Western-oriented Azeri pipelines pass in close proximity to the conflict zone. Contention in the Nagorno-Karabakh area could disrupt European bound-exports. This shows that due to their interdependence, opting for cooperative relations in the European-Azeri-Russian triangle is necessary. This hypothesis will be supported by further empirical examples throughout this thesis.

1.4 Methodology Azerbaijan’s external policies are studied in two directions: toward the European Union, and toward Russia. Russian policy toward Azerbaijan is analyzed, along with European Union policy toward Azerbaijan, and Russian-European relations. Diplomatic, economic and security correspondence is assessed. Research is conducted at the Russian and Azeri State, and European Union supranational levels.

This analysis is performed based on qualitative methods. This is necessary because my thesis wishes to gain a descriptive understanding on Azerbaijan's foreign policy capabilities. Primary

sources, such as policy documents are studied. The main policy papers collected and analyzed are: The Azerbaijani National Security Concept of 2007 and the Energy strategy of Russia for the period up to 2030. Further, secondary academic sources are analyzed from the journals: Energy Policy, Journal of Eurasian Studies, Middle East Journal and Caucasus Analytical Digest and the Oxford Academic Journal of World Energy Law & Business. Quantitative data is collected from the U.S Energy Information Administration, the International Energy Agency, and the European Commission, solely to provide the numerical backbone of this thesis. To provide contemporary empirical examples of cooperation between the three chosen actors, international news agencies such as: Azernews, Bloomberg, Business Insider, Eurasianet.org and Stratfor.

Azerbaijan’s role is a partner to the EU in its attempts to diversify energy import away from Russia. If Azerbaijan did not possess these hydrocarbons, it would be more difficult, almost impossible, for the country to emerge from under Russia’s giant shadow. The independent variable of this research thus is Azerbaijan’s natural resources, and the dependent variable is its pragmatic external policies.

1.5 Structure of the thesis After providing the research outline and theoretical framework in the current chapter, Chapter Two will set the stage by giving a background of Azerbaijan’s and Russia’s hydrocarbon possessions. In Russia’s case, it is due to its energy reserves that it is able to project its power internationally. Azerbaijan is able to use its hydrocarbons to strategically maneuver its international political behavior to boost its geopolitical importance in the eyes of the European Union. The questions this chapter will answer are: How is the domestic natural resource stage set in Azerbaijan? How is the domestic natural resource stage set in Russia? It gives a picture of resources, production, consumption and export. The title of this chapter is: Setting the stage:

Hydrocarbons in Azerbaijan & Russia. Findings of this chapter show the superiority of Russia’s natural resource possessions to those of Azerbaijan.

Chapter Three studies foreign policies in detail. The following research questions will be answered: Who are the main decision-making forces in Azerbaijan’s energy policies? Who are the main decision-making forces in Russia’s energy policies? What role do hydrocarbons play in Azerbaijan’s policies regarding Russia? What role do hydrocarbons play in Russia’s external policies and what policy tactics are identified toward Azerbaijan? What are the roles of Azerbaijan and Russia in EU energy supply security? The title of this chapter is: The Political Economy of Energy in Azerbaijan, Russia & The EU. This chapter found that Azerbaijan uses its natural reserves to partner with the EU, however its hydrocarbons are not enough to completely substitute Russian import.

To address the success of the Azerbaijani state and its foreign policies, the domestic challenges it faces are elaborated on. This is done in Chapter Four: Domestic and Geopolitical Challenges in Azerbaijan. It reports on the current context of geopolitical competition for influence between the EU and Russia in Azerbaijan. It analyzes how Azerbaijan manages to stay neutral and satisfy its national interest at best. The country strives to orientate toward the West, but must maintain compensatory political behavior with sensitivity toward its neighbor, Russia. Among several difficulties independent Azerbaijan continues to face, this thesis emphasizes economic struggles and the internal security threats of corruption and the military risk of the frozen Nagorno- Karabakh conflict. This thesis elaborates on both Russia’s and the EU’s stance in these issues.

The research questions this chapter follows are: What is the contemporary context of geopolitical competition for influence in Azerbaijan? What are the contemporary domestic socio-economic and political challenges in contemporary Azerbaijan? This chapter finds that both Russia and the European Union are attempting to foster Azerbaijan’s well-being. This proves my hypothesis that the interdependence between them is severe, thus eliminating one geopolitical actor would be impossible.

Chapter Five concludes the findings of this thesis. It will elaborate on theory and methodology, connecting critical geopolitics to empirical examples. It will highlight my hypotheses, showing their success. It will include a brief recommendation for further research.

Chapter Two: Setting the Stage- Azerbaijan’s & Russia’s Hydrocarbons

2.1 Introduction This chapter follows the research questions: How is natural resource stage set in Azerbaijan? How is the natural resource stage set in Russia? It gives a picture of resources, production,

consumption and export. This thesis argues that it is thanks to Azerbaijan’s reserves that it can strategically maneuver its foreign policy between Russia and the European Union.

In section 2.2 I illustrate the domestic energy environment in Azerbaijan, along with its domestic and foreign energy policies. Empirical examples show that Azerbaijan’s energy is intertwined with both Russia and Europe. In section 2.3, I describe Russia’s domestic energy situation following the same structure. This chapter concludes that although Azerbaijan does possess its own natural resources, they are significantly less than those of Russia. Its hydrocarbons enable it to partner with Europe, but they are not enough to fully distance either Azerbaijan or the EU from Russia. Azerbaijan must maintain cautious compensatory political behavior, sensitive enough not to offend, Russia.

2.2 Azerbaijan as a Producer Country This section introduces Azerbaijan’s natural resources by following the research question: How is the natural resource stage set in Azerbaijan? Data was collected form the U.S Energy Administration. The indicators: reserves, production, consumption and export are used to paint a picture of Azerbaijan’s natural resource reserve scene.

Azerbaijan’s economy and its energy sector is bound to both Europe and Russia. Four out of five top export destinations of Azerbaijan are within the European Union. They are: Italy, Germany,

France and the Czech Republic (Observatory of Economic Complexity 2016). The remaining export destination is Indonesia (Observatory of Economic Complexity 2016). The second largest amount of import to Azerbaijan comes from Russia, following Turkey (Observatory of Economic Complexity 2016). They are followed by: The United Kingdom, Germany and Italy (Observatory of Economic Complexity 2016). This shows Azerbaijan's severe economic ties to both Europe and Russia. This underlines my second hypothesis, which aims to prove interdependence between Russia, Azerbaijan and Europe. These trade relations also highlights the need for Azerbaijan to balance its foreign policies between Europe and

Azerbaijan’s economy is contingent on its energy sector. Volatile oil and gas prices hinder the economic well-being of (Hoffman et al 2015:26) the country. The lower the prices, the less the income for Azerbaijan. Its GDP accounted for 53.05 billion USD (Trading Economics 2017) in 2015. At the end of 2015, its proven crude oil reserves were estimated at 7 billion barrels (U.S. Energy Information Administration 2016). Oil production and export is declining. In 2010, production was marked at approximately one million barrels per day (U.S. Energy Information Administration 2016). In 2015, 850,000 barrels per day (b/d) of petroleum and other liquids were produced (U.S. Energy Information Administration 2016). The Azeri-Chirag-Gunashli oil fields are the largest oil basins. They produced the majority of Azeri oil, 634,000 b/d in 2015 (U.S. Energy Information Administration 2016). These fields accounted for 75% of total export (U.S. Energy Information Administration 2016). Note: Azerbaijan’s petroleum consumption and production is demonstrated on the figure from the U.S. Energy Information Administration at the end of this section.

Proven natural gas reserves were roughly 35 trillion cubic feet (Tcf) as of 2016, out of which most are associated with the Shah Deniz field (U.S. Energy Information Administration 2016). It’s natural gas production is growing. In 2013, Azerbaijan produced 590 billion cubic feet (Bcf) of dry natural gas, its growth is demonstrated on figure six at the end of this chapter (U.S.

Energy Information Administration 2016). In 2014 exports were marked at 240 billion cubic feet (U.S. Energy Information Administration 2016). The majority of natural gas is exported through Georgia and Turkey through the South Caucasus Pipeline. This is otherwise known as the Baku- Tbilisi-Erzurum, BTE pipeline (U.S. Energy Information Administration 2016). It runs parallel to the BTC oil pipeline and is set to be connected to the Trans-Anatolian, TANAP pipeline (U.S. Energy Information Administration 2016). These pipelines are part of the EU’s Southern Gas Corridor Project. Most of Azerbaijan's natural gas exports via SCP are destined for Turkey, but small volumes also go to Greece through the Turkey-Greece Interconnector (U.S. Energy Information Administration 2016). The pipeline has a capacity of 310 billion cubic feet/year, and should reach 656 cubic feet by the time its expansion is complete (U.S. Energy Information Administration 2016). Azerbaijan’s balance in external energy policies between the EU and Russia can be seen. Between 2007 and 2014, natural gas was exported to Russia through the Hajigabul-Mozdok pipeline (U.S. Energy Information Administration 2016).

