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A Strategy for Cooperative Energy Security in the Caucasus

Robert M. Cutler

Abstract: The West's primary interest in Eurasian energy is to ensure a political environment that not only restrains conflict but also implements cooperation for common energy security. An organization such as the proposed EurAsian Oil and Gas Association (EAOGA) can promote the technical means for getting the energy to market, allowing capabilities to be pooled, costs shared, and benefits distributed, by building on the triad of political, economic, and legal accomplishments established by the Energy Charter Treaty (ECT). It would promote resolution of issues that are not in themselves political but have strong political overtones, particularly international regimes for the development of energy resources. Private capital from the West seeks a stable investment environment, as a precondition to deepening economic relations with the NIS. With an adjunct "EAOGA-Bank" institution, it could ensure that the national systems of banking, finance, and legislation in the newly independent states (NIS) of the former Soviet Union dovetail with international requirements. Contents: 
  1. [Introductory Remarks]
  2. Recent Developments
  3. The Main Idea
  4. Making EAOGA Work
  5. The Logic of Cooperation among EAOGA-ists
  6. Conclusion
Suggested citation for this webpage:

Robert M. Cutler, “A Strategy for Cooperative Energy Security in the Caucasus,” Caspian Crossroads 3, no. 1 (Summer 1997): 23–29, available at ⟨http://www.robertcutler.org/CES/html/ar97cxr.html⟩, accessed 26 June 2017


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A Strategy for Cooperative Energy Security in the Caucasus

Oil and gas development in the former Soviet area does not regularly hit the world headlines or otherwise grab the attention of Western publics, as does live satellite coverage of military violence.[1] That is why the topic is hard for political executives to focus on. Yet only pro-active cooperation among the Western governments, together with the oil companies and nongovernmental organizations as well as governments in the region, can provide the vital incentives that will actually promote economic development.

Economic development is necessary to create the prosperity that will permit resources to be devoted to providing food, shelter, and medical care to populations in the Caspian region. If this is not accomplished, then their discontent will in the 21st century be mobilized for social unrest, and that will create political uncertainty that will definitely prevent the region's oil and gas from getting to market. Therefore we have a disappearing window of opportunity to establish the necessary infrastructure of transport, communications, and humanitarian support.

1. Recent Developments

It might seem at first that an export pipeline construction and transportation infrastructure between Baku and Black Sea are the only real area for regional cooperation. This would suggest a very limited bilateral cooperation, between Azerbaijan and Georgia, and in a very narrow area. However, in June at the Crans Montana Forum in Switzerland, a project was announced to establish a Common Market of the Caucasus. Specifically, it was proposed to establish a regional investment bank in Tbilisi.

Since this initiative is at present most vigorously promoted by Chechen representatives seeking to enlarge their margin of political maneuver from Moscow, some Russian hesitancy is to be expected. However, in mid-July Russia, Chechnya, and Azerbaijan signed an accord providing for repair of the pipeline through Chechnya and a distribution of transport revenues has been tentatively agreed.[2] Moreover, Russia's representation in the Assembly of Baltic Sea States by Kaliningrad and St. Petersburg provides a precedent for constituent units of the Russian Federation to participate autonomously in multilateral Caucasus-based international organizations.

The separate proposition (made at an international conference in Tbilisi in early June) for the convocation of an Assembly of the Peoples of the Caucasus is also of interest. This could go ahead despite hesitations expressed by certain Armenian legislators. It could provide a cooperative multilateral forum through committee meetings, if the Assembly itself could avoid inflammatory political declarations (e.g., on the Georgia-Abkhazia conflict). The precedent of the Baltic Assembly shows that such a multilateral discussion forum (through ad hoc working groups or constituted committees) can indeed promote cooperation where networks of bilateral contacts cannot.

The Assembly's own practical work should concentrate on humanitarian, health, and environment related issues, which private interests tend to neglect because they do not bear the social cost of these. For this, cooperation among nongovernmental organiza-

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tions of different countries of the region will be important. In that sphere Western private voluntary organizations, as well as the European Bank for Reconstruction and Development and various European Union organs, already play an important role. The Assembly would provide an institutionalized focal point for their cooperation with and promotion of local nongovernmental organizations.

