USSR demise as the foundation for Russia’s inherited role and its new claims in regional energy dynamics

From the early 19th century until 1991, firstly the Russian Empire and then the Soviet Union conquered the Caspian Basin, gradually establishing a firm hold on the area. That long experience of domination by Moscow and the related restricted sovereignty played a decisive role in the ability of local cadres to manage the post-1991 independence and advance new approaches to domestic, economic (including energy) and foreign politics. After the fall of the USSR, the situation in the Caspian region changed drastically. Those transformations prompted new types of interaction between regional and extra-regional states and determined new trends, interests, perceptions and tactics. First, instead of having two coastal powers (USSR and Iran), the former Soviet Republics of Azerbaijan, Kazakhstan and Turkmenistan emerged as independent states. The heir of the USSR, Russia, which retained the northern shore and the upper part of the western shore, remained the primary but no longer the sole player. The fact that Moscow considered the three states to be its traditional zone of political and economic influence determined Russia’s successive regional stance to a considerable extent.

Second, the modification of the legal status led these newly-formed states to the “unusual situation of being projected out of centuries of isolation onto the international scene [and therefore] exposed to pressures. [The latter came] from the former colonial ruler, Russia, in search of ways to reassert its power; from fast developing China seeking access to markets and raw materials; from the Muslim world to the south; and finally from the West where the US is in the forefront in searching for energy supplies from safe sources. All these pressures were experienced in the midst of serious internal difficulties”.[1] In addition, siding with bigger foreign players entailed some problems. “Faced with a financial squeeze, many of the Caspian states settled for minority shares in a number of projects, leading critics to accuse them of trading their dependence on one great power for another. Their problems were exacerbated by the fact that years of Soviet rule had left these states ill-equipped to run their economies, [once] fully state-owned”.[2] Third, the new elites in power became increasingly more detached from Moscow compared to their Soviet predecessors. Russia felt anxious about losing influence over the new generations of local politicians, and uncertainty over their political course spurred Moscow to strengthen economic (mainly energy) relations as well.

Fourth, despite the fact that oil and gas had been extracted in the Caspian region throughout the last century, it was only after the demise of the USSR that its abundance attracted foreign players.[3] The severe shortage of hard currency in the independent states in the 1990s and the related need to secure access to foreign markets for their energy riches encouraged local governments to implement a twofold policy. On the one hand they had to preserve their obliged relationship with Russia, while on the other they started gradually to balance its influence by launching partnerships with other regional and extra-regional actors. “Reliance on foreign investment is crucial for their economic survival. Therefore, the choice of pipeline routes becomes an issue of political convenience”.[4] However, they had to take into account that energy is a powerful instrument that Russia possesses to influence their development. After 1991, these countries inherited deep integration in the Russian energy transit system from the USSR. Traditionally, hydrocarbons from the Caspian region have been transported either through Russian territory or through the Russia-owned pipeline grid. “Since oil and gas are the primary source of profits for the Caspian countries, the control over their export granted to Russia a significant political influence and served its strategic goals”.[5] This explains why Russia is so reluctant to surrender control over its system of pipelines to any external player (especially Western multinational companies). Therefore the independent states’ new attitude caused Russia’s resistance to regional tendencies of diversification of energy customers due to fears that this would gradually weaken Russia’s role.

Fifth, and stemming from the importance of energy, is the ongoing dispute over the legal status of the Caspian Sea. The collapse of the USSR was an occasion to revise the condominium approach to the Caspian Sea between Moscow and Tehran as agreed by the Soviet-Iranian treaties of 1921, 1935 and 1940. These documents focused merely on navigation and fishing rights, overlooking the exploration of Caspian seabed resources. After 1991, Russia and Iran united their positions in resolving delimitation issues against the claims of the three independent states. For example, both insisted that the principle of condominium should govern the use and exploitation of any hydrocarbon and other riches lying beneath the Caspian seabed. Although this was not explicitly affirmed in the 1921 and 1940 treaties, they argued that since the condominium principle had been included in those documents with reference to fishing and shipping, it should be implicitly applied to exploitation of seabed resources as well (unless a new regime be agreed by all parties). After 1991, the condominium approach meant that each country had veto power over new projects, which while serving Russian-Iranian interests also strengthened the leverage of the new independent states against Russian-Iranian positions. However, “Russia benefitted not only from a longer coastline but also from the discovery of substantial energy fields in what would be its sector of the Caspian under a median line delimitation regime [an approach supported by the three independent states]. As a result, the condominium principle became of less durable interest to Russia”.[6] [7]

