Trade and Energy Impact on the Turkish-Azerbaijani Relations

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1. The volatility of Turkish-Azerbaijani  Relations

After the Soviet Union’s dissolution in the 1990s,  new states proclaimed their independence in the  Caucasus, including Georgia, Armenia, and  Azerbaijan. To take advantage of the void, Turkey  and its allies – the US and EU countries – worked to  win those countries over. 

Azerbaijan, specifically, has large reserves of oil and  gas resources, and the EU has desired to reach them  through Turkey to reduce reliance on Russian gas.  Globally, Azerbaijan was one of the first countries in  oil discoveries. Because of its large reserves and the  introduction of advanced technology into drilling,  production, and export processes, Azerbaijan  achieved fiscal gains reflected in its economic  situation, which has increased the pace of economic  development, per capita income, and demand for  imported goods. Thus, Azerbaijan has become an  international investment destination for many  countries. 

Being a regional neighbor, Turkey has sought a  share of investments and trade through its political  and economic relations based on the two countries’  common Turkish nationalism, history, and language.  It is to be noted that Turkey is a consumer state that  relies almost entirely on the import of energy  resources and seeks to diversify its sources and  reduce reliance on Russia and Iran.

2. The volatility of Turkish-Azerbaijani  Relations

It is recognized that Turkish-Azerbaijani relations  have always been strong and are described as “one  nation in two states.” There is also a clear  convergence between Turkey and Azerbaijan for  several reasons.  

1- The two countries belong to the same  Turkish identity; they have almost the same  Turkish nationalism orientation.  

2- Having developed a Turkish nationalistic  discourse in the last 20 years, Turkey has greatly enhanced its coherence with  Azerbaijan.  

3- Both countries are geographically close,  unlike other Turkish-speaking countries such  as Uzbekistan or Kazakhstan.  

4- Upon establishing the Turkish Republic,  many Azerbaijani intellectuals moved from  Russia to Turkey to help establish the new  Turkish Republic. 

5- The two countries had a certain attitude  towards a common regional enemy,  Armenia.  

In one way or another, those reasons contributed to  creating strategic relations between the two  countries, but that did not prevent gaps’ presence.

In 1992, Turkey did not intervene in the war on  Azerbaijan’s side when Armenian forces attacked  and occupied Karabakh. 

Despite Turkish public and political pressure to  intervene on the Azerbaijani forces’ side, Prime  Minister Suleiman Demirel refused military  intervention as the United Nations, the Organization  for Security and Cooperation in Europe, and NATO  got involved to find a solution to the issue. In fact, Demirel’s rejection was mainly to avoid a  possible confrontation between Turkey and Russia,  which then supported Armenia and caused the  collapse of Azerbaijan’s government, headed by  Abulfaz Elchibey, on June 4, 1993. Then, Haydar  Aliyev acquired (took) the power.

Under Aliyev, Azerbaijan’s foreign policy was  directed towards Turkey and the West. Still, when  he realized that the West was not providing the  necessary support to resolve the Karabakh conflict,  he strengthened the ties with Russia, especially  after its military intervention against Georgia in  August 2008. 

At that time, the sense of insecurity intensified in  Azerbaijan when Turkey proceeded to normalize  relations with Armenia. As a result, the two countries’  relations declined, and Azerbaijan developed its relations  with Russia, China, Japan, South Korea, and Israel.

During the failed Turkish-Armenian normalization  attempt, Azerbaijan raised the price of natural gas  exported to Turkey to $ 300 per thousand cubic  meters─ it was sold for $120 to Turkey while it was  priced at $335 on the international market.  

President Ilham Aliyev then emphasized that the  price of natural gas that Turkey was purchasing  from the Shah Diniz project had to be adjusted in  accordance with the market prices.  

Pressures against Turkish companies in Azerbaijan  and boycott against Turkish goods marked the same  period.

In August 2010, former President Abdullah Gül  visited Azerbaijan and signed a strategic partnership  and cooperation agreement between the two  countries, reviving relations after two years of  bilateral tensions.  

During the negotiations, measures had been taken  for greater stability and security in the Caucasus and  for finding a solution to the Nagorno-Karabakh  conflict within Azerbaijan’s territorial integrity and  Armenia’s withdrawal from the occupied territories.  The Turkish-Azerbaijani relations were back to  normal after 2012 with an expansion of trade and  investment between them. The two countries were  also linked to a new network of gas and oil  pipelines, roads, and railways. 

After the break-up between 2008 and 2010, the  concept of “One Nation in Two States”  reemerged to mark the two countries’ relations.

3. Turkish-Azerbaijani Economic Relations

Economic interests play an important role in  relations between the two countries. Since the  establishment of Azerbaijan three decades ago, the  two countries have deepened their economic  partnership through bilateral trade, joint energy  projects, and direct investments – which added a  strong foundation to their multifaceted strategic  cooperation.  

Azerbaijan formed the bridge linking Turkey to the  other Turkish countries in Central Asia. Similarly,  Turkey emerged as a key link for Azerbaijan to  Western and international markets, facilitating its  integration into the international economic community. 

