Caspian Report - Issue 06 - Winter 2014

CASPIAN
PUBLISHED BY CASPIAN STRATEGY INSTITUTE | WINTER 2014 ISSUE: 06
The Southern Corridor
Relevance for Italy
Paolo Magri
From Economy to
Domestic Politics: The
German Attitude Towards
Turkey’s EU Membership
Ebru Turhan
The Caucasus and the
American-Iranian Nuclear
Deal
Alex Vatanka
Final Investment
Decision for
Shah Deniz II
Boosts Prospects
for Southern Gas
Corridor
Gareth M. Winrow

CASPIAN
Publisher
Caspian Strategy Institute
Owner on Behalf of Publisher
Haldun Yavaş
Editor-in-Chief
Efgan Nifti
Managing Editor
Hande Yaşar Ünsal
Editorial Board
Siddharth Saxena, Gönül Tol, Bekir Günay, Efgan Niftiyev, Şaban Kardaş, Svante E. Cornell,
Taleh Ziyadov, Amanda Paul, Mitat Çelikpala, Ayça Ergun, John Roberts, Fatih Macit,
Şener Aktürk, Cemil Ertem, Kornely Kakachia, Ercüment Tezcan, Vladimir Kvint,
Joshua Walker, Sham L. Bathija, Emin Akhundzada, Hayreddin Aydınbaş
Researcher
Seda Birol
Research Assistants
Ali Şenyurt
Ayhan Gücüyener
Emin Emrah Danış
Sina Kısacık
Translator
Cansu Ertosun
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CASPIAN REPORT
2
Almost two decades after signing an agreement on the
exploration of the Azeri-Chirag-Guneshli (ACG) oilfields,
known by many as the ‘deal of the century’, Azerbaijan and
its international partners agreed upon the utilization of
Shah Deniz Phase 2 project, which promises around 1.2
trillion cubic meters of proven reserves. With the Final Investment
Decision (FID) on Shah Deniz Phase 2, the State
Oil Company of Azerbaijan (SOCAR) and its partners will
need to invest up to $35 billion in order to implement the
project. The project is expected to supply 400 bcm of natural
gas to Europe and Turkey, generating around $200 billion
in revenue in 25 years.
Undoubtedly, a comprehensive assessment of the intertwined
geopolitical and economic implications of the
agreement requires a detailed approach, and so the feature
story of this issue, by Gareth M. Winrow, focuses on
the Shah Deniz Phase 2 investment decision and its wider
implications. This represents the biggest natural gas deal
signed in the Caspian to date. SOCAR and the Shah Deniz
partners have also agreed the terms for extending the
Shah Deniz Production Sharing Agreement up to 2048.
The Shah Deniz project is comprised of several elements.
Offshore, it entails the drilling and completion of 26 subsea
wells and the construction of two bridge-linked platforms;
onshore development will see new processing and
compression facilities at Sangachal.
Efgan Nifti
Editor-in-Chief
Twitter: @enifti
efgan.niftiyev@hasen.org.tr
This decision will realise plans to extend the South Caucasus
Pipeline through Azerbaijan and Georgia to connect
with the planned Trans Anatolian Natural Gas Pipeline
(TANAP) across Turkey, and to construct the Trans Adriatic
Pipeline (TAP) across Greece, Albania and into Italy.
Together, these projects, along with gas transmission
infrastructure to Bulgaria, will create a new integrated

