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Azerbaijan: Energy, reforms, COVID-19 and optimism

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When Azerbaijan became the elected member of the United Nations Security Council in 2012-2013 for the first time in its independent history the achievement may have seemed surreal for this small country in the South Caucasus region. However, it was a long road for Azerbaijan to having overcome many imponderables along its way to make it to the top. Today Azerbaijan has managed to establish itself as an energy state, but not only the mere exporter of the crude, but also as the exporter of energy security. Azerbaijan is active on many international fronts and its trust on multilateralism, balanced and pragmatist foreign policy has earned it many friends and strengthened its partnerships.This piece aims to explore some important aspects of Azerbaijan’s current development, focusing first and foremost on energy and navigating from there to touching upon the reforms, then covering the country’s battle with COVID-19, alongside offering optimism from the bleak picture created by the pandemics.

Energy

Since the inception of its independence Azerbaijan has built reliable partnerships not only within its neighbourhood, but also with the EU, the U.S. and other countries in the West as well as East. Azerbaijan’s multi-vectored and pragmatic foreign policy, which is also very well aligned with its national (including economic) interests enabled it to build equally strong, well-thought and balanced relations with all partners. The only exception from this list is the neighboring Armenia, with whom Azerbaijan has no relations due to the existence of unresolved conflict over Azerbaijan’s Nagorno-Karabakh region. Azerbaijan’ s successful model of collaboration with its western partners has begot its ever-evolving energy cooperation with Europe. Together with some large multinational corporations that are its international partners in the West, Azerbaijan has established a successful model of energy cooperation through the construction of the Baku-Tbilisi-Ceyhan and the Baku-Tbilisi-Erzurum oil and gas pipelines—both of which transport hydrocarbons extracted from the Caspian Sea to international markets. It is on the cusp of commencement of the multimillion megaproject – the Southern Gas Corridor that stands as a valuable contribution to Europe’s energy security by not only being a mere provider of crude energy, but also by ensuring diversification of sources and routes. Azerbaijan’s energy strategy thus, during the last 25 years aimed at contributing to stability, cooperation and mutually beneficial partnerships in its neighborhood and beyond.The revenues acquired from Azerbaijan’s hydrocarbon resources have been channeled to the socio-economic development of the country; as a result, every aspect of Azerbaijan’s statehood has flourished.

Azerbaijan’s trajectory of becoming an “energy state” could be considered to be rather natural and therefore linear. The country became the motherland of the first industrially drilled oil well in the world in 1846. In 1899Azerbaijanwas the world frontrunner in oil production and refining and provided the half of oil production volume. It provided 75% of all fuel for the tanks, aircrafts and all sorts of artillery of the Soviet Army during the World War II in the fight against fascism. Azerbaijan has managed to become self-sufficient and economically independent state by virtue of its oil and gas projects upon the signature of the “Contract of Century” in 1994, despite the fact that it also had to deal with the occupation of its territories and bear the socio-economic burden of large army of refugee and IDP population created in the consequence of Armenia-Azerbaijan conflict. Its reliance on oil should therefore come as natural escape to deal with variety of challenges to its statehood.

Beyond oil, the weight of natural gas, which is a low carbon energy source is lately increasing, including in Azerbaijan, in the overall global energy balance. The growing role of natural gas in the 21st century has increased the importance of issues related to diversification of sources and routes as well as energy security. Azerbaijan, which has made its name largely as an oil country, has been working intensively to build international partnerships towards exploration of the country’s gas resources.

The estimated gas reserves of the country are 2,6 trillion cubic meters. The existing Baku-Tbilisi-Erzurum gas pipeline did not suffice for the exploration of these fields and transportation of large production volumes. The necessity to explore these reserves and turn them into a strategic commodity for energy security of a broader region begot the strategic project such as the Southern Gas Corridor.

Thus, the Southern Gas Corridor project, initiated in 2013 and inaugurated in May, 2018, has become an important chain of energy security, economic development and global partnership. This Corridor of 3500 km length consists of four integral parts – “Shah Deniz-2” project, Southern Caucasus Pipeline Extension (SCPX), Trans Anatolian Pipeline (TANAP), Trans Adriatic Pipeline (TAP). The significance of this project is also enhanced due to fact that it is the first tangible megaproject existing in Europe that unites all components of energy security. It involves close cooperation of seven nations – Azerbaijan, Georgia, Turkey, Greece, Bulgaria, Albania and Italy, participation of numbers of international oil and gas companies as well as the support of major financial institutions, like the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and Asian Development Bank (ADB).Together with its partners and through the Southern Gas Corridor, Azerbaijan is working towards the creation of European gas market that envisages competitiveness and diversification of sources and routes. This project requires solid partnership, continuous political and donor support.

