Guest Column: America's Ostensible Ally in Baku

Next week, Dmitry Medvedev travels to Japan for his first G-8 summit as president of Russia. But before that, he is on a three-day trip to Azerbaijan and Turkmenistan. If the West hasn't taken note of that, it should -- Vladimir Putin and now Medvedev have neatly cemented strong relationships with the oil- and natural gas-rich Caspian countries of Kazakhstan, Azerbaijan and Turkmenistan, nations that during the 1990s the U.S. sought to bring into the Western fold. These countries continue to be strategically important, both because of the tight energy supply, and because of the energy independence they can provide to Europe. In an email exchange, my friend Tom de Waal -- co-author of the classic Chechnya, and author of the trenchant Black Garden -- told me that in The Oil and the Glory I overplayed Azerbaijan's alienation from Russia. His argument was compelling, and I asked him to expand it into a guest column. The result follows.

By Tom de Waal

Russian President Dmitry Medvedev arrives in Baku today.

In the West, there is a widespread assumption that Azerbaijan is an ally, and in the same anti-Russian camp as Georgia. I think that is a misperception. Azerbaijan is now developing a foreign policy of “complementarity,” which used to be the aspiration of the Armenians – be on good terms with everybody and get the best out of everybody. The model here is Kazakhstan, rather than Georgia.

Actually this was always the case. I suspect the Azerbaijanis have always been good at delivering the message in Washington, “You are our main ally and friend” and then going to Moscow and repeating the same refrain. Heydar Aliyev, the first post-Soviet Azerbaijani president (and father of the current president), was careful to keep good relations with Russia; before he talked seriously to Western partners about the non-Russian Baku-Ceyhan oil pipeline, he got a Russian oil pipeline in place – the so-called Early Oil line from Baku to Novorossiisk. Aliyev also wanted to give the Iranians a stake in the offshore Azerbaijani oil consortium, known as AIOC, but was of course over-ruled by the Americans. Aliyev kept his good contacts in Moscow, but was held back by Boris Yeltsin’s personal antipathy to him -- although he did successfully bury the hatchet with another Gorbachev-era reformer who had been his enemy in the Politburo, Eduard Shevardnadze.

Once Vladimir Putin came to power, Aliyev made it a strategic priority to rebuild relations with Russia. Aliyev was very successfully at charming the Putin Kremlin, and his daughter, Sevil, made a useful marriage with a well-connected Moscow Azerbaijani, Mahmud Mammadquliyev. The elite-level relationship has deepened under his son, Ilham Aliyev.

Medvedev, with his background as former chairman of Gazprom, the Russian natural gas giant, now speaks the same language of money and energy as the Azerbaijani elite. They must find it a relief not to have to bother with all that talk of democratization and human rights that enters conversations with Western politicians.

The Georgians enjoy the access they get in Washington but I wonder if they secretly envy the lobbying power in Russia of people like Vagit Alekperov, the Azerbaijani chairman of Lukoil, who have made sure that Azerbaijan doesn’t suffer the kind of boycotts, visa bans and border closures that the Georgians do.

The price for Azerbaijan is that it will not pursue NATO membership, which would alienate Russia, but I believe that is not a big priority for the country’s elite. The Azerbaijanis now feel secure enough because of their vast and growing oil wealth. Moreover, NATO standardization would also threaten to bring unwelcome transparency to the notoriously corrupt Azerbaijani armed forces.

This is not a love-match but a marriage of interests—as indeed is the Azerbaijani-U.S. relationship. Both Baku and Moscow are still capable of actions that hurt ordinary people:

In Azerbaijan, the authorities have needlessly banned the re-broadcasting of Russian television channels, barring Russian-speaking pensioners who cannot afford satellite television from their only form of entertainment; in Russia, the authorities have played to a xenophobic constituency by stopping Azeris from trading at markets. The newspaper commentariats in both countries continue to exchange hostile remarks, and men like former Azeri presidential adviser Vafa Guluzade continue to blame all of the country’s ills on the Russians.

But on an elite level, there are plenty of common interests. And consider also an opinion poll conducted by Azerbaijani political analyst Rasim Musabekov in Azerbaijan in February 2008.

Asked to name the three nations friendliest to Azerbaijan, 89% of Musabekov’s respondents unsurprisingly named Turkey. But Russia came in second place with a 20% vote of approval, well ahead of the United States, which was named by 5.7%, just behind Iran and on the same level as Ukraine.