(U.S. Energy Information Administration 2013)

Crude oil makes up 86% of total Azeri export (Observatory of Economic Complexity 2016). 80% of Azeri oil is exported via the Southern Gas Corridor’s Baku-Tbilisi-Ceyhan pipeline (U.S. Energy Information Administration 2016). From the port in Ceyhan, oil is shipped to European markets (U.S. Energy Information Administration 2016).

The second largest pipeline is the Baku-Novorossiysk (Northern Route Export) pipeline which exports to Russia (U.S. Energy Information Administration 2016). The Russian orientation of this pipeline is a further empirical example for Azerbaijan’s strategic maneuvering between the EU and Russia. The largest oil pipeline exports to Europe, and the second largest to Russia. The two opposite directed pipelines further advance the need for Azerbaijan to maintain its foreign policy parity between these two geopolitical players.

Azerbaijan’s smallest oil export pipeline is the Baku-Supsa pipeline, which reaches Georgia (U.S. Energy Information Administration 2016). As an addition to the pipelines, Azerbaijan also exports a small amount of oil by rail (U.S. Energy Information Administration 2016). Note: The energy infrastructure of the country is portrayed on the figure on the next page. (U.S Energy Information Administration 2016).

Azeri Energy Infrastructure (U.S Energy Information Administration 2016)

Azerbaijan produces its own domestic energy consumption needs. Note: its natural gas consumption and production is illustrated on Figure 6 below (U.S. Energy Information Administration 2016). The state-owned Azerenerji is responsible for the generation and transmission infrastructure along (Energy Charter Secretariat 2013). The company has monopoly in the market and produces, transports, distributes and sells electricity throughout the whole country, except the distribution business in Baku (Energy Charter Secretariat 2013). In 2013, natural gas made up 67% of Azerbaijan’s domestic energy consumption, oil 21% (Energy Charter Secretariat 2013:36). Hydropower and other sources were used in a limited amount (Energy Charter Secretariat 2013). In 2011, residential consumption accounted for 43% of domestic consumption, the transportation sector followed with 25% and the industrial sector by 12% (Energy Charter Secreatariat 2013:37). In 2016, SOCAR began importing fuel oil from Russia and Kazakhstan to supply Azerenergy’s thermal power stations in cases where it has been possible to switch back from burning gas (Pirani 2016), showing Azerbaijan’s dependency on Russia.

2.3 Russia as a Producer Country This section answers the following research question: How is the natural resource stage set in Russia? Data used to describe Russia’s hydrocarbon reserves was collected from the U.S Energy Information Administration.

Russia is one of the largest resource bearing countries in the world. Its GDP was 1.3312 trillion USD in 2015 (Trading Economics 2017). Proven oil reserves were 80 billion barrels in 2016 (U.S. Energy Information Administration 2016). It is the world’s largest crude oil producer, and following the U.S, the second largest natural gas producer (U.S. Energy Information Administration 2016). In 2015, it produced around 11.03 million barrels per day of petroleum and other liquids (U.S. Energy Information Administration 2016). Natural gas production was marked at 22.4 trillion cubic feet of natural gas in 2015 (U.S. Energy Information Administration 2016). Note: Petroleum supply and consumption is illustrated on the graph below (U.S. Energy Information Administration 2016).

It is also the third largest nuclear power and coal producer in the world (U.S. Energy Information Administration 2016). Russia’s domestic energy consumption consists of 53% natural gas, 22% petroleum, 14% coal and 11% nuclear and renewables (U.S. Energy Information Administration 2016).

Similarly to Azerbaijan, Russia’s economy is also contingent on revenue from hydrocarbon exports. 43% of its federal budget revenue came from energy exports in 2015 (U.S. Energy Information Administration 2016). That year, it was said to have exported 7 million barrels per

day of petroleum and other liquids, out of which around 60% of total crude oil export and more than 75% of natural gas was to Europe (U.S. Energy Information Administration 2016). Europe depends on import from Russia, while Russia depends on income from the EU’s market. This underlines my second hypotheses, emphasizing the interdependence between the actors.

Russia is geographically the grandiose neighbor of smaller Azerbaijan, and bears a significantly larger amount of energy reserves. Note: The difference is illustrated on the images below. Azerbaijan: Proven crude oil reserves 7 billion barrels 2015 (U.S Energy Information Administration 2016)

(Enchanted Learning 2016, U.S. Energy Information Administration 2016)

Russia: Proven Oil Reserves 80 billion barrels 2015 (U.S. Energy Information Administration)

(Enchanted Learning 2016, U.S. Energy Information Administration 2016)

2.4 Concluding Azerbaijan’s and Russia’s Natural Resource Settings Azerbaijan engages both Russia and the European Union in its energy policies. First and foremost, it has both Eastern and Western oriented export pipelines. Its largest oil export pipeline, the BTC, is Western-bound. It accounts for the majority of Azeri hydrocarbon revenue. The second largest oil pipeline, the Baku-Novorossiysk is destined to Russia. The South Caucasus natural gas pipeline, which is set to be connected to the TANAP, is part of the EU’s SGC initiative. Between 2007 and 2014, Azerbaijan also exported natural gas to Russia through the Hajigabul-Mozdok pipeline.

As its energy export orientation is both East and West bound, it can be deduced that Azerbaijan’s hydrocarbons are used to generate relations with both Europe and Russia. This postulates my first hypothesis, that Azerbaijan uses its production capabilities to align with Europe, without antagonizing Russia. It is evident that European-Azeri relations do not antagonize Russia to the point of open confrontation, because the country still maintains economic ties, which would be cut, should Russia feel absolutely exasperated. Using material capabilities, namely hydrocarbons, for political actions is part of the critical geopolitics theory.

Not only does Azerbaijan maintain cooperative relations with both actors, it also depends on them. Should Azeri exports toward either Europe or Russia be cut-off, severe damage to the country’s economy would be seen. This underpins my second hypothesis, that due to their interdependence, opting for cooperation between these actors is necessary.

Economic and energy ties continue to bind Azerbaijan to Russia. Azerbaijan’s economic welfare is contingent on its energy sector. The country depends on import from Russia to keep up the well-being of its national energy company, Azerenrerji. This shows the country’s dependence on Russia for economic security.

Azerbaijan’s energy reserves are significantly inferior to those of Russia. It suffers from supply- induced scarcity. Russia does not. Azerbaijan’s caution toward its superior neighbor is an act of critical geopolitics, which states that statecraft is based on calculations regarding geographical location. Russia is much closer to Azerbaijan in geographical proximity, and could do more harm to the country should tensions arrive. This creates the need for Azerbaijan to maintain sensitivity in its policies toward Russia. The EU suffers from demand-induced scarcity and wishes to decrease energy import from Russia by partnering with Azerbaijan, however the latter’s hydrocarbons are not sufficient enough to fully substitute for Russian import to the EU. This underpins my second hypothesis, that due to their interdependence, opting for cooperative relations in the Azerbaijan-EU-Russia triangle are necessary.

Chapter Three: The Political Economy of Energy in Azerbaijan, Russia and The EU

3.1 Introduction The facts provided on Azerbaijan’s and Russia’s production and export capabilities in Chapter Two are connected to energy policy decision-making in Chapter Three. The following research questions are used: Who are the main decision-making forces in Azerbaijan’s energy policies? Who are the main decision-making forces in Russia’s energy policies? What role do hydrocarbons play in Azerbaijan’s policies regarding Russia? What Russian policy strategies are identified toward Azerbaijan? What role does Russia and Azerbaijan play in Europe’s energy security?

This chapter will begin by providing a picture of the Azerbaijani state. It will study in detail its energy sector, political and economic situation. Assessment of external relations will be performed. Section 3.3 will illustrate Russia by using the same indicators. It will create a comparative analysis of the political economy of energy in Russia and Azerbaijan. In Section 3.3 the European Union is added to this policy triangle. This thesis attempts to show how the three chosen actors of this case study are interdependent. The European Union and Russia are intertwined. The EU relies heavily on Russian energy import. At the same time, Russia is dependent on income from the European market. The EU attempts to decrease its energy

dependence on Russia by partnering with Azerbaijan. Howbeit, Azerbaijan’s hydrocarbons are significantly less than Russia’s. This shows interdependence between the three actors, and the need for Azerbaijan to maintain relations with both its superior neighbor and the EU. This chapter finds that Azerbaijan is able to use its hydrocarbons as a power asset to maintain cooperative relations with both Europe and Russia.

