ANALYSIS: TURKISH-ARMENIAN THAW AND ENERGY
By John C.K. Daly

UPI Energy
April 27, 2009 Monday 6:22 PM EST

During the past year, at a time of record-high energy prices,
many European officials have decried what they see as Russia’s
state-owned Gazprom natural gas company being used as a tool to
promote the Kremlin’s policies by indulging in hardball quot;pipeline
politics.quot; Gazprom’s favored tool is variable prices being used
to send political signals to recalcitrant former Soviet republics
such as Ukraine and Georgia, with the pressure ramping up in direct
proportion to a government’s inclination to look westward.

Of all the former Soviet republics, Armenia receives the most
preferential pricing; effective April 1, Armenia pays a mere $154 per
thousand cubic meters for Russian gas. In contrast, three months ago
Gazprom Deputy Chairman Alexander Medvedev noted, in reference to
Gazprom’s intention to ramp up Ukraine’s cost from $179 per tcm to
$250 per tcm, quot;The rest of Europe pays more than $400 for each
thousand cubic meters of gas it gets from Russia.quot;

However, great political changes are moving in the southern Caucasus
under one of the region’s last quot;frozen conflicts,quot; which may
well spell the end for Armenia’s cozy arrangement for subsidized
Russian gas. The longstanding triangular dispute between Turkey,
Azerbaijan and Armenia over the 1988-1994 Azeri-Armenian conflict,
during which Turkey in 1993 closed its border with Armenia in a
show of solidarity with Baku, has recently seen Ankara and Yerevan
tentatively moving toward normalizing relations.

On April 24, the Turkish and Armenian foreign ministries announced,
quot;The two parties have achieved tangible progress and mutual
understanding in this process, and they have agreed on a comprehensive
framework for the normalization of their bilateral relations.quot;
After the implosion of the Soviet Union, Turkey was the first
country to recognize Armenia’s independence, but the positive
relations were short-lived, and they were subsequently subsumed
into the Azeri-Armenian conflict. After the Armenian-Turkish road
map was announced, the Azerbaijani Foreign Ministry said, quot;The
normalization of Turkish-Armenian relations must proceed in parallel
with the withdrawal of Armenian troops from the occupied lands of
Azerbaijan.quot;

Should the framework result in full normalization of relations, it will
represent yet another turn in the kaleidoscope of Caucasian politics,
and Baku, worried about potential abandonment by its erstwhile ally
Turkey, is making its displeasure widely known. If the discussions
result in normalization, then it will prove a major step toward
resolving a 20-year-old dispute, the longest remaining quot;frozen
conflictquot; on former Soviet territory, which predates the collapse
of the Soviet Union by three years.

A shooting war between Armenia and Azerbaijan broke out in February
1988 as both nations claimed the Nagorno-Karabakh enclave, then
administered by Baku. By May 1994, when Azerbaijan and Armenia signed a
cease-fire agreement ending active hostilities, the conflict had caused
thousands of casualties, created hundreds of thousands of refugees on
both sides and left Armenian armed forces occupying swaths of Azeri
territory, including Nagorno-Karabakh and seven neighboring districts.

The conflict was used by Russia as a bargaining chip to retain
influence in the Caucasus, liberated from Soviet control by the 1991
collapse of the Soviet Union. As both Georgia and rising petro-state
Azerbaijan drifted out from under Moscow’s control, Armenia by default
became Russia’s major Caucasian ally. A thaw between Turkey and Armenia
would recast this strategic reality, but, as with most issues in the
Caucasus, they remain complex as Azerbaijan remains deeply unhappy
with the recent Turkish-Armenian rapprochement.

Last but hardly least, a normalization of Turkish-Armenian relations,
if Azerbaijan could be mollified, could have a dramatic impact on any
potential future export routes for the rising volumes of Caspian oil
and natural gas, as routes transiting Armenia would be far shorter
and less expensive than those developed up to now.

The crown jewel of Western investment in the Caspian is the $3.6
billion, 1,092-mile, 1 million-barrel-per-day Baku-Tbilisi-Ceyhan
pipeline, which became operational in May 1996. BTC transits
high-quality Azeri crude from Azerbaijan’s Caspian offshore
Azeri-Chirag-Guneshli fields to Turkey’s deepwater Mediterranean
terminus at Ceyhan.

Given the state of relations between Armenia and Azerbaijan at the
time of BTC’s construction, Armenia was excluded from hosting the
pipeline, but Azerbaijan in turn was forced to pay a price for its
unwillingness to negotiate, as BTC was forced to take a lengthy
detour around Armenia, adding substantially to the project’s cost
and construction delays.

The pipeline’s contorted geography dovetailed nicely with Washington’s
support for multiple pipelines, so long as they avoided both Russia
and Iran. BTC proved a financial windfall for both producing nation
Azerbaijan and transit nations Georgia and Turkey. In the first half
of 2007, BTC revenues boosted Azerbaijan’s gross domestic product
growth to an astounding 35 percent, while Georgia received annual
transit fees averaging $62.5 million. Given that BTC covered 155
miles of Georgian territory but 669 miles across Turkey, Ankara’s
share of transit revenues was projected at approximately $200 million
per year. Yerevan could only sigh and watch from the sidelines.

Not that Western pipeline schemes have ended; following the recent
Gazprom-Turkmenistan dispute, interest is reviving in a Trans-Caspian
Pipeline from Turkmenistan passing through Azerbaijan. While TCP was
initially proposed as running through Georgia, a thaw in Turkish and
Armenian relations could divert it southward, cutting many miles and
millions of dollars off construction costs.

Such a change would not be without political risk, however. The BTC
could afford to divert around Armenia since it was not, in any military
sense, a significant threat to the project or the states involved,
but in the case of the TCP, it is most unlikely that either Russia
or Iran would stand idly by while the TCP was built.

Azeri displeasure with quot;blowbackquot; from the discussions
is already evident. Gazprom is on the verge of new deals with
Azerbaijan that promise to bring Azerbaijani gas back into Russian
pipelines, specifically its envisioned South Stream pipeline, which, if
constructed, would transit under the Black Sea from Russia to Bulgaria
and then split into two pipelines — one through the Mediterranean
to Italy, the other through Serbia and Hungary to Austria.

Not wishing to be left out in the cold, Azerbaijani and Armenian
Presidents Ilham Aliyev and Serzh Sargsyan have agreed to meet in
Prague, Czech Republic, on May 7 to continue the direct negotiations
to settle the Nagorno-Karabakh conflict.

Russia’s reaction to the Turkish-Armenian thaw? For those reading
ulterior political motives into Gazprom policies, ArmRosGazprom
spokeswoman Shushan Sardaryan announced last week that gas supplies
to Armenia would be halted from April 23 to 26 for quot;maintenance
work.quot;

Baku is not above sending an energy signal to Ankara, either, as
Azerbaijan decided to the raise the price of the natural gas supplied
to Turkey as of April 15. Turkish Prime Minister Recep Tayyip Erdogan
responded that for Baku to raise natural gas prices when oil prices
were falling was quot;bizarre.quot;

Throw in Armenia’s insistence that Turkey recognize the events in
eastern Anatolia in 1915 as genocide, and the adjective seemingly best
suited for prospects for a final pacification of the southern Caucasus,
despite its energy potential, would seem to be quot;murky.quot; As
geopolitical alliances thaw and shift, the only apparent certainty
is that Caspian energy producers will signal their displeasure to
neighboring client and transit nations with more quot;bizarrequot;
behavior.