This suggests that, on the street level, Russia and Russians remain popular with ordinary Azeris. They are still on the same wavelength in a way that Americans or Europeans will never be.

More on the Baku Bluff

A friend has passed along a fascinating speech I'd missed early this month by Bill Schrader, who runs BP's operations in Azerbaijan. In it, Schrader says that BP and its Big Oil partners in Baku can pump almost 70% more oil from their offshore Caspian fields there than they previously thought, or an increase of 3.6 billion barrels. The total now will be close to 9 billion barrels.

At a time of scarce positive news from the world's oilfields, Schrader doesn't imply the onset of a flood of new oil to the market. But he does mean that Baku's 1 million-barrel-a-day production will last longer -- it was thought that this peak would terminate in five years; now it can be extended for another six years, through 2019. With North Sea and Alaskan oil on the decline, that's a bit of a cushion. I don't have a link to the June 4 speech itself, but here is Platt's coverage if it.

Yet, for the O and G audience, I couldn't help shaking my head. You will recall that, back in the 1990s, when recalcitrant BP was under pressure from Washington and Azerbaijan to build a non-Russian pipeline from Baku to the Mediterranean, the company replied that it would love to, but that there simply wasn't enough oil.

Why, then-BP representative Terry Adams said again and again, there are just 4 billion barrels of oil offshore, and at least 6 billion would be necessary to economically warrant the proposed Baku-Ceyhan pipeline. That naturally was before BP discovered that it needed Washington's approval to buy Arco. Then BP said: Did we say we needed 6 billion barrels? We meant 5 billion! And what do you know? We have found another billion barrels offshore! How do you like that? So let's go ahead and build that pipeline! The 1,000-mile line went live two years ago, and ships a million barrels of oil a day to the world market.

There are multiple interpretations of that timely shift. My own is that both sides exaggerated -- Washington elevated the volume of oil in order to promote the region; the oil companies under-estimated, partly to get a better transit fee deal from Georgia and Turkey.

As for the current energy environment, the Shepherd speech I think informs the current panic-stricken atmosphere. All the information isn't necessarily out there.

Photo: CarbonNYC

Rights: Creative Commons

Baku oil legend Nikolai Baibakov Dies at 98

As readers of O and G know, many historians think the second half of the 20^th century would have been dramatically different had Hitler’s troops reached Baku. Hitler needed Baku’s oil to fuel his war machine, and when his army failed to penetrate the Caucasus after its 1941 invasion of the Soviet Union, it was the beginning of the end for Nazi-era Germany.

Just in case Hitler’s troops were not stopped before they reached Baku, Stalin entrusted one man with making sure that the Nazis could not avail of the city’s legendary oil. This man, who ordered the fields plugged up with cement, was Nikolai Baibakov, who died yesterday in Moscow at the age of 98.

Baibakov – Stalin’s oil commissar and for two decades the director of Soviet economic planning – was born in the Baku oilfield of Sabunchi; his father had worked in the Baku oilfields before him. So he knew intuitively what Stalin was so worked up about. A superlatively colorful actor in the biggest events of recent history, Baibakov recalled with black humor some of his encounters with the murderous Stalin.

In a 1998 interview with The Petroleum Economist, Baibakov said Stalin pointed two fingers at his head and said, “If you fail to stop the Germans getting our oil, you will be shot. And when we have thrown the invader out, if we cannot restart production, we will shoot you again.”

Those were the tenor of the times. Oil engineers from Baku, accused of crimes such as being the relative of the Czarist-era oil barons, were loaded into railcars with their families like cattle and shipped to Siberia to start new oilfields.

A New York Times obituary quotes Baibakov's reply as to whether his fellow oil officials were shot during those days: “Yes, several.”

Then, as now, Russia’s entire economy was dependent on oil and the revenue from oil exports

What's the Book About?

Shawn Miller of Critical Compendium had a slew of questions about The Oil and the Glory. Here is his interview.

Becoming Like the Soviets - Part II

While researching The Oil and the Glory, an amusing story I heard again and again from the oilmen and diplomats who found themselves on the Caspian Sea was the ubiquity of eavesdropping. As they sought their lucrative deals or carried out statesmanship, they would find KGB microphones hidden behind portraits in their hotel rooms, and dug into the walls of their offices. Somehow the Azeris were able to surveil them even in five-star hotels all the way in London.

The Westerners described a resultant atmosphere that was paranoid, poisonous and wholly over the top.