EDITORIAL
Southern Gas Corridor (SGC) to Europe, which we discussed
in greater detail in our Fall issue.
The Caspian Report is closely monitoring further developments
regarding the Southern Gas Corridor, and Robert
Cutler and Paolo Magri provide an important analysis of
the role of the SGC in relation to the regional energy map.
HASEN Expert Fatih Macit looks into Turkey’s energy
bill and the possible contribution of the SGC to Turkey’s
natural gas market. This issue also provides analyses on
several key policy matters, such as the Iranian – Western
rapprochement process by Alex Vatanka and Emin Akhundzada.
These articles shed light on the ongoing debate
over whether the process is provisional or will bring permanent
resolution to the long-standing dispute.
Articles by Roman Rukomeda, Fatih Ozbay, Sergii Tolstov,
Mesut Hakkı Casin and Ebru Turhan and Ayhan Erdem
present unique perspectives on Ukrainian politics, Russian
naval build-up, Turkish – German relations and other
key policy questions. The areas covered in the current issue
of the Caspian Report are both wide-ranging and indepth,
providing a comprehensive understanding of the
political and economic developments that will shape the
future of our region.
I wish you an enjoyable read.
ALMOST TWO DECADES
AFTER SIGNING AN
AGREEMENT ON THE
EXPLORATION OF
THE AZERI-CHIRAG-
GUNESHLI (ACG)
OILFIELDS, KNOWN BY
MANY AS THE ‘DEAL
OF THE CENTURY’,
AZERBAIJAN AND
ITS INTERNATIONAL
PARTNERS AGREED
UPON THE UTILIZATION
OF SHAH DENIZ PHASE
2 PROJECT, WHICH
PROMISES AROUND 1.2
TRILLION CUBIC METERS
OF PROVEN RESERVES.

CASPIAN
CASPIAN REPORT
4
06
ALEX VATANKA
The Caucasus and the
American-Iranian
Nuclear Deal
16
GARETH M. WINROW
Final Investment Decision
for Shah Deniz II Boosts
Prospects for Southern
Gas Corridor
28
ROBERT M. CUTLER
The Role of the Southern
Gas Corridor
in Prospects for European
Energy Security
56
EBRU TURHAN
From Economy to
Domestic Politics: The
German Attitude Towards
Turkey’s EU Membership
70
AYHAN ERDEM
Turkish Petroleum
Market is Reshaped by the
New Draft on Petroleum
Market
84
ROVSHAN IBRAHIMOV
Turkish-Armenian
Rapprochement: Defining
the Process and its Impact
on Relations Between
Azerbaijan and Turkey

TABLE OF CONTENS
42
ROMAN RUKOMEDA
Ukraine’s Energy Sector
in 2014: New Chances or
Lost Opportunities
110
FATIH MACIT
Energy Bill of Turkey and Sustainable
Economic Growth
114 EMIN AKHUNDZADA
Iran’s Nuclear Deal with the West and its
Regional Impacts
98
SERGII TOLSTOV
The West and Ukraine
Current Trends,
Treatments and Attitudes
120
128
134
MESUT HAKKI CASIN
Turning the Russian Naval Fleet Back
to Warm Mediterranean Waters
Transformation to a New Rivalry with the
West
FATIH OZBAY
Legal and Illegal Money Transfers as
Russian Foreign Policy Instruments
PAOLO MAGRI
The Southern Corridor Relevance for Italy

ALEX VATANKA
6
THE CAUCASUS AND
THE AMERICAN-IRANIAN
NUCLEAR DEAL
ALEX VATANKA
MIDDLE EAST INSTITUTE, WASHINGTON D.C.

Hassan Rouhani has been striving to say
the right things in order to convince the
international community that Tehran is
changing course.
Since he was elected president of Iran
in June 2013, Hassan Rouhani has
been striving to say the right things
in order to convince the international
community that Tehran is changing
course. Within a few months of coming
to power, he dispatched his foreign
minister Javad Zarif to Geneva, where
in November the Iranians managed
to seal an interim but still important
compromise deal about Iran’s nuclear
program. The world is now eagerly
watching to see if more compromises
can be reached with Tehran, and if a
permanent nuclear settlement can be
expanded to incorporate other contentious
issues that have long divided
Iran from the West and from many
of its immediate neighbours. Among
those neighbours are the South Caucasus
states.
ROUHANI’S PATH TO THE
PRESIDENCY
The November 2013 nuclear deal in
Geneva came only few weeks after
Rouhani visited New York to attend the
annual UN General Assembly, where he
ROUHANI, THE
65-YEAR CLERIC
AND LONG-
TIME REGIME
OPERATIVE,
HAD SOMEHOW
MANAGED TO
THRILL THE
INTERNATIONAL
COMMUNITY.
took the opportunity to meet American
officials face-to-face and had a brief but
historic telephone conversation with
President Barack Obama. This was the
first time in 34 years that an Iranian
president had spoken directly to his
American counterpart. The flurry of
excitement that followed about a new
era in American-Iranian relations
was in that sense wholly justified.
Rouhani, the 65-year cleric and longtime
regime operative, had somehow
managed to thrill the international
community. And his charm offensive
has continued.
At the World Economic Forum in Davos
in January 2014, Rouhani’s remarks
were arguably the most watched of
any leader’s. He focused not on the
issues that are most pressing for Iran’s
foreign relations, notably the stillunresolved
nuclear dispute, but on
Tehran’s newfound quest to return to
the structure of the global economy.
Along those lines, Rouhani set out a
long list of items that his government
will seek to achieve and which together
amount to a formidable policy agenda.
7
CASPIAN REPORT, WINTER 2014