3.2 The Political Economy of Energy in Azerbaijan The theory of critical geopolitics connects geography, economy and the state. Section 3.2 provides an insight to the state in the geographical location of Azerbaijan, its energy sector at the core of its economy and the political actions surrounding it. To do so it follows the research question: who are the main decision-making forces in Azerbaijan’s domestic energy policies?

The country is a dominant-party presidential republic lead by Ilham Aliyev. The country has a unitary constitutional political system (Sovacool and Andrews 2015). The Aliyev family dominates Azerbaijani politics since its post-Soviet days. Heydar Aliyev came to power in 1993 and was succeeded by his son in 2003. The past two elections, held in 2008 and 2013, were both won by Ilham Aliyev by a landslide. The next election is scheduled for 2018. President Aliyev appointed his wife, Mehriban Aliyeva, as Vice President this year. The fact that Aliyev appointed his wife as next in line in the nation’s power structure shows that there is no provisional risk as of now for an opposing party to come to power (Bloomberg 2017). It is a young country and has only 26 years of independent political experience. Factors such as personality and kinship ties play a determinant role in Azerbaijani politics (Starr 2011).

The energy industry is entwined with the government, showing an authoritarian state-society- market complex. The main decision makers are part of President Aliyev’s government and report directly to him (International Energy Agency 2015). The protagonist of Azerbaijan’s energy sector is its national oil company. It is closely affiliated with the presidency. The State Oil Company of the Azerbaijan Republic, SOCAR, is involved in all aspects of the oil sector, including exploration and production (U.S. Energy Information Administration 2016). It produces around 20% of total oil production (U.S. Energy Information Administration 2016).

The main Azeri energy policy document is the State Program for Development of the Fuel- Energy Complex in Azerbaijan for 2005-2015 (State Program for Development of the Fuel- Energy Complex in Azerbaijan 2005). Its main objective is to meet the electric power, gas and overall energy demand of both the population while developing the energy sector (State Program for Development of the Fuel-Energy Complex in Azerbaijan 2005).

The document enclosing domestic and external policies is the 2007 National Security Concept of the Republic of Azerbaijan. “Concept” is defined as a set of goals, principles and approaches to policies and measures (National Security Concept of the Republic of Azerbaijan 2007). The activities highlighted in the energy security policy provision of the concept are: development and exploitation of the existing and prospective oil and gas reserves, construction and installation of modern oil and gas platforms, and identifying threats to oil and gas pipelines and terminals, along with countermeasure procedures(National Security Concept of the Republic of Azerbaijan 2007:20).

To manage the income and assets from hydrocarbon activity, the State Oil Fund of the Republic of Azerbaijan, SOFAZ, was established in 1999 (U.S Energy Information Administration 2016). It attempts to avoid income volatility and transform resource wealth into productive assets (U.S

Energy Information Administration 2016). Such activity includes resettling refugees, building water pipelines and developing educational facilities (U.S Energy Information Administration 2016). Its financial flows are subject to comprehensive internal audits (U.S Energy Information Administration 2016). The supervisory board consists of representatives from both the executive and legislative branch, who are appointed by the President (U.S Energy Information Administration 2016). Finances are also subject to regular and independent external audits that meet international standards (Aslani 2014). The chairman of the SOFAZ Supervisory board is Artur Rasizade, and the multinational firm PWC is responsible for international audits (Azernews 2017).

Hydrocarbons are the main asset of the country, and foreign energy politics are the main subject of Azerbaijan’s diplomatic negotiations. The premier hypotheses of this research is that Azerbaijan’s natural resources, enable it to strategically maneuver its foreign policies between the European Union and Russia. The second hypothesis of my research states that due to their interdependence, making opting for cooperative relations crucial. To prove these hypotheses, this section will connect hydrocarbons and foreign policies. The research question investigating this is: What role do hydrocarbons play in Azerbaijan’s policies regarding Russia?

In its National Security Concept, Azerbaijan mentions the importance of relations with both the EU and Russia. The Concept states how Azerbaijan pursues a multidimensional, balanced foreign policy (National Security Concept of the Republic of Azerbaijan 2007). This underpins my first hypothesis.

Azerbaijan has shown reluctance to join integration projects among the post-Soviet States (Bayramov 2013). However, no open confrontational realpolitik has been seen between them, despite Azerbaijan’s wish to maintain its relations with both the West and reject ex-USSR integration. It has rejected, among others, joining the Eurasian Economic Union and Customs Union (Bayramov 2013). Joining would have had benefits on its IT, construction and transport sectors, but Azerbaijan would have lost independence in its energy policy (Bayramov 2013: 14- 16). The EEU would have harmonized energy policies among members (Bayramov 2013:14-16). This would have prevented Azerbaijan from implementing its Western oriented energy strategy toward the EU, independently of other EEU member states (Bayramov 2013:14-16).

3.3 The Political Economy of Energy in Russia The research question this section answers is: who are the main decision-making forces in Russia’s energy policies? Analyzing Russia’s energy policies, will ease proving that Azerbaijan’s natural resources, enable it to strategically maneuver its foreign policies between the European Union and Russia. It will also aid the process of proving interdependence between the actors.

Similarly to Azerbaijan’s, Russia’s energy policies are dominated by the government. In Russian politics, it is the President who is the most prominent decision-making figure. His decisions call the shots in the energy sector as well (International Energy Agency 2014).

Being one of the largest resource-rich countries in the world, it is evident that Russia has several institutions for the management of hydrocarbon activity. The Russian Energy Agency was established in 2009 under the Ministry of Energy to support and improve energy efficiency (U.S. Energy Information Administration 2015:8). The Ministry of Natural Resources and

Environment regulates the use of natural resources, including subsoil licensing and compliance(U.S. Energy Information Administration 2015:8).

Further institutions include the Government Commission on the Fuel and Energy Complex and the Reserve Replacement and Improving the Economy’s Energy Efficiency (International Energy Agency 2014). The current head of the Ministry of Energy is Viktor Khristenko (International Energy Agency 2014).

Energy corporations in Russia are intertwined with the Kremlin. Note: Russia’s oil and gas producing companies are listed in the table compiled by the U.S Energy Information Administration (U.S. Energy Information Administration 2016).

Russia’s oil production by Thousand b/d (U.S company, 2014 Company Energy Information Administration 2016)

Rosneft 4,041 Lukoil 1,724 Surgutneftegaz 1,223 Gazprom (including 997 Gazprom Neft) Tatneft 528 Slavneft 334 Bashneft 355 Russneft 313

PSA operators 287 Novatek 120 Others 567

Russia’s natural gas Bcf/d production by company, 2014 Company Gazprom 42.9 Novatek 6.0 Rosneft 5.5 Lukoil 1.8 Surgutneftegaz 0.9 PSA operators 2.9 Others 1.9 Total 62.0

(U.S Energy Information Administration 2016)

5 firms account for more than 75% of total oil production, and the state directly controls over 50% (U.S. Energy Administration 2016). The CEO of Russia’s largest oil company Rosneft, is Igor Sechin (Rosneft 2017). Sechin is closely affiliated with President Putin (Tayler 2008).

Domestic and foreign export pipelines are almost completely owned and run by the state-owned Transneft (U.S. Energy Administration 2016). The upstream natural gas sector is dominated by the state-owned Gazprom (U.S. Energy Administration 2016). In 2014, it produced nearly 70% of the country’s total natural gas export (U.S. Energy Administration 2016). In Russia, as Lilia Shevtsova, associate fellow in the Russia and Eurasia program at Chatham House notes, there is a marriage between power and business(Shevtsova Business Insider 2017).

The main Russian energy policy paper is the Energy strategy of Russia for the period up to 2030. It was issued by the Ministry of Energy and approved by the presidency in 2009 (Ministry of Energy of the Russian Federation 2009). It was issued under President Medvedev and remains intact under President Vladimir Putin(Ministry of Energy of the Russian Federation 2009). It puts energy policy at the center of diplomacy, aiming to boost Russia’s geopolitical strength (Lucas 2014).

The objectives of Russian energy policy are: to maximize the effective use of natural energy resources and the potential of the energy sector to sustain economic growth, improve the quality of life and promote strengthening of foreign economic positions of the country (Ministry of Energy of the Russian Federation 2009). This shows the usage of Russian energy resources as a political instrument.

Following the introduction of Russian energy policy decision-making, its hydrocarbons are connected to its external policies. To do so, this section asks the question: what role do

hydrocarbons play in Russia’s external policies and what policy tactics are identified toward Azerbaijan?

