The Fall of 2020 represented a watershed in Azerbaijan’s contemporary history, as a result of the victory in the «44 Days War» over Nagorno-Karabakh against Armenia, on the one hand, and the start of natural gas export to European markets through the EU Southern Gas Corridor, on the other. These events marked the culmination of decades-long processes, which shaped both Azerbaijan’s foreign and domestic policy. Consequently, 2021 was characterized by Baku’s attempt to open a new chapter in the country’s post-Soviet evolution, in an ever-changing regional and international context. The attempt to put the Nagorno-Karabakh war behind meant investing on the rehabilitation and reintegration of the recently re-conquered territories, in the wider attempt to put forward new vision for regional development. Simultaneously, the inauguration of a gas export pipeline to south-eastern Europe propelled Baku to move towards a new phase in its national energy strategy, aimed at enhancing its role as critical EU supplier, while adapting to a possible post-oil development in the mid- and long-term. The article maintains that, in tackling a «new beginning», Azerbaijan seems stuck at a crossroads, still caught between the attempt to redefine its approach to both the dossiers and old habits and strategic thinking. This, in turn, may jeopardize the path towards a peace agreement with Armenia and endanger the long-term sustainability of a development model based primarily upon energy export.

Keywords – Azerbaijan; Southern Caucasus; Nagorno-Karabakh war; EU Southern Gas Corridor.

1. Introduction

2021 may well be seen as the start of a «new beginning» in Azerbaijan’s contemporary history, as a result of two timely overlapping events that occurred in fall 2020: first, the reconquest of much of the country’s territory from Armenia in the 44 Days War over Nagorno-Karabakh. Second, the inauguration of the last segment of the European Union (EU) Southern Gas Corridor, allowing Azerbaijani gas export to reach European markets. The significance of the recalled developments cannot be overestimated, as they represent the culmination of decades-long processes that shape both Azerbaijan’s domestic and foreign policy.

Indeed, since the military defeat in the 1992-1994 war at the hands of Armenia and the resulting occupation by the latter of the Nagorno-Karabakh and seven surrounding districts, reaffirming Azerbaijan’s full sovereignty over its internationally recognized territory became Baku’s first and main aim in international politics. Thus, having recaptured the districts surrounding the enclave and having made significant inroad into the enclave itself, Azerbaijan managed to overcome its «mutilated sovereignty syndrome». It was a syndrome which had accompanied its post-independence path, incentivised by the inability of the main negotiating format – the so called OSCE Minsk Group – to broker a solution to the conflict.1 At the same time, Baku did also manage to heal a perceived and long-time denounced injustice, resulting from the non-application of the UN resolutions requesting Armenian forces to withdraw from the occupied districts and urging the return of the hundred thousand internal displaced people (IDPs) caused by the conflict.2 In the same vein, the December 2020 inauguration of the Trans-Adriatic Pipeline (TAP) marked the culmination of almost twenty years of regional energy politics, resulting from Brussels’ attempt to diversify its gas supply network. As a consequence, the start of Azerbaijani gas flow along the EU Southern Gas Corridor sealed a new and outstanding role for Baku, emerging from the long and complex regional energy match not only as a new gas supplier to European consumers, but also as a (energy) security provider to the EU, thereby linked to the latter by a kind of political «steel umbilical cord».

The combination of the two events just mentioned represented a watershed in Azerbaijan’s post-Soviet history, allowing the country to turn a new page in both its domestic and foreign policy. However, the resulting window of opportunity for Baku did not come free of challenges. The magnitude of change occurred in fall 2020 reflected itself in the magnitude of the tasks to be mastered in the short-, mid-, and long-term with the dual goal of leaving the Nagorno-Karabakh conflict behind once and for all and entering a new phase of energy development strategy. The aim of the article is to assess the state of the art of Azerbaijan’s new beginning on both the above-mentioned grounds. It maintains that Baku seems to be still caught between old and new habits, unable for the time being to develop strategies radically different from those taken before.

The article proceeds as follows. First, it introduces the key parameters of Baku’s foreign and domestic policy, intended to frame the changes occurred in fall 2020 in the wider picture of Azerbaijan’s post-Soviet history. In turn, this will enable a better appreciation of the magnitude of the change brought by the above-mentioned fall 2020 events. Next, the article discusses the opportunities and challenges faced by Azerbaijan on the path leading to the full reintegration of the recently reconquered district surrounding the Nagorno-Karabakh enclave, as well as the state of the art of the negotiations with Armenia over normalization of the bilateral relations. Finally, the new phase of Azerbaijan’s energy strategy is introduced and discussed in both its external and domestic dimensions.