In the spirit of this cooperation and respect for its commitments, Azerbaijan’s priority is to deliver first gas to Europe in 2020. Strategic importance of the Southern Gas Corridor is not only confined to Azerbaijan and the countries involved. This megaproject has the potential to expand to Balkans, Central and Western Europe as well, to attract new supplier, transit and consumer countries. BRUA project (Bulgaria-Romania-Hungary-Austria gas pipeline), IGB (Interconnector Greece Bulgaria) and IAP pipeline (Ionian Adriatic Pipeline) are the potential interconnecting pipelines that could deliver Shah Deniz gas to other destinations through the Southern Gas Corridor. The completion of the TAP as expected in 2020, will enable the import of about 8,8 billion cubic meters of Azerbaijani gas to Italy, with potential growth capacity of more than 10 billion cubic meters per year.

The works on all four segments of the Southern Gas Corridor project are successfully implemented. The inauguration of TANAP became the bedrock of the Southern Gas Corridor. Turkey is already receiving volumes of gas since the formal inauguration of the Southern Gas Corridor and as the completion of the project as this fall as expected, Europe will also start receiving 10 billion cubic meters of Azerbaijani gas per year. As of June 2020 Turkey is set to receive 6 billion cubic meters of gas. With the onset of the final implementation stage of the Southern Gas Corridor, successful completion of works on TAP become ever more important, since it is an essential element to deliver gas to Europe. With the completion of TAP, Azerbaijan will contribute to the energy security of Italy as well as of the countries in South Eastern Europe and will ensure the diversification of routes and sources and contribute to the de-carbonization efforts of the continent.

The Corridor was built with the real vision so that the future opportunities can also be explored. This is an expandable diversification network with the capacity to expand up to 31 billion cubic meters in SCPX and TANAP and doubling up to 20 billion cubic meters for TAP. It is stated that market demand tests for the Corridor’s possible extension are already being carried out and if conditions are suitable additional gas volumes could reach the EU and South-East Europe already within this decade. Such plans could though be challenged by virtue of the fact that the EU’s energy policies maybe changing in a long-term future with the adoption of the “Green Deal” which sets the stage for Europe’s becoming carbon-neutral by 2050. With EBRD becoming a “climate bank” and mostly focusing on public and private “green” investments, it will therefore not invest in any future fossil fuel projects, including gas, starting from 2022. However, it is stated that the situation with already functional projects like the Southern Gas Corridor could be assessed differently. As was voiced by the EU officials themselves, becoming carbon-neutral in fact does not mean that the EU will no longer need natural gas. Natural gas is also said to be a significant back up commodity for the renewables for some time.

The Southern Gas Corridor project also brings social benefits, such as new employment opportunities in the countries through which the Corridor passes, which doubtlessly, has positive impact on the economy of these countries.

The latest, 6th meeting of the Advisory Council on the Southern Gas Corridor that took place on 28 February, 2020 in Baku, offered another valuable opportunity to review the achievements in this field. It was reported that works were progressing at a steady pace and TAP is almost complete (93,5%as of March 2020). Growing number of countries joining the Advisory Council each year also testifies to the increasing interest to the project. Azerbaijan is about to complete this megaproject, which is a great stride towards strengthening Azerbaijan’s regional and global stance as an energy exporter. However, Azerbaijan acts not only as a mere exporter of crude energy, but also as an exporter of energy security by providing alternatives and diversification of routes and sources of energy.As President Ilham Aliyev said during the opening ceremony of the Southern Gas Corridor on May 29, 2018: “We are implementing such giant projects together with our partners and redrawing the energy map of the world”.

Looking beyond oil and Reforms unleashed

Beyond energy, Azerbaijan’s economy has also been witnessing major transformations since 2014. They say global trends are called “global” because of their global ramifications. Azerbaijan had to suffer two currency devaluations in 2015, nevertheless, it was not something that happened only to Azerbaijan. It was the period of economic perturbations in many countries brought by fluctuating oil prices in global oil markets since 2014. However, the country adapted fast by undertaking necessary measures to adjust to the associated challenges. Putting more premium on the development of non-oil sector of the economy and embarking on the development of its renewable energy sector in order to increase the share of renewable energy in overall energy balance of the country are some, however very direct examples of how Azerbaijan manages the challenges associated with fluctuating oil prices.

