The Potential Impact of Improving Azeri-Iranian Relations on the Extraction of Oil and Natural Gas from the Caspian Sea

Last week Azerbaijani President Ilham Aliyev met with his Iranian counterpart Hassan Rouhani and Iranian Supreme Leader Ayatollah Ali Khamenei in Tehran. These meetings mark a significant step towards improving relations between the two countries which have been strained in recent years due to Iran’s displeasure with Azerbaijan’s positive relations with the United States and Israel, Azerbaijan’s distaste for former Iranian President Mahmoud Ahmadinejad, and accusations from both sides that the other side was interfering with their internal affairs. The potential for US-Iranian détente and fear over Russia’s actions in the Caucasus have removed an impediment for dialogue and created an incentive to cooperate respectively. Such cooperation could have a significant impact on regional energy cooperation which will likely affect global energy markets.

One result of improved Azeri-Iranian relations could be the development of oil and natural gas pipelines that link the Caspian Sea to the Persian Gulf. Such a route was not feasible in recent years for a variety of reasons such as poor relations between Baku and Tehran, US Sanctions, and Russian pressure. Now we find ourselves in situation where Azerbaijan has an interest in improving relations with Iran while knowing that such an attempt is unlikely to damage Baku’s relationship with Washington. In fact Washington will likely support such a move as the US has an interest in undermining Russia’s energy policy. The EU and Turkey will also support an improvement in Azeri-Iranian relations as Brussels and Ankara  have a long-term interest in diversifying their energy supplies. Such a move goes against Russian interests. It should be noted that during the visit President Aliyev was quoted as saying, "Many powers do not want a friendship between Iran and Azerbaijan, and are after disrupting this relationship. The officials of the two countries must make efforts to counter these steps." Presumably he was talking about Russia.

Russia’s regional military presence puts pressure on Azerbaijan which forces Baku to exercise caution with regards to any actions that could undermine Russia's energy interests. Currently, Russia has troops based in neighboring Armenia and in the Georgian break away republics of South Ossetia and Abkhazia. At the present there is no indication that Moscow has any plans to invade Azerbaijan. That said, Russia annexation of Crimea and the 2008 Russian-Georgian War serve as testaments that Moscow will act decisively to protect Russian interests. Suffice it to say Russia's regional military presence does not sit well with Baku. By improving relations with Iran and maintaining positive relations with Turkey and Georgia, Azerbaijan could gain support against Russia. An indicator that will likely precede significant energy cooperation is a security agreement between Tehran and Baku with the potential involvement of Ankara and Tbilisi. The reality is that significant cooperation in the region goes against Russian interests thus a credible deterrent will need to precede any developments in energy policy that go against Moscow’s interests. Azerbaijan by itself is too weak to counter any threats from Russia, however, if Baku is credibly backed by Tehran and Ankara, Moscow will have to be more careful in how it responds to any shifts in Azerbaijani energy policy that go against Russian interests.