2. Deciphering Azerbaijan’s foreign policy and the domestic-external nexus

Azerbaijan, the most populous and wealthiest country in the Southern Caucasus, represents an almost unique case in international politics in the former Soviet Union area. Indeed, through the skilful management of the limited resources available to a minor power,3 Baku managed in escaping the «polarization trap» affecting most post-Soviet Republics, caught between the loyalty to the former metropolitan power and regional hegemon, Russia, and the attempt to pursue cooperation with Euro-Atlantic powers and multilateral fora. Instead, following a «balanced» course of foreign policy,4 Azerbaijan managed to develop sectorial yet significant cooperation with the latter, without giving up a fruitful partnership with the former. Escaping the dichotomous choice between balancing and bandwagoning strategies vi-à-vis the regional hegemon, theorized by the realist school of international relations for minor powers, Baku did pursue, rather effectively, a non-aligned, multi-vectorial foreign policy course based upon hedging strategies vis a vis competing powers.5 The balanced foreign policy did play well also in the country’s neighbourhood, as it allowed Azerbaijan to simultaneously keep cooperating with competing middle powers – like Turkey, Israel, and Iran.

In an area where strategic polarizations often overlap with identity fault lines, Azerbaijan’s multi-vector foreign policy is narratively built upon and legitimized by the syncretic nature of its culture and the complexity of its historical experience. Indeed, not only the country is located at the confluence of regional powers’ security perimeters, but it is also strictly connected to each of them by virtue of ethnic and cultural links. While being part of the Turkic world in ethnic and linguistic terms, over the centuries Azerbaijan territory fell within the Persian cultural milieu which left visible traces – first and foremost Shiism. Also, the country’s socio-political and economic entry into modernity occurred under Russian domination – first that exercised by the Tsars then that exercised by the Soviets – which left its imprinting in both the country’s nation and state-building processes.6 The balanced course of foreign policy is thus constructed and understood as a result and as a recognition of the country’s multi-cultural essence.7

Over the years, multi-culturalism emerged as the cornerstone of Baku’s foreign policy, a key tool to safeguard and promote national interest for the sake of material and immaterial gains. This policy, originally built in the mid-1990s by then-President Heydar Aliyev (1993-2003), was chiefly reactive and defensive,8 aimed to escape the regional cultural-strategic polarization trends. Later, under the presidencies of his successor and son, Ilham (2003-), it came to acquire a pro-active connotation. Building upon multi-culturalism – and upon the connected narrative of being an example of pacific coexistence of different ethnicities, religions and languages – Azerbaijan started constructing a «niche diplomacy» around the role of responsible promoter and facilitator of intercultural dialogue and cross-cultural-cooperation. A niche-building that made use of various and interconnected diplomatic tools, ranging from nation branding to cultural diplomacy, from sport to humanitarian diplomacy.9

Far from responding to merely immaterial and reputational aims, the proposition of a «good international citizenship»10 may be also portrayed and understood as a soft approach to the resolution of the Nagorno-Karabakh conflict. Indeed, it stands as a tool to deconstruct the image of a clash-of-civilizations conflict between Muslim and Turkic Azerbaijan versus Christian Armenia. An image which, based primarily upon the Armenian narrative of the conflict, contributed, in Baku’s view, to build a vicious circle of «injustice, prejudice, double standards and in some cases even encouragement of the [Armenian] aggressor».11

2.1. Azerbaijan’s power resource base: the «3 Gs» country

Borrowing the words of Hafiz Pashayev, Azerbaijan’s first ambassador to the US and current deputy minister of Foreign Affairs, Azerbaijan may be described and understood as the «3Gs country», founding its international policy upon Geography, Geopolitics, and Geology.12

The country’s strategic posture and value for major powers result first and foremost from its geographical location and from its significance in post-bipolar power competition. Besides neighbouring, and being constituent part of, the security perimeters of three «heavy weights» in Eurasian politics – Russia in the north, Turkey in the west, and Iran in the south – Azerbaijan stands as a critical strategic connector among regional chessboards. Indeed, the country may well be simultaneously portrayed as integral part of the former-Soviet southern flank, of the Middle Eastern northern tier, of the easternmost part of the European security space, and of the westernmost offshoot of China’s recently achieved Central Eurasian range of action and influence.

Among the «3Gs», geology – namely the availability of significant oil and gas reserves – has been by far the most important in shaping both domestic and foreign policy, to the point of connotating Azerbaijan as a «petro-state»13, founding both its external and internal legitimacy on the development of the energy sector. At domestic level, «geology» offers a privileged perspective on the involution of the democratization process over the last decades14 as well as on the regime’s longevity and resilience. Indeed, the country presents the most significant features of a «rentier state»,15 founding its wealth on an externally generated rent and primarily concerned with its redistribution. In turn, such an «allocative state» posture16 may be seen as the primary factor behind the causal mechanisms leading from the over-reliance on energy sector to authoritarianism. This has primarily to do with the so called «taxation effect».17 Since state revenues are not generated by the taxation of productive activities – which, outside the oil & gas sector, are indeed rather weak – the state enjoys a large degree of autonomy vis-à-vis its citizens and, therefore, is less incline to allow participation, representation and accountability. This trend is quite visible in Azerbaijan where tax revenue accounted for 14.2% of the GDP in 201918 and whose population is largely depoliticized and manifests «a widespread apathy to politics».19 Secondly the allocative nature of the state also works in enhancing co-optation mechanisms through the «spending effect». In fact, the redistribution of the rent allows the state to buy consent through both patronage and the funding of quasi-civil society bodies and government-sponsored organizations,20 while hindering the formation of independent groups. Moreover, co-optation is not merely pursued through informal channels, but also through official and institutional ones. On the one hand, the state is the first employer in Azerbaijan, hiring a significant quota of the national workforce.21 On the other, consistently with an «electoral authoritarian» rule,22 allegedly democratic institutions act as a tool for co-optation and legitimation. Far from being mere facades behind which authoritarianism is played, democratic procedures and institutions – such as elections, a legislative body and a ruling political party – do act as «tools of cooptation, credible instruments of self-constraint or channels of societal information».23