Before the onset of COVID-19 pandemics and the worldwide lockdowns that negatively affected everyday and economic life, including in Azerbaijan, forecasts on Azerbaijan’s economy was very optimistic and positive. For instance, in October 2019 the then Minister of Economy Shahin Mustafayev declared that “In 2020, real growth in Azerbaijan’s GDP will be three percent, including 1.6. percent for the oil sector and 3.8 percent for the non-oil sector. The growth of the non-oil industry is projected at 8.8. percent, and agriculture – at 4.8 percent”. His successor, a young and western educated former Minister of Taxes Michael Jabbarov later also reiterated this objective with a new and steady commitment to achieve more. Azerbaijan’s unemployment rate has dwindled from 5,02 percent in 2018 to 4,99 percent in 2019 and was projected to further decrease in the years to come. On another front, Azerbaijan aims to increase the share of renewable energy resources in the overall energy consumption balance of the country by 30% till 2030, while currently this number is 18-19%, including hydropower stations. It aims to hold auctions in 2020 in order to attract the best business partners for the development of renewable energy projects (mostly solar and wind) at specifically allocated sites of the country. In January 2020 it has signed implementation agreements of pilot projects on renewable energy with two leading companies of Saudi Arabia and United Arab Amirates – “ACWA Power” and “Masdar”, respectively, and more such undertakings could come in future.

Azerbaijan’s relations with the European Union – one of the biggest economic actors – is also developing dynamically. EU-Azerbaijan Strategic Partnership Agreement, unlike the Association Agreements and Deep and Comprehensive Free Trade Agreements envisaged by the Eastern Partnership (EaP) is based on more equal conditions for partnerships that capitalizes on mutually beneficial partnership for both sides, having thus, eliminated the need for Azerbaijan to one-sidedly comply with EU standards and expectations. The successful conduct of the second round of EU-Azerbaijan Security Dialogue in Baku on 19 December 2019 once again underscored common positions on political, economic, security and energy related issues, while also stressing the importance of continuing to work towards the finalization of EU-Azerbaijan Strategic Partnership Agreement. The open chapters within the Agreement are currently being negotiated and there is a genuine interest on both sides to find a common denominator soon.

Moreover, the country is undergoing a comprehensive reform process in all areas of its statehood and the very nature of the current reforms in all political, economic, administrative strata of Azerbaijan implies the peaceful transition of state management to younger generation that carry more zest and energy alongside also being competent for such a leadership. This does not, however, obviate the fact that older generation are also given their due respect and recognition for their service and their experience are valued and kept at hand’s reach if needed. This evolutionary example of “rejuvenation” of state management while maintaining the synergy of “institutional memory and experience” with “youthfulness and energy” is thought to deliver the needed results in the overall scheme of things.

The reforms have brought number of palpable changes in the state administration, the results of which are already showing in terms of concrete achievements and progress attained in various areas. The leadership of the country has chosen the path of “evolution” in its efforts to adapt the country to ever changing nature of international relations and boost the country’s resilience in the face of evolving global political, socio-economic and other challenges. The snap parliamentary elections held on 9 February was therefore also an important achievement that reshaped the composition of the Parliament and attracted many young parliamentarians. 1314 candidates (independents and representatives of 19 parties) were registered in the race for 125 seats in the Azerbaijani Milli Maclis and 50 per cent of the candidates were under 40 years old. For the first time in the history of independent Azerbaijan a female speaker of the Parliament, Sahiba Gafarova was elected.

COVID-19 and Azerbaijan’s response

Despite the positive picture above, when the scales of global pandemics acquired bigger proportions, Azerbaijan did not also remain immune to the contagion. The news about the first infection case broke on 28 February and the government was swift to close down country’s borders, restrict international and domestic transportation, schools in early March, and all the shopping malls restaurants, etc. gradually. The entire country was put into the lockdown and quarantine was enhanced incrementally as the situation so demanded. From 5 April onwards, people are only allowed to leave their houses for basic needs, like grocery shopping, pharmacy needs, attending the funeral of the closest family member via the SMS permission system. As of this writing there were 1197 coronavirus patients in the country with 351 cured, 13 dead and 833 active patients.

