Trade and Energy Impact on the Turkish-Azerbaijani Relations
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 ?psala 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.