Russia has historically been a global superpower. Its strongest power projecting capabilities are on the Soviet successor states(Cornell 2014). According to expert Svante Cornell, the ambition of Moscow is to restrict the sovereignty of successor states (Cornell 2014).

Starr and Cornell identify eight tactics used in Putin’s grand external strategy: diplomacy (and business), subversion through cooperation, support for opposition forces, sabotage and terrorism, economic and energy warfare, creation and manipulation of ethnic tensions, and regular and irregular warfare (Cornell 2014:59-82). The following section will identify and apply the relevant tactics to Russia’s policies toward Azerbaijan. Sabotage and terrorism along with warfare and subversion through cooperation are not applicable. This aids the understanding of Azeri-Russian relations.

The first category of tactics identified by the authors is diplomacy and business (Cornell 2014:59-82). Diplomacy, trade and investment show that not all of Russia’s activities are coercive in nature. They are active in the case of Azerbaijani-Russian relations. Gazprom purchases natural gas from the country (Gazprom 2016). Russian oil companies such as Lukoil are likewise invested in the country. The head of Lukoil, Vagit Alekperov is of ethnic Azerbaijani origin. Azerbaijan’s SOCAR also discussed purchasing between 3-5 billion cubic meters of gas from Gazprom a year in May 2016 (Babayeva 2016). There is no contract yet Babayeva 2016). The import would be needed for the Azeri-Chirag-Gunashli oil and gas fields to maintain a stable oil production (Babayeva 2016). Russia is needed for maintaining the well- being of stable oil production, thus the well-being of Azerbaijan’s economy. This shows Azerbaijan’s dependence on Russia. It also connects Europe, Russia and Azerbaijan, as the ACG fields provide oil for the Western-bound BTC pipeline. This postulates the second hypothesis of

this thesis, that due to their interdependence, opting for cooperation between these the EU, Russia and Azerbaijan is necessary.

Diplomatic relations between the two countries are active and kept up by high level consultations between the Foreign Ministries (Azerbaijani MFA 2013). Personality ties empower these relations. Both presidents have a background in the KGB. Aliyev was a General and Putin was a Colonel (Cornell 2014:151). It is rumored that Putin has personal respect for Aliyev (Cornell 2014:151).

The second tactic identified by the authors is the manipulation and control of information and propaganda (Cornell 2014:59-82). This tactic is the weakest in countries where native-language television dominates, as opposed to Russian airings (Cornell 2014:59-82). In Azerbaijan, native- language television is more popular strategy (Cornell 2014:59-82).

The next tactic category is support for opposition forces, civil society and extremists (Cornell 2014:59-82). In the 2013 Azerbaijani elections, President Aliyev’s only opposition was Rustam Ibrahimeyov, a former dual, Azeri-Russian citizen (Tabula 2013). In order to run in the elections, he had to deprive himself of his Russian citizenship (Tabula 2013). On the second of July, President Aliyev stated that “The opposition is constantly looking at the big brother” (Tabula 2013). By big brother, he meant Russia (Tabula 2013). Aliyev went on to win that election, as Ibrahimeyov’s paperwork to eliminate him of his Russian citizenship failed to proceed on time (De Waal 2013).

Due to Soviet history, there are pro-Russian forces present in Aliyev’s government. Ramiz Mehdiyev, Head of the Presidential Administration, and Ramil Usubov, current Minister of Internal Affairs and previous Head of Police have been said to pursue policy goals orienting toward Russia (Cornell 2014:59-82). Furthermore, President Putin organized the Union of Azerbaijani Organizations in Russia (Cornell 2014:59-82). It includes Araz Agalarov, father of Aliyev’s son in law, Vagit Alekperov, head of Lukoil, Soyun Sadigov creator of a pro-Putin political party and Abbas Abasov a former deputy minister of Azerbaijan who moved to Russia in 2006 (Cornell 2014:59-82). Critics view this as mobilizing pro-Russian Azerbaijanis (Cornell 2014:59-82). This connects Russia to Azerbaijan’s civil society and domestic politics, showing interdependence between the two countries.

The most important strategy identified by Cornell and Starr is economic and energy warfare (Cornell 2014:59-82). Russia is substantially larger than Azerbaijan, and if Russia were to extend economic warfare to Azerbaijan, that would have devastating effects on the country’s economy. Challenging Russia would be costly for Azerbaijan. It does have its own natural resources, but Azerbaijan’s 7 billion barrels of oil are inferior to Russia’s 80 billion barrels. Following the dissolution of the USSR, newly independent Azerbaijan depended on the Soviet pipeline network (Heinrich and Pleines 2015:299-311). Russia views the dependence of the Caspian littoral states on the ex-Soviet pipeline network as a means to maintain its influence in its near abroad (Heinrich and Pleines 2015:299-311).

There are contemporary examples of Russia implicitly threatening Azerbaijan. Threats show the need for the country to opt for cooperative relations with Russia, An example occurred in 2014. At the UN General Assembly, Azerbaijan casted a pro-Kiev vote, and Putin supporting Russian political scientist Alexander Dugin was quoted saying that: “an Azerbaijan hostile to Russia will instantly cease its existence, the only guarantee of the territorial integrity of all the post-Soviet

states is Russia itself . In a confrontation with Moscow, not one post-Soviet state will exist in its current borders (Cornell 2014:188).”

The next tactic category the creation and manipulation of protracted conflicts (Cornell 2014:59- 82). The Nagorno-Karbakh conflict has plagued Azerbaijan since its independence. Russia plays a role in the conflict, by acting as mediator or supporting Armenia (Cornell 2014:59-82). The conflict is regarding the legal belonging of the Nagorno-Karabakh territory. It is with the support of Armenia in the conflict that Russia can keep Azerbaijan in check, showing Azerbaijan’s need to maintain cooperative relations with Russia.

Five out of eight foreign policy tactics identified by Cornell and Starr (Cornell 2014:59-82) are applicable to Russia’s attitude toward Azerbaijan. Russia’s size and capabilities could pose a threat to Azerbaijan at will. This shows that keeping up cooperation is of interest. Interconnections identified between Russia, the EU and Azerbaijan, such as the need for Russian aid to maintain ACG field oil production postulates my second hypothesis, that due to their interdependence, opting for cooperation between these actors is necessary.

3.4 Russia and Azerbaijan in the EU’s Energy Supply Security The role Russia and Azerbaijan play in Europe’s energy supply security is studied. Section 3.4 asks the question: What role do Russia and Azerbaijan play in Europe’s energy supply security?

The EU suffers from supply-induced scarcity. Over half of its energy consumption comes from imports (European Commission 2017) . One of its main importers is Russia. In 2015, it accounted for 30% of its oil import(U.S. Energy Information Administration 2016). It was also responsible for over 30% of natural gas import (U.S. Energy Information Administration 2016). This heavy reliance on Russian energy import makes the EU vulnerable to supply-security risks.

Two main contemporary risks can be observed in the Russian-European energy relationship. The premier is the ongoing Ukrainian crisis. Almost half of Russian import to Europe transits through unstable Ukraine (European Parliament 2016), making EU import susceptible to disruptions. As a response to the Ukrainian crisis, the EU implemented sanctions on Russia. These have burdened the country. They resulted in a currency collapse, a higher interest rate, recession, inflation, capital outflows, depletion of foreign exchange reserves, a crash of the Russian stock market in 2014 (Investopedia 2015). This shows weighty EU-Russia interdependence.

Interdependence generates vulnerabilities for both sides. An example portraying this is an event that occurred in 2014. Russia cut off gas supplies to Ukraine, claiming the country did not pay its obligations (Investopedia 2015). This disrupted the import of Eastern European member states (Investopedia 2015). The Russian gas giant Gazprom dominates the European market, giving it the ability to overprice imports (Investopedia 2015). In 2012, an antitrust case was launched against Gazprom for abusing its market power in the states of: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia(Investopedia 2015). It was alleged that Gazprom: monopolized resale, denied and limited third-party access to resources and overpriced import(Riley 2012). As of March this year, Gazprom has conceded to the EU’s demands in this case(Stratfor 2017). It has agreed to grant other countries permission to resell the natural gas purchased from Gazprom (Stratfor 2017). It conceded to the usage of Western European natural gas price benchmarks (Stratfor 2017). The EU was vulnerable to import disruptions, and Russia was vulnerable to energy income volatility. In 2014, 60% of Gazprom’s total sales were to the

EU’s market (Investopedia 2015). Note: Figures 3 and 7 from the U.S. Energy Information Administration (U.S Energy Information Administration 2016) at the end of this chapter demonstrate the ratio of Russian export by destination. The main Russian government income is from its energy sector. Should Russia not depend so heavily on income from the EU’s market, it would not have been so quick to surrender to European Union terms. Gazprom’s yielding to EU demands is an example that underlines my hypothesis regarding interdependence.