This cooperation must be deepened, since international private investment is targeted largely at energy exploration and export and the states in the region do not at present have significant autonomous fiscal resources. Even if the scale of such cooperation is relatively modest, its successful pursuit would be a positive precedent at least as important for the future, as any concrete results of such cooperation. The important thing is to promote cooperation among whatever countries and political-administrative units are interested in cooperating. Candidates for cooperation at a subsequent stage extend beyond the region to include Ukraine, Uzbekistan, Kazakstan, and Turkmenistan.

2. The Main Idea

Two economic preconditions for regional economic cooperation are that it should be mutually beneficial, and that the cooperating countries should have a similar level of development. Further, there must not be political hostilities among them, for otherwise these will dominate any attempt at economic cooperation. Multilateral forums can frequently do this better than any network of bilateral contacts. Any successful Caucasus cooperation could be brought into relation with the tripartite Central Asian Union, which includes Kazakhstan, Kyrgyzstan, and Uzbekistan (with Turkmenistan as observer).

Multilateral forums can frequently do this better than any network of bilateral contacts. ANy successful Caucasus cooperation could be brought into relation with the tripartite Central Asian Union, which includes Kazakhstan, Kyrgyzstan, and Uzbekistan (with Turkmenistan as observer).

The West's primary interest is to ensure a political environment that not only restrains conflict but also implements cooperation for common energy security. The technical problems of pipeline construction are inseparable from the political issues of who will finance and build them, where they will be built, and how they will be managed. However, in all the bargaining over financial and technological packages, it seems frequently forgotten that no one party alone can successfully exploit the region's oil and gas wealth.

The governments in the region are unable to do this themselves. Recent public statements by the oil and gas companies have made it abundantly clear that they themselves decline to intervene to solve regional political problems or even participate in intergovernmental negotiations over transport fees. Only the Western governments can both establish the political incentives and promotes the technical means for getting the energy to market.

The recent moves towards cooperation in the Caucasus, mentioned above, are only one step towards guaranteeing cooperative energy security for producers and consumers together. In fact, the groundwork for achieving cooperative energy security together with economic development in EurAsia has already been established. What is needed is to implement and extend the vision of the Energy Charter Treaty.[3] The solution is to establish a EurAsian Oil and Gas Association or EAOGA to free the vast energy potential of the former Soviet area, guaranteeing the West's energy security and preserving Western interests by short-circuiting the fuse of the demographic timebomb in the Caucasus and Central Asia.[4] Like the European Coal and Steel Community, EAOGA would be inspired by the idea of guaranteeing national and international security multilaterally, but it would work differently.[5]

Whereas France and Germany created the European Coal and Steel Community in the early 1950s in order place under international control the physical resources upon which conventional war-making depended (and so prevent another war in Europe), EAOGA itself need not be an international organization in the classical and traditional sense. Indeed, for it to be so may not be politically feasible. Therefore EAOGA would be an association, not a community. Specifically, it would neither create an international bureaucracy like UNCTAD did in the 1970s, nor supersede national authority as the Law of the Sea Treaty sought to do. Nor would EAOGA seek to control natural resources in the former Soviet area or their extraction and sale.

Specifically, it would neither create an international bureaucracy like UNCTAD did in the 1970s, nor supersede national authority as the Law of the Sea Treaty sought to do. Nor would EAOGA week to control natural resources in the former Soviet area or their extraction and sale.

This means that Western governments would not be the only players at the table. Transnational oil com-

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panies would be there, not necessarily just in the hallways. From the NIS, local political groups (including environmental groups) would also be there; international sponsorship of their participation will promote "civil society" in these countries. EAOGA can establish a framework that allows capabilities to be pooled, costs shared, and benefits distributed, by building on the triad of political, economic, and legal accomplishments established by the Energy Charter Treaty (ECT).