ALEX VATANKA
8
In his own words, Rouhani will
strive to steer his country toward
the mainstream of the international
economy. His government, he vowed,
will set in motion policies that can
become the foundations for an Iranian
economic rebirth. His stated goal is to
turn Iran into one of the ten largest
economies in the world by the middle
of the century.
BY THE TIME ROUHANI CAME TO POWER IN AUGUST 2013,
IRAN’S OIL EXPORTS HAD DROPPED FROM ROUGHLY 2.5
MILLION BARRELS A DAY TO 1 MILLIONS BARRELS AND
TEHRAN’S OIL EXPORT INCOME HAD HALVED, FROM
AROUND $100 BILLION PER YEAR TO $50 BILLION PER
YEAR.
Rouhani’s pledges in Davos were
noteworthy from two fundamental
perspectives. First, even those who
deride Rouhani’s ambitious agenda as
delusional must admit that at minimum,
he is changing the traditional rhetoric
of Tehran. His predecessor, the
inexperienced and populist Mahmoud
Ahmadinejad, had during his 8 years
as president helped push the country
toward deeper reliance on oil-income
and distribution. The way in which
he managed this was fraught with
corruption. Furthermore, the increase
in mass cheap imports from countries
such as China have in turn decimated
Iranian domestic production. Together
with the devastating impact of the
sanctions, which began to bite in
earnest from 2011, the last few years
of the Ahmadinejad presidency was an
economic free-fall.
But to put everything on Ahmadinejad
is to miss the big picture. It was
Iran’s Supreme Leader and ultimate
powerbroker, Ayatollah Ali Khamenei,
who was Ahmadinejad’s initial and
main cheerleader, who when the
sanctions first began to bite dismissed
them as mere pebbles in the path of
the Iranian nation. Khamenei soon
after coined the phrase “khodkafai
eqtesaadi” (economic self-sufficiency)
and said that Iran can do without the
world if that is what it takes to remain
independent and be able to stand up to
international demands regarding its
nuclear program.
But even Ayatollah Khamenei was
flabbergasted by the speed at which
Iran found itself cut off from the world
economy. By the time Rouhani came
to power in August 2013, Iran’s oil
exports had dropped from roughly
2.5 million barrels a day to 1 millions
barrels and Tehran’s oil export income
had halved, from around $100 billion
per year to $50 billion per year. For
the sake of Iran’s internal stability
something had to give, and the dire
economic situation helped convince
Khamenei that a new chapter had to
be opened. Hence, the smiling and
pragmatic Rouhani was permitted by
the regime establishment in Tehran
to run and to win the elections in the
summer of 2013.
IN THE SAME BOAT
Rouhani’s language in Davos was
trail-blazing in more ways than one.
His speech in Davos was effectively a
180-degree turn away from the purported
ideals of “khodkafai” peddled
by his boss, Ayatollah Ali Khamenei.
In fact, the Iranian president said in
Davos that “all nations are in the same
boat.” In other words, nations will either
rise or sink together. Rouhani
did not apply this theory only to Mus-