The authoritarian nature of Azerbaijan’s regime shouldn’t lead to the simplistic conclusion that its longevity and resilience rest merely upon neo-patrimonial mechanisms or repression, as legitimation strategies are an essential ingredient in the autocracies’ stability recipe.24 In particular, output-based sources of legitimation have proved to be very effective in the country. This has to do first and foremost with performances, which in turn are closely related to the energy sector development and to the mentioned «spending effect». Taking the lead of the country back in 1993, at a time when Azerbaijan was on the verge of state-failure, the so-called Aliyev dynasty managed in ensuring stability, growth, and socio-economic welfare,25 thereby fulfilling the main demands coming from the populace and generating a high degree of trust in the Presidency.26

The nexus between energy sector development and authoritarianism may also be portrayed through international interaction models, under three main perspectives. First, the strategic significance of energy export (see below) allegedly contributed to international and particularly Western actors «apathy» vis-à-vis democratic involution in Azerbaijan.27 Second, centralization and verticalization of power and the decision-making process came all but unwelcome to foreign investors, which could pursue a «one-stop shopping» business model in dealing with local counterpart.28 As a consequence, a vicious circle was established whereby power centralization and verticalization facilitated the re-launch of the energy sector, while in turn the latter ended up in enhancing the former. Third and lastly, if the theory whereby «international engagement» represents a source of domestic legitimation for authoritarian rule holds true,29 it is hard to overlook the impact exerted on consensus-building by the regime’s interactions with the most relevant international actors.

At international level «geology» stood as the main tool to protect and promote the national interest, fostering the country’s economic growth and enhancing its strategic posture. In this, the role assigned to energy politics cannot be fully grasped unless Geology is considered together with Geography and Geopolitics. It was not merely the possession of – comparatively limited – oil and gas resources to provide Baku a pivotal role in opening up the Caspian riches to the West. It was, instead, also the possibility to provide the land-locked Central Asian producers an outlet to western market simultaneously bypassing the politically sensitive northern and southern routes, respectively through Russia and Iran.30 As a result, Azerbaijan plays a «double role» in the competition for the exploitation of Caspian area riches: of energy producer and exporter, on the one hand, and of potential energy transit state, on the other. The latter role has traditionally been played particularly with Turkmenistan, whose meaningful reserves of natural gas are transported to European markets through a trans-Caspian infrastructure transiting Azerbaijani territory.

It is hard to overlook the strategic benefits ensured to Baku by its dual position as an oil producer and a privileged link between Central Asia’s oil resources and the outside world.31 In particular, it allowed Azerbaijan to build resilience to external conditioning, thereby achieving the central objective driving the foreign policy of a minor power. Moreover, resilience was built not only in absorptive terms – as the capability to mitigate the consequences of external shocks – but also in adaptive and transformative ones. In other words, Azerbaijan’s «double role» has translated into its ability to interdict external threats and to exercise a significant autonomous role at international level.32

Geology helped building an absorptive capability ever since the 1990s, as the initial exploitation of the national extractive potential was understood by national authorities and served in as an «insurance policy»33 for the country’s recently gained independence. As a senior US Department of Energy officer put it, by «bring[ing] in as many large companies from different countries as possible […] Aliyev’s strategy was to try to gain as much support for Azerbaijan and its development plans», first and foremost by the United States.34

Since the beginning of the century, absorptive capabilities were enhanced along with adaptive ones throughout the second phase of the energy sector development. This process aimed at strengthening Azerbaijan’s newly-acquired role of energy supplier to European consumers by extending it to the politically sensitive natural gas sector. Baku became the key Brussels’ interlocutor in its attempt to inaugurate a new gas supply channel – the South Caucasus Pipeline (SGC) – intended as a critical tool to safeguard EU energy security by means of diversification of its supply network – overly reliant on an allegedly unreliable and threatening Russia. Moreover, not only Baku emerged as a pivotal EU interlocutor in its energy security strategy, but also as an enabler for the latter. Indeed, it has been chiefly as a result of Azerbaijan’s initiative and funding that the SGC vision survived the 2007-2008 financial crisis, though in a different and partially scaled down version. The new and often recalled (energy) security provider role taken on by Azerbaijan resulted in a significant increase of its posture and bargaining power vis-à-vis the EU. This, in turn, allowed the South Caucasian republic to resist Brussels’ transformative power, fulfilling its own economic and strategic interests without granting any concessions in terms of domestic policies.35

As the SGC funding scheme showed, the reinvestment of the energy rent abroad became the key to acquire adaptive and limited yet significant transformative capabilities. The pro-active «going abroad strategy» foremost targeted the transit states of national hydrocarbons, with a view to downgrade the power asymmetry– and the consequent vulnerability – resulting from the relations between a landlocked state, as Azerbaijan, and its windows to the market. Accordingly, such a strategy was pursued vis-à-vis the countries along the SGC route, particularly Georgia and Turkey, becoming the first foreign investor in both countries.