In 2007, the two countries signed the Economic  Partnership Program and Action Plan in several  areas, including trade, free economic zone, and  transport. In 2010, the two countries signed an  agreement to establish the Turkish-Azerbaijani  Strategic Cooperation Council and took steps to  remove the economic relations obstacles.

3:1. Turkish-Azerbaijani Trade 

Oil and natural gas account for 90% of Azerbaijani  exports, which explains the impact of the  international market’s oil price fluctuations on the  state budget and GDP. 

Due to the international oil price increase,  Azerbaijan enjoyed sustained economic growth up  to 2014. However, Azerbaijani GDP decreased  gradually with oil’s lower price – $74 billion in 2013  to $47 billion in 2018. In 2019, Azerbaijan exported  goods with a total value of $19.7 billion, while  imports reached $13 billion. 

Turkey is Azerbaijan’s second-largest trading  partner. In terms of imports, Turkey is ranked  second after Russia. Turkey’s share of Azerbaijan’s  imports reached 15% of the total trade volume with  a value of $1.6 billion in 2019. As for Azerbaijan’s  exports, Turkey is the second after Italy, with a  value of $2.55 billion. 

According to 2020 statistics, Azerbaijan’s population  has approximately reached 10 million, so Azerbaijan  is mostly an importing country seeking to secure its needs, including machinery, equipment, food,  metals, and chemicals. The discovery of energy  resources (oil, gas) has led to a significant increase  in per capita income and the imports volume,  making Azerbaijan a fertile ground for exports.  Through their historical ties and national  interdependence, Turkey seeks to expand its trade  with Azerbaijan. In 2019, Turkish President Erdogan  signed trade agreements worth $15 billion with Azerbaijan President Aliyev. Thus, Turkey will be  Azerbaijan’s first trading partner in the coming  years.

3:2. Investment Flows

Turkey has invested about $11 billion in the  Azerbaijani economy, while Azerbaijan’s investment  in Turkey is expected to reach $20 billion by 2020.  The number of Azerbaijani companies in Turkey has  reached 2467. The most important of them is  SOCAR – a State-owned company working in the oil,  gas, and petrochemical industries – while the  number of Turkish companies invested in Azerbaijan  has reached 3,400, most of which operate in the  construction and textile industry.

4. Pipeline and transportation routes between Turkey and Azerbaijan

Azerbaijan is a geographically closed country and  does not have sea ports. Therefore, it relies on  pipelines and land networks with neighboring states  for importing and exporting operations. Under the  Soviet Union, the infrastructure of manufacturing  and extracting oil and natural gas in Azerbaijan was  primitive and traditional, with resources not fully  utilized. Even After the dissolution of the Soviet  Union, Russia maintained partnerships with  Azerbaijan in the fields of energy and defense. In  fact, Russian energy companies like Gazprom,  Lukoil, and Transneft are still operating in  Azerbaijan’s oil and gas manufacturing. Besides, The  Russians maintain influence on the state-owned  Azerbaijan energy company: SOCAR.

4.1: Baku – Tbilisi – Ceyhan pipeline

BTC Pipeline carries the crude oil from Azerbaijan through Georgia to Ceyhan Terminal at Turkey’s Mediterranean Coast. It also transports some of Kazakhstan and Turkmenistan’s oil.

The underground pipeline is 1768 km long, and the production capacity has been 1 million barrels per day since March 2009 — expanded later to 1.2 million barrels per day.

By linking the geographically closed Caspian Sea to international markets, Azerbaijan has become politically closer to the Western world. Despite the economic advantages of the pipeline for the countries involved, the project had political objectives. First, the U.S sought to break the Russian monopoly on the Caspian Sea region by being the main supporter of the project. Second, the pipeline passage from Armenia was abandoned due to the Azerbaijani reservations, causing its isolation.

Azerbaijan exports oil through two other lines. First, The Baku-Subsa oil pipeline, operating since 1998, is a 520-mile pipeline whose production is loaded at its terminus on tankers in the Georgian port of Subsa and exported through the Bosphorus Strait in Istanbul to the international market. Second, the Baku-Novorossiysk Oil Pipeline, which passes through Russia, is also an old line built during the Soviet Union era.

4.2: Natural gas pipelines between Turkey and Azerbaijan

Striving to be a strategic exporter of natural gas in the international market, Azerbijan constantly seeks to export its reserves of 1.2 trillion cubic meters in the Shah Deniz field and other sources that may exceed 2.6 trillion cubic meters. Given other natural gas fields’ potential, Azerbaijan’s gas production is expected to reach 50 billion cubic meters annually between 2020 and 2025.

Azerbaijan began to define strategic objectives concerning the gas export policy after the successful implementation of the oil pipeline strategy.

Azerbaijan is currently the only country in the Caspian Sea region that exports gas to international markets, so the European Union considers it to be the main supplier of the TANAP pipeline. By producing and exporting gas as a strategic product that can contribute effectively to its access to a large geostrategic and financial center, Azerbaijan will be able to export more, thereby increasing financial returns, income, and investment.