The EU has also pressured Russia to accept the European Energy Charter, which it has yet to do so (Krickovic 2015). Countries that signed the charter agree to open up their energy markets to competition from foreign companies and to remove restrictions on foreign ownership (Krickovic 2015). The charter also establishes the principle of freedom transit, guaranteeing access to pipeline networks to all producers (Krickovic 2015).

To decrease the threats rising from its dependency on Russian energy, the European Union has taken a number of initiatives. Examples are: the Southern Gas Corridor project, the 2010 Security of Gas Supply Regulation, the 2014, Energy Security Strategy and the Energy Union project (European Parliament 2016). The Union project strives for diversifying sources, suppliers and routes, while creating a more integrated and transparent European energy market (European Parliament 2016).

Azerbaijan is a key player in the EU’s attempts at diversifying its import away from Russia. Impeding these efforts are not only Azerbaijan’s supply-induced scarcity, but the discrepancy in EU member state policy toward Azerbaijan as well. Diplomatic relations of EU member states with Azerbaijan are split. Countries putting a stronger emphasis on the promotion of human rights, such as Sweden, have shown critical perspectives toward the Azerbaijani governments behavior toward human rights. On the other hand, Hungarian Prime Minister Viktor Orban called Azerbaijan a “model country” after signing a Joint Declaration on Strategic Partnership in 2014 (Politics.hu 2014). There are countries that share stronger economic ties with Azerbaijan. In May 2017, SOCAR approved the program for the development of the Absheron gas field in the Caspian Sea by French energy corporation Total (Aliyeva 2017).

Relations between Azerbaijan and the EU at the supranational level are active through the

Partnership and Cooperation Agreement since 1999 (EU-Azerbaijan Eastern Partnership: Supporting reforms, Promoting Change). Bilateral trade between the EU and Azerbaijan accounted for 16.7 billion euros in 2014 (EU-Azerbaijan Eastern Partnership: Supporting reforms, Promoting Change). The country’s National Security Concept claims that Azerbaijan shares European values (National Security Concept of the Republic of Azerbaijan 2007), showing its commitment to the West. Furthermore, Azerbaijan is a member of the European Council since 2011 (Council of Europe 2017).

The European Union Eastern Partnership initiative was set up in 2009. This serves as an instrument for the EU to develop relations with its Eastern neighbors, including Azerbaijan. The Eastern Partnership includes an Energy Flagship. It covers: energy security, renewable energy, energy efficiency and nuclear safety, the construction of infrastructure links, and aligning energy laws with EU regulation (European Parliament 2016). It aims to ease the trade of gas and electricity between the EU and the Eastern Partnership countries (European Parliament 2016).

The Eastern Partnership initiative has caused geopolitical competition between Russia and the EU for influence in Azerbaijan. According to expert Cornell, it was an unintended defiance toward Moscow (Cornell 2014:179-190). In March 2009, Russian Foreign Minister Sergei Lavrov asked “what is the Eastern Partnership, if not an attempt to extend the EU’s sphere of influence?”(Pop 2009). According to Cornell, this statement showed that Russia misinterpreted the soft-power initiative as a threat to Moscow’s power projection in the Caucasus (Cornell 2014: 179-190). President Putin answered the Eastern Partnership initiative with organizing the Eurasian Union (Cornell 2014: 179-190). Azerbaijan has refrained from joining this initiative. The development of EU-Eastern partner relations has not caused open conflict between Russia and the EU, but it has triggered competition, miscalculation and distrust. It has not, however antagonized relations to the point of military action.

Azerbaijan partners with the European Union in an attempt to diversify its import away from Russia. This generates geopolitical competition and tension. Russia does not want to lose the European market or its influence in the Caucasus. Azerbaijan’s natural reserves are not enough to fully substitute import from Russia. As my hypothesis argues, the interdependence between the actors is so severe, that cooperative relations must be kept.

The most important factor of EU-Azerbaijan energy relations is the Southern Gas Corridor initiative. It brings Caucasian and central Asian oil hydrocarbons to Europe by bypassing the existing Russian pipeline systems. The Trans Adriatic Pipeline would bring Azeri gas from the Shah Deniz field by linking up with the Trans Anatolian Pipeline. TANAP brings gas from the

Shah Deniz thorough Turkey at the Turkish-Greek border (Krickovic 2015:14). From there it would transport gas through Greece and Albania, and under the Adriatic Sea to Italy. From Italy it would be transported to the rest of Europe (Krickovic 2015:14). TAP would also supply gas to Greece, Bulgaria, Albania, Croatia, Macedonia and Montenegro. 283 billion cubic feet is contracted to be exported to Italy, and 35 billion cubic feet to Bulgaria by 2019 (U.S. Energy Information Administration 2016). Gas from Azerbaijan is set reach Europe after 2020 (European Parliament 2016). Note: The main events of the Southern Gas Corridor timeline have been summed up in the table below. The table was created by the author based on data collected from (Delegate.com 2016).

Year Event 2006 Shah Deniz Gas Field Production Beginning 2006 Start of South Caucasus Pipeline Deliveries within Azerbaijan and to Georgia

2018 Estimat ed Start of Export to Turkey through TANAP 2020 Estimat ed export to Europe through TAP

Decreased government revenue due to low oil prices resulted in the need for Azerbaijan to borrow around $5 billion from international financial institutions to fund its share of construction costs in the SGC project. It has also sold $1 billion worth of Eurobonds, is prepared to sell more and secured a $400 million loan from the world bank (Karayianni 2017). The fact that Azerbaijan needed to secure loans to fund its share of the SGC project shows weakness of the country. The weaker it is, the more Russia continues to pose a threat. The resorting to loans shows Azerbaijan’s commitment to the European project. This is an example underpinning the second hypothesis of this thesis, that emphasizes the interdependence between Russia, Azerbaijan and the EU.

The second phase of development of the Shah Deniz field is set to begin ni 2018 (U.S Energy Information Administration 2016). It is expected to produced 565 billion cubic feet of natural gas per year (U.S. Energy Information Administration 2016). BP is the largest developer of the field, with a 28.8% stake (U.S. Energy Information Administratin 2016). SOCAR has 16.7%, Turkish Petroleum 19%, Russian Lukoil 10% and Naftiran Intertrade Company has 10% (U.S. Energy

Information Administration 2016). It must be noted that both BP, a European company, and Lukoil, a Russian company are stakeholders. Foreign direct investment is an instrument with which external relations can be promoted. This shows that by attracting both European and Russian investors, Azerbaijan is able to strategically maneuver its foreign policies between Europe and Russia.

Gas from Azerbaijan is set to reach Europe after 2020 (European Parliament 2016). The TANAP will carry gas from the Shah Deniz fields to Greece via Turkey (European Parliament 2016). TAP will transport TANAP gas from the Turkish-Greek border to Europe. 283 billion cubic feet is contracted to be exported to Italy, and 23 billion cubic feet to Bulgaria (U.S. Energy Information 2016). Note: The Southern Gas Corridor project pipelines are illustrated on the figure below.

(SGC Pipelines: Bankwatch Network 2015)

The impact of the SGC on Europe’s import is small(Krickovic 2015). Azerbaijan’s export capabilities are not enough to substitute for Russia’s. This underlines my hypothesis that due to their interdependence, absolute isolation of one power is costly while regarding European Union, Russian and Azerbaijani relations, therefore opting for cooperative relations is crucial. The most recent ministerial meeting of the Southern Gas Corridor Advisory Council was held in

February 2016 in Baku (The Second Ministerial Meeting of the Southern Gas Corridor Advisory Council Joint Declaration 2016). It was signed by representatives of Albania, Azerbaijan, Bulgaria, Georgia, the Hellenic Republic, the Italian Republic, Turkey, Croatia, Montenegro, UK, USA and Vice President of the European Commission (The Second Ministerial Meeting of the Souther Gas Corridor Advisory Council Joint Declaration 2016). Since early 2017, Azerbaijan has invested $799.3 million in the Southern Gas Corridor Project (Azernews 2017). It has also signed a loan agreement of $500 million with the Asian Development Bank on May 7, 2017 for the funding of the project (Azernews 2017). This shows the commitment of the country to the European Union.

The SGC initiative created geopolitical competition for influence between Russia and the EU. Despite being linked to the SGC itself, Russia responded to the project with its own initiative, the Turkish Stream pipeline plan that would bring Russian gas to Europe (Siddi 2017:3). Russia wishes to maintain its domination over the European energy market. Azeri import would not be enough to substitute for Russian import, showing that the interconnection between Russia, Azerbaijan and the EU still remain.