ECT covers issues of the repatriation of capital, other capital transfers, and energy transit through "GATT-by-reference" treatment. This means that it "calls down" the relevant GATT articles into national tariff schedules. It establishes a framework for promoting international regimes for the development of energy resources and to ensure that the national systems of banking, finance, and legislation in the NIS dovetail with international requirements. These questions have never before been addressed in the former Soviet context, and no international treaty has ever addressed them in this manner at all. It will enter into force, with support from the U.S. government and the international oil industry, because it requires ratification by only 30 of the 52 signatories.[6]

3. Making EAOGA Work

The Caucasus region provides an opportunity to work out practical procedures and evaluate unexpected obstacles before full implementation of the ECT, a "pre-test" of EAOGA principles and methods. Their terms could by common consent be applied to the Caucasus through the Caucasus Investment Bank as an experiment to perfect the mechanism of its wider application after formal entry into force. All potential problems to successful energy exploration and development in the whole of Eurasia are present in microcosm in the Caucasus.

The issues involved are not in themselves political but have strong political overtones. It may therefore be efficient to organize EAOGA along working-group lines, perhaps with provision for ad hoc general forums to deal with energy-security issues that ECT did not address. EAOGA would thus merely be the crucial catalyst to establish the rules of the game, create the general framework for the necessary cooperative regimes, provide a forum for coordinating crisis management, define criteria for guiding behavior, and provide stable expectations for routine commercial and political transactions. All the players in the game agree that these are desirable. Certainly it is enough for starters.

The best way to move pragmatically towards a lean institution such as described above, is probably through a limited series of international conferences like those called in the early 1990s, after the Soviet collapse, on coordination of Western assistance to the NIS.

That differentiated series of large international meetings, structured as a set of Coordinating Conferences and Technical Assistance Working Groups, could even serve as a model. The key and indispensable function of such meetings is to gather together in one venue of a large number of responsible decision-makers and highly qualified experts, focusing their attention. These conferences could be oriented towards evaluating the evolving Caucasus cooperating and implementing the broader EAOGA on the basis of experience thereby gained.

There are other, specific ways that the development of EAOGA could build on the foundation laid by ECT. One of these ways is key. ECT requires the harmonization of national legislation and international practice, and it has provisions for implementing essential environmental protection. It extends a national-

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treatment regime to all investment in the energy sector both pre-existing and subsequent to the Treaty. However, two extant problems that ECT did not address were are the tremendous instability of legal regimes for foreign direct investment, particular in the energy sector, and punitively high rates of taxation. Some NIS are dealing with these issues on a piecemeal basis. Only concerted Western encouragement and support will assure a comprehensive solution. Only EAOGA provides a forum for that. Again, cooperation in the Caucasus will provide necessary experience as well as focus institutional attention and accelerate momentum.

The Caucasus Investment Bank could help avoid a patchwork quilt of noncomplementary legal and financial regimes. Such an effort would cost next to nothing in the short run and avoid significant transaction costs in the long run. In view of this, it will in the longer run be useful to establish a new EAOGA-wide international financial institution somewhat like the Bank for International Settlements (BIS), which was originally founded after the First World War for the original purpose of tracking and accounting for German reparations payments imposed by the Treaty of Versailles.

Like the BIS, such a EaogaBank would not have to be a bank per se but it would play a key and irreplaceable role that no one now performs. It would not have to have executive authority. It would be a mere technical complement, but an essential one, to EAOGA's broader mandates. Its focal task, analogous to the BIS's original charge, would be to track payments and financial arrangements for oil and gas development in the former Soviet area. The chaos of the banking systems in many of the NIS makes this most essential, but at present not even the International Energy Agency (IEA) set up by the West in Paris after the 1973 oil embargo, seeks to do that.

The IEA should not play more than a consultative and facilitating role in EAOGA. That is because Russia is cool to the IEA, where she is vastly outnumbered by the industrialized West. In 1995, for example, she responded coolly to an American proposal to hold an international diplomatic conference on the Caspian under IEA auspices partly for this reason. Even with Russia co-opted into the G−7, it is doubtful that she would prefer such a forum.

