The London School of Economics and Political Science Integration in Energy and Transport Amongst Azerbaijan, Georgia and Turkey Alexandros Petersen A thesis submitted to the Department of International Relations of the London School of Economics for the degree of Doctor of Philosophy, London, August 16, 2012. 1 Declaration I certify that the thesis I have presented for examination for the MPhil/PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it). The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without my prior written consent. I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of 84,608 words. 2 Abstract A limited process of integration has been occurring amongst the countries of Georgia, Azerbaijan, and Turkey. From the mid-1990s to 2008, integration amongst the three countries has occurred in the energy and transport sectors, but not in other sectors, such as security, politics or trade beyond energy and transport. In the energy sector, this integration can be explained through neo-liberal institutionalist theory. Integration in the transport sector occurs due to a mixture of elements from the neo-liberal institutionalist, security communities and neo-functionalist theories of integration. In both sectors, transnational extra-regional actors (TERAs) are the explanatory variable in the integration. 3 Table of Contents - Introduction – p. 6 o What is Integration? o A Definition of Integration o What is a Transnational Extra-regional Actor? o Conclusion - Chapter 1 – Toward a Theory of Integration – p. 17 o Security Communities Theory . Deutsch’s Classical Security Communities Theory . Refining Deutsch’s Theory At the End of the Cold War . Linking Security Communities and Constructivist Theory . The Relevance of Deutsch’s Model in the Modern World . A Security Communities Theory of Integration o Neofunctionalism . Classical Functionalism . Ernst Haas and Neofunctional Theory . The Decline of “Spillover” Theory . Revived Neofunctionalism as Partial Theory . Toward a Synthesis . A Neofunctional Theory of Integration o Neo-liberal Institutionalism . The Theory of Neo-liberal Institutionalism . Developing a Theory of International Institutions . The Neorealist Critique of Neo-liberal Institutionalism . A Neo-liberal Institutional Theory of Integration o Conclusion - Chapter 2 – Evaluating Integration in Azerbaijan, Georgia and Turkey – p. 64 o Security . Evaluation o Political . Evaluation o Social and Cultural . Evaluation o Economics and Trade . Evaluation o Energy . Evaluation o Transport . Evaluation o Transnational Extra-regional Actors o Conclusion - Chapter 3 – Transnational Extra-regional Actors: The World Bank Group – p. 103 4 o Overview o Azerbaijan . Energy Sector Development and Local Community Outreach . State Oil Fund and Resource Revenue Transparency . Non-Oil Sector Development . Governance and Rule of Law o Georgia . Energy and Transport Sectors . Crisis Response . Building Institutional Capacity o Turkey . Energy Sector and Risk Mitigation o Coordination With Other Extra-regional Actors . Azerbaijan . Georgia . Turkey o World Bank Group Rankings o Conclusion - Chapter 4 – Transnational Extra-regional Actors: TRACECA and INOGATE – p. 118 o TRACECA . The Nuts and Bolts of TRACECA . TRACECA’s Evolution o INOGATE o Conclusion - Chapter 5 – The China-Central Asia Pipeline: A Counterfactual on the Role of TERAs – p. 135 o The China-Central Asia Pipeline and Energy in Central Asia o Similar Energy Sectors o A Lack of Integration Amongst the China-Central Asia Pipeline Countries o Less Foreign Investment o International Organizations But Lack of Integration o Conclusion - Conclusion – p. 152 o Implications and Shortcomings o Summing Up 5 Introduction A limited process of integration has been occurring amongst the countries of Georgia, Azerbaijan, and Turkey. From the mid-1990s to 2008, integration amongst the three countries has occurred in the energy and transport sectors, but not in other sectors, such as security, politics or trade beyond energy and transport. In the energy sector, this integration can be explained through neo-liberal institutionalist theory. Integration in the transport sector occurs due to a mixture of elements from the neo-liberal institutionalist, security communities and neo- functionalist theories of integration. In both sectors, transnational extra-regional actors (TERAs) are the explanatory variable in the integration. These theories will be analyzed in greater depth below. This process occurred during this thesis’ time period of study (mid-1990s to 2008) despite