While targeting primarily the energy sectors, the reinvestment of the rent went well beyond that. In particular it became a tool to propose – and, partially, realize – new axes for transportation, aimed at making Azerbaijan an hub in the developing trans-continental communication network. Accordingly, Baku did invest in the realization of an East-West Caucasian-Anatolian transportation axis running parallel to the pipelines, as well as in a North-South one, aimed at connecting the Persian Gulf to Russia.

Last but not least, the strategic benefits deriving from Geology did also play a decisive role in the solution of the Azerbaijan-Armenia protracted conflict over Nagorno-Karabakh. Not only energy rents did progressively widen the power gap between the belligerents in Azerbaijan’s favour, but they also allowed Baku to successfully pursuit an isolation strategy vis-à-vis Erevan.36 By excluding and isolating Armenia from the regional infrastructural projects, Baku aimed at further chocking a land-locked country with most of its borders – in the west with Turkey, and in the east with Azerbaijan – already sealed as a consequence of the 1992-’94. Baku’s goal was providing incentives to Yerevan for reaching a compromise while widening the above-mentioned power gap.

3. Azerbaijan and the Karabakh: the post-conflict scenario

The military victory in the Nagorno-Karabakh 44 Days War stood as the culmination of a thirty-years-long effort, which mobilized all the national power resources and shaped the entire course of Azerbaijani domestic and foreign policy.37 The «new beginning» has not come free of relevant challenges, as it has been unfolding along two parallel tracks: the efforts towards rehabilitation, reconstruction and reintegration of the recaptured districts surrounding the enclave, on the one hand, and the achievement of a long term solution for the enclave itself, de facto still controlled by the self-proclaimed Republic of Artsakh under the protection of the newly-deployed Russian peacekeeping force, on the other.

3.1. Rehabilitation, reconstruction, and reintegration of the recaptured districts

Rehabilitation, reconstruction, and reintegration of the recaptured districts are a critically important government commitment, under both a domestic and international perspective. First and foremost, it is closely intertwined with the long-standing engagement to return the internally displaced persons (IDPs) which left the area as a consequence of the 1992-1994 war. Indeed, around the «Great Return» – as it has been labelled by the authorities38 – has revolved much of Baku’s domestic and international narrative on the Nagorno-Karabakh conflict. While the promise/duty to ensure the return of Azerbaijani IDPs to their native lands represented a long-standing commitment towards both the IDPs and the wider national community, the right to do so has traditionally been a cornerstone of Azerbaijan’s arguments put forward in international fora for the sake of the restoration of the country’s territorial integrity. Second, the reconstruction and reintegration activities do stand as a «showcase» for the international community as well as for Armenians in the Nagorno-Karabakh enclave. The restoration work is indeed understood and portrayed to foreign audience, along with the victorious conduct of the war, as a demonstration of the «strength» of both the Azerbaijani state and people.39 It also serves the attempt to move towards full reintegration of the Nagorno-Karabakh enclave itself, by making Armenian residents «realize that they are better off under Azerbaijan’s leadership».40 Third, the reconstruction and reintegration plan intertwines also with Azerbaijan’s foreign policy strategy, where the need to attract foreign investments and know-how overlaps with the resolve to enhance interdependence with friendly countries, in the attempt to gain an indirect form of legitimation, or an «insurance policy», over the reconquered territories.

Not by chance, Baku has spared no effort in designing and start implementing a very ambitious reconstruction plan,41 revolving around three main vectors: restoring communications, promoting housing construction, and building a new productive base. To the implementation of this reconstruction plan, the government allocated US$1.3 billion in 2021,42 while creating a fund – the Karabakh Revival Fund – aimed at attracting and facilitating the flow of investments from both individuals and legal entities. The logic behind the plan is to make reconquered territories self-sufficient, in both energy and economic terms, making use of the most advanced technologies available. To this end, the vision of technology and social innovation driven by «smart cities» and «smart villages» was put forward, with a view to build settlements using «digital technology, innovation and knowledge to improve rural economic opportunities, infrastructure, services, and governance».43 The construction of the first smart villages was started in the Zangilan district, with a view of allowing the beginning of the «Great Return» from 2022 onward44 under the supervision of the UNHCR.45 The «smart city» concept is also accompanied and supported by the vision of a «Green Karabakh», namely an eco-friendly area whose constructions shall make use of energy-saving green technologies and whose primary energy demand shall be ensured by renewables. Building upon the high potential for renewable energy development in the region, this may ensure self-sufficiency and sustainability to the Karabakh, without increasing fossil fuels consumption and draining export-oriented oil and gas resources. In 2021, four hydroelectric power stations were reconstructed and put into operation.46 Moreover, in order to promote regional development, the government plans to set up and subside large agrobusiness enterprises, the so-called agro-parks, as well as industrial parks in two newly-established economic zones in the recaptured territories – namely Aghdam and the Araz Valley, in the Jabrayil district, close to the East-West and North-South axis for transportation. Finally, significant results were also achieved on the restoration of transport and logistics, especially with the inauguration of an airport in the recaptured city of Fizuli as well as of the «Victory Road», which starts from the Hajigabul-Minjivan-Zangezur corridor and stretches to Shusha, the main city of Karabakh. Moreover, the construction of a railway running along the country’s southern border up to the border with Armenia also started and is expected to be completed in 2023.47

