Baku Walks a Fine Line

Following Russian President Vladimir Putin's visit to Baku, Azerbaijan has announced two significant decisions. The State Oil Company of Azerbaijan (SOCAR) has declared a strategic partnership with Gazprom, the Russian gas conglomerate currently under sanctions due to Russia’s aggressive war against Ukraine. Additionally, Azerbaijan has announced its intention to join BRICS, a grouping of countries from the Global South, led by Beijing and Moscow. Both decisions pose considerable risks for Azerbaijan’s not-so-self-sufficient economy.

Putin's visit to Azerbaijan drew attention to two major developments:

• The agreement between Gazprom and Azerbaijan's state oil company SOCAR.
• Azerbaijan's announcement of its intention to join BRICS.

Reactions to these events range from dismissive—"this will change nothing"—to alarmist—"this undermines the sanctions regime against Russia and poses risks to the global order." As always, the truth lies somewhere in between.

Gas from SOCAR

Indeed, the Russian state-controlled energy conglomerate Gazprom and Azerbaijan’s state corporation SOCAR have agreed to strengthen their broad strategic partnership. A corresponding agreement has been signed.

For this purpose, Alexey Miller, a close ally of Putin and Chairman of the Board of Gazprom, visited Baku as part of the Russian delegation. It was Miller who signed the agreement. As an example of cooperation, Miller cited the "North-South" project, although what is known about this project does not directly relate to Gazprom.

The "North-South" project is an old and not particularly successful initiative that has been ongoing for 22 years. The full name is the International North-South Transport Corridor (INSTC). In 2002, Russia, Iran, and India signed an agreement on this project. Later, Azerbaijan, Armenia, Kazakhstan, and Belarus joined. However, up until now, only the three founding states have been really actively involved. The idea of the project was to create a transport corridor between India and the Baltic as an alternative to the route from East Asia to Western Europe via the Suez Canal.

This new route is supposedly cheaper and faster. Given recent attacks by Houthi rebels on commercial vessels in the Red Sea, the INSTC claims to be a safe, short alternative to the Suez route. Interestingly, the Houthis are Iranian proxies, but that’s probably just a coincidence, right?

A railway line between Kazakhstan, Turkmenistan, and Iran has already been completed and became operational in 2014. Additionally, in July 2022, the Russian company "RZD Logistics" announced the successful completion of its first trial shipment of container cargo to India via the INSTC. However, there is one very significant problem: EU countries are blocking the transit of goods through Russia due to sanctions. As a result, this project has effectively lost its transit status. In reality, the "North-South" project will only make sense as a transport corridor linking Russia, Iran, and India. The purpose of this is clear: the corridor would allow the three countries to transport sensitive goods without hindrance and create additional opportunities to bypass sanctions imposed on Russia due to its invasion of Ukraine.

This raises an interesting question—how exactly are Gazprom and SOCAR, companies involved in the transport of oil and gas, related to container shipments? At first glance, they aren’t. And when it comes to containers, this is indeed true. But in reality, this appears to be an attempt to establish a system to circumvent sanctions on the export of Russian gas and oil to EU countries. It seems likely that the agreement between Gazprom and SOCAR will involve attempts to export Russian gas under the guise of Azerbaijani gas.

The official narrative, however, focuses on declarations of intent to significantly increase trade between the two countries and double freight traffic—from the currently planned 15 million tonnes to 30 million tonnes per year. This was announced by Azerbaijani President Ilham Aliyev following his meeting with Putin. He specifically mentioned that the two countries discussed "the possibility of transporting 15 million tonnes of cargo, with the potential to increase to 30 million tonnes per year." Aliyev's comments on oil and gas were quite cautious: "The situation in the energy sector was thoroughly analysed—in the oil and gas sector, as well as in electricity... and I am confident that we will continue to coordinate our actions."

The reaction was swift: in Ukraine, a public campaign has emerged calling for a boycott of SOCAR petrol stations in the country. Although SOCAR does not dominate the local market, its presence is quite visible.

According to Azerbaijan’s Ministry of Energy, in 2023, Azerbaijan produced 48.3 billion cubic metres of natural gas. In particular the state company SOCAR produced 8.4 billion cubic metres (8.1 billion cubic metres in 2022). In 2023, gas exports amounted to 23.8 billion cubic metres, of which 11.8 billion cubic metres were sold to Europe, 9.5 billion cubic metres to Turkey, and 2.5 billion cubic metres to Georgia. Interestingly, production increased by 37% compared to 2022, that is, by 13 billion cubic metres. The increase in exports was 5% compared to 2022, or by 1.2 billion cubic metres. However, it is worth noting that the Ministry of Energy’s figures on gas production and export do not seem entirely credible. A doubling of domestic consumption in one year, from 12.7 to 24.5 billion cubic metres? What could explain such a jump?

This gives rise to well-founded suspicions that something very "grey," if not outright "black," might be going on with this gas. It’s important to recall that due to sanctions and consumer boycotts, imports of Russian gas to the EU via pipelines have fallen from 153 billion cubic metres in 2020 to 27 billion cubic metres, of which approximately 14 billion cubic metres transit through Ukraine. For Gazprom, restoring gas supplies to the EU is a matter of survival, as sanctions and the boycott of Russian gas have caused revenues to plummet, turning profits into losses.

BRICS as a Means of Trade

Baku has announced its application to join BRICS. This is a significant diplomatic victory for the founders of this anti-G7 group, particularly Russia. Azerbaijan's economy may not be impressive in scale—$72.4 billion with a per capita income of $5,700 in 2023—but for the BRICS summit scheduled for October 2024 in Kazan, Russia, this is a noteworthy boost, as several expansion announcements are expected to be made there.

The reasons for Moscow’s interest are clear. But what does Azerbaijan stand to gain? Even without joining BRICS, Baku could reap additional benefits from facilitating Russia's shadow foreign trade. However, by joining, these benefits are likely to increase. Yet, Azerbaijan is also likely to face secondary penalties for aiding Russia in evading sanctions. While G7 countries may not explicitly mention Azerbaijan’s BRICS membership when imposing secondary sanctions, the fact itself will hardly be forgotten when these measures are formulated.