Caspian Geopolitics: The View from Moscow

Caspian Geopolitics:
The View from Moscow

CAROL R. SAIVETZ
Fellow
Davis Center for Russian Studies, Harvard University

W
ith the collapse of the Soviet Union in 1991, Russia lost influence
and proprietorship over much of the Caspian Sea basin. Where
there were only two littoral states, the USSR and Iran, there are now
five. Even worse, in the view of many high-ranking Russian officials, Azerbaijan,
Kazakhstan, and Turkmenistan sought to build upon their new-found indepen-
dence by exploiting—with Western investment—the energy resources in what
they viewed as their sectors of the Caspian. Russia openly objected, claiming that
the Caspian was an inland lake; this meant that any projects had to be agreed by
all the littoral states. Faced with the proliferation of consortia despite Russian
opposition, the Russian Ministry of Foreign Affairs (MID) proposed in 1997,
that each state have a 45-mile zone of its own, while the center of the sea would
remain under joint administration—leaving a shape much like a doughnut. Again
in 1998 the Ministry altered the official Russian position. Russia would agree to
the sectoral division of the sea bottom, but not to a division of the waters of the
Caspian.
Yet ownership of the resources is only half of the equation. Equally impor-
tant is the routing of the oil and natural gas export pipelines. A quick look at the
map reveals the complexities of the issue. In order to bring the oil and natural
gas riches of the Caspian Sea to international markets, pipelines must cross Rus-
sia, Iran, or Georgia. A Soviet era pipeline runs from Baku, the Azerbaijani capi-
tal, to the Russian Black Sea port of Novorossiisk, but it passes through war-torn

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Carol R. Saivetz

Chechnya. When Chechnya descended into war for a second time in fall 1999,
then-Premier Vladimir Putin authorized the building of a pipeline through
Dagestan to by-pass Chechnya. It was completed in mid-2000. A pipeline to
Iran, or a system of swaps with Iran, would allow export via the Persian Gulf;
however, for the moment at least, that route is proscribed by the U.S. sanctions
regime against Teheran. A refurbished pipeline carries oil to the Georgian port of
Supsa, also on the Black Sea. Thus both the Russian and Georgian variants re-
quire tankers to pass through the Bosporus, alarming Turkey at the prospect of
increased tanker traffic.
The United States has been pushing for a pipeline from Baku, through
Georgia, to the Turkish Mediterranean port of Ceyhan. Officials claim that Baku-
Ceyhan avoids a long list of obstacles: It frees the new littoral states from depen-
dence on Russian pipelines; it continues to isolate Iran; and it eliminates tanker
passage through the Bosporus. As a counter to Baku-Ceyhan, MID officials have,
despite Turkish objections and the risks of transit through the unstable Caucasus,
been adamant that the oil from the Caspian be piped through Russia. In the most
benign interpretation, this would allow Russia to garner transit fees; more malig-
nant observations are that Russia is determined to control the exports of the former
Soviet republics.
This article will lay out how Russia has approached questions of Caspian
oil and natural gas. In particular, it will explore Moscow’s evolving geopolitical
views of Caspian developments and reactions to U.S. proposals for the Baku-
Ceyhan export pipeline. The concluding section will look at how and why Russia’s
new president, Vladimir Putin, has made the Caspian a priority.

The Division of the Caspian and Pipelines

In September 1994, Azerbaijan signed the “contract of the century,” the first of
several consortia agreements with Western oil companies and with the Russian com-
pany LUKoil. The Russian Foreign Ministry objected almost immediately and threat-
ened sanctions against Azerbaijan. Many officials argued, on economic grounds,
that the already existing oil and natural gas fields had been developed by the Soviet
Union and that, therefore, these should be considered Russian resources. Others,
particularly oil company executives and representatives of the Ministry of Energy
and Fuel, saw no problem with the deal. Then–Prime Minister Viktor Chernomyrdin
reportedly assured Azerbaijani President Heidar Aliev that Russia would not object
to the deal, but that Azerbaijan would need to coordinate policy with Russia regard-
ing ecological issues and fishing. Interestingly, the same reports alleged that then–
Foreign Minister Andrei Kozyrev reassured Aliev that no sanctions would be levied
against Azerbaijan.1 One can only speculate that the MID, in the person of Kozyrev,
retracted the threats under pressure from the oil and gas lobby.

