Intelligence Brief: Iran Offers Energy Supplies to Azerbaijan

Posted in Iran | 05-Dec-06

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.

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