lim states or to those countries that
have in the past been sympathetic
to Iranian policies. The notion of “all
nations” as interdependent – including
Tehran’s former adversaries
such as the United States - is indeed
a new type of rhetoric coming from
Tehran, and has made Rouhani into
something of an Iranian internationalist.
If such thinking gains further
momentum in Tehran, then the potential
policy ramifications may be
wide-ranging.
That is the principal test for President
Rouhani and the second fundamental
implication of the pledge he made in
Davos about Iran’s yearning to embrace
the world once again. Is it at all
likely that the Iranian Islamist system
will be open to the kinds of transformative
agenda and an entire new relationship
with the world, which in
effect is what Rouhani is calling for
It is one thing to appreciate Rouhani’s
quixotic language and the fact
that the elite in the Islamic Republic
have perhaps re-discovered the virtues
of being an integral part of the
ROUHANI’S LANGUAGE IN DAVOS WAS TRAIL-BLAZING
IN MORE WAYS THAN ONE. HIS SPEECH IN DAVOS WAS
EFFECTIVELY A 180-DEGREE TURN AWAY FROM THE
PURPORTED IDEALS OF “KHODKAFAI” PEDDLED BY HIS
BOSS, AYATOLLAH ALI KHAMENEI.
global economy given the harsh impact
of the sanctions. Still - and this
is something of which the sophisticated
and seasoned Rouhani must be
fully conscious - the re-integration of
the Iranian economy cannot happen
without other and very likely bigger
domestic political adjustments to
some of most hardened and contentious
dogma that remains in place. In
other words, to assume that solving
the Iranian nuclear saga is the path to
Tehran’s total redemption is naïve at
best.
What are those likely bigger political
adjustments The list of demands is
long and will depend on who is asked.
Outside Iran, the United States, Israel
9
CASPIAN REPORT, WINTER 2014
Iran and P5+1
negotiations in
Almaty.

President of Iran
Hassan Rouhani.
ALEX VATANKA
10
THE RE-INTEGRATION OF THE IRANIAN ECONOMY
CANNOT HAPPEN WITHOUT OTHER AND VERY LIKELY
BIGGER DOMESTIC POLITICAL ADJUSTMENTS TO SOME
OF MOST HARDENED AND CONTENTIOUS DOGMA THAT
REMAINS IN PLACE.
or Saudi Arabia will first expect to
see a change in Tehran’s belligerence
toward them before they can be convinced
that Rouhani’s words represent
a tectonic shift. But even among
some of Iran’s smaller immediate
neighbours, there is plenty of scepticism
about the likely discrepancy between
Rouhani’s promises and Iran’s
action. In the meantime, a successful
and sustainable overhaul of Iran’s foreign
policy has first of all to be convincing
for neighbouring countries in
the Persian Gulf or in the Caucasus.
ROUHANI AND POLICY
CONTINUITY
Nonetheless, President Rouhani has
to be commended for his vision and
courage to stand up or at least attempt
to reshape the orthodoxy that
has prevailed in Tehran in recent
years. But he has to be reminded that
fixing Iran’s economic ills and standing
in the world will not be as simple
as just inviting foreign investors to
Iran. It requires confidence building
across the spectrum, at home vis-àvis
domestic opponents, and abroad
among those that have for long resented
Tehran’s regional policies.
Furthermore, to understand Rouhani’s
prospects to bring about
change, it is useful to recall the performance
of his immediate predecessors.
Mahmoud Ahmadinejad (2005-2013)
used his presidency as a platform to
promote his persona as a man of the
masses. He too sought to challenge
the orthodoxy in Tehran and wanted
to shape the debate and Iran’s path,
but he made all the wrong decisions.
His worldview was not that of an internationalist
but a radical populist
who ultimately had no final destination
in mind. Instead, his presidency
will be remembered for his bombas-