The EaogaBank, as a new financial institution would not duplicate work already performed by such organizations as U.S. Agency for International Development and various programs of the European Union. Rather, it would serve as a clearing house to evaluate what has worked where and what has not worked elsewhere, and how well or how badly. It could be argued that such a clearing house does not require great effort to establish and is not even necessarily justified. However, EaogaBank could play a still more important, crucial and irreplaceable role.

This new bank could act not only as an information clearing house but also as a problem-oriented analytical center for EAOGA itself. The EaogaBank could furthermore impose operational discipline upon banks in the NIS, especially if it were given authority to grant a generally respected international certification or accreditation for financing of oil and gas development. In brief, EAOGA would give the West leverage on Russia by providing a forum for joint cooperation among the non-Russian NIS, while giving Russia specific incentives to cooperate and the transnational energy corporations the stable business environment they need.

Creating the EaogaBank is one of three concrete steps that EAOGA could take to resolve the three most significant practical problems: establishing a positive investment climate, guaranteeing reliable transport to market for the resources, and assuring political stability. EAOGA and the EaogaBank would solve this first problem by helping to put in place the transnational financial and legal regimes into the present international-legal vacuum. Legal issues are the difficult starting point because the NIS do not generally have their legal systems in order and have no strong procedures in place where systems are established.

EaogaBank could thus have two initial tasks. First, as a financial institution it could seek to regularize payments transfers with the West and particular among the NIS themselves, improving the banking situation in the NIS. This would promote the comprehensive development not only of banking and tax law in those countries, but also accounting, inheritance, property, insurance, and bankruptcy law, all of which need to be developed and integrated with international norms. The

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NIS, including Russia, often fail to understand how Western investment decisions are made and how bad an uncertain business environment is.[7] The worst sticking point in this regard is the general absence of appropriate legislation in the NIS. The ECT would be EAOGA's point of reference for implementing the common political decisions already there embodied.

Second, as an analytical center and research institution, the EaogaBank should also coordinate, promote, and act as a clearing-house for environmental studies. Environmental issues are difficult because these are not typically included on the traditional agenda of international affairs, yet they are extremely expensive, interdisciplinary, and especially requisite of cooperation.[8] In the past, such ecological studies have often produced political consensus facilitating agreement on commonly acceptable financing and implementation of necessary technical work.

On that basis EAOGA and its Bank could work towards solving the second problem, i.e., financing a rational and secure transport system. The unique forum provided by EAOGA would help to depoliticize transport and pipeline problems, motivating their resolution. The most difficult areas are often environmental and legal-financial issues in particular. These two types of issues frequently interrelate in practice, complicating the more traditional economic and political issues, which themselves interact in the issue area of energy security. This is exactly where EAOGA can help most in the beginning.

The third step that EAOGA could take involves the general problem of political stability in the region. EAOGA cannot assure the solution of this directly, but as a technical and relatively depoliticized forum, at once nongovernmental and intergovernmental, it could make a unique contribution. For example, by inviting not just government representatives from the South Caucasus but also "nongovernmental organizations" from the region, and with the transnational corporations (TNCs) in the hallway, EAOGA could bring to bear in one place and at one time a huge amount of political pressure, moral suasion, and economic incentive.

The existence of a transparent multilateral forum gives the Western governments added leverage by providing another tool through which to cajole Russia and the other NIS countries as needed, with the TNCs playing both carrot and stick. Institutions of cooperation in the Caucasus would provide the prototype for all EurAsia, pointing the way.

4. The Logic of Cooperation among EAOGA-ists

Although Russia's domestic politics lead her international interests to wander into Asia, the country is also European by geography and by economy. EAOGA is an unsurpassable vehicle for anchoring Russia in Europe and the West, much better even than the G−7. The West has to take strategic perspective, shaking off the false belief in own impotence to influence how these situations evolve.[9] EAOGA gives the West the chance to give the non-Russian NIS a collective voice, decreasing Russia's ability to be arbitrary, at the same time as it encourages Russia's positive cooperation and involvement through concrete incentives and rewards.

By providing a forum of transparency, including transparency of information about the financing of foreign direct investment by TNCs, EAOGA would afford the non-Russia NIS countries a common voice, decreasing Russia's ability to be arbitrary. At same time, this would not represent a threat to Russia; indeed, it would encourage Russian involvement, and even promote the cooperative interest of the oil and gas ministries in their struggle within the Kremlin against other narrower-minded political forces.