By 1998 Russia started to revise its official policy on Caspian delimitation, broke ranks with Tehran and abandoned the condominium approach to endorse national sectors defined by the median lines. Azerbaijan, Kazakhstan and Turkmenistan were all signing agreements with major multinational energy consortiums to exploit fields off their coasts. Russia favoured the most remunerative approach of working with its neighbours to resolve exploitation rights, and gave Russian energy giants the go-ahead to work with international consortiums, capital and advanced technology for mutual profit. This explains why Russia shifted from its previous consideration of the Caspian Basin as a lake (resources are split equally between all littoral states) to a sea, so that the stipulations of the Law of the Sea became applicable and each country had the right to exploit its continental shell without regard to the intentions of the others. “Analysts say that Moscow decided to abandon its insistence that the region is a lake after realising that its own northern Caspian sector has huge hydrocarbon potential”.11 Hence Moscow began negotiations in the first instance with Kazakhstan on an approach to delimitation which put aside Russia’s previous much contested condominium approach. In 1998 they agreed bilaterally to negotiate their division of the seabed into national sectors using the modified national median line principle while sharing the water column and surface above it. Iran refused to recognise this. By 2002 Kazakhstan and Russia signed a completed bilateral delimitation agreement. Another similar agreement followed, as will be shown below. As a result Russia broke off relations with Iran, which began to explore its own self-proclaimed 20% sector. “The often-asserted congruence of Russian and Iranian approaches to Caspian issues was largely a myth that began to be clearly exposed by 1998. Tehran’s isolation on Caspian issues revived in Iran a deep sense of historical betrayal by Russia, now in collusion with Kazakhstan and Turkmenistan but most bitterly Azerbaijan”.[8]

Sixth, the new independent states were not the only ones to experience economic hardship in the 1990s. The demise of the USSR provoked a complex destabilising effect on Russia’s statehood and economy. Extra-regional actors such as the US found room for manoeuvre in the management of the region. A long-lasting game of power politics, deep mistrust and reciprocal provocation started between Russia and the US. Russia refused to accept that its monopoly over access to Central Asian energy resources was seriously challenged. “The US too hardly [agreed] to the role of a secondary actor in the energy sphere in this region”.[9] The struggle for exploration of Caspian oil and gas and the means to bring them to Western markets that unleashed in the Caspian region after 1991 between the US, the European Union (EU) and Russia led some scholars to liken it to a New Great Game. These players have divergent interests. For the West, “although Caspian energy reserves are underdeveloped, they are potentially critical on the margins for diversifying the international supply base. Thus control over the division and transport of Caspian energy has animated intense strategic and economic gamesmanship among outside states and global energy firms”.[10] The US government declared the export of the region’s energy resources through multiple non-Russian/non-Iranian routes to be “its foreign policy priority, mainly to ensure that the West has access to secure supplies. To do this it had to ensure that the [new independent] states reduce their dependence on Russia”.[11] The US interpreted Russia’s weakened regional position as a window of opportunity to influence those countries. Therefore it decided “to support the independence of those states and reject the notion of Russia’s traditional sphere of influence; to support democratisation; to secure open access to oil and gas riches in opposition to Russian efforts to control the routes of energy exports; and to uphold the view that the Caspian Sea is legally a sea and so each coastal state is the master in its own maritime sector”.[12] Unlike the US, Europe is highly dependent on Russia. Although non-Russian transit routes would augment the EU’s supply diversification, Europe’s proximity to and interdependence with Russia implied a more cautious EU approach to Moscow. Russia, for its part, became a more assertive energy actor in Eurasia and, with each new term in leadership, Vladimir Putin strengthened Russia’s energy companies. Russia’s ambition was not only to keep its current European customers but also to gain new ones and to affirm itself as the transporter of Caspian hydrocarbons to the West.

