Losing allies: EU cultivates new friendship with Azerbaijan

Last week, the EU formally approached Azerbaijan to renegotiate their relationship, signalling an upgrade in diplomatic relations. Europe is hedging against continued deterioration of its alliances, whilst Azerbaijan will be seeking better access to European financial markets.

The EU is on the lookout for new friends to replace its deteriorating relationships. Britain is leaving, Russia is interrupting its affairs at every turn, Moldova and Bulgaria turned towards Moscow in recent elections, and the US is about to reconsider its foreign relationships entirely under the incoming Trump administration. Due to these pressures, Europe has recently made gestures towards Azerbaijan that indicate a renewed interest in strengthening the Baku-Brussels relationship.

Last week, the European Council (consisting of foreign ministers from EU member states) ordered the European Commission to review and renegotiate the existing Partnership and Cooperation Agreement, which was drafted in 1996 by Azerbaijan and the EU’s predecessor, the European Community. The twenty-year-old document has been the framework for diplomatic activity between Brussels and Baku.

The agreement bound the two parties to settle many disputes within the OSCE (Organization for Security and Cooperation in Europe). Azerbaijan and the EU also agreed to grant each other most-favoured-nation status for international trade. It is likely that the next agreement will build on these foundations, leading to greater economic integration. This will generate new business opportunities for Europeans in Azerbaijan and vice-versa.

Azerbaijan will attempt to negotiate terms that will allow its banks greater access to European financial markets. The small republic has seen its currency, the Manat, forcibly devalued after the central bank could no longer justify spending billions in foreign currency reserves to protect it from the demise of oil prices in 2014. Azerbaijan derives the bulk of its wealth from oil and gas exports, and its state finances were ill prepared for the price collapse that decapitated infrastructure and welfare spending initiatives. Baku has a strategic imperative to gain better access to foreign currencies like the Euro, and this renegotiation presents an opportunity to get its private banks in position to create correspondent banking relationships. Azerbaijani banks need to solidify their solvency with foreign reserves and more diversified assets.

Europe has long been critical of the Azerbaijani government for numerous rights abuses. Nonetheless, EU policymakers cannot escape the reality that Azerbaijan presents tangible strategic and economic offerings to European nations. For many years, the EU has looked to Azerbaijan for opportunities to diminish its reliance on Russia for energy imports, and Azerbaijan is well aware that it offers the best alternative to Russian supplies. After all, a full 45% of Azerbaijan’s exports, mostly oil and gas, go to European customers.

The Trans-Anatolian Pipeline (TANAP) and Trans-Adriatic Pipeline (TAP) will soon bring Azerbaijani natural gas to Europe via the Southern Gas Corridor (SGC), with Azerbaijani supplies scheduled to enter the pipeline in 2018. TANAP’s initial capacity will be 16 billion cubic meters (bcm) per day, and TAP will have an initial capacity of 10 bcm. Both pipelines have plans to expand capacity to 60 bcm and 20 bcm, respectively.

The SGC route will enable many European countries, such as Austria, to consume natural gas procured from the Caspian Sea’s massive Shah Deniz II field. However, this will require reverse-flow through existing pipelines that must be linked with TAP. But there is a greater appetite for natural gas in Europe than even the SGC can offer. The proposed (and now dormant) Nabucco pipeline project would have brought over 30 bcm of natural gas from the Caspian directly to Austria.

A new EU-Azerbaijan agreement will most likely serve to lay the groundwork for further energy integration between the EU and Azerbaijan. The EU can expect as much goodwill from oil markets as it can from British voters. Europe simply must engage Azerbaijan to prevent Russia and OPEC from dominating its energy profile. With Russia and OPEC nations signalling the introduction of production limits designed to boost prices, European nations are already looking to Azerbaijan for a better energy option.

While the EU and Azerbaijan have much to gain from one another, we can expect Europe to cultivate other relationships along similar lines. In addition to targeting non-OPEC petroleum producers for imports, the EU will also look to expand its export destinations. After this year’s political upheaval, the US and Britain are poised to tighten the noose on free trade deals that Germany and other core European economies depend on for billions of dollars in GDP. Azerbaijan is just the first of many smaller nations that could begin to play a more pivotal role in the EU’s economic apparatus as the Western system pushes against its structural limits.

Categories: Europe, Finance

About Author

Jack Anderson

Jack Anderson is a consultant active in natural resources, transaction advisory and foreign affairs. His past and current clients include several Fortune 100 companies, trade associations, and multinational financial institutions. Jack previously worked in private equity, has twice filled National Security Council Staff roles for US government war gaming scenarios and is a US State Department Critical Language Scholar. He is an alumnus of Washington & Lee University, where he studied Geopolitics of Central Asia. Jack lives in Washington, DC and speaks Azerbaijani, Turkish and Spanish.