Once, two Britons in Baku – BP’s Terry Adams and Ambassador Thomas Young – had something confidential to discuss, too confidential to risk being overheard indoors, and went for a rainy walk along the shoreline. Their privacy seemed assured — few cars or people were braving the nasty weather. Just then, a small Soviet-made Lada stopped fifty yards ahead of them, and a sheepdog with a big collar jumped out. The dog trailed after the men, making them suspicious. “When the dog’s tail would go up, Tom would say, ‘Careful, it must be transmitting,’” Adams told me. As bizarre as it sounded, the story took on a life of its own, and it helped convince many other oilmen that most if not all conversations were being recorded.

The foreigners began to treat it as a game. They would tailor their conversations with the express purpose of manipulating government negotiators. Some of the locals themselves tried to confound the bugging by dropping crumpled-up notes on the floor to caution foreign guests to watch their mouths.

Meanwhile the foreigners resorted to code names in hopes of confusing those listening in. One member of Azerbaijan’s loyal opposition was dubbed “Loyal Avis” by the Pennzoil team. Another who wore alligator shoes became “the Big Bopper,” and a third who owned a house near the president’s was known as “the Landlord.” A fourth who was in the local KGB was “the Lamp.”

As we see in today’s New York Times, the Bush administration set off on an eavesdropping campaign within two weeks of taking office, in February 2001. We can debate the merits of becoming like the Soviets, which I've blogged about previously.

But I can tell you after years of researching the KGB experience that in this respect it doesn’t work, at least not for long – shrewd listenees find a way to disguise their conversations, and conduct their genuine ones out of earshot.

Photo: tanakawho
Rights: Creative Commons

Trouble in Tbilisi

I've been exchanging messages with a friend in Tbilisi, the Georgian capital that until recently was the scene of bloody protests. He predicts political crisis almost regardless of what President Mikheil Saakashvili does.

Remember that Georgia is the crucial crossing point of the East-West Caspian oil route.

Why is there nothing for Saakashvili to do? I quote my American friend:

"Poverty.
GDP per capital here is $3,900.
Russia's is $12,100.
Azerbaijan's is $7,500.
Armenia's is $5,500.
Enough said."

Saakashvili has done much in terms of curbing corruption and attracting foreign investment. But, in my friend's view, Russia's economic embargo has made it impossible to truly dent the country's post-Soviet poverty. "They've sunk to just above Tajikistan, Kyrgyzstan, Turkmenistan maybe, Moldova," he said.

So Saakashvili's opposition is bound to be in the streets regardless of the results of the snap January presidential elections.

Photo: Alexander Nitzsche
Rights: Creative Commons

Putin's Show: An Opening on the Caspian

Yesterday's Caspian Sea summit in Tehran was decidedly the Vladimir Putin show, but the ostensible common front oddly enough seems to have revealed an opening for a spoiler. The West ought to climb through.

The main news of course was the states' rejection of being used as a staging ground to attack Iran. That's a very real issue, as the word has been on the street for almost a year that U.S. offensive plans against Iran included possible land attacks from both Azerbaijan and Afghanistan. If true, it would be downright unneighborly not to go along with Putin's proposed declaration against such an attack; Azerbaijan's Ilham Aliyev specifically couldn't disrupt the bonhomie and say, "Sorry, fellas, but we have to punch Mahmoud's lights out."

Yet, given Russia's similar peacenik act in Serbia in 1999, Putin's reach for the moral high ground this time wasn't all that surprising.

The more interesting topic I think regarded the issue of controlling activities on the Caspian. In the guise of environmentalism, Russia has long urged that all five Caspian states be vested with a veto against any work on the sea by any of its neighbors.

The actual reason for Moscow's supposed concern for sturgeon and seals is control of the region's oil and natural gas -- as long as no pipeline is built across the sea, Kazakhstan and Turkmenistan are effectively bottled up, and subject to a Russian stranglehold on energy exports.

Tehran was no different. Putin told the other presidents, "Projects that may inflict serious environmental damage to the region cannot be implemented without prior discussion by all five Caspian nations." Read AP account.

Yet, according to the AP account, his fellow former Soviet leaders were noticeably non-commital on the topic. Kazakhstan's Nursultan Nazarbayev, for example, said only that "pipeline routes need to be coordinated with nations whose territory they cross." That logic would not preclude building a cross-sea line, say, from Turkmenistan to Azerbaijan, as long as both agreed.

Russia, of course, expresses no such ecological concern when it regards Nord-Stream, its natural gas pipeline project across the Baltic Sea.