The special Coronavirus Support Fund was established with 19 March 2020 Presidential Decree and the government, and other type of organizations, entrepreneurs were very swift to extend financial support to the Fund. Moreover, the government prepared 9 programs worth 2,5 billion manats – 3 % of the GDP to support the economy and the entrepreneurship as well as social benefits containing compensations for unemployed population as well as educational fee rescue package for socially vulnerable parts of the population in the aftermath of the total lockdown of the economy. The idea is to put the economy back on track as soon as possible and weather the COVID-19 storm with minimum losses.

Obviously, pandemics has affected not only global health but also global economy. Some even compare its magnitude and potential effects to those of the Second World War, while others predict severe economic crisis unseen since 1929-1930. Azerbaijan obviously is not immune to the consequences of the pandemic. Granted, the acute slump in oil prices as a consequence of worldwide lockdowns and therefore suppressed demand for crude, and the failed OPEC+ endeavor to find a common denominator on 6 March, put further strain on the economy, which otherwise was on an upswing before the COVID-19. Azerbaijan’s 2020 budget has envisaged 55 USD per barrel of oil. However, with oil prices in the first two months of the year being above 60 USD and budget proceeds surpassing the expenditures for about 400 million manats in January alone, plus the proceeds from tax and customs services testifies to the increasing income to the state budget. Azerbaijan’s strategic currency reserves are estimated to be over 50 billion USD, which provides extra fiscal security. The overview of the extra financial reserves acquired since beginning of the year in fact enables to compensate for the losses incurred due to the coronavirus induced decline in oil prices.

This is more so, in the light of the recent OPEC+ deal, which pledged to reduce oil production by 9,7 million barrels per day (bpd) in May and June of 2020 (plus 300 thousand barrels the US will cut instead of Mexico’s proposed share), plus voluntary reductions up of 2,7 million bpd by Saudi Arabia, Kuwait and United Arab Amirates planned for April. The US, Canada, Indonesia, Norway and Brazil are thought to also cut their output by 4-5 million bpd, while oil production in Iran, Venezuela and Libya is expected to drop by 2,8 million bpd. as well. In total, 20 million bpd. oil is expected to be withdrawn from the markets, which should help to stabilize the market and maintain balance between supply and demand. Further cuts will be 7,7, million bpd. from July till end 2020 and 5,8 million bpd from January 2021 till April 2022.It is yet to be seen how the deal will operate under the current conditions and in future, but early market reactions have been rather positive.

The ramifications of COVID-19 and its impact on world economy and everyday lives of citizens are yet to be seen as the debate is still ongoing. However, one thing is clear that there will be no winners and losers of this global calamity as everyone is affected. So is Azerbaijan. However, Azerbaijan’s strong standing before the outbreak as an energy and reformer state and swift measures to contain the virus as well as operationalization of state support mechanisms can offer the cause for optimism that the country could quickly return back to normal and continue the works interrupted with greater rigor. There definitely is a political will and hopefully the way will be unhindered soon too.

Dr. Esmira Jafarova is the Board Member of the Center of Analysis of International Relations (AIR Center), Baku, Azerbaijan.

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South Caucasus: Prospects and challenges

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During an online conference on the current situation in the South Caucasus, hosted by Rossiya Segodnya news agency, the executive director of the “Eurasian Development” center Stanislav Pritchin and Alexander Karavayev, a researcher with the Russian Academy of Sciences’ Institute of Economics, presented their joint report on the “Settlement of the Armenian-Azerbaijani conflict and the development of the South Caucasus: prospects and challenges.”

Earlier, Russia’s Foreign Minister Sergei Lavrov met with his Azeri and Armenian colleagues on the sidelines of the meeting of the Council of Foreign Ministers of the CIS to discuss humanitarian and economic issues related to Nagorno-Karabakh. They noted that the Russian-mediated ceasefire agreement in Nagorno-Karabakh, signed on November 9, 2020, was the first document in many years to tackle systemic issues of settlement and offer a primary plan for normalizing relations between the conflicting sides.

During the online conference, Stanislav Prichin and Alexander Karavayev outlined potential areas of cooperation in various fields and identified the role of external actors, primarily of Russia and Turkey, in realizing the existing potential. They also analyzed the prospects of economic development in the South Caucasus.

Stanislav Pritchin said that the idea of writing the report came right after the signing of the peace accord in Nagorno-Karabakh. In addition to the usual collection of information, several roundtables were held, attended by Russian experts, and Armenian and Azerbaijani specialists were polled and asked the same questions. Naturally enough, Baku and Yerevan had diametrically opposite views of the results of the ceasefire agreement, with  Azerbaijan seeing them as a reflection of the changes brought about by its military victories, while Armenia views them as a major defeat that forced it to make major concessions. There was even talk about the resignation of Prime Minister Nikol Pashinyan and his government. Pashinyan has so far managed to stabilize the situation, with early parliamentary elections slated for this coming summer, which will most likely keep him in power. Polls also showed that even if Pashinyan’s party loses out, Armenia will still be forced to comply with the terms of the agreement simply by virtue of its position. Indeed, Yerevan has been quick to give the Akdam, Geybaldar and Lachin regions back to Baku.

