Key Takeaways:
· Russian President Vladimir Putin’s visit to Azerbaijan resulted in several bilateral agreements to expand transport infrastructure and a joint venture to build tankers for oil and petroleum products. The agreements indicate deepening economic and strategic ties between Russia and Azerbaijan.
· Azerbaijan is positioning itself as a key intermediary in the regional energy market, balancing relations with the West and Russia. This includes its intention to join BRICS and its hosting of COP29, aligning with a broader strategy of trying to appeal to Western governments while maintaining strong ties with Russia.
· With the expiry of the Russia-Ukraine gas transit agreement (on December 31st, 2024) approaching, Azerbaijan looks to play a key role in facilitating a solution and supplying natural gas to the EU. However, KSG assesses that the agreement is unlikely to be renewed. Therefore, the EU is highly likely to seek natural gas imports from a greater diversity of suppliers in the long term, enhancing the bloc’s energy security and fettering Russian leverage.
Russian President Vladimir Putin visited Azerbaijan on the 18th and 19th of August, marking his first visit to Russia’s neighbour since 2018. The leaders finalised multiple bilateral agreements, and Putin offered Russian assistance in mediating a peace treaty between Armenia and Azerbaijan. In a closing statement, both presidents expressed their intent to increase economic cooperation by expanding the capacity of rail and road transport between Russia and Azerbaijan (as part of the North-South corridor) and announcing a joint venture to build tankers to transport oil and petroleum products. Following the visit, Azerbaijan formally applied to join the BRICS group of emerging economies.
The two-day visit is one of Putin’s many attempts to forge new economic alliances to mitigate growing economic isolation as a result of Western sanctions. Closer economic cooperation with Azerbaijan is highly likely a symptom of Russia’s ongoing effort to circumvent Western sanctions and access new markets; developing the North-South corridor and growing its fleet of tankers shows Moscow fostering alternative markets and expanding its capacity for exporting hydrocarbons.
Challenges to Continued Gas Transit through Ukraine
Russia is attempting to maintain demand for its pipeline gas among European countries that are relatively sympathetic to Moscow and dependent on gas to guarantee their energy supply. The imminent end of the Russia-Ukraine gas transit agreement on the 31st of December 2024 is a significant challenge to these efforts. Whether the agreement is renewed, and if so, in what capacity, will also significantly impact the makeup of European energy imports and signal a long-term strategy on energy security, as the safety and operability of Ukrainian gas transit infrastructure depends on the continuous flow of gas. If the agreement is not renewed, the gas transit route will highly likely cease carrying natural gas for the foreseeable future. Despite these consequences, a renewal of the agreement is highly unlikely, given that both the EU and Ukraine have shown no willingness to negotiate a renewal, and Ukraine currently controls the crucial gas transit point in Sudzha, which complicates Russia’s negotiating position.
However, all stakeholders have at least some interest in pursuing an alternative solution that would ensure sustained gas flow from Russia to Europe via Ukraine. Russia has both a commercial interest in maximising the chances for a return of Russian pipeline gas to Europe, and a political interest in maintaining customers within the EU. Ukraine seeks to maintain its gas transit infrastructure, which is only possible through its continued use. Its operation partially incentivises the EU to continue supporting Ukraine’s defence and deters Russia from further escalating attacks. While the EU ultimately aims to stop the import of Russian pipeline gas, Austria (and to some extent Slovakia) is still dependent on Russian gas transited through Ukraine. Thus, there is a reasonable likelihood that the EU might agree to an alternative gas transit solution that supports Ukraine, even though the bloc is highly likely to withstand a cessation of Russian gas imports from Ukraine.
In the likely case the current transit agreement is not renewed, the most prominent alternative proposal would see European countries buy more gas from Azerbaijan instead of Russia. However, the implementation of that plan is incredibly challenging due to limited capacity in the Southern Gas Corridor and Azerbaijan’s ambition to both meet growing domestic demand while trying to fulfil an already existing pledge to increase exports to Europe. Moreover, the prospects for shipping Azerbaijani gas to the EU through Ukrainian gas transit infrastructure are also problematic, as the gas would have to pass through Russia’s gas transit infrastructure before reaching Ukraine, meaning Russia would lose export volume and become a mere facilitator of Azerbaijani exports. Both Azerbaijan’s limited export capacity and problems associated with transport would likely require a customer swap between Russia and Azerbaijan, which would effectively mean a continuation of Russian gas supplies to Europe, labelled as Azerbaijani gas.
As its role in potential alternative agreements illustrates, Azerbaijan is trying to position itself as an intermediary that can trade and engage with both Russia and the West. This multi-vector approach is exemplified by climate issues featuring visibly during Putin’s visit, and Baku hosting the upcoming COP29 conference in November in an effort to present itself as a viable trading partner for the EU. Simultaneously, Azerbaijan has requested to join BRICS, aligning itself with Russia and China.
Looking forward
· Azerbaijan is highly likely to continue pursuing a strategy that will position it as an economic intermediary between the West, Russia, and BRICS more broadly, exploiting opportunities to trade with both blocs simultaneously. Azerbaijan has a specific interest in securing technological and financial support from Western companies to develop its natural resource extraction capacity; therefore, Azerbaijan is highly likely to continue courting the West (and providing gas to the EU) while deepening ties with Russia and BRICS.
· Growing economic cooperation between Russia and Azerbaijan is likely to expand existing trade corridors and increase tankers used to export Russian hydrocarbons. However, Russian economic involvement is highly unlikely to facilitate the construction of a new pipeline infrastructure between Azerbaijan and Russia, largely given Russia’s focus on the war in Ukraine and associated economic pressures, which makes the delivery of such a large project unrealistic.
· KSG considers an arrangement renewing or substituting the Russia-Ukraine gas transit agreement unlikely. While it is possible that the EU agrees to an alternative agreement to support Ukraine, the current most plausible substitute would contradict its commitment to phase out Russian fossil fuel imports. Moscow has the option to reach its main goal of supplying gas to the European market using transit routes through Türkiye and is unlikely to offer its infrastructure to facilitate Azerbaijani exports. An end to the agreement would likely only affect importers of Russian gas, such as Austria and Slovakia, in the short-term. In the long-term, not using the transit infrastructure significantly decreases the likelihood of a return of Russian pipeline gas transported to the European market via Ukraine, increasing the demand for alternative supply either through other pipelines or by buying LNG; deterioration of the transit infrastructure will make it increasingly complicated to use Ukrainian gas storage for European customers.
· While European countries have a sustained interest in buying gas from Azerbaijan and keeping the transit infrastructure through Ukraine operational, their reluctance to commit to long-term contracts against the backdrop of climate targets will most likely hinder the ability of Azerbaijan to gain the necessary investment for exploration in the Caspian Sea and upgrading transport infrastructure to Europe. Türkiye, looking to establish itself as the primary transit route to Europe, might provide an alternative source of investment to increase the capacity of the Southern Corridor.