Notwithstanding the efforts made and the results already achieved, many hurdles still hamper the path leading to the delivery of the government’s commitments. Sceptical voices emerged regarding the possibility to start the Great Return in the short-term,48 while attracting foreign investments and know-how seems to be quite hard to achieve. Despite a generally favourable business climate and the organization, in October 2021, of the first «Rebuild Karabakh» international exhibition,49 foreign companies seem still to find it difficult to enter the reconstruction business, leaving de facto the upper hand to Turkish firms.50 The latter are traditionally closer and more adaptable to Azerbaijani business environment, with the ability to benefit from existing and functioning business fora and favoured by resolute governmental support. The hitherto lukewarm involvement of foreign companies in the reconstruction of Karabakh seems to derive from two related factors: on the one hand, the scarce level of transparency reported by the major international consultancy companies; on the other, a context that, one year after the end of the conflict, is still anything but stable.

3.2. The bumpy road to peace in Nagorno-Karabakh

In 2021, the Azerbaijan-Armenia peace process was characterized by the very slow pace of negotiations and promising developments, against a backdrop where encouraging statements from the belligerents were accompanied by repeated moments of diplomatic tension, frequent military clashes, and hatred speeches.

Both governments’ highest representatives repeatedly expressed their belief on the necessity to come to a peace agreement, accounting for and reflecting the reality on the ground. However, not only peace negotiations failed to advance towards a comprehensive resolution of the conflict, but dialogue proved to be very difficult also on very basic issues. Among the latter, two were the main catalysts for tension: Baku’s refusal to hand over to Armenia the alleged prisoners of war held captive in the country – which it maintains do not actually exist51 – and, on the opposite side, Erevan’s refusal to hand-over to Azerbaijan the minefields maps of the territories lost in the war – which allegedly it does not entirely possess.52 Though during 2021 Baku and Erevan managed to reach some maps-for-prisoners swap deal,53 by the end of the year the estimated number of Armenian still kept prisoners in Azerbaijan ranged between 40 and 140,54 while the number of landmines still planted in the recaptured territories could still be, according to Azerbaijani estimations, close to one million.55

The issue of Nagorno-Karabakh’s future status – traditional and current main bone of contention, left open by the ceasefire declaration ending the 2020 war – was not dealt with at the negotiating table, where a «step-by-step» approach, rather than a package solution, is currently followed. Here, the delimitation and demarcation of the border between Azerbaijan and Armenia arose as the first and main step to be taken to move towards normalization of relations as well as to avert a new spiral of violence and conflict. Indeed, the reconquest of the previously Armenia-occupied districts laying between Nagorno-Karabakh and Armenia took the Azerbaijani army to an international border that de facto did never exist, and left the two armies much closer to one another than ever in the past.56 Since late Spring 2021,57 this led to a creeping border crisis resulting from the attempt to build and reinforce favourable military positions ahead of negotiations on border demarcation, with reiterated Azerbaijani encroachments in Armenian territory and several deadly military clashes.58 Having reached its apex in November – with the largest clashes since the ceasefire – the crisis was somehow defused in the following weeks thanks to Russian mediation. Convened by Russian President Vladimir Putin in Sochi on November 26 for the second meeting of 2021 after the one held in Moscow in January, Aliyev and Armenian Prime Minister Nikol Pashinyan signed a declaration aimed at the establishment of a bilateral commission for the delimitation and demarcation of the border.59

The main responsibility to avoid a new escalation and to bring the parties at the negotiating table has been taken over by the Russian Federation. Ever since the ceasefire brokered in November 2020 and the deployment of a Russian peacekeeping force, the latter has become the key power broker between Azerbaijan and Armenia. In this, post-conflict developments confirmed and sealed an already unfolding trend, shaped by the progressive withdraw of western powers from Southern Caucasus and by the inversely proportional growth of the regional powers’ influence in the area. As a matter of fact, in 2021 Euro-Atlantic actors did keep the Nagorno-Karabakh issue at arm’s length,60 while the OSCE Minsk Group proved incapable of relaunching its mediation role.61 The main proposals for breaking the vicious circle of regional polarization did come instead from local actors – namely Turkey and Iran, along with Russia.62