Speaking of risks and challenges, the expert noted that we are primarily talking about domestic political risks both in Armenia and Azerbaijan, as well as external ones – exacerbation of contradictions between outside players and, finally, the danger of a new conflict flaring up directly between Yerevan and Baku. … First of all, Armenia finds itself in the former group of risks. A  survey of experts done in February showed that 67 percent of respondents  believed that Nikol Pashinyan would not stay in power, while only 33 believed he would. The situation in Azerbaijan is calmer: they expect Armenia to fulfill all the terms of the trilateral agreement. By the way, Azerbaijan has a lot of work to do to restore the region’s infrastructure and resettle the refugees, which will prove a heavy burden on the country’s budget.

As far as external risks go, the gravest concern is the regional rivalry between Russia and Turkey. Seventy-two percent of the Armenian experts surveyed believe that this is fraught with destructive consequences, and only 28 said that Russian-Turkish interaction will help stabilize the region. The overwhelming majority of Azeri experts have no problem with the Russian and Turkish influence on the peaceful settlement in Nagorno-Karabakh. The role of the OSCE Minsk Group in the settlement of the Karabakh problem is assessed differently in Armenia and Azerbaijan. While the Armenians pin hopes on the Group, the Azerbaijanis do not see any benefit from it.

The status of the Russian peacekeepers, who will stay on in the conflict zone for the next five years, is an important issue. Their mandate will automatically be renewed if it is not objected to by either side. As of now, 42 percent of Azeri experts believe that five years from now the mission of the Russian peacekeepers will be over. Just as many believe that they will still be needed, and 16 percent said that it will depend on the situation. In Armenia, 85 percent of respondents answered that five years from now the presence of Russian peacekeepers will still be needed.

The dispute between Armenia and Azerbaijan over Nagorno-Karabakh remains the biggest sticking point, with Azerbaijan considering this territory as its own, which is confirmed by the relevant resolutions of the UN Security Council issued in the wake of the Soviet breakup. The Armenians, conversely, believe that even after the conclusion of the November trilateral agreement, Nikol Pashinyan does not recognize Azerbaijan’s right to Nagorno-Karabakh. A survey of the two countries’ experts showed that in each of them the absolute majority – more than 80 percent – thinks that within the next five years the status of Nagorno-Karabakh will not acquire a mutually acceptable legal form. Pritchin also considers the problem of border delimitation in disputed territories as being intractable.

Wrapping up the political section of the report, Stanislav Pritchin outlined three possible scenarios of political development in the South Caucasus: negative, neutral and optimal. In a negative scenario, one or more parties opt out of the trilateral accord. According to the neutral scenario, some of the provisions of this agreement will be implemented, while some will not. The positive scenario sees the implementation of all provisions by all the signatories to the deal. The majority of experts in Armenia (about 80 percent) and a significant number (over 40 percent) of those in Azerbaijan, gravitate towards the second, neutral variant.

The economic part of the report was presented by Alexander Karavayev, who emphasized that it is for the first time in 30 years that a post-Soviet state is restoring its territorial integrity, including in economic terms. Not only did the territory of Nagorno-Karabakh suffer from the ethnic conflict of 1991-92, but it was not developing economically and did not have any investment status. The development took place only at the microeconomic level; there were no large-scale recovery programs sponsored by the state, including those aimed at luring major foreign investors. Karavayev warns that given the enormity of the tasks at hand one should not expect any quick results – we are talking about a decade, no less.

The Azeri leadership has outlined the first stage of restoration to run until 2025. In 2021, US 1.3 billion will be allocated for the reconstruction of energy facilities, the construction of roads, trunk infrastructure, including the creation of transit transport communications across the territory of Armenia and Nagorno-Karabakh. To fill them with goods, Armenia, as the party that has suffered the most from the conflict, must see the prospects for making up for the losses. This could be achieved through exports, primarily of raw materials, such as copper ore and rare earth and precious metals (molybdenum, gold, etc.). In practical terms, the export of raw materials from Armenia to Mediterranean ports would be facilitated by modernizing the old Soviet railway via the Nakhichevan autonomous region to the Turkish port of Iskenderun, where there is a terminal of the Magnitogorsk Iron and Steel Works. Alexander Karavayev warned, however, that the implementation of large-scale economic projects would attract big investors and competition between them could stir up contradictions between large regional players. He still believes that “the game is worth the candle.”

