October 1996

Published by the Eisenhower Institute's Center for Political and Strategic Studies

RUSSIA'S POLICIES TOWARD CASPIAN REGION OIL:
NEO-IMPERIAL OR PRAGMATIC?

By Dr. Yuri Fedorov, Moscow Institute of International Relations, Russian Ministry of Foreign Affairs

NOTE: THE FIRST HALF OF THIS ARTICLE WAS PUBLISHED IN LAST MONTH'S PERSPECTIVES. IN THAT ARTICLE, DR. FEDOROV EXAMINED WHAT HE CALLED THE "NEO-IMPERIAL" VIEW OF RUSSIAN POLICIES TOWARD THE CASPIAN REGION. IN THIS CONTINUATION, HE EXPLORES AND DESCRIBES THE SECOND PREVAILING VIEW IN MOSCOW: THAT OF PRAGMATISM.

THE PRAGMATIC TENDENCY IN RUSSIAN POLICY TOWARD THE CASPIAN REGION

Events related to the process of opening up Caspian oil demonstrate that neither political and diplomatic pressures nor "threatening" Russian military presence in the region may provide effective tools of successful "post-imperialist" policy. Rather they are manifestations of Russian weaknesses. That is why a totally different - pragmatic approach has begun to influence Russia's behavior, especially in connection with oil-related projects in the Caspian region. The main advocates of this approach are to be found among oil people and realistically-minded members of the government. The essence of the new tactics is to make sure that Russian oil companies, primarily Lukoil, are given the opportunity for normal business activity related to Caspian oil and natural gas projects, especially since development of the Caspian's reserves may provide considerable guaranteed profits with relatively low capital investment.

However such a policy also requires finding a compromise in resolving various problems which have appeared in relations between Russia and her Caspian and Western partners. Otherwise, such a policy is doomed for failure. As it was aptly described by Russian expert Yakov Pappe:

The oil people do not support any attempts by Russia to pressure its Southern neighbors, in particular declaring the former Islamic republics of the USSR a zone of Russia's special interest. They do not support it because they don't believe in the effectiveness of such measures. For them it is important to have the possibility of expansion now, while not everything has yet been divided. That is why the oil people want to respect national aspirations of other new independent states, while at the same time expecting that these states would decide to make maximum use of the scientific, technological, human potential still possessed by Russia.

The first success of this pragmatic approach to matters related to Caspian oil occurred in Russian-Azerbaijani relations in November 1993, after the People's Front government (which was known for its strong anti-Russian policy) was removed. At that point two important agreements were signed between the two nations. The first one, concluded between representatives of the State Oil Company of Azerbaijan (GNKA) and the Russian Ministry of Fuel and Energy, provided for Russia's participation in the development of oil and gas resources in the Caspian, and it announced the two sides' cooperation in pipeline construction and production of oil and gas extracting machinery. The latter clause was very important both for Baku and Moscow for a very special reason. Before the collapse of the USSR, over half of all oil and gas industry equipment was being manufactured in the republic of Azerbaijan. Once the USSR was gone, certain enterprises of the Russian military-industrial complex started their own production of similar types of tools and machinery. However, even for the highly capable military-industrial complex it was difficult to master all the complicated procedures involved in this type of production.

The second agreement, again signed in November 1993 by GNKA and Lukoil, related the latter's intention to participate in an international consortium, dedicated to the development of three major Azeri off-shore oil reserves. Lukoil received 10 percent of Azerbaijani share.

The deals apparently went well beyond regular business transactions. From the Azerbaijan's view, they acquired a military-political dimension. In articular, the Azerbaijani leadership was hopeful that by rejecting the uncompromising attitude of their predecessors, i.e. the People's Front, on the crucial issue of Azerbaijan's cooperation with Russian companies in the Caspian, they could invite Russia to review and change its position toward the Nagorno-Karabakh problem. At the same time it was hoped that the concerns regarding the Caspian Sea oil extraction business that had been infiltrated by Western companies would also be moderated. For a while the Russian side was giving certain indications that that was exactly what was going to happen. For example, it was around that time that Yuri Shafrannik, the Russian Minister for Fuel and Energy, had stated: "The signing of the treaty between Moscow and Baku will have an effect on solving the Karabakh conflict."

This shift toward developing closer and more amicable relations with Moscow could in no way be interpreted as Baku's refusal to cooperate with Western companies. At the end of August 1993, independent experts representing Azerbaijan and seven large Western oil companies had conducted talks in London on the subject of developing three major off-shore oil reserves. Until February 1994 these discussions were conducted on a semi-official level; however afterward official negotiations resumed. A new important element also appeared. As was pointed out by Gaidar Aliev, Azerbaijan's President at the time, "In February 1994 negotiations were renewed, this time with the participation of the Russian oil company Lukoil."

At the same time despite all of the practical conciliatory steps by Azerbaijan's leadership, Moscow failed to change both its official and unofficial negative attitude toward the issue of contracts. The main Russian counter argumentwas again rooted in its special understanding and interpretation of the status of the Caspian Sea. However, despite the resistance of the Foreign Ministry, Russian oil interests, particularly Lukoil, decided to commence broad cooperation with Azerbaijan in developing off-shore oil reserves. In September 1994 Lukoil received a 10 percent share in a project developing the Guneshli, Azeri, and Chirag oilfields. A large international contract was signed in Azerbaijan in November 1995, and ratified in February 1996 by the Azerbaijani parliament. The aim of the contract was to develop a new oil field, at the cost of $1.7 billion. Lukoil appears to be an uncontested leader in this project--its share, also to include that of the "Lukoil-Agip" joint venture, is supposed to reach 57.7 percent. In February 1996 a statement was signed concerning the intentions of Lukoil and GNKA to jointly develop the Shah-Denis reserve. The estimated cost of this contract is $4 billion, with the proposed Lukoil share of 20 to 30 percent.

It appears that for all practical purposes the supporters of the pragmatic approach to Caspian oil-development projects, which involves considerable Russian investments, are winning the bureaucratic struggle in Moscow's corridors of power. According to the Russian press, in July 1994 shortly before the first large contract was signed between Baku and a group of Western companies, President Boris Yeltsin signed a secret directive entitled: "On Securing the Interests of the Russian Federation in the Caspian Sea," which examined possible economic sanctions against Azerbaijan, should it proceed to implement proposed contracts with Western oil companies. One of these was banning Azerbaijani vessels from Russia's internal water routes, which meant the creation of a serious obstacle on the way to transporting heavy equipment for Caspian off-shore platforms. However, the draft of a governmental ordinance applying economic sanctions against Azerbaijan, as stipulated in the Presidential directive, was never signed by Prime-Minister Victor Chernomyrdin. Later on, President Yeltsin suspended his directive.

Another testimony to the growing influence of pragmatists over supporters of "post-imperialist" policy in Russian regional policy circles was the agreement on transporting "early" Caspian oil through the Russian Black Sea port of Novorossiisk. One of conditions for that agreement was a Russian pledge to allow passage of oil extracting equipment through Russian territory. Opponents of Russia's participation in opening up the resources of the Caspian region were appalled by the prospect of unimpeded passage of these important goods intended for Caspian oil development. According to Vladimir Trofimov, former Director of the Committee of the State Duma on International Affairs, "We (Russia) are thereby voluntarily depriving ourselves of the only real tool of compulsion."

However, the Russian government did not yield to the temptation to put pressure on Azerbaijan. As was pointed out by arepresentative of the Ministry of Fuel and Oil, Russia did not think that it would be timely and appropriate to link the status of the Caspian Sea to the problem of transportation of "early" oil from the sea shelf of Azerbaijan. According to the same source, Moscow did not favor "attempts by certain powers to begin the examination of the status of the Caspian within the framework of on-going negotiations."

The main argument often used by the pragmatic group inside Russia's policy making elite is that, in the words of a highly placed representative of the energy establishment, "while we (the Russian side) are procrastinating, others are drilling and pumping oil". Evidently Moscow pragmatists also think that the process that had been started in earnest may not be stopped without creating serious problems for everyone, including the Russian Federation. A natural conclusion to be drawn is that Russia should "jump on the bandwagon" as soon as possible.

This is the only realistic position. Regardless of Russia's desire to dictate its will to others or control the Caspian region, it does not have sufficient leverage to do so, barring the outright use of force to prevent cooperation between Caspian region states and Western oil companies. However, even in the area of power projection and adopting force-related decisions Russia has been demonstrating serious handicaps and limitations. A brief discussion of this specific aspect of Russian behavior seems to be appropriate. It may be observed that on the one hand Russia did manage to preserve and legalize some military presence in the region: currently she has a mechanized infantry division stationed at Gumli in Armenia and two such divisions at Analkalaki, Vasiani and Batumi in Georgia. Russian border guards are also participating in patrolling these two states' borders with Turkey. On the other hand the overall size of Russian military outposts in the Transcaucasian region is fairly small - no more than 20,000 regular troops and 5,500 borderguards. Moreover, despite some obvious attempts, Russia failed to secure Azerbaijan's agreement to place Russian troops in its territory as 'peacekeepers.'

At the same time Russian military has stated its plans to overcome current limitations of Russian power projection capabilities in Near- and Transcaucasus. Recently the Russian General Staff announced an ambitious program to increase the capacity of the Northern Caucasus Military District to no less than 600 tanks, 2,200 personnel carriers and 1,000 artillery pieces. According to Russia's former Minister of Defense Pavel Grachev, "We want to create a powerful military district with mobile and regular forces that would be able to conduct any kind of military activities in any local and/or 'large-scale' conflict."

However, as ill-fated Russian involvement in the republic of Chechnya has demonstrated, military build-up and even direct use of force do not guarantee Russia satisfactory solutions to the problems she is facing in those volatile andunpredictable regions.

It is patently clear that the politics of mounting military threats and intimidation would be another confirmation of Caspian region suspicions of neo-imperialistic aspirations of the Russian leadership. The Caspian states would then look even more actively for outside protection against real or perceived Russian expansionism in the region.

Therefore, if Russia does not want to be faced with more difficulties in the Caspian region, she should abandon any "post-imperialist" claims and arrange truly constructive connections with the Caspian states, including participation in the opening up of the region's natural resources. Under these circumstances pragmatism becomes an indispensable tool of achieving better interests of the Russian Federation.

The views expressed in this article are the author's and do not necessarily reflect those of the Eisenhower Institute.

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