Southern Gas Corridor Stakeholders (Delegate.com 2016)

Note: Southern Gas Corridor stakeholders are shown on the figure above. Lukoil is present in the Shah Deniz consortium. It has a 10% stake in the Shah Deniz field itself, and a further 10% in the South Caucasus pipeline (Delegate.com 2016). The fact that the Russian company is present in the consortium, shows that efforts to decrease European import dependency on Russia cannot manage to isolate the country from Europe’s energy policy completely. Turkey and EU member state Greece have signed bilateral agreements allowing Gazprom to transport gas through the

SGC (Bacheva-McGrath and Robbenbuck 2017:3). This postulates both hypotheses of this research. Through the SGC, Azerbaijan uses its hydrocarbons to partner with Europe. The SGC also ties Azerbaijan to Russia, as Lukoil is invested in the country’s Shah Deniz field. The presence of Lukoil in the SGC reflects on the interdependence between Europe, Russia and Azerbaijan, as a Russian company is invested in the very project attempting to orient away from the energy giant.

Another irony of the Southern Gas Corridor project is its financial backings from the European Bank for Reconstruction and Development. The project striving to lessen European dependence on Russia has approved a $500 million loan to Lukoil (Bagirova and Antidze 2015). $380 million was also disbursed to Lukoil’s subsidiary, Lukoil Overseas Shah Deniz Ltd (Bagirova and Antidze 2015). The loan is to aid the development of the Shah Deniz Gas field (Bagirova and Antidze 2015). The project aiming to decrease Russian import to Europe requires European loans to a Russian company.

3.5 Concluding Chapter Three The Southern Gas Corridor and Azerbaijan’s energy reserves enable it to meet its goal of partnering with Europe. This postulates the hypothesis that Azerbaijan uses its hydrocarbons to partner with Europe. Russia remains economically present in the project through Lukoil’s stake in the Shah Deniz consortium. This shows that Azerbaijan is able to maintain ties with both Europe and Russia without antagonizing one side. The EU, Azerbaijan and Russia remain intertwined. This postulates hypothesis two of this thesis regarding European, Russian, Azeri interdependence. Azerbaijan’s reserves are not large enough to substitute for Russian domination on the European energy market, further postulating this hypothesis.

It is in the best interest of all three chosen actors to opt for cooperation in this policy triangle. The EU depends on import from both Russia and Azerbaijan. Azerbaijan is economically bound

to both the EU and Russia. Furthermore, the security of the country also requires it to maintain sensitive policies toward its gigantic neighbor.

Chapter Four: Domestic and Geopolitical Challenges in Azerbaijan

4.1 Introduction This chapter is dedicated to study challenges the Azeri ruling elite faces. Three main domestic issues are identified: economic struggles, corruption and the Nagorno-Karabakh conflict. Both Russia and the European Union play a part in efforts to overcome these issues. All three identified security issues can be tied to the energy sector. The last part of this chapter studies in detail the geopolitical competition of Russia and the EU for influence in Azerbaijan. As demonstrated in the findings of Chapter Three, Azerbaijan’s main currency for bargaining in international relations are its hydrocarbons. Its natural resources boost the country’s importance in the eyes of the European Union. This chapter finds that provided the variety of major powers seeking influence in Azerbaijan, it is able to orientate toward the West, maintains compensatory political behavior with sensitivity toward its neighbor, Russia. The research question this chapter follows is: What socio-economic and political challenges does Azerbaijan face?

4.2 Domestic Challenges in Azerbaijan Azerbaijan possess its fair share of domestic struggles. One domestic adversity of Azerbaijan is the case of corruption. The country frequently struggles with the issue, but active steps have been taken to overcome it. This thesis follows the definition of corruption given in Chapter One, the abuse or misuse of inherent state office power for personal gain as opposed to serving the nation as a whole (Nichols 2017). Corruption hinders the economic well-being of countries.

McPherson and MacSearraigh’s study showed that the oil industry is particularly vulnerable to corruption (McPherson and MacSearraigh 2007:197-211).Oil production is profitable, its deals are lucrative and generally suited for embezzlement (McPherson and MacSearraigh 2007:291- 211). Revenue flows are opaque and thus not subject to public scrutiny (McPherson and MacSearraigh 2007:197-211). Technical and legal challenges impede the transparency of deals, and monopoly over energy sectors encourage insider deals to take place (McPherson and MacSearraigh 2007:197-211).

International action has been taken to overcome corruption in the hydrocarbon industry. Such an initiative is the Energy Industries Transparency Initiative. Azerbaijan was the second country to enforce the Extractive Industries Transparency Initiative. This aimed to enhance transparency in the energy sector. Despite being a leader signatory country of the EITI, Azerbaijan has withdrawn from it in March of this year (EITI Secretariat 2017). This move may compromise Azeri loans for the pipelines (Bacheva-McGrath and Robbenbuck 2017:1). It is also a member for the Anti-corruption Network for Eastern Europe and Central Asia (OECD ACN) since 2003 and The Council of Europe’s Group of State against Corruption (GRECO) since 2004. It signed the United Nations Convention Against Corruption in 2005, and is a part of the International Forum of Sovereign Wealth Funds (IFSWF) (Pleines and Wöstheinrich 2016) . It has also adopted the Council of Europe Civil Law Convention against Corruption, and the Council of Europe Criminal Law Convention Against Corruption. (European Security Initiative 2012). The establishment of the BTC pipeline motivated Azerbaijani initiatives to enhance energy industry transparency (Oge 2015:14).

Azerbaijan cooperates with the EU on such measures to combat corruption. It has acceded to the European Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime of 1990 and the European Convention on the Suppression of Terrorism of 1977

(Israfilbayova 2017). It also coordinates with the Council of Europe Select Committee of Experts on the Evaluation of Anti-money Laundering Measures and applies the universally recognized 40+8 Financial Action Task Force Recommendations throughout its financial system (Israfilbayova 2017).

Similarly to the case of Azerbaijan, malfeasance is frequent in Russia. On Transparency Internationals 2016 Corruption Perceptions Index, Azerbaijan ranked 123 out of 170 followed by Russia at 131(Transparency International 2016). Government monopoly over natural resources is correlated with corruption (McPherson and MacSerraigh 2007:197). By monopolizing and limiting access to control over pipelines and refineries, opportunities for abuse of power are created (McPherson and MacSerraigh 2007:297). Russia’s corruption does not stop at its borders, but comes in to the European Union as well (Organized Crime and Corruption Reporting 2015). Romanian prosecutors charge that Lukoil Romania’s manager Andrey Bogdanov and his colleagues exported oil below market prices to Lukoil firms based abroad (Organized Crime and Corruption Reporting 2015). This malice resulted in a $102 million loss to the Romanian subsidiary between 2011 and 2014 (Organized Crime and Corruption Reporting 2015). Lukoil’s vice-president for oil refining, Thomas Mueller, called the allegations unfounded (Organized Crime and Corruption Reporting 2015).

Apart from socioeconomic troubles, security issues are present in Azerbaijan as well. One of the other greatest barricades Azerbaijan faces is the conflict over the territory of Nagorno-Karabakh. It has shadowed the country since Soviet times. It was given to the Azerbaijani SSR by Stalin,

but was and remains in majority inhabited by Armenians (Sibilla 2013). In 1988 the Nagorno- Karabakh war broke out and lasted until 1994. Currently, under international law, it as part of Azerbaijan (Sibilla 2013). Albeit, it remains de facto under the control of the Armenian army (Siddi 2017:6). They also control adjacent Azeri territories (Siddi 2017:6). The conflict itself entails a complex nature under international law. Azerbaijan argues that Nagorno-Karabakh is part of its sovereign territory (Sibilla 2013). Armenia argues that it has the right to self- determination (Sibilla 2013). Both inviolability of territorial sovereignty and the right to self- determination are basic principles of international law (Kohen and Schramm 2013).

As an attempt to solve the conflict, the Minsk Group was set up. The basic principles for settling it are self-determination and territorial integrity (Rasizade 2011:84). Both Europe and Russia are present in the mediating process. This connects the two actors to Azerbaijan beyond energy politics. They are present in the country’s security as well. Participants of the Minsk Group are: France, Russia, the U.S, Belarus, Germany, Italy, Portugal, Finland, Sweden, the Netherlands and Turkey. Azerbaijan and Armenia are simultaneously included in the process. The capital of Nagorno-Karabakh, Stepanakert, is excluded (Rasizade 2011). The presence of both Europe and Russia in this peace-making process reflects on the interdependence between these actors. A gentleman’s agreement in the Minsk group holds that negotiations should remain confidential in order to avoid derailing peace-making efforts (Rasizade 2011:86). Azerbaijan is committed to the Minsk group conflict resolution framework (National Security Concept of the Republic of Azerbaijan 2007:8). Armenia has abstained from implementing four UNSC resolutions that call for withdrawal of its troops.