The main conclusion that can be drawn from the report is that the signing of the trilateral agreement has opened a “window of opportunity” for the gradual normalization of political and economic relations between Armenia and Azerbaijan, including the settlement of the situation in Nagorno-Karabakh.

From our partner International Affairs

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A Grey Swan: Is There a New Conflict in Donbass?

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The prospect of a new exacerbation in Ukraine’s Donbass region has worried market players. It is difficult to talk about the strong influence of bellicose statements on the currency and stock markets. However, investors have again started talking about “geopolitical risk”. The key concern stems from the fact that the resumption of a large-scale armed conflict will inevitably lead to new sanctions against Russia. Moreover, the scale of such restrictions is difficult to predict, which gives rise to the uncertainty of expectations. Should strict sanctions be viewed as a baseline scenario? What is to be expected from the development of the situation?

Ceasefire violations in Donbass were already evident in winter. The ceasefire has been in effect since July 27 last year. However, on March 31, in the Contact Group on Conflict Resolution, the Ukrainian side raised the issue of a new ceasefire statement. In fact, this meant that Kiev considered the existing agreement invalid, citing cases of shootings and military losses. Moscow criticised this initiative. All this is happening against the background of the concentration of Ukrainian troops in the conflict zone. Russian troops are also moving to the state border. Statements by Ukrainian officials, who cited a conversation between ministers, about US support in the event of a war with Russia, added fuel to the fire.

A military exacerbation may well be viewed as one possible scenario. At least it is not devoid of precedent. During the August 2008 war in in Georgia, Mikheil Saakashvili launched a military campaign, citing the support of the United States, among other things, as one of his motivations. Later it turned out that such support was only conditional, but confidence in it could become a trigger for radical decisions. There is also the experience of the recent war in Nagorno-Karabakh. For a long time it was believed that it would be difficult for both sides to win in the conflict. As a result, Azerbaijan won a victory using new tactics: with the help of unmanned aerial vehicles. Ukraine also plans to use Turkish drones, although they have not yet appeared in large quantities in service in the Armed Forces of Ukraine. Kiev may also believe that a new conflict will have a high cost for Russia. Even in the event of the defeat of the Ukrainian Armed Forces, Moscow is unlikely to go beyond the existing boundaries of the DPR and LPR. New sanctions will be imposed against Russia. Perhaps the Ukrainian leadership also hopes for good luck. Even tactical successes in Donbass will strengthen the Ukrainian position.

However, this scenario is still extremely risky for Kiev. In recent years, Russia has shown that it is ready to take decisive action. Force can be used without undue hesitation. Moscow understands that the West will side with Ukraine in any scenario. But political support is one thing, and military intervention is quite another. The United States and its allies are unlikely to agree to such an intervention. Even the supply of lethal weapons will have its limits. Without a doubt, they increase the combat readiness of the Armed Forces of Ukraine. However, they are unlikely to allow it to achieve qualitative and quantitative superiority, even on the scale of the alleged theatre of military operations. The Russian army has undergone a high degree of modernisation. It is capable of rapidly concentrating well-trained and well-armed small units, units and large units. The threat of sanctions will also fail as a deterrent. There’s no doubt they will damage the economy. However, Moscow is unlikely to be stopped if it comes to a military conflict. In addition, Russia has a certain amount of space to vary the degree of its involvement. It can range from active support of the forces of the LPR and DPR to direct involvement in the conflict and the defeat of the Armed Forces of Ukraine in the conflict zone.

Apparently, the Ukrainian leadership does not intend to bring the matter to a direct clash. It is escalating the situation, trying to attract the attention of Western partners and gain points for the future. Most likely, the Kiev authorities initiated the current manoeuvres of their own accord, and they are not the result of the “insidious game” of the West. However, the American and EU diplomats may well use such manoeuvres to put pressure on Russia. The main threat is the loss of control over the situation, should the symbolic whipping turn into a real conflict.

In the end, full-scale military operations in Donbass in the near future are not the baseline scenario. Russia is a strong adversary; the risk of big losses for Ukraine are great. Accordingly, it is hardly worth considering a scenario of a sharp tightening of sanctions against Russia. No radical aggravation—no radical sanctions.

