"INTELLIGENCE BRIEF: IRAN OFFERS ENERGY SUPPLIES TO AZERBAIJAN"

The Power and Interest News Report (PINR
Dec 5 2006

In late November, Unified Energy Systems, Russia’s electricity
monopoly, announced that it would cut electricity supplies to
Azerbaijan from 300 megawatts to 60 megawatts in 2007. Just prior to
the announcement, Russian gas giant Gazprom announced its plan to cut
gas supplies to Azerbaijan and to raise the price of those supplies
about 13 percent. Officially, Moscow made these decisions because
Azerbaijan’s gas production rose during recent months and the country
is better able to cover its energy needs domestically. Unofficially,
however, it is likely that the decision stems from Russia’s goal of
obstructing Azeri attempts to sell more gas to Georgia.

Shortly after the Russian announcement, Baku’s government announced
that it had reached an agreement with Iran over electricity supplies.

The agreement states that there will be a mutual exchange of energy
during alternating consumption peak seasons. Additionally, the two
countries agreed to build two hydropower stations on both sides of the
Araz River. Azerbaijan’s president also announced the possibility that
oil shipments along the Baku-Novorossiisk pipeline could be reduced,
diverting oil toward different terminals such as the Georgian Black
Sea ports or the terminals on the Turkish Mediterranean coast.

Even though this development does not mean the beginning of a new
alliance, the Iranian-Azeri deal is remarkable. It is a clear example
of how the geometry of geopolitical interests in the Caucasus is
fluid and complex. By replacing Russia in the energy sphere, Tehran
wants to demonstrate its will to use its energy resources to play a
more decisive role in the Caucasus and in Central Asia. This posture
could have several effects on the political balance in the region.

For one, the Iranian move demonstrates its complex relations with
Russia. While often their interests run parallel with each other,
they still run on separate tracks. Iran delivers gas to Georgia,
for example, even though the latter country is emerging as a key pawn
for U.S. interests in the region. In the same way, Tehran will sell
electricity and gas to Azerbaijan to send a signal to its northern
neighbors that it has the capability to help those countries with
their energy needs.

Iran’s agreement with Baku represents a paradigmatic case of pragmatism
in Iranian foreign policy. During the past few years, Baku and Tehran
have had many disputes: territorial division of the Caspian Sea, whose
southern seabed is contested between Iran and Azerbaijan; the issue of
ethnic Azeri irredentism within Iran, in which Azeris represent the
largest ethnic minority; the proximity of Iran with Armenia over the
Nagorno-Karabakh conflict; and the substantial pro-Western attitude
taken by Baku since the disintegration of the Soviet Union. These
are all elements of tension between the two countries. Such factors,
however, do not prevent deals in particular fields that serve their
short-term interests.

Notwithstanding the support of Russia for Iran’s nuclear research
program and their common interests in the Middle East, Tehran wants
to play a more independent role in the Caucasus and in Central Asia.

Therefore, it wants to promote its role as an energy seller to better
serve its geopolitical and security interests near its northern
boundaries, even though these moves could damage Russia’s regional
posture. The Iranian-Azeri energy agreement is an example of this
approach. It does not represent the beginning of a new, different
Iranian foreign policy, but rather it is a further signal of Iran’s
pragmatism in international affairs.

The Power and Interest News Report (PINR) is an independent
organization that utilizes open source intelligence to provide conflict
analysis services in the context of international relations.

PINR approaches a subject based upon the powers and interests
involved, leaving the moral judgments to the reader. This report
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