The subject of the conflict dominates both the Azeri Security Concept of 2007 (National Security Concept of the Republic of Azerbaijan 2007) and the Military Doctrine of 2010 (Krivelyte 2012). Azerbaijan asks for withdrawal of Armenian forces, restoration of the sovereign rights of Azerbaijan in the occupied territories and return of displaced persons to their native lands

(National Security Concept of the Republic of Azerbaijan 2007:8). Socio-economic restoration in the region is aimed for (National Security Concept of the Republic of Azerbaijan:2007-8). President Aliyev accepts the interim status of Nagorno-Karabakh, and rules out possibilities for its territorial independence (Rasizade 2011:86).

The worst clash in two decades occurred in April 2016 (Khalilova 2016). Azerbaijan came out victorious in this Four Day War. It managed to retrieve minimal strips of territory from Armenia (Jarosiewicz 2016). Russian mediation helped restore the ceasefire after these tensions (News.Az 2016).

The conflict zone also entails a potential energy supply security risk for the European Union. It is only kilometers away from the main Western oriented pipelines (Siddi 2017:6). Note: The distance of the pipelines from Nagorno-Karabakh is shown on the map below. An outbreak could impact the pipelines and its exports to the West.

(Radio Free Europe 2016)

Both Russia and the EU actively participate in the resolution process surrounding the conflict. The basic Minsk group principles were revised in 2007. They are called the Madrid principles (Rasizade 2011:86). They are: phased withdrawal of Armenian troops, demilitarization, deployment of peacekeeping forces, reconstruction of territories, aiding the return of Azeri refugees and the finalization of a plebiscite concerning the legal status of Nagorno-Karabakh (Rasizade 2011:86).

There is disagreement between Yerevan and Baku concerning the sequence of implementation of the Madrid principles (Rasizade 2011:87). Yerevan asks for a binding decision on the status of the territory to precede withdrawal of troops, an Baku insists on withdrawal before referendum (Rasizade 2011:87). Stepanakert, despite being excluded from the peace-making efforts, insists on its independence (Rasizade 2011:87).

There is a large Armenian community in two Minsk Group member countries. France and the U.S. both have influential Armenian lobby groups. (Sibilla 2013). Azerbaijan’s instruments of influence on the mediating process lie in its strategic location and hydrocarbons. (Sibilla 2013), but Washington’s oil lobby is countervailed by the larger than one million Armenian population in the United States (Rasizade 2011). Armenian skeptics believe that the entire international community favors Azerbaijan in the conflict due to the oil factor (Sibilla 2013). Some analysts are wary of the objectivity of the Russian co-chair of the Minsk Group: Sergey Lavrov, as his father was Armenian. (Shiriyev 2017).

Military expenditure is correlated with oil prices (Holodny 2017). If a resource-rich state has a larger income due to higher sales prices, it can allocate more money to military spending (Holodny 2017). Generally, Azerbaijan wishes to use its hydrocarbon revenue to strengthen its army (Sibilla 2013). In the early 2010’s, when oil prices were hitting highs, Aliyev launched substantial military developments (Waller 2016). In October 2010, a 90% hike in defense spending was announced (Lomsadze 2010). A $3.1 billion military budget was introduced, larger than Armenia’s national budget (Lomsadze 2010). Oil revenue was invested in sophisticated Russian equipment (Waller 2016). An Arms deal was conducted this spring as well (Azernews 2017). Political expert Arzu Nagiyev was quoted saying: “As the Nagorno-Karabakh conflict continues, we really need these weapons”(Azernews 2017). In 2015, 85% of Azerbaijan’s arms came from Russia (Eurasianet 2015). This year, however, as a result of plummeting oil revenue, Azerbaijan must cut its defense budget (Waller 2016). In 2016, it accounted for $1.2 billion. (Lomsadze 2016). It will be decreased by 27 percent and will now reach for just $1 billion

(Waller 2016). This amount does not dwarf Armenia’s $2.8 billion government spending (Lomsadze 2016). It does, however, outnumber Armenia’s $430 military budget (Lomsadze 2016).

Russia plays an intricate role in the conflict. It is the main supporter of Armenia, and has a strong presence in its mining, telecommunications and energy sectors (Eurasianet 2016). It also maintain a military base in Armenia (Grigoryan 2017).

Azerbaijan has first-hand paid the price of Russian aggression in 2008. During the Georgian- Russian war, oil and gas pipelines crossing Georgia were shut. The only operational Azeri oil pipeline was Baku-Novorossiysk (Kirvelyete 2012:200). This shows how vulnerable Azerbaijan is to Russian aggression, showing that it should opt for cooperative relations with its neighbor.

4.5 Concluding the Security Challenges of Azerbaijan Azerbaijan has its fair share of economic and security issues. Chapter Four identified security issues: economic struggles, corruption and the Nagorno-Karabakh conflict. All these adversities can be tied to Azerbaijan’s energy sector. Both the EU and the regional leader Russia play a significant role in helping Azerbaijan tackle the challenges. Both play a role in the mediation process over Nagorno-Karabakh. The conflict zone is in close proximity to Azerbaijan’s Western oriented pipelines. Russia plays an intricate role in this conflict, as it supplies both Armenia and Azerbaijan with weapons.

Russia is the closest and largest political actor to Azerbaijan that could pose a threat to the country if it wanted to. Azerbaijan already paid first-hand the price of Russian aggression during the 2008 Russian-Georgian war that disrupted its exports. At the same time, Azerbaijan depends on income from the European Union’s market. It must maintain its compensatory political

behavior between these two actors. The presence of both the European Union and Russia in Azerbaijan’s security issues shows that the three actors of my case-study are interdependent.

Being newly independent, corruption continues to hinder Azerbaijan’s prosperity. The country, however, has made several attempts to overcome it. It has conceded to European Union anti- corruption conventions. Many of Azerbaijan’s initiatives to tackle malfeasance were motivated by its energy ties to transparency-promoting Europe.

Geopolitical competition between the EU and Russia for influence in Azerbaijan can be observed. Azerbaijan is able to use its hydrocarbons to partner with both actors without antagonizing its neighbor Russia to the point of a military confrontation. There is a further interdependence between Russia and the EU. Economic, trade and security relations tie Azerbaijan, Russia and the EU. This shows that the actors should strive for cooperation to satisfy their own interests at best.

Chapter Five: Conclusion

5.1 Objectives The aim of this research was to study Azerbaijan’s foreign policy balance between Russia and the EU following the theoretical framework of critical geopolitics. The country aims to maintain cooperative relations with both. It is able to secure its position in international politics using its hydrocarbon reserves. It maintains a sensitive foreign policy regarding its Russia, using compensatory political behavior in order not to offend its giant neighbor. Orientation toward Europe has been a dominating tenet of Azeri foreign policy. However, historic, social and economic ties bind it to Russia. The main element of the energy policy triangle is the Southern Gas Corridor. It aims to decrease European energy import dependence on Russia by partnering with Azerbaijan. The research question answered was: Do Azerbaijan’s hydrocarbons help the ruling elite balance their foreign policy orientation between the European Union and Russia? This research contributes to the study of international relations by touching upon the subjects of the political economy of energy and diplomacy. The timeframe of this thesis is an addition to existing literature on the topic.

Chapter Two of this thesis highlighted the significant difference in size between their reserves. There is an intrinsic relationship between natural resources and international political power. Russia’s larger energy reserves represent more bargaining power and influence in both domestic and international politics.

This thesis assessed the relationship between hydrocarbons, domestic and external policies in Russia and Azerbaijan The ruling elite in both countries have a monopoly over the energy resources of the country. Due to their shared Soviet past, Russia and Azerbaijan have similar authoritarian state-society-market complexes. Both are resource-rich countries who’s government revenues are contingent on energy sectors.

Europe’s relationship with both Azerbaijan and Russia was studied. Russian-European relations are protean. The country dominates European energy supply security. Nevertheless, there are frequent disagreements and security challenges between these two actors. The EU strives to decrease its energy import dependence on Russia. Aiming for this goal, it partners with Azerbaijan. This, however is not without reaction from Azerbaijan’s gigantic neighbor, Russia. The difference in capabilities to export to Europe is so heavyweight, that Azerbaijan will never be able to completely substitute Russia on the European energy market.