EAOGA would thus have both the potential to act in all three of the areas mentioned above, as well as the means to take concrete steps to promote the resolution of these problems. Just as the European Coal and Steel Community created the possibility of positive-sum bargains by giving the parties incentives to cooperate and participate even though they had to relinquish some things, so EAOGA as a loose institution would enable the parties to compromise because they would get something in return.

A summary of the West's incentive structure makes clear why the West should encourage its foundation. All "political" instruments at the West's disposal are either pure types or combinations of three aspects of international life: financial-legal, economic, and mili-

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tary-strategic. Actually there is also a fourth, "political-cultural" instrument, which involves propagating and implementing norms of democratic participation and market-based competitive entrepreneurialism. This list of instruments also represents a typology of Western interests and of the issues that engage it in the NIS. To realize its interests, the West can spend any of three things: words, lives, and money.

This last is not a distinction without a difference; it represents a difference of agent and incentive structure. Specifically, the multilateralism minimizes the political risk that Western elites have to run. In the past, multilateral actions in finance and economics have given a phenomenal return on investment where they have been put into effect. This return is easy to overlook because it is hard to see and hear: we know it has worked when the dog has not barked. For exactly this reason the U.S. has supported the Energy Charter Treaty: it offers a low-cost way (in terms of taxpayer dollars) to help the NIS economies to rebuild, as well as a source of natural gas and oil for energy-hungry Western Europe, other than North Africa and the Persian Gulf.

5. Conclusion

The Common Market of the Caucasus/Eurasia is a worthwhile project that the European Union should seriously consider supporting, taking into account any trepidations on Russia's part.

But even the Stavropol region has for years had a transborder agreement with the Donbass, with the full and formal support of both the Russian and the Ukrainian governments. The Caucasus cooperation is worthwhile on its own terms and is a useful first step towards a EAOGA-based implementation of the Energy Charter Treaty.

The ECT is itself unprecedented in international commerce, law, and practice. It has already set the terms for providing most-favored-nation status to all countries across three continents—Europe, Asia, and North America—in the exploitation of resources in the energy sector. It has already established the preconditions for harmonizing national and global legal regimes governing foreign direct investment in this economic sector transnationally and internationally. It has done this by invoking existing norms of international law established by Western practice, and by motivating their integration into national legal systems of the NIS. It already provides a transition period to protect the industries native to the former Soviet area.

Russian fears of loss of "control" of the former Soviet area can be answered by the assertion that Russia’s participation will safeguard her interests. It is possible that the non-Russian NIS may fear a multilateral organization to develop oil and gas reserves will become a kind of superministry of the Commonwelath of Independent States. This fear can be assuaged

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through Western participation and oversight, and the development of specific modalities for this. However, like cooperation in the Caucasus, EAOGA must be motivated by the Western powers. Neither Russia nor the other NIS have the strength to promote its success, and the TNCs have neither the means nor, frankly, the desire.

The common sense in founding EAOGA is clear. Private capital from the West seeks a stable investment environment, as a precondition to deepening economic relations with the NIS. That means creating conditions for legal and financial stability in the NIS, which in turn requires prior engagement by the states both of the West and of the NIS (including Russia). Precisely this kind of engagement is what the history of this decade has shown to be most successful, least costly, and least risky.

All major contestants in this, the Greatest Game in Eurasia, are tired of playing without a set of rules or, worse still, with rules dreamt up on the fly by competitors.[10] The rules will not determine the result of the game: but the TNCs' hesitation until now shows that in the absence of rules, most people will just stay home. Since we are all condemned to live no longer in a global village but in the same house, the only result of that way of proceeding will be collective cabin fever: and, as Sartre put it in his play No Exit, "Hell is other people." The way out is to free energy through EAOGA practice. Cooperation in the Caucasus points in the direction of that way.