At the same time, politics likes surprises. Erroneous assessments, the personal ambitions of leaders, the peculiarities of group decision-making with their “shift to risk”, random incidents and much more can give rise to an extreme scenario. War in this case is a “grey”, rather than a “black swan”. It is unlikely, but its parameters are quite clear. Low chances of winning a war can be offset by high expectations of its consequences. Is it not an attractive scenario to give Russia a military slap in the face during an election year? However, in Moscow, such a scenario is also, apparently, expected. With appropriate organisational conclusions.

From our partner RIAC

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Blue Ocean Strategy for South Caucasus

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The recent arrival of Russian peacekeepers in Nagorno-Karabakh has underlined the difficulties for a number of international institutions–the United Nations (UN), the Organization for Security and Co-operation in Europe (OSCE), the European Union (EU) and the Eurasian Economic Union (EAEU)–to provide a diplomatic answer to violent conflicts that emerged in the aftermath of the collapse of the Soviet Union.

Nagorno-Karabakh is the latest example, as most of the ethnic quarrels in the South Caucasus are still ongoing since 1991, with Abkhazia and South Ossetia remaining de facto [1] independent from Georgia, while only one of the three recognized countries (Armenia, Georgia, and Azerbaijan), Armenia, has managed to join a supranational framework [2].

In over three decades, the political-economic context of the region has deteriorated with a continuous decline in birth rates coupled with emigration, difficult economic recovery and the rise of autocratic political regimes and confirmed cronyism. Some experts believe it is time for the South Caucasus countries to develop a Blue Ocean strategy [3] and abandon the idea of joining the Euro-Atlantic institutions (the EU and NATO) or Russian-led alternatives (the EAEU and the CSTO). This may seem challenging, but given the economic and diplomatic achievements of the past decade and the political crisis in the context of the COVID-19 pandemic, it is perhaps a viable option for restoring prosperity and stability in this part of the world.

What is the Blue Ocean Strategy and how can it be applied in international politics?

The Blue Ocean Strategy is a concept developed at INSEAD by Renée Mauborgne and W. Chan Kim. Although the approach usually applies to business strategy, it can be combined with a SWOT analysis to develop new geopolitical alternatives and provide innovative thinking in politics.

Therefore, by looking at the SWOT matrix for the South Caucasus, we can establish similarities between the countries and see how the Blue Ocean strategy approach can develop the “opportunity” part in the region:

SWOT Matrix of the South Caucasus
StrengthsLocated between great players – Russia, Turkey, EU and Asia – the South Caucasus can be successfully used as a platform for the production, transfer and transformation of goods; Favorable climate for the development of renewable energies and products in with a high demand on international markets (e.g. Georgian wine on the Chinese market).
WeaknessesDifficulties to overcome the events following the break-up of the Soviet Union (e.g. rhetoric regarding separatism in Georgia) and political repetition compulsion; Insufficient resilience to international influence, as highlighted by the interest of all parties in joining an alliance (e.g. the European Union), which makes it ambiguous for the state(s) to develop an independent international policy; Corruption and cronyism in governments resulting in a paucity of innovation by the institutions and little support for the growth of innovative businesses.
OpportunitiesUnder-explored markets such as renewable energy, biological agriculture and high-tech; Affordable and skilled labour resources available; Possible regional cooperation between the three main countries – Georgia, Armenia, Azerbaijan – instead of seeking different alliances outside the South Caucasus
ThreatsRemaining ethnic tensions (internal and external) and the constraint of continuous political repetition compulsion regarding the de facto autonomous territories; Laissez-faire the corruption and cronyism at all levels of the state hampering the development of innovative thinking and increasing the human capital flight (brain drain); An emphasis is on external actors to solve internal problems (e.g. the European Union to solve economic issues instead of investment in higher education and entrepreneurship).

By analyzing the SWOT matrix, we can establish similarities between the three recognized countries and the three de facto/partially recognized states–Abkhazia, South Ossetia, Nagorno-Karabakh–having close SWOT profiles.

As such, the SWOT matrix underlines the countries’ profiles in the South Caucasus, and difficulties seem to stem from weak institutions, with an enforced political repetition compulsion [4] by elites and citizens alike, rather than from external threat(s) [5]. Nonetheless, the external threat is presented as the main one (e.g. Russia in Georgia and Turkey/Azerbaijan in Armenia), while the problems seem to be mostly domestic, having a lot to do with corruption or difficulties to accept the change of borders in the post-Soviet order.