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 Caspian Geopolitics: The View from Moscow

Chernomyrdin clearly supported the participation of LUKoil and it was

widely reported that the prime minister intervened personally to secure not only
the 1994 Azerbaijani deal, but later agreements with Kazakhstan. Despite the
cozy relations between Chernomyrdin and LUKoil, it was not until 1997 that the
MID’s declared policy shifted. It was then that the MID proposed the so-called
doughnut, that is limited sectoral division of the sea. The proposal was not sup-
ported by the other littoral states, but it was a major step toward recognizing the
validity of the several Caspian consortia.
It was finally negotiations with Kazakhstan that pushed the MID and other
officials to recognize formally the sectoral division of the Caspian. With Russia
and Kazakhstan disputing a site in the northern Caspian, Kazakh President
Nursultan Nazarbaev traveled to Moscow on April 9, 1998 to meet with Boris
Yeltsin. The agreement to divide the sea bottom, but not the waters of the Caspian,
was finally initialed in early July 1998 when Nazarbaev again traveled to Moscow.
The arrangement legitimated the division of the riches of the seabed, but allowed
Russia to block proposals for trans-Caspian pipelines, ostensibly on ecological
grounds. This was clearly a dramatic shift from the earlier Russian positions and
represented at least a partial victory for the oil companies.
If Russian authorities acquiesced on the question of the sectoral division of
the Caspian, the pipeline issue was far from resolved. As noted above, foreign
ministry officials in effect demanded that oil from the Caspian be piped through
Russia despite the two wars in Chechnya. Beginning in November 1997, early
oil—the first oil from any given site, before a well is fully operational—has been
exported via Novorossiisk, and, starting in April 1999, additional quantities have
flowed to the Georgian port of Supsa, through a renovated pipeline. Despite the
completion of the Chechen by-pass, Moscow’s concern remains Washington’s push
for Baku-Ceyhan. Because the U.S.-supported Turkish route is by far the most
expensive and technologically difficult, the Azerbaijani consortium repeatedly
postponed a final decision about the main export pipeline. The low price of oil
throughout 1999 and into 2000 exacerbated the concerns of the oil companies
about costs; in addition, there were also doubts expressed about whether or not
the volumes of oil needed to make Baku-Ceyhan practical even existed. It was
only in October 1999 that the Azerbaijani consortium companies agreed to Baku-
Ceyhan. Nonetheless, Russian efforts to block the route continued. Russian en-
voys traveled to the Caspian in a major initiative to dissuade Azerbaijan,
Kazakhstan, and Turkmenistan from signing the final agreement. The following
month, on the sidelines of the Istanbul OSCE summit, a formal agreement for
Baku-Ceyhan was signed by the presidents of Turkey, Azerbaijan, Georgia, and
Turkmenistan.
As noted above, the 1998 agreement with Kazakhstan in effect legalized the
many consortia arrangements initiated by the littoral states. Indeed, by the begin-