sometimes flaring tensions between Russia and Georgia, which led to a brief but hot conflict in 2008, the ongoing Nagorno-Karabakh conflict between Azerbaijan and Armenia, and a history of non-cooperation between Georgia, an Orthodox Christian country, and its Turkic Islamic neighbors.1 This integrative trend possesses characteristics distinct from analogous processes in regions such as Western Europe and Southeast Asia, which have helped to transition constellations of small countries into dynamic regional trading blocs to their mutual benefit.2 First, the integration amongst Azerbaijan, Georgia, and Turkey is largely restricted to the high value and highly regulated spheres of energy and transport. It has not spilled over into political and economic integration writ large. In part, this may be a self-perpetuating phenomenon: as the energy and transport sectors are treated differently because they are harmonizing, they will continue to be treated differently in the future. This is not the entire story. Highly regulated sectors such as these lend themselves to standardization and therefore harmonization when it is in the interests of the countries to do so. Energy resources, such as oil and natural gas in Azerbaijan, are extremely valuable and governed outside the legal-rational state apparatus. Consequently, energy as a sector is treated as sui generis by the countries of the region. In addition to this major distinction, the countries of Georgia, Azerbaijan, and Turkey possess another difference as well: the organic integration that is occurring in these three countries is cultivated, that is, it is orchestrated as a top-down process by international institutions operating in the region in pursuit of a broader agenda.3 Identified here as transnational extra-regional actors (TERAs), these institutions have provided financial, material, and legal support of harmonization of the transport and energy sectors not solely for purposes of resource extraction and profits, but also for purposes of transparency, proper accounting of state finances, good governance, and most importantly a predictable business environment that is attractive to foreign investors. This process of integration, even limited to the energy and transport sectors, is multifaceted and not necessarily progressive or even unidirectional. Nor are the two sectors themselves proceeding in the same manner. The energy sector, particularly in Azerbaijan, is a 1 See generally, Thomas De Waal, The Caucasus: An Introduction (Oxford: Oxford University Press, 2010). 2 Compare, e.g., Frank Moller, Thinking Peaceful Change: Baltic Security Policies and Security Community Building (Syracuse: Syracuse University Press, 2007); Amitav Acharya, Constructing a Security Community in Southeast Asia: ASEAN and the Problem of Regional Order (New York: Routledge, 2009); 3 See, e.g., Paul Stephenson, “Let’s Get Physical: The European Commission and Cultivated Spillover in Completing the Single Market’s Transport Infrastructure,” Journal of European Public Policy, 17(7), 2010, pp. 1039-1057 (explaining cultivated integration from the top down in a neo-functionalist framework). 6 shadowy realm governed from the highest levels of government, outside the reach of ordinary parliamentary legislation and outside the political constraints of the ordinary electorate. TERAs and other international institutions that attempt to influence energy policy in Azerbaijan must do so from the very top—it is here that production and extraction agreements with foreign oil companies are negotiated; here where state oil profits are divided and dispersed; and here where major foreign policy decisions concerning the export of Azerbaijani oil and gas are made.4 By sharp contrast, the transport and communications sector (treated as one for the moment because the two components possess similar structural characteristics) affects ordinary lives, shapes broad social transformations, and engages highly public regulatory reform such as harmonization of customs and border controls, public infrastructure financing, such as the sale of bonds, and tariff and trade policy. This is not to overstate the binary distinction—pipeline security, for instance, is an aspect of energy integration that affects local control and requires local cooperation—but nonetheless, two separate processes are underway. While integration in the energy sector is almost entirely cultivated by TERAs and international financial institutions, integration in the transport and communications sector is a more diffuse process. Why has this