tic style and aimless policies, as well
as his abhorrent opportunism (such
as when he sought to gain popularity
among the Arab populations by raising
questions about the veracity of
the Holocaust).
The president before Ahmadinejad,
the reformist Mohammad Khatami
(1997-2005), was a very different
proposition. Like Rouhani, Khatami
too promised to turn Iran into a
mainstream international actor and
he too reached out to the United
States. Nonetheless, at the end of the
day, regardless of the fact that Ahmadinejad
and Khatami had very different
styles, both only could do as much
as was sanctioned by the Supreme
Leader, Ayatollah Ali Khamenei. In
other words, in the Iranian political
system, presidents come and go and
at times major policy differences are
evident but the system’s policy continuity
rests on the fact that the Supreme
Leader’s office is a permanent
feature of the political process. That
office has since June 1989 been occupied
by the same man, Ali Khamenei.
Ayatollah Khamenei jealously guards
his political prerogatives, including
his absolute right to block any policy
that he deems as unsuitable for the
Islamist order (nezam), which has
governed Iran since the revolution
of 1979. In that context Khamenei
has certain so-called “red-lines,” or
policy areas where the supreme
leader is more or less fixed in his
mindset, and where no president can
seek to alter the status quo. Up until
recently, enmity toward the United
States was one of those “red-lines”,
but Khamenei has now seemingly
allowed President Rouhani at least
test the waters and see if a deal can
be stuck with Washington. Another
“red-line” is the ideological hostility
against Israel, but there are no signs
that Ayatollah Khamenei is ready yet
to make any concessions on this front.
The vast majority of all the other foreign
policy issues that Iran faces then
fall outside Ayatollah Khamenei’s socalled
“red lines”, and there Rouhani
has much more leeway.
NONETHELESS, AT THE END OF THE DAY, REGARDLESS
OF THE FACT THAT AHMADINEJAD AND KHATAMI HAD
VERY DIFFERENT STYLES, BOTH ONLY COULD DO AS
MUCH AS WAS SANCTIONED BY THE SUPREME LEADER,
AYATOLLAH ALI KHAMENEI.
How can this leeway be utilized in
practical terms by the Rouhani government
At the regional level, Tehran
can be expected to build on existing
multilateral political-economic
structures. On that front, the Economic
Cooperation Organization (Afghanistan,
Azerbaijan, Iran, Kazakhstan,
Kyrgyzstan, Pakistan, Tajikistan,
Turkey, Turkmenistan and Uzbekistan)
and the Shanghai Cooperation
Organization - where Tehran has observer
status but has applied for full
membership – stand out as channels
where Iran likely will seek to inject
some momentum in the hope that it
can promote itself as a geographic
bridge connecting West Asia, Central
Asia, and East Asia.
This is of course a tested formula to
which even President Ahmadinejad
endorsed, to only to find himself
empty handed at the end. Over recent
decades attempts at regional
political-economic integration in
West Asia in particular has proven
enormously difficult. The Rouhani
11
CASPIAN REPORT, WINTER 2014

ALEX VATANKA
12
government would be well advised
to instead pursue narrow and specific
goals that would yield tangible
result over grandiose but unrealistic
– at least in the short term – and lofty
aspirations.
MEANWHILE, BY SIMULTANEOUSLY IMPROVING
RELATIONS WITH THE UNITED STATES AND AZERBAIJAN,
THE IRANIANS CAN FEEL FAR LESS CONCERNED ABOUT
THE CAUCASUS AS A POTENTIAL ZONE OF INSTABILITY
THAT COULD THREATEN TEHRAN’S OWN INTERESTS.
In other words, the government of
President Rouhani should be selective
in its foreign and regional policy
goals. Thus far he has acted in such
a manner. On the international stage,
Rouhani has already made it clear he
wants to repair American-Iranian
relations. Closer to home, he has
specifically referred to the need to
reach out to Saudi Arabia and find
ways to reduce tensions, particularly
as the two countries are seen as
leaders of the Shia and Sunni camps
respectively in the sectarian battle
that is now raging across so many
parts of the Middle East. If he takes
a fresh look at the challenges that
his country faces, other possibilities
do exist for Iranian foreign policy
adjustments.
THE CASE OF THE SOUTH
CAUCASUS
If a narrow focus and attention to the
best returns on investment guides
Rouhani’s approach, then the South
Caucasus deserves his attention. In
this part of the world, Tehran can
through a realignment of its policies
enhance its political standing, promote
its economic objectives and better
safeguard its security interests.
For too long, Tehran has either meddled
in the South Caucasus (specifically
Azerbaijan) or simply abdicated (to
Russia) its role as a larger neighbour
that could play a constructive role in
helping the region meet its challenges.
In Azerbaijan, a country with close historical
and religious ties to Iran, Tehran
for too long sought to play the role of
the “big brother” with a relentless desire
to superimpose its Shia-centric
Islamist political model over a Shiamajority
country that