Moscow’s upper hand in the post-conflict peacebuilding process resulted in a complex mix of tactical opportunities and strategic risks for Baku – the more so in the perduring lack of a clear mandate for the Russian peacekeeping force deployed following the ceasefire agreement. The major strategic risk results from the possibility of Russia transforming a temporary63 deployment in Azerbaijani territory into a permanent one. Not only in the mid- and long-term this may result in making the self-proclaimed Artsakh Republic a Russian «Trojan horse» deployed on the still undefined and un-demarcated border – as has already happened in Georgia, Moldova, and Ukraine.64 It may also, in the shot-term, affect Baku’s attempt to de-legitimize and isolate the remains of the self-proclaimed Artsakh Republic – Which Baku consider as a necessary pre-requisite for reintegrating what it merely conceives as an area of the country inhabited by an Armenian minority, not deserving a special status.65 It is therefore not by chance that during 2021 the strategic partnership with Turkey – seen as a key balancer of Russia – was enhanced and brought to the level of a full alliance. The resulting Shusha Declaration, signed by the parties on 15 June, during a visit of Turkish President Tayyip Erdoğan to the recaptured territories and in the city elevated to a symbol of the victory over the Armenians.

At the same time, Moscow’s influence entails relevant tactical opportunities for Baku, both in a short- and mid-term perspective. Above all, Azerbaijan and Russia have a joint priority highlighted in Article 9 of the ceasefire declaration. This is the opening of all regional communication routes, beginning with the opening of the so called Zangezur corridor connecting Azerbaijan and the Nakhchivan Autonomous Republic through southern Armenia and unimpeded by Armenian checkpoints. Fully in line with traditional Azerbaijani foreign policy vectors, the unblocking of regional communications can ensure important economic dividends for Russia itself, which in fact has placed the realization of the Zangezur corridor at the very heart of its mediation and confidence-building effort. Accordingly, the first post-war meeting between Aliyev and Pashinyan, hosted by Putin on 11 January, resulted in a four-points trilateral agreement whereby the parts undertook to unblock all economic and transport regional links and to create, for this purpose, a working group at the level of deputy-prime ministers.66

In a wider perspective, unblocking regional communication channels has emerged as the most promising vector for post-conflict confidence-building between the former belligerents. Indeed, it holds the potential not only to revolutionize the regional transport map, but also to break the «zero-sum game» situation which, so far, has characterized the regional infrastructural politics. For the first time it is promoted an inclusive and shared development perspective – which, not by chance, has been positively welcomed not only by Armenia, 67 but also from Turkey and Iran. However, notwithstanding the envisaged advantages to the parties, the concrete implementation of the process did suffer from the above-mentioned repeated moments of crisis and did not itself come free of tensions. In fact, Baku, facing a rather cautious approach on Erevan’s side,68 adopted an assertive and at times aggressive stance towards Armenia, either by rising claims on «West Zangezur» – i.e. southern Armenian province of Syunik – or by reverting to not-so-veiled threats of invasion.69

Despite all the difficulties in pursuing the opening of regional transport channels, this policy remains the privileged path potentially leading to the normalization of relations between Baku and Erevan. Moreover, the chances to break the vicious circle of regional polarization significantly increased in fall 2021 by virtue of the renewed attempt to normalize diplomatic relations between Turkey and Armenia. The two countries followed a step-by-step approach to normalization not dissimilar from the one unfolding in Karabakh between Armenia and Azerbaijan. As a result, the possibility to reopen the border between the two countries – sealed by Ankara in 1993 as a retaliation for Armenian military advance in Azerbaijan – and restarting communication emerged as a cornerstone of the diplomatic initiative and as the main incentive for reaching a compromise. Of course, the parallel Turkish-Armenian and the Azerbaijani-Armenian negotiations naturally overlap and may influence each other. This has prompted Baku to declare its support to the former,70 with a view to enhance the latter’s chance of success.

4. Towards a new phase in national energy strategy

The inauguration, in December 2020, of the last of the three SGC segments symbolically sealed the second phase of development of Azerbaijan’s energy sector. 2021 marked therefore the beginning of a new development phase, shaped, according to Elshad Nasirov, vice president for investment and marketing of the State Oil Company of the Republic of Azerbaijan (SOCAR), by three interconnected objectives: full exploitation of national reserves, search for new outlet markets for national production, and relaunch of Azerbaijan’s transit role for hydrocarbons extracted in third countries71 – first and foremost natural gas from Turkmenistan.

Such an attempt unfolds in a wider energy scenario marked by the resolute drive towards energy transition, challenging over the mid- and long-term the very foundation of the Azerbaijani Petro-State. Accordingly, the «new beginning» in national energy strategy entails both a domestic and external level of action. The former is needed to sustain production and to make the extractive industry compatible with buyers’ policies. The latter, instead, results from the need to engage old and new partners along the whole energy chain. Both levels of action are primarily functional to the increase in gas volumes exported along the SGC, which stands as the cornerstone of the energy sector new development phase.

4.1. The external track: relaunching energy diplomacy in an ever-muting market scenario

The increase in gas volumes exported to European markets is technically feasible by virtue of the scalable capacity of the SGC infrastructures.72 However, the increase itself naturally depends upon enabling conditions at both the ends of the energy chain – namely additional gas volumes in upstream and additional demand in downstream. Therefore, besides acting domestically on the attempt to ramp-up production (see below), in 2021 Baku’s gave a new impetus to energy diplomacy, pursuing the double objective of engaging potential European buyers and relaunching Azerbaijan’s s hub role between Central Asia and the EU.

