The NYTimes published an article today detailing a set of energy deals concluded between Russia and Turkey in Ankara, with Prime Ministers Putin and Erdogan present.  The deal was with Russian energy giant Gazprom, allowing state-owned Gazprom access to Turkish territorial waters, a benefit Russian czars and party chairmen since Peter the Great (pictured above — who ruled Russia from 1682-1725) have sought by force (or threat of force).  Now, in true “Western” fashion, Russia, Inc. is signing a business contract that provides benefits to Turkey as well.  Turkey desires to become an energy hub and has obtained a Russian commitment to build a pipeline across its territory.

The Times article explains how Western interests have competed with Russia for energy agreements with Turkey in order to avoid Russian dominance of the Eurasian energy pipeline system, and the consequent vulnerability of energy-hungry Western Europe.  Russia has used pipeline cutoffs before for political purposes, e.g. with the Ukraine.

Turkey for its part, with a less pro-Western government than heretofore, headed by the moderate Islamist AKP party, probably does not mind playing what the Brits over a century ago called, “the Great Game,” or the Great Power competition in the East.  Has Vlad the Great bested Peter??

The New York Times features an article today by Andrew E. Kramer concerning Russia’s gas worries.  Kramer explains that as gas prices (not to be confused with oil prices) fall, Russia’s state-run gas company Gazprom will suffer.  The main reason is because Gazprom is contractually obligated to purchase gas from its Central Asian former-soviet neighbors at high prices.
Example:

• Imports from Uzbekistan are roughly $340 per 1,000 cubic meters.
• Meanwhile, gas that Russia sells to Ukraine is priced at $230 per 1,000 cubic meters.

Because of Gazprom’s contracts with its neighbors, Russia has been forced to close many of its domestic gas fields due to reduced demand for gas, which will drop this year by 60 billion cubic meters globally (according to Jonathan P. Stern from the Oxford Institute for Energy Studies).

The drop in demand and prices directly impacts Moscow’s revenue.  Gazprom is the largest taxpayer in Russia.  It payed about $40 billion in taxes in 2008 but that number is expected to drop to $22.5 billion in 2009.

All of this spells crisis for Russia’s budget and domestic gas production economy.  And the hardest hit will be Russian citizens.  Yesterday’s report from the Russian Federal Statistics Service revealed that country’s economy contracted by 9.5% in the first quarter of 2009.  This indicates a degree of failure of PM Putin’s stimulus package and has led President Medvedev to criticize his senior ministers for their lack of attention to diversifying the Russian economy.

Russia’s southern neighbors, such as Turkmenistan and Azerbaijan are no doubt keenly aware of Russia’s current purchasing power vulnerability and financial weakness.  Some might even be expecting Gazprom to renege on some of its contracts in order to bolster domestic Russian gas production.  As gas production and revenues fall, the window continues to open wider for the EU’s Nabucco Pipeline plans.  It seems natural to expect Nabucco to continue to develop provided prices and demand remain low for Russian gas.

The New York-based website Eurasianet.org, part of the Open Society Institute, issued 2 reports today on happenings in the Caucasus.

First, Stephen Blank, a professor at the US Army War College, writes an article on Friday’s agreement in the form of a memorandum of understanding between Russia’s Gazprom (state controlled energy company) and the State Oil Company of Azerbaijan (SOCAR).  Blank’s argument is that the deal is indicative of Russia’s nervousness about its slippery hold on energy reserves in the Caspian Basin.  And Russia has cause to worry.  The Caucasus is quite an active playing ground between Western interests and the agenda of resurgent Russia.  The August Georgia war that placed the breakaway republics of Abkhazia and South Ossetia firmly under Moscow’s watch is the most obvious manifestation of Russia-West tension.  What are the causes?  To name a few:

• NATO expansion: Georgia has repeatedly expressed its desire to join the strategic organization
• Geostrategic positioning: The Caucasus is a region that gives a potent military a chance to strike at the soft underbelly of Russia.
• Russia’s shaky hold on the northern Caucasus: Daghestan, Ingushetia, Chechnya… the list continues.  All are breakaway regions and by asserting itself over the independent nations of the southern Caucasus, Russia is indirectly able to reaffirm its hold on the northern areas.
• Pipeline politics: A key pipeline runs from Baku in Azerbaijan, through Georgian territory, and then into Turkey.  Various EU and American groups plan to use the pipeline as part of the Nabucco project that will eventually pipe gas from Turkmenistan all the way to Vienna.  This runs in opposition to Russian plans to continue its energy dominance.

And so the agreement between SOCAR and Gazprom is particularly interesting because it essentially guarantees that Azerbaijan will pump its gas to Russia, and not towards Georgia and Turkey.  The conditions: Russia will match whatever price for gas Europe is willing to pay on the Nabucco project.  Russia is desperate.  Its economy is faltering, the ruble continues to lose value, and its population continues to shrink.  The Kremlin has showered Azerbaijan with good will this past month, and Foreign Minister Sergei Lavrov even made a trip to Baku.  By saying it will match the European price, Russia is signaling that it is willing to cut its losses over the Nabucco/South Stream dispute just as long as it continues to be the dominating force in the gas market to Europe… that is, unless the diplomats and planners in Brussels intensify their work on Nabucco and present Azerbaijan a stronger offer than Moscow can do.

And that’s not all…

The Caucasus dominated Eurasianet.org’s radar with another story - this one about Georgia.  As Russia showers aid on Abkhazia and South Ossetia, Washington is planning to secure a western-leaning Georgia.  Giorgi Lomsadze, a freelance reporter based in Tbilisi, explains:

US Joint Chiefs of Staff Deputy Chairman General James Cartwright stated on March 30 that the US will “soon” begin training Georgian soldiers for “homeland defense.” The announcement comes as the most specific indication to date of how the United States plans to assist Georgia’s post-war military reforms.  Read more.

The US is propping up Tblisi as a strong counterweight to the more Moscow-friendly Azerbaijan and Armenia, and it is guaranteeing the security for the Nabucco pipeline that can ultimately take away a part of Russia’s energy dominance.