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Apr 26, 2006 | 01:21 GMT

Azerbaijan: A Pipeline to Profits and Territorial Tension

Summary
As the Baku-Tbilisi-Ceyhan oil pipeline moves toward operational status, the Azerbaijani government stands to make a lot of money very quickly. Most will likely go to President Ilham Aliyev, his clan and the country's defense budget (probably in that order). Meanwhile, hostilities between Azerbaijan and Armenia, which occupies the Nagorno-Karabakh territory within Azerbaijan, will likely escalate and eventually erupt into renewed conflict.
The Baku-Tbilisi-Ceyhan (BTC) pipeline, which will bring oil from the Caspian Sea to the Mediterranean, is scheduled to become operational within two months. The income the pipeline will bring to Azerbaijan, along with other energy projects, will reach approximately $2.8 billion by the end of 2006. Though much of the money will go to President Ilham Aliyev and his clan, the defense budget will benefit as well.
Any increase in military spending has been dismissed by Baku as purely defensive, but the longtime ethnic and territorial conflict within Azerbaijan suggests a future arms buildup and increasing hostilities with the Armenian-populated Nagorno-Karabakh enclave. During a bloody conflict in the early 1990s, Armenians gained control not only of Nagorno-Karabakh but also of a buffer zone and corridor to Armenia. A tenuous cease-fire has been in place since 1994. However, there has been some shooting over the Line of Control, and the atmosphere is palpably tense. A recent meeting in France between the presidents of Azerbaijan and Armenia, as expected, brought the two no closer to a solution. With the influx of cash, Azerbaijan might purchase armaments and vehicles from France, the United States or the former Warsaw Pact countries, and the Azerbaijani military could receive instruction from its U.S. ally. While the intensity of Armenian nationalism — and the inferiority of the Azerbaijani military — has usually made up for the smaller Armenian defense budget, the obvious imbalance in funding will likely shift the equilibrium. In 2005, Armenia's national budget was $930.7 million, while the Azerbaijani national budget was $2.986 billion. Azerbaijani defense expenditures in 2005 reached approximately $300 million, according to numbers from the Jamestown Foundation, and Aliyev has been quoted as saying that Azerbaijan's defense budget will soon match the entire national budget of Armenia. While Armenia's defense budget for 2005 was $100 million, it will increase in 2006 to $160 million. Upon completion, the BTC pipeline, along with the already-operational Baku-Supsa oil pipeline and the South Caucasus (Shah Deniz) natural gas pipeline (which comes online in the fourth quarter of 2006), will be the major contributor to the Azerbaijani economy. And the BTC is ramping up quickly — currently, the pipeline fill is complete through Azerbaijan and Georgia and is in the final stages in Turkey. In 2007, production is expected to increase significantly as new platforms come online in the Caspian Sea. The BTC will reach its full capacity of 1 million barrels per day as early as 2008. Without even including projected income from the Shah Deniz natural gas pipeline, this will result in a dramatic increase in income for the Azerbaijani economy. Although it looks as if an Azerbaijani attempt to incorporate the secessionist enclave is imminent, there are several factors that could temper any aggressive move. Not the least of these are the many large multinational corporations that have set up camp in the country, running the numerous energy operations around Baku. Anything that could jeopardize the extraction operations or the pipelines will not be looked upon kindly by the people who brought Azerbaijan all this income. There are other vulnerabilities that could be exploited. The BTC and the South Caucasus pipeline both come close to Nagorno-Karabakh and secessionist regions within neighboring Georgia. Sabotage is quite possible on the 1,094-mile-long pipeline, despite high security. Moreover, all secessionists in the region are supported by Russia in one way or another, and the patron might decide to cast a complacent eye toward any sabotage, since the BTC circumvents Russia's own pipeline network. The Armenians have shown they are willing to fight. They are also quite politically powerful — the Armenian community in the United States, which outnumbers Armenians living in their own country, has an influential lobby in Washington. The delicate balance of the U.S. alliance with Azerbaijan and U.S. support for Armenia will cause Washington to do everything within its means to prevent the remilitarization of the conflict. However, nothing can prevent the escalation of an age-old blood feud in a region where history means everything. Any quarrel can be escalated to trigger renewed bloodshed. Slowly but surely, the conflict will again come to a head, but this time, the Azerbaijani side will be better-prepared, better-armed and better-financed, gradually shifting the balance to its side.
Stratfor
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Azerbaijan: A Pipeline to Profits and Territorial Tension
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