Since we are all condemned to live no longer in a global village but in the same house, the only result of that way of proceeding will be collective cabin fever: and, as Sartre put it in his play No Exit, “Hell is other people.” The way out is to free energy through EAOGA practice. Cooperation in the Caucasus points in the direction of that way.

Notes

[1]. For conversations towards the end of June 1997, I wish to thank Erjan Kurbanov, whose comments on some of these ideas I have incorporated into the present text. For a lengthier exposition of the reasoning for cooperative energy security, which complements but does not duplicate the present article, see Robert M. Cutler, "Towards Cooperative Energy Security in the South Caucasus," Caucasian Regional Studies, 1 (No. 1, 1996): pp. 71–81.

[2]. The Organization for Security and Cooperation in Europe is making another strong push for settling the Karabakh conflict, but as of this writing (19 July 1997) the conflicting parties have not approved the proposal. Such a settlement is in Armenia's objective interest, not only because it opens up the possibility of oil transport through Armenia to Turkey, but also because Azerbaijan may otherwise spend much of its oil revenue, with popular support, to purchase weapons and for a military build-up. Clearly the use of oil revenues to solve internal social problems is to be preferred.

[3]. The best brief overview available of the history, goals, and means of the ECT is Bruce Barnard, "European Energy Charter: Swapping Technology for Oil," Europe, no. 341 (November 1994), pp. 20–21. Although slightly dated, Robert DeBauw, "Government Promotion of Markets: The European Energy Charter," Energy Policy, vol. 20, no. 5 (May 1992), pp. 430–432, is also good.

[4]. The term "former Soviet area" is generally preferred here over "former Soviet Union" because it refers to a specific geographic area rather than to a non-existing political entity. The term "newly independent states" (NIS) is reserved for reference to the collection of independent political units that succeeded the USSR.

[5]. For a concise contemporary assessment of the European Coal and Steel Community, see Clive Archer, Organizing Europe: The Institutions of Integration, 2nd ed. (London: Edward Arnold, 1994), pp. 73–84.

[6]. ECT was enthusiastically signed by all members of the OECD, the European Union, the NIS, and the European ex-members of the Soviet-bloc Comecon. The EU members, plus its members-in-waiting, plus the NIS, plus the ex-Comecon countries (all very favorable to the Treaty) together satisfy the minimum 30 ratifications.

[7]. One of the most striking examples is the series of irrational decisions taken 1992–93 by the Yeltsin government, against the advice of its own experts, concerning exploitation of the Shtokmanovskoe (Stockmann) oil and gas condensate field in the Barents Sea region, which still languishes undeveloped. For background, see "Shtokmanovskoye Award Blasted," Oil and Gas Journal, vol. 90, no. 50 (14 December 1992), p. 19.

[8]. Environmental issues are far from trivial in the region. Oil companies absolutely cannot avoid them. To mention only the most striking trend, if the Caspian Sea continues to rise (and it could rise ten feet in the next 25 years), it would inundate oil refineries in Baku and petrochemical plants in Sumgait, and turn land rigs in northwest Kazakhstan into offshore operations. The resulting pollution would be enormous and moreover affect all littoral states, contaminating rich agricultural land. There is a growing scientific literature on this issue. For a brief note, see "Threat of Rising Caspian," East European Markets, vol. 14, no. 11 (27 May 1994), pp. 4–5.

[9].One could almost justifiably speak of "obsessional indecision." See David Shapiro, Autonomyand Rigid Character (New York: Basic Books, 1981), pp. 89–90.

[10]. For instructive background, see Umirserik T. Kassenow [Kasenov], Zentralasien und Russland: der dornige Weg zu gleichberechtigten Beziehungen, Berichte 1995/14 (Cologne: Bundesinstitut für Ostwissenschaftliche und internationale Studien, 1995).


Dr. Robert M. Cutlerwebsiteemail ] was educated at MIT and The University of Michigan, where he earned a Ph.D. in Political Science, and has specialized and consulted in the international affairs of Europe, Russia, and Eurasia since the late 1970s. He has held research and teaching positions at major universities in the United States, Canada, France, Switzerland, and Russia, and contributed to leading policy reviews and academic journals as well as the print and electronic mass media in three languages.

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