From the first perspective, colloquia were launched with potential buyers, especially in the Balkan area. The latter may indeed be connected to the TAP either through the almost completed Interconnector Greece-Bulgaria or adding a new infrastructure from Albania to the Croatian transmission system – the so-called Ionian-Adriatic Pipeline. Thus, starting from spring 2021, discussion have been launched with Bulgaria, Serbia and Croatia.73

It was however in the attempt to relaunch a transit role for the gas from Turkmenistan – the fourth fourth country by proven reserves at global level – that Azerbaijani energy diplomacy registered the most significant achievements, accounting for a breakthrough in bilateral Baku-Ashgabat relations. They have traditionally been strained by clashing sovereignty claims over off-shore fields in the Caspian, which in turn did hinder cooperation and added obstacles to the already complex realization of a trans-Caspian gas pipeline (TCGP). In January 2021 the foreign ministers of Azerbaijan and Turkmenistan, Jeyhun Bayramov and Rashid Meredov, signed a Memorandum of Understanding (MoU) for the joint development of the previously contested field in the Caspian Sea.74 By manifesting the resolve to jointly develop the potential of a long disputed field,75 the MoU marked a decisive change of pace in bilateral relations76 and breathed new life into the TCGP – a long-stalled project first introduced by the US administration in 1999, and successively taken over by the EU in its drive toward diversification of its gas supply system.

It should therefore come as no surprise that, in April 2021, a US-based firm, Trans Caspian Resources (TCR), was created with the explicit aim of constructing the TCGP related infrastructure – though on a minor scale in comparison to its initial version.77 The TCGP project benefitted from wide political and potentially financial support on both sides of the Atlantic. Indeed, labelled as a «project of common interest», the TCGP has been eligible to attract EU funds under the Connecting Europe Facility Program. The pipeline would be also allegedly eligible for funding from the US International Development Finance Corporation, the Trade and Development Agency, and the Countering Russian Influence Fund.78

In the first semester of 2021 the results achieved by Azerbaijan on the upstream front, were not matched by analogous progresses on the downstream side. The two-years fall in gas demand resulting from the pandemic, the possibility for European consumers to access in the mid-term to new, large, and closer sources of supply in Eastern Mediterranean, and the greater supply flexibility allowed by the LNG and by the purchase in the spot market, all ostensibly contributed to reduce operators’ interest in subscribing to the long-term purchase commitments necessary to expand the SGC’s pipeline capacity. Moreover, the success by Turkey in diversifying its import network added uncertainties to the Azerbaijani drive towards expanding gas export. This was reflected in the controversy over the renewal of one of the two Turkey-Azerbaijan gas contracts, expired in April 2021 and renewed with a short-term agreement in September.79 However, both the market conditions and the mid- and long-term operators’ expectations radically mutated over the course of 2021, as a result of the rapid tightening of the gas market as well as of the increasing tensions in Russian-Ukrainian relations. While the former resulted in a record increase in gas prices for European consumers,80 the latter – as was the case with the analogous crisis occurred after 2003 – gave a new impetus to the resolve to diversify European gas supply network,81 making it less vulnerable to the alleged Moscow’s blackmail power.

A clear demonstration of the rapidly changing gas market conditions – and, consequently, of the new window of opportunity to increase Azerbaijani export – came from the opposite outcomes of two market test initiatives launched by the TAP consortium (TAP-AG), with a view of receiving non-binding demands for additional volumes of gas. Launched during the spring and concluded in July 2021, the first market test went desert,82 as a reflection of the above-mentioned conditions. However, as the latter rapidly changed in mid-2021, the second market test, launched in July and concluded in September, had a different result. The TAP consortium received indeed non-binding proposals at all the interconnection points along the pipeline route, in Greece, Albania and Italy.83 Accordingly, TAP-AG scheduled to start in January2022 the next phases of the expansions process, on whose basis it will be decided whether and to what extent the capacity of the pipeline will be expanded.84 Interestingly, with a view to respond to the rapidly-changing market conditions, the consortium foresaw the possibility to adopt an «accelerated timeline», leading to the start of the binding bidding phase in July 2022 – instead of July 2023, as originally planned. Should this be the case, the consortium also foresaw the possibility to launch in 2022 a new and parallel non-binding phase, leading to a binding one in 2023.85

4.2. The domestic track: ramping-up production, reforming the market

On the domestic front, the new development phase chiefly entailed the need to ramp-up oil and gas production, sustaining the production in already operating fields and eventually developing new ones. However, the task is not easy because of over-dependence on major fields, whose production is declining.86 In fact, while new projects are still struggling to take off, notwithstanding the substantial resource base available to the country, the 2021 production data confirmed that, consistently with a long-standing trend, the bulk of national oil and gas production was still ensured by the two major off-shore fields, namely Azeri-Chirag-Guneshli (ACG) and Shah Deniz, jointly accounting for 77% and 82% of the annual oil and gas output.87 While the production from the AGC field has been on a downward trend since 2010, Shah Deniz has still to reach the production plateau. Nonetheless, the additional volumes planned to be extracted from the field have already found their way to buyers in the west. Therefore, an increase in gas production would be needed in order to expand export capacity towards European markets.