Against this background, Russia’s economic and transition difficulties undermined significantly its capacity to finance both the former Soviet Republics’ budgets and its own regional projects. Nevertheless, already in 1992 Russian policy-makers agreed that control over Caspian energy resources was a fundamental national interest and a key factor in mitigating possible domestic energy bottlenecks and upholding special security concerns in the region. In the following years, Moscow initiated a strategy to ensure control over energy resources and their infrastructure, which determined the underlying principles of the current president Putin’s approach to the region. “First, Moscow fought to preserve its monopoly over the existing pipeline system and to contain impulses for regional diversification. Second, [it] consistently pressed for the Caspian Sea to be legally defined as a sea and to share the benefits of offshore energy development. By insisting on a collective decision regarding the sea’s final status, Russia attempted to broaden its jurisdiction and secure a veto over future off-shore exploration while leaving opportunity for participation in preferred commercial ventures. Third, Moscow exacerbated the political and commercial risks of those Caspian energy projects that competed directly with Russia’s strategic interests. By mid 1997, however, Moscow softened its stance by promoting the preferential participation of Russian companies in regional energy projects. It also endorsed the principle of multiple oil pipelines for the region with the proviso that at least one of the main export routes would include the north-south (Baku-Novorossyisk) route that traverses Russia”.[13]

The coming to power of Vladimir Putin gave Russia’s politics in the region even greater stimulus. This was mainly due to the country’s improved financial situation and political influence worldwide. He launched a qualitatively new approach to access to Caspian hydrocarbons and ensured a global energy superpower role for Russia. “The most notable features of this strategy included: the assertion of Russia’s unambiguous interests in competing for economic and diplomatic influence in the Caspian basin as well as concerted lobbying efforts aimed at gaining inclusion of Russian energy firms in joint development projects and blocking several US-sponsored proposals for transCaspian pipelines. Putin’s approach was akin to the classic entrepreneurial im- age”.[14] Russian companies were encouraged to penetrate local economic activities as deeply as possible with the aim of complementing geopolitical rivalry between states. For example, Moscow reiterated its support for commercially viable, non-Russian pipeline routes, going so far as to moderate opposition to

Russian firms’ participation in the rival Baku-Tbilisi-Ceyhan (BTC - see below) east-west oil pipeline and regional oil swaps with Iran. It also proposed to increase transit quotas for Azerbaijan, Kazakhstan and Turkmenistan to persuade those countries to rely on the Russian pipeline system. In addition, Putin agreed to an equidistant median line division of the seabed (excluding surface or water columns) in a 2001 bilateral declaration with Azerbaijan which extended the principle of national sectoral division stipulated with Kazakhstan in 1998. Hence Moscow explicitly clashed with the Iranian proposal of both dividing the Caspian resources into equal 20% parts for each littoral state and deciding all outstanding issues via a consensus accord, opting instead for bilateral agreements.

The approach of asserting Russia’s interests in the region was maintained during the US counter-terrorism campaign in Afghanistan and despite Russia’s initial support for the US. In 2002 Putin proposed a Eurasian Gas Alliance between gas producer states (Russia, Turkmenistan, Kazakhstan and Uzbekistan), which would serve as a means for Moscow to dominate and hence coordinate regional energy dynamics and multiply Russia’s future energy advantages in European markets. “The project was to be a large part of the solution to the shortchanging of the Russian domestic market that had resulted from Gazprom’s focus on export profits. But it went far beyond this, aiming at a monopoly on [less expensive] Central Asian gas in order to satisfy both domestic and [highly lucrative European] export markets and to greatly increase Gazprom’s profit margins in the latter”.19 The idea was to accomplish both geostrategic and commercial control over the Caspian energy bonanza. To support this stance a few months later, Putin announced his decision to hold a major naval military exercise in the Caspian Sea using Russia’s Caspian Flotilla (the larger one in the region). The Flotilla was perceived as instrument to defend political and economic interests in the region given the growing mistrust of the US and its expanding presence due to Afghanistan (including through military bases in Central Asia). Officially, the exercise was justified by the need to combat terrorism, given the vicinity of Afghanistan and Georgia’s Pankisi gorge where Chechen rebel fighters and Arab mujahideen were operating.

Moreover, two decisions point to the high priority that Putin assigned to Russian economic competitiveness in the area. First, in order to bolster the efficiency of Russian policies in the region, he appointed Viktor Kalyuzhnyy as Special Presidential Envoy for Caspian affairs in charge of coordinating the five littoral states’ policies in the region, as well as to emphasize Russia’s special interests. It is worth noting that Kalyuzhnyy - who made his career in the energy sector and later was Fuel and Energy First Deputy Minister when he appointed Semen Vaynshtok as head of Transneft, Russia’s oil pipeline monopoly - was also Deputy Foreign Minister at that time. “Putin wanted someone like Kalyuzhnyy to put into practice what was described as the president’s new foreign policy concept - the big business [was] obliged to support the priorities of the Russian state as defined by Putin”.20 Second, the Kremlin actively promoted the formation of a new Russian energy consortium comprising leading Russian oil and gas firms. The consortium was intended to improve coordination of state and firms’ activities and orchestrate the development of energy deposits along the northern Caspian rim.