The Azerbaijani state has its fair share of socio-economic struggles. Economic recession, over- dependence on hydrocarbon income and corruption continue to plague the country. The Nagorno-Karabakh military issue further impedes the security of the country. It shows ambition to overcome challenges. It natural resources and income they generate play a key role in these efforts.

5.2 Research questions This thesis was divided into three larger subtopics. The first topic is a detailed background on Azerbaijan’s and Russia’s hydrocarbon reserves. This was provided by answering the questions: How is the natural resource stage set in Russia? How is the natural resource stage set in Azerbaijan?

Chapter Three provided an analysis of foreign policies. The research questions used were: Who are the main decision-making forces in Azerbaijan’s energy policies? Who are the main decision-making forces in Russia’s energy policies? What role do hydrocarbons play in Azerbaijan’s policies regarding Russia? What Russian policy strategies are identified toward Azerbaijan? What role does Azerbaijan and Russia play in the EU’s energy supply security?

Chapter Four followed the research question: What socio-economic and political challenges does Azerbaijan face? The main challenges identified were socio-economic struggles and the Nagorno-Karabakh conflict.

5.3 Theory and methodology The theory used to aid research was that of critical geopolitics. It connects geography, politics and economy. Hydrocarbons are at the backbone of economic well-being of countries. Both Azerbaijan and Russia depend on energy sector income for economic well-being. The European Union depends on energy import to maintain the success and development of its economy. Azerbaijan’s natural resources and geographical location of strategic importance boost its geopolitical value in the eyes of major players. This thesis reflected on geopolitical competition between Russia and the EU for influence in Azerbaijan. It uses its structural power deriving from its own natural resources to maintain its orientation toward the West without openly offending Russia. When studying the political economy of energy though a geopolitical lens each case- study is sui generis. Each importer and exporter country differs in its domestic and external policies. Findings of this research cannot be generalized to cases other than the case-study of

Azeri-European-Russian energy trade relations. Results of this research showed that Azeri- Russian relations are strongly shaped by their geographical proximity, displaying that the theory of critical geopolitics holds or this case-study. Research conducted by experts such as Svante Cornell found Azerbaijan’s aspirations to orientate between Russia and the EU in its foreign policies. This aligns with the findings of the research I conducted connecting the three actors from 2008 on.

A quantitative background on Azerbaijan’s and Russia’s hydrocarbon reserves, production and export was needed. This was done based on data collected from the U.S. Energy Information Administration and the International Energy Agency. The analytical part of this thesis was based on roughly 70 qualitative sources collected from peer-reviewed journals such as the Journal of Eurasian Studies, the Caucasus Analytical Digest, Journal of Energy & Natural Resources Law and The Oxford Institute for Energy Studies. Available policy papers from the chosen three actors were also analyzed. Empirical examples were given using news agencies such as: Azernews, Bloomberg and Eurasianet.org. This thesis weighed more on the qualitative side of research methodology because it aimed to provide an answer to the reason and means of Azerbaijan’s compensatory political behavior.

5.4 Hypotheses The primary hypothesis of this paper was that Ilham Aliyev’s presidency is able to spark the interest of Western powers with the country’s production capabilities, but is cautious not to exasperate Russia. This was tested by analyzing the international political behavior Azerbaijan shows between these two countries. This was done by analyzing credible sources and media reporting on Azerbaijan’s energy policies. Empirical examples for compensatory or competitive geopolitical behavior were incorporated. Azerbaijan plays a role in decreasing the European Union’s dependence on Russian energy import. This shows that Azerbaijan uses its natural resources to boost its heightened presence in international politics. Several sources confirmed

that since its emergence from the Soviet past, securing national independence away from Russia is of Azerbaijan’s primary goal. It is able to do so using its own natural resources, however must maintain cooperative relations with Russia as the country could pose a threat to Azerbaijan if it wanted to. This hypothesis is corroborated with examples of Azerbaijan engaging both the EU and Russia in its energy policies.

The second hypothesis of my research Is that due to their economic and security interdependence, opting for cooperative relations in the European-Azeri-Russian triangle is necessary. This hypothesis is postulated when linkages are identified between the three actors where possible cutting off ties would harm one actor. The European Union is dependent on energy import from both Russia and Azerbaijan. Azerbaijan is able to provide a part of the import needed for the EU, however it is unable to provide the amount of resources that would be needed to completely diversify away from Russia. Further, Azerbaijan is dependent on Russia for economic and security reasons. Russia is dependent on the EU’s energy market. This shows multipolar interdependence, where complete isolation of one power would be costly.

When studying Azerbaijan’s and Russia’s natural resource reserves in Chapter 2, it became evident that Russia’s are superior to Azerbaijan’s. Azerbaijan’s gigantic neighbor bears a significantly larger economic and military capability. Azerbaijan’s caution toward its superior neighbor is an act of critical geopolitics, which states that statecraft is based on calculations regarding geographical location. Russia is close to Azerbaijan in geographical proximity, and could do more harm to the country should tensions arrive. This creates the need for Azerbaijan to

maintain sensitivity in its policies toward Russia. Among others, it is for this reason that Azerbaijan continues to maintain cooperative relations with it.

It has both European and Russian-bound pipelines. This shows that it uses its hydrocarbons to promote relations with both the EU and Russia. This postulates my hypothesis, that Ilham Aliyev’s presidency is able to use its production capabilities to partner with the European Union, while maintaining economic and security ties with Russia. Using material capabilities, namely hydrocarbons, for political actions is part of the critical geopolitics theory. Not only does Azerbaijan maintain cooperative relations with both actors, it also depends on them. Should Azeri exports toward either Europe or Russia be cut-off, severe damage to the country’s economy would be seen. This underpins my second hypothesis, that due to their interdependence, opting for cooperation between these actors is necessary.

Findings of Chapter Three show several Russian strategies to maintain influence over Azerbaijan. Diplomatic, economic and energy trade relations are active. There are even ongoing discussions for Russian import to maintain stable oil production at the Azeri-Chirag-Gunashli fields. This shows Azerbaijan’s economic dependence on its neighbor, postulating my second hypothesis. The ACG fields provide oil for the Western-bound BTC pipeline, which is part of the EU’s Southern Gas Corridor project. The fact that Russian help would be needed to maintain stable production shows the interconnection between Europe, Russia and Azerbaijan, postulating my second hypothesis. Further, mutual Soviet history bind Azerbaijan and Russia. There are pro- Russian forces present in Aliyev’s cabinet, linking the two countries.

Chapter Three also reflected on the premier empirical example postulating Hypothesis 1. The chief initiative promoting Azeri-European energy relations is the Southern Gas Corridor initiative. It attempts to decrease European dependence on Russian import by partnering with Azerbaijan. This postulates that Ilham Aliyev’s presidency is able to use its production

capabilities to partner with the European Union, while maintaining economic and security ties with Russia. The Russian company, Lukoil is a stakeholder in the SGC initiative. The presence of Russia shows that Azerbaijan economic maintains ties with the country. It also shows interdependence between Russia, Europe and Azerbaijan postulating my second hypothesis. The EU would want to decrease its import-dependency on Russia through the SGC, but Russia is present in the project as a stakeholder. This shows that the three actors stays interconnected and cooperation remains necessary.

Chapter Four identified security issues that are tied to Azerbaijan’s energy sector: economic struggles, corruption and the Nagorno-Karabakh conflict. Both Russia and the European Union play a part in efforts to overcome these issues. Being a newly independent country, Azerbaijan is still in the progress of overcoming corruption. This particular issue impedes the economic well- being of the country. Azeri efforts to overcome malfeasance were partly motivated by its energy cooperation with Europe. This is another example of Azerbaijan using its energy reserves to partner with Europe. Russia simultaneously suffers from corruption. Postulating hypothesis two of this thesis regarding interdependence is Russian Lukoil’s corruption scandal in EU member state Romania. This shows that Russia’s corruption does not stop at its borders.

Interdependence is not only economic and energy related, but security related as well. Both Europe and Russia play an effort to overcome Azerbaijan’s ongoing Nagorno-Karabakh conflict. The conflict zone is in close proximity to Azerbaijan’s Western oriented export pipelines.

5.5 Recommendation Further recommendation for research would be to conduct a detailed research for geopolitical relations between Europe, Russia and Azerbaijan after the finalizing of the Shah Deniz Stage 2 project. A following recommendation would be to assess changes in the foreign policy balance of Azerbaijan between Europe and Russia following the commencement of Stage 2 Shah Deniz deliveries. Relations between the three actors can also be studied in a way of focusing on one individual European Union member state at a time. A reassessment of Azerbaijani policies after the 2018 elections can also be done.

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