Towards the effective implementation of a Blue Ocean strategy in the South Caucasus

A major obstacle to effective implementation of a Blue Ocean strategy in the region will come from the phenomenon of repetition compulsion and the fact that elites and citizens are not used to listening to another political discourse, often asking for outside help to solve domestic issues. As such, we can assume that states in the South Caucasus will be more likely to continue to focus on finding external alliances instead of using their own internal resources to develop their potential.

This phenomenon is linked to the in-group bias, which is the tendency to assume that ‘your’ problems are coming from the outside (e.g. Russia in Georgia) instead of assuming the responsibility related to ‘your’ own failing policy [6]. Thus, a nation will tend, even more so in times of crisis, to assume that the problem is due to an outside event.

The second obstacle that states will face in the South Caucasus is that neighboring countries have an incentive in keeping the states located next to them under control. At present, the main outsiders–Russia, the EU/NATO and Turkey– have little or no interest in seeing the South Caucasus enjoy greater autonomy.

In fact, some have even developed the rhetoric of ‘grandiosity [7],’ which refers to an unrealistic sense of superiority, characterized by a sustained view of oneself as better than the other, which is expressed by disdainfully regarding them as inferior. This approach is implemented in numerous forms through instruments of power, such as the Eastern Partnership (EaP) which aims to promote European values without taking into account the possibility that a state in the South Caucasus may differ in the way it wishes and should develop.

In the eyes of many EU citizens, the EaP is a means of promoting EU’s identity such as democracy, while non-Europeans would point out such an instrument has been implemented to achieved an economic and/or political superiority (the rhetoric of ‘grandiosity’) over participating states as they can only wish, in the mind of the one implementing them, to be like the EU member states [8]. The rhetoric of grandiosity is identified when the proponent refuses to assume that it may be wrong (cognitive dissonance).

The South Caucasus nations will therefore have to change their internal thinking and concentrate more on what they have and develop strengths instead of waiting for outside assistance. For instance, rather than focusing on how to get the separatist territories back and who could help them achieve this geopolitical goal, in order to increase their internal performance and economic capacities they could focus on fighting corruption, thus making themselves in fine more attractive in the eyes of autonomist regions (soft power) and a valuable political alternative.

Once this is achieved, there will be resistance from the major players–Russia, the West, and Turkey–to seeing the South Caucasus states outside their sphere of influence, which will be another obstacle to the long-term development and continued implementation of the Blue Ocean strategy for self-development.

In many ways, the strategy for the South Caucasus can be inspired by South Korea, a country that, instead of focusing on recovering control over North Korea and explaining a poor economic performance because of the difficult regional context (proximity to the USSR and the People’s Republic of China), managed to see its national advantages and emerge as a self-sustaining economic power.

While North Korea remains a priority in foreign affairs, as does the relationship with Beijing, Seoul has focused on internal development after 1953, subsequently or complementarily on international alliances. Like South Korea, the South Caucasus might focus on solving internal issues before outside matters, especially considering the stagnation with para-states for already more than three decades.

  • [1]de jure according to some states such as Russia, Syria and Venezuela
  • [2]Armenia is a member of the Eurasian Economic Union, however without Nagorno-Karabakh which is recognised to be de jure part of Azerbaijan.
  • [3]Blueoceanstrategy
  • [4]Edward Bibring (1943). The Conception of the Repetition Compulsion. The Psychoanalytic Quarterly. 12 (4): 486–519.
  • [5]The situation in Abkhazia and South Ossetia is stabilised since 2008, and the rhetoric of a Russian interest in occupying the whole Georgia does not goes in line with a geopolitical reality. As such, Tbilisi could develop its internal policy on the short run and focus on the two “occupied” territories (Abkhazia and South Ossetia) on the long run instead.
  • [6]Hall. Taylor, Donald M.; Doria, Janet R. (April 1981). Self-serving and group-serving bias in attribution. Journal of Social Psychology. 113 (2): 201–211.
  • [7]Elsa F. Ronningstam (2005). Identifying and Understanding the Narcissistic Personality. Oxford University Press.
  • [8]Women’s rights, democracy, freedom of expression, human rights are all examples of what EU citizens believe they can bring to the South Caucasus through the Eastern Partnership. This does not mean that they are not valuable to the countries, but rather that the lack of debate on whether and why to promote them expresses ‘grandiosity’, the assumption of values superior to any others, similar to what happened during colonialism, when Europeans considered Christianity to be superior to any other religion in colonised countries.

From our partner RIAC

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