Capitalising on successive years of boom in oil prices and the correlated improvement of Russia’s international status, the country gradually became the second leading oil exporter after Saudi Arabia - a status that corresponded with Putin’s ambitions to transform Russia into a global energy superpower. Moscow used this opportunity to market Russian oil as an alternative source to unstable Middle Eastern supplies and to promote investment opportunities and expansion of the Russian oil sector’s export capacity through joint activities with leading energy firms. Putin even proposed to supply the United States with Russian liquefied natural gas. Russia was emerging as an independent energy player, which allowed it to influence the interests of some Caspian Sea states (the construction of the Tengiz-Novorossyisk oil pipeline was completed in that period).

In the same period, Russia managed to control and obtain concessionary terms for the purchase and re-export of Turkmen gas. Moscow was able to exploit this vulnerability to guarantee Turkmenistan’s neutrality vis-a-vis extra-regional leanings and secure acquiescence to its favoured positions on the legal status of the Caspian Sea. In 2003 Turkmenistan signed an unprecedented and financially controversial 25 year export agreement with Russia (Turkmenistan agreed to a price 50-60% lower than Russia collected from reexporting gas to European countries, as well as accepting only 50% of the payment in cash until 2007, after which time Russia could renegotiate the price for future deliveries). By signing this deal, Ashgabat reduced the estimated supply available for alternative export routes, thus diminishing the commercial appeal of investing in non-Russian gas pipeline options and reducing the prospects of diversifying foreign energy relations. This enabled Russia to earn a projected $300 billion by substituting cheap Turkmen imports to fill a growing percentage of Russian consumption, while freeing up a corresponding proportion of Russian gas for delivery in foreign markets.

In the case of Kazakhstan, Moscow succeeded in regulating the pace of its gas exploration and exports to Europe, but could not do the same in the oil industry. From 1998 to 2003 Moscow increased Astana’s short term oil exports through Russia, but while it complained about Kazakhstan’s flirtation with the promoters of the BTC it failed to secure commitments regarding the richest projected Caspian offshore oil deposits in Kazakhstan’s Kashagan field. Recognising the latter to be essential for breaking out of Moscow’s transit monopoly and for the future cost-effectiveness of the BTC pipeline bypassing Russia, the Kazakh leadership gravitated towards its Western backers. Moscow secured only a minority stake for Russian energy firms in 4 out of 46 of Kazakhstan’s oil projects.

As for Azerbaijan, Moscow was unable to impede its competitive policies. Azerbaijan encouraged both foreign-financed energy projects and a diversification of the main east-west oil pipeline routes at Russia’s expense. Some explain Baku’s attitude with the fact that “in the face of Moscow’s suspected schemes to stir unrest among separatist elements in the South Caucasus, Washington [may] guarantee pipeline security”[15]. Notwithstanding Moscow’s shift from coercion to offers of increasing the capacity of Russian pipelines available for transporting Azerbaijani crude, Baku held firm in pushing the development of the BTC pipeline. Facing the inevitability of this pipeline, Moscow started to relax its hostility to the project and explore construction of a connecting segment to the Black Sea. Baku’s defiance also extended to outstanding issues of ownership of Caspian crude. For example, Azerbaijan resisted Moscow’s early pressure to accede to a condominium solution for the legal status of the Caspian Sea, signing on to a bilateral agreement only after Moscow conceded to Baku’s insistence on a national sector division of undersea energy resources. With Russian-Kazakhstani and Russian-Azerbaijani accords sealed on adjoining national sectors, Azerbaijan and Kazakhstan completed the triangle with a bilateral delimitation of their own in 2001 and Russia’s interest in exploiting northern Caspian oil and gas fields was to a great extent resolved.