4.3: TANAP Pipeline

TANAP pipeline runs from Shah Diniz field in Azerbaijan through Georgia and Turkey. It will be connected to the TAP pipeline in İpsala district of Edirne, Turkey, on the Greek border. The pipeline conveys natural gas to Europe, and the first amount was pumped into Turkey in 2020.

Azerbaijan will achieve significant economic gains out of TANAP as it has 68% of its ownership. That is, it will receive the proceeds from the transfer of gas to European markets. Additionally, Azerbaijan and Turkey laid the foundation for a refinery project in Pitkim. Given the two projects, SOCAR’s investment in Turkey will amount to $17 billion, making it the largest company and Azerbaijan the largest country to invest in the Turkish industry.

One of the most important provisions of the TANAP construction agreement is the deal between the Azerbaijani company SOCAR and the Turkish company BOTAS on the possibility of applying a request to TANAP project management by the Governments of Azerbaijan and Turkey. Under the request, the line is leased to Britain, the United States of America, and the European Union with the Adriatic Pipeline (TAP).

In this case, those countries can invest in the pipeline in the future. They can also import energy resources by connecting the project with other pipes, giving TANAP a global geopolitical significance.

Additionally, Baku-Tiflis-Erzurum Natural Gas Pipeline (980 km long) has been active since 2007. BTE provides the transition of Azerbaijan natural gas produced in Shah Deniz to Georgia and Turkey.

After the war with Armenia, Azerbaijan signed an exchange agreement with Iran for natural gas export. Accordingly, Iran has been transporting Azeri natural gas to Nakhchivan since the end of 2006. To conduct this process, Azerbaijan sends gas to Iran through Baku Astara Line, and Iran transports it to Nakhchivan through Salmas Nakhchivan Line. Iran receives a 15% commission from transit income.

Azerbaijan has become the main supplier of gas to Turkey, reducing its dependence on Russian one. From January to May 2020, Turkey imported 4.5 million cubic meters of Azerbaijani gas, which is about 20.4% higher than the same period in 2019. On the other hand, imports from Russia decreased by almost 62% in May 2020, compared to the same month in 2019. It is expected that Azerbaijan will officially become the largest gas supplier to Turkey, so the $7.8 billion, 930-kilometer-long Russian TurkStream pipeline project, built across the Black Sea and opened in early 2020, will be affected. The decline in Russian gas flows is also due to increased imports of BOTA from Algeria and Nigeria.

Turkish concerns regarding the growing Russian military influence in Syria and the Black Sea and the disputes over the Libyan conflict could move Turkey to reduce its reliance on Russian gas and increase the dependence on Azerbaijan and other countries’ resources. Therefore, Turkey is interested in the unimpeded flow of Azerbaijani gas, and, as a regional force, it will be ready to defend the gas supply chain politically and militarily. This is evident in Turkey’s position regarding the recent fight between Armenia and Azerbaijan in the Tufuz region of northern Karabakh, where the regional gas, oil, and railway infrastructure is located. Turkey has strengthened its geopolitical position as an important site on pipelines and international trade roads through those projects. Turkey was also able to purchase oil and gas at a lower price, which is crucial given its complete dependence on imports. The State Treasury also benefits from the annual revenue from the pipeline’s passage through its territory.

4.4: Baku-Tbilisi-Kars Railway (BTK)

The Baku-Tbilisi-Kars railway (BTK) is a regional railway that was opened on October 30, 2017. It connects Kars in Turkey, Tbilisi in Georgia, and Baku in Azerbaijan, as shown on map 3. The initial project capacity is 1 million passengers, 6.5 million tons of cargo per year, and is expected to increase to 3 million passengers and 17 million tons of cargo per year by 2034.

The project’s main objective is to improve trade and economic relations between the three countries and gain foreign direct investment by linking Europe to Asia. By connecting BTK to the Marmara tunnel project under the Istanbul Strait, the railway facilitates passengers, cargo, and energy resources transportation. The geography of the railroad and the signatory States’ interdependence show that they have isolated Armenia and supported their integration.

Turkey has achieved political and economic gains through cooperation with Azerbaijan in the fields of energy and trade. As Turkey aims to transform its position into an energy transport and sale center in the region, it is likely to strengthen its relations with Azerbaijan, and Azerbaijani gas will continue to play a vital role in the Turkish strategy. Turkey has also managed to achieve diversity in its energy sources and energy security, relying on Azerbaijan as a reliable resource for several reasons:

1- Geostrategic pipelines that cross Turkish territory into the international market have become the most exported of Azerbaijan’s resources.
2- The two countries benefit from mutual investments, particularly in the energy industry.
3- There is also the common Turkish nationalism that Turkey has been strengthening since the beginning of the third millennium and the social interdependence between the two countries, expressed by “one nation in two States.”

Azerbaijan has achieved economic gains and development through its ability to export reserves to the international market through pipelines and break the Russian monopoly that dominated its resources.

Furthermore, Azerbaijan has become one of the countries that is part of the oil and gas supply chain to the European Union’s States, which strengthens its role and position in international policy.

Hasan Al-Shaghel

Hasan Al-Shaghel

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