A rise in the production of the major extractive projects was not recorded in 2021, allegedly as a result of the cyclical nature of investing activities, which tend to slow down in oversupply phases. This was the case with the off-shore fields in the Caspian, currently at different stages of development. A first case in point is the Absheron field which, developed by Total under a production-sharing contract (PSC) dating back to 2009, may ensure up to 5 bcm/y of gas. After the discovery of gas and the signing of an agreement with SOCAR, establishing the terms for production, respectively in 2011 and 2016,88 the start-up of the first development phase has been pushed back twice – first from 2019 to 2021 and lately from 2021 to the end 2022. Also, it is still unclear when the second phase, originally planned for 2022-23, whose production is to be sold abroad, will be starting. Analogous delays were registered in the new phases of development of the Umid-Babek block, aimed at adding additional volumes to the modest ones already produced by SOCAR in partnership with Nobel Energy. The new development phase is focusing on the Umid-2 block which may ensure additional 5 bcm/y of gas. However, after having delayed the start of production to fall 2022,89 SOCAR has hitherto been unable to attract international partners. Furthermore, no significant progresses have been made during 2021 in the joint Azerbaijani-Turkmen development of the Dostlug field. The only company bucking the above-mentioned trend in 2021 was BP – the main foreign investor in the country and operator at Shah Deniz. BP is indeed involved in two projects currently at different stages – the ACG Deep Gas Project and the Shafag-Asiman. They may ensure significant additional volumes of gas, which, nonetheless, are unlikely to have a significant impact on overall national gas production before the second half of the decade.

Increasing production may not be enough to ensure significant additional volumes for export as well as mid-to -long-term sustainability of the national development model. The latter may be ensured primarily by reforming the market, with the objective of rationalizing the energy consumption and partially liberalizing a centrally-managed energy sector. These actions were suggested to Azerbaijan by a recently published International Energy Agency report, which highlighted the need for a transition from Azerbaijan’s gradual transition «from its current system – which is government-owned and -operated, vertically integrated and subsidised – to competitive markets with significant private sector participation and cost-covering energy prices».90 Reforming the energy subsidies system plays a central role in the drive towards market reform. Besides draining an elevate quota on annual GDP,91 subsides run contrary to energy efficiency and keep domestic consumption high, thus draining resources for exports. Moreover subsides, together with government-set low tariffs to end-user for gas, oil and electricity, do hinder the development of the renewable sector, as well as new market entrants and investors.

While 2021 did not mark a change of pace towards market reform, more encouraging developments came from the decarbonization strategy. This is a critically important segment of the national energy policy, as the transition target adopted by Azerbaijani clients – first and foremost by the EU – implies in the mid- and long-term a fall in demand for hydrocarbons without carbon capture, utilisation and storage. Consistently with a strategy launched in 2010, the national oil company further reduced carbon emissions in extraction at its oil and gas fields, currently at 2%. The company management also pledged to reach net zero emissions by 2022.92

5. Conclusions

Fall 2020 marked a watershed in Azerbaijan’s recent history and, therefore, brought about the hope that 2021 could be see a «new beginning» for the country, bringing new opportunities along with equally significant challenges, requiring the ability to adapt to an ever-changing scenario. Yet, on both fronts – namely Nagorno-Karabakh and energy politics – Azerbaijan seems to be stuck between a traditional and increasingly obsolete approach and the attempt to put forward new visions and strategies.

Nowhere is this more evident than in Karabakh. Peace remains fragile, as 2021 ended with a mixed record characterized by the presence of challenges, still menacing a new spiral of violence, and opportunities, arising from a new and inclusive prospect for development. The latter results primarily from the possibility to open-up trans-regional communication channels, a potential game-changer capable of breaking the vicious circle of strategic polarization. Yet, despite all the encouraging signals coming from the negotiating table, the overall equilibrium remains unstable, not only as a result of the still unresolved issues arising from the conflict, but also in relation to the regional environment. Indeed, while the «regionalization» of the conflict resolution brings relevant advantages, at the same time it risks making it a hostage of power politics, i.e. of the state of relations between regional powers.

A non-dissimilar, yet more encouraging, trend is also detectable in energy politics. Here the launch of the third phase of energy development comes with deep challenges on both the domestic and external front. Building on a traditionally effective energy diplomacy, Azerbaijan has managed to achieve significant results with a view to enhance its energy supplier and security provider role. Moreover, the price hike in both the oil and gas sector as well as the looming EU-Russian crisis over Ukraine may reverse, at least in the short-term, the declining demand trend, opening a new window of opportunity for Baku. However, a more resolute domestic action seems to be essential in order to adapt to a rapidly changing global energy scenario. It is hard to overestimate the scale of the challenge the latter brings to Azerbaijan, as some of the steps to be taken – and, in particular rationalizing consumption and attracting new investments through liberalization – endanger the centrally planned and managed system typical of a petro-state. Still, a yet partial reform of the sector seems to be necessary to ensure the sustainability of Azerbaijan’s development model.

ISSN 2385-2526