Moscow also experienced difficulties in dissuading Russian oil firms from participating in the energy consortia in the region. Much to Moscow’s disappointment, its largest oil company, LUKoil, exerted its independence by acquiring a 10% stake in the international consortium charged with developing Azerbaijan’s main offshore oilfields. Despite the validity of the secret decree already signed by former president Yeltsin, arguing that Russia should preserve its sphere of influence and keep Western joint ventures out of the Caspian Sea, the Fuel and Energy Ministry backed LUKoil’s deal by affirming that it would have been a mistake not to take an active part in international pro- jects.[16] LUKoil’s mere participation not only contradicted Russia’s official policy but also strengthened the hand of advocates of the BTC. Ironically, LUKoil withdrew from the project after construction of the BTC was approved. Russia’s capacity to exercise leverage over domestic firms proved weaker in the oil sector than in the gas industry.

While from 2001-2003 Washington enjoyed strong domestic support as well as universal sympathy for its anti-terrorist cause, by 2005 when the situation in Iraq deteriorated rapidly, the US treasury was depleted and domestic public opinion opposed the unpopular war, Moscow decided to confront US policies. This US weakness “gave Moscow the impression that Washington could no longer exercise decisive influence in the Caspian Sea Basin. That perception allowed Moscow to act without seeking allies in Europe or Asia. In Moscow’s view, Western Europe, dependent on energy imports from Russia, would tolerate whatever action Russia might take. China, aligned with Russia against the US presence in Central Asia, would do the same. Finally, the Central Asian states, if left to themselves, would not dare to mutter a word”.[17] Additionally, Russia’s assertiveness was strengthened further after the Coloured Revolutions in Ukraine (2003), Georgia (2004) and Kyrgyzstan (2005). Moscow also attempted to ally with China within the Shanghai Cooperation Organisation in order to curtail US influence in the region, being aware that “Central Asian states were not in a position to oppose Russia and China when they acted together”.[18] Finally, according to the Kremlin, with the 2008 Rus- sian-Georgian war Russia gained an indirect victory over the US for its policy of instigating anti-Russian attitudes in the post-Soviet space. However, Russia’s recognition of the independence of Abkhazia and South Ossetia, while cooling its relations with practically all states in its neighbourhood, increased Tbilisi’s desire to seek closer ties with the West. Kazakhstan allowed oil shipments to Baku to transit through the BTC pipeline. Turkmenistan demanded Moscow pay higher prices for its gas and expressed interest in shipping gas for the Nabucco project, backed by the West, if and when it becomes operational. Azerbaijan accelerated its promotion of Baku as a Caspian Sea Basin energy hub. “The August 2008 show of force by Moscow in Georgia, instead of cowing the states of the region into submission, ignited a contrary trend, namely a search for ways to strengthen links with Western powers and even with China in order to lessen dependence on Moscow”.[19] This tendency survived in the subsequent years and is still a dominant approach in the area.

  • [1] M. Rywkin, “The geopolitics of the Caspian Sea Basin”, American Foreign Policy Interests, vol. 32, 2010, p.96.
  • [2] S.R. Dadwal, “Politics of oil: Caspian imbroglio”, Strategic analysis, vol. 22, issue 5, 1998, p. 758.
  • [3] A. Petersen, (2012), p. 33.
  • [4] A. Andrianopoulos, The economics and politics of Caspian oil, in Southeast European and Black Sea Studies, vol. 3, issue 3, 2003, p. 82.
  • [5] A. Petersen, (2012), p. 40.
  • [6] J.W. Parker, Persian dreams: Moscow and Tehran since the fall of the Shah, Potomac Books, 2009, p. 152.
  • [7] S.R. Dadwal, (1998), p. 753.
  • [8] J.W. Parker, (2009), p. 147-148.
  • [9] G. Evstafiev, “Russia’s energy policy in Central Asia and the Caspian Sea region”, Security Index: A Russianjournal on international security, vol. 14, issue 1,2008, p. 75.
  • [10] A.N. Stulberg, “Moving beyond the Great Game: The geoeconomics of Russia’s influence in the CaspianEnergy bonanza”, Geopolitics, vol. 10, issue 1,2005, p. 5.
  • [11] S.R. Dadwal, (1998), p. 754.
  • [12] M. Rywkin, (2010), p. 100.
  • [13] A.N. Stulberg, (2005), p. 5-6.
  • [14] Ibid., p. 5.
  • [15] A. Andrianopoulos, (2003), p. 82.
  • [16] J.W. Parker, (2009), p. 153.
  • [17] M. Rywkin, (2010), p. 98.
  • [18] Ibid.
  • [19] Ibid., p. 100.
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