This is a hunch, but it could be that Kazakhstan and Turkmenistan are a bit fed up with, and not a little suspicious over, Putin's turns of glad-handing and subtle pressure to consign their energy future -- and independence -- to Russia.

As it stands, the eastern Caspian states are effectively in Russia's pocket because of the absence of trans-Caspian pipelines west to export their oil and especially natural gas free of Moscow's interference.

It's long been in their interest to commit to construction of that route. And it's in the West's interest -- particularly Europe's -- to make it happen once that commitment is made.

The Pirate of Prague's Newly Restored Grin

Incredible as it seems, Viktor Kozeny could indeed ride again.

Accused of bribing Azerbaijan leaders, the Harvard-educated, lavish-living Kozeny has sat for almost two years in a Bahamas jail fighting extradition to the U.S. But now a U.S. prosecutor says the government may have to drop most charges against him. The reason -- the statute of limitations.

If it does, and Kozeny is freed or lightly sentenced, it will put a bow around the charmed life that he has led the last 17 or so years, in which he masterminded two of the most controversial investment schemes of the Gorbachev and post-Soviet era.

This story actually broke last month, but appears to have been largely overlooked. Tip to Paul Sampson for pointing it out to me. Here is the first paragraph of an AP story: NEW YORK — The government is seeking to resurrect its case against three men accused of offering hundreds of millions of dollars to top officials in the former Soviet republic of Azerbaijan to get favorable treatment in oil deals. Read story

Steve's comment: The 43-year-old Kozeny is famous for investment schemes in which lots of people lose most of their money.

He first attracted attention in the early 1990s when he swooped into his native Prague and persuaded hundreds of thousands of Czechs to invest their state-issued privatization vouchers with him, and become fabulously wealthy. Almost all lost most or all of their money, but Kozeny left the country worth tens of millions of dollars and never returned. For that Fortune magazine dubbed him "The Pirate of Prague."

Kozeny bought lavish homes in London, the Bahamas and elsewhere with the money.

Next, he turned up on the Caspian Sea. He decided that there were even greater earnings to be had, particularly in Baku. In 1997, he threw a now-famous party in Aspen, Colorado, where he persuaded some of America's most savvy investors and their friends that they could own, then flip, the state oil company of Azerbaijan, or Socar.

Those who tossed in a bundle totalling more than $200 million included Wall Street hedge fund doyen Lee Cooperman, former Senate Majority leader George Mitchell and Frederic Bourke of the Dooney & Bourke luxury handbag company.

The problem, as (almost) anyone who has set foot in Azerbaijan knows, is that there is no way the Azerbaijan government would part with its cash cow.

In October 2005, U.S. prosecutors charged Kozeny and two of the investors with bribery and money laundering. Specifically, the government said that the defendants provided financial incentives to a "senior Azeri official" (the late President Heydar Aliyev) in order to privatize Socar.

In June of this year, a U.S. district judge said the statute of limitations had passed on charges against Kozeny's two co-defendants, and dismissed most of them. And in an appeal last month, prosecutors said that, if the decision holds, most charges will also have to be dropped against Kozeny.

The appeal hasn't been decided yet. But those who follow the Azerbaijan case always wondered -- why, given Kozeny's history, did so many smart people entrust so many millions with him? To a person, his investors replied that they felt they had done their due diligence.

That rang hollow. The truth was that Kozeny dangled the prospect of an enormous windfall before Aspen's and Wall Street's moneyed crowd -- in addition to great fun and adventure -- and they simply grabbed for it.

Ten years later, there is the prospect of Kozeny going onto his next adventure.

4 Leaders Try to Offset Russia's Clout

BAKU, Azerbaijan (AP) – Leaders of four former Soviet republics discussed ways to counterbalance Russia's wide influence in the Caspian and Black Sea basins at a summit of their regional grouping.

The summit is the first for the organization, called GUAM, the Organization for Democracy and Economic Development, since its four member countries – Georgia, Ukraine, Azerbaijan and Moldova – agreed last year to deepen ties and cooperation.
Read the rest of story

From Steve: On the other side of the Caspian, Kazakhstan and Turkmenistan still have no concrete link into the Baku-based oil-and-natural gas pipelines to the Mediterranean.

Instead they recently agreed to build another natural gas pipeline through Russia. To the degree that they are seeking leverage against Russian influence of their energy markets, they are doing so by building up transportation with China, and organizing barge traffic to Baku.

But one wonders if this will be sufficient for their long-term economic independence.