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Carol R. Saivetz

ning of the new century, all of the littoral states—with the exception of Iran—
had agreed at least tacitly to the sectoral division of the Caspian. Yet, it leaves
unresolved the question of undersea pipelines. This is highly significant because
most analysts would argue that without pipeline links providing large volumes of
Kazakhstani oil between the east and west sides of the Caspian, Baku-Ceyhan is
much less viable. The success of the Baku-Ceyhan line—or even whether or not it
is finally built—thus depends on Russia’s ability to block proposals for trans-
Caspian pipelines.
At this point, from the Kremlin’s perspective, the one bright spot in all the
geopolitical wrangling is the Caspian Pipeline Consortium (CPC). The full his-
tory of the CPC is beyond the scope of this article. It should be noted, neverthe-
less, that CPC is the main export route from the vast Tengiz field in Kazakhstan,
through Russia to Novorossiisk. The Chevron Oil Corporation signed an original
deal in 1993, but when little or no progress was made on actual pipeline con-
struction, the Kazakh government reshuffled the participants’ deck and sold a
twenty five percent stake in Tengiz to the Mobil Oil Corporation. According to
many observers, Chevron and Mobil ulti-
mately realized that the only way to get
Putin brought to his job Russia to cooperate was to bring in a Rus-
a marked determination sian company—in this case LUKoil.2 The
to restore Russia’s great new CPC was initialed on April 27, 1997.
In the final arrangement, the Russian gov-
power status. ernment has a 24 percent stake in the pipe-
line and an additional 20 percent is held
by LUKoil and Rosneft; moreover, the private oil company participants agreed to
finance the pipeline’s construction. Despite repeated delays in obtaining con-
struction permits from local and regional authorities, the CPC is now scheduled
to be completed in 2001.
In fact, it might be argued that CPC is the model that Russia would like
other export schemes to follow. While the project is not without its difficulties,
the economic and strategic payoffs are clear. Yevgeny Primakov, stated openly
that “... Russia viewed the construction through Russian territory as an impor-
tant state task, the solution of which would both give certain economic benefit
and serve for consolidation of relations with CIS countries, first of all with
Kazakhstan.”3
The Turkmen case also highlights the importance of export routes.
Turkmenistan, with its tremendous natural gas reserves, is in effect a captive of
the Russian gas monopoly Gazprom. Until December 1999, Gazprom chairman
Rem Vyahirev refused to allow Ashgabat use of Gazprom pipelines to supply the
lucrative East European markets; instead Gazprom limited Turkmenistan to the
Commonwealth of Independent States’ (CIS) market. Many of the CIS states

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 Caspian Geopolitics: The View from Moscow

have been unable to pay for the gas. As the government in Ashgabat searched for
alternative routes to world markets, President Saparmurat Niyazov defied Gazprom
and turned off the spigot. Clearly, Russia, and Gazprom specifically, view
Turkmenistan as a competitor in the natural gas market. Were Turkmenistan to
secure alternative export routes, it would emerge as a significant rival to Gazprom.
In late December, both Ashgabat and Gazprom seemingly relented. They
signed a new deal in which Ashgabat has agreed to sell Moscow 20 billion cubic
meters of gas at a price of $36 per 1000 cubic meters. Forty percent of the rev-
enue was to be in cash, with the rest in barter.4 There is some speculation that
Gazprom, which faced shortages in southern Russia last winter, decided that
Turkmen gas could be used to meet that demand. At the same time, President
Niyazov succumbed to Russian pressure and agreed on a price that was lower
than Turkmenistan had sought previously. As of this writing, it is not clear how
long-lived the rapprochement will be: Negotiations, thus far unsuccessful, are
continuing over future purchases of Turkmen gas.
The deal does reflect the heightened competition in the gas sector created
by the discovery of vast gas reserves at Azerbaijan’s Shah Deniz field. Now
Turkmenistan, Azerbaijan, and Russia’s Gazprom are rivals for the lucrative Turk-
ish market. For Turkmenistan, access to the Turkish market was to be assured
through a U.S. proposed trans-Caspian pipeline from Turkmen gas fields to
Azerbaijan and then on to Turkey. For Gazprom, the 1997 Blue Stream agree-
ment with Turkey to supply gas via a pipeline that would go under the Black Sea
was its lock on the Turkish market. The route is technologically difficult, but
enjoys the obvious advantage of not crossing multiple international borders. With
the discoveries at Shah Deniz, Azerbaijan emerges as a formidable rival to both
Gazprom and Turkmenistan: Azerbaijan’s gas will be cheaper to export because of
its proximity to Turkey. Turkmenistan needs Azerbaijan’s cooperation on the trans-
Caspian pipeline, but the two are wrangling over the percentage of throughput
capacity dedicated to Azerbaijani gas. At the same time, Gazprom seems deter-
mined to proceed with Blue Stream. Indeed, some observers claim that Gazprom
needs Turkmen gas not so much for the market in southern Russia, but for the
former’s need for enough volume to make Blue Stream viable. From Turkmenistan’s
perspective, it may well turn out that export via Russia is the least bad scenario.5

Putin’s Policies

Vladimir Putin was appointed acting president shortly after the signing of the
Baku-Ceyhan agreement. There could be no doubt that many in Moscow viewed
the deal as a political and economic defeat for Moscow and a victory for the
United States. Moreover, Putin brought to the job—first as acting president and
then as elected president—a marked determination to restore Russia’s great power

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status. That the United States was the promoter of the Baku-Ceyhan line at a
time when contacts between the new littoral states and NATO were intensifying
contributed to the sense of loss. Perhaps most importantly, Russia’s failure to
prevent the deal came after NATO’s fiftieth anniversary celebration and the for-
mal accession of Poland, the Czech
Republic, and Hungary to the military
The reassertion of Russian alliance. It also followed NATO’s show
influence in the Caspian is of force in Kosovo. Statements by MID
both a commercial and a officials make clear that this is the
prism through which Caspian politics
diplomatic endeavor. are viewed. At a meeting in May, Am-
bassador Andrei Urnov, head of the
MID’s Caspian Working Group stated, “certain outside forces are trying to weaken
Russia’s position in the Caspian basin by driving a wedge” between Moscow and
the new littoral states.6 There could be no doubt that the United States was the
target of these remarks.
On April 21, 2000 the Russian Security Council discussed the Caspian.
According to Russian media reports, Putin stated:

We must understand that the interest of our partners in other countries—

Turkey, Great Britain, and the United States—toward the Caspian Sea is not
accidental. This is because we are not active. We must not turn the Caspian Sea
into yet another area of confrontation, no way. We just have to understand
that nothing will fall into our lap out of the blue, like manna from heaven.
This is a matter of competition and we must be competitive.7

The meeting also created a new post of special presidential representative for the
Caspian. Viktor Kaluzhny, the former minister of energy, was appointed to the
position and charged with enhancing Russia’s presence in the region. Since taking
over as Putin’s special representative, Kaluzhny has traveled to each of the littoral
states. One idea he has been promoting is a Center for Strategic Economic Plan-
ning for the Caspian to facilitate joint exploitation of the sea’s energy resources.
In a recent interview, Kaluzhny stated with regard to the Center: “We must now
concentrate everything in the same hands. It must not be an economic but an
advisory body co-founded by the five states.” He added that “intensive steps are
expected from Russia in order to resolve the existing problems.”8 A second is a
new proposal for joint development of disputed fields. Both proposals contain
echoes of Moscow’s initial stance on the Caspian: agreement by all the littoral
states to any deals. By the same token, the bid for joint exploitation of disputed
regions would garner Moscow a role in an area in the northern Caspian that is
claimed by both Russia and Kazakhstan. This concerted Russian lobbying effort

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 Caspian Geopolitics: The View from Moscow

coincided with the publication of the new Russian foreign policy concept, which
contains clear references to the Caspian.

Serious emphasis will be made on the development of economic cooperation,

including the creation of a free-trade zone and implementation of programs
for joint, rational use of natural resources. Specifically, Russia will work for
such a zone in the Caspian Sea, enabling the littoral states to develop mutually
advantageous cooperation. Caspian states would use the region’s resources on a
fair basis by taking into account the legitimate interests of one another.9

Equally important, the concept gives voice to the idea that the reassertion
of Russian influence in the Caspian is both a commercial and a diplomatic en-
deavor. It reads: “Russia intends to steer a purposeful course for turning it [the
Caspian] into a zone of peace, stability, and good neighborliness, something that
will help advance Russian economic interests, including in the matter of the choice
of routes for important energy flows.”10
Putin seems to understand that he needs to bring Russia’s economic and
geopolitical interests together. He stated at the April Security Council meeting:
“The key issue in this sense is the balance of interests of the state and mineral
resource companies. We must realize the efforts of the state alone will not be
enough for implanting the Russian companies there.”11 To that end and clearly
encouraged by the Kremlin, the Russian oil companies LUKoil and Yukos teamed
up with the natural gas company Gazprom to form the Caspian Oil Company. In
a press conference to announce the new company, LUKoil’s first vice president,
Ravil Maganov, stated that the new company would “help Russia strengthen its
stand in the region.”12
Of course, the question remains how effective Russia’s policy can really be.
Thus far, Russia has had an exceptionally difficult time in persuading the other
littoral states to adopt any of its policies. All rejected the idea of the Center for
Strategic Economic Planning and have been silent on the proposal for joint ex-
ploitation of disputed sites. By the same token, Russian diplomats have found a
receptive audience in the other formerly Soviet littoral states. Putin or his emis-
saries have visited all of the littoral states. The former Soviet republics remain
wary, however, of Russia’s other policy—such as the manipulation of the Nagorno-
Karabakh conflict, charges against Azerbaijan and Georgia that they are harbor-
ing Chechen fighters, and the slow pace of negotiations over the final disposition
of Russian weaponry in Georgia.
Of particular importance will be Russia’s relationship with Iran. The com-
munity of interests between Russia and Iran—including the export of sophisti-
cated nuclear technology to Teheran—is derived at least in part from their mu-
tual exclusion from the Caspian by the Baku-Ceyhan pipeline. They had until the

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summer of 2000 taken common stands on the division of the Caspian in opposi-
tion to the other littoral states. There has been some attenuation of the relation-
ship over the past few months: Russia’s acceptance of the sectoral division of the
Caspian has left Iran as the odd man out. Now Teheran is demanding 20 percent
share of Caspian resources-seemingly more than the other littoral states are will-
ing to concede. One can only speculate on the impact of a change in U.S. policy
that would allow Iranian participation in Caspian export schemes. This is the
solution that the oil companies prefer: It is cheaper and more easily realized, but
it is thus far politically unacceptable to Washington. Iranian inclusion in U.S.
pipeline proposals might easily put a damper on Russia’s interest in military and
nuclear sales to Iran. It would also facilitate greater flexibility for Turkmenistan,
Kazakhstan, and Azerbaijan and they search for ways out of Moscow’s shadow.
There can be no doubt that Putin will at least in the short to medium term
continue to focus Russian attention on the Caspian. From Moscow’s perspective,
the stakes are high—oil, natural gas, and an historic sphere of influence. It would
also seem that in an era of diminished Russian capabilities, Moscow is concen-
trating its efforts on areas closer to home. Influential foreign policy analyst Sergei
Karaganov has urged Russia to do just that.13 At a recent meeting of the Russian
Security Council’s Interdepartmental Commission on the Problems of the CIS,
deputy Security Council secretary, Oleg Chernov, listed the “program of action to
ensure Russia’s strategic interests in the Caspian region” among the commission’s
priorities.14
Yet, it is also clear that until now Moscow’s policies have been disjointed and
ineffective. If nothing else, Putin, by merging economic and geopolitical concerns,
might just succeed in bringing a degree of coherence to Russia’s Caspian policy as it
seeks to ensure a role for itself in a region that it regards as its own. WA

Notes

1. Interfax, 14 October 1994, in FBIS SOV 94 200 (17 October 1994): 67–68.
2. For example, see the details in Dan Morgan and David B. Ottaway, “Vast Kazakh Field Stirs
US-Russian Rivalry,” Washington Post, 6 October 1998, A1.
3. Oksana Polishuk, “Primakov and Chevron President discuss Caspian oil main,” ITAR-TASS,
24 January 1998.
4. Michael Lelyveld, “Turkmenistan: Economy Facing Brighter Prospects,” RFE/RL Report on
the Caucasus and Central Asia, 10 January 2000.
5. See the discussion in Jamestown Foundation Monitor, VI, no. 35 (18 February 2000).
6. Harry Dunphy, “Russia Wants Fair Oil Competition,” Associated Press, 17 May 2000, 9:41
P.M.
7. Russian Public Television, Moscow, 21 April 2000 from BBC Monitoring
8. ITAR-TASS, 28 September 2000, as reported by BBC Monitoring.
9. “The Foreign Policy Concept of the Russian Federation,” approved by the President of the
Russian Federation, V. Putin, 28 June 2000. From the Russian Foreign Ministry Website.

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<www.mid.ru>. Italics added.

10. “The Foreign Policy Concept of the Russian Federation,” 28 June 2000.
11. Prime-Tass News Wire, 21 April 2000.
12. “Relations: Russian Trio Targets Caspian Riches,” Energy Intelligence Group, 27 July 2000
from ISI Emerging Markets database.
13. See, for example, Sergei Karaganov, “What is Russia to Do? What is to be Done with
Russia” Moscow News, 8 March 2000, from ISI Emerging Markets database. This is an English
translation of a piece that appeared in Moskovskiye Novosti the previous week.
14. ITAR-TASS, 4 October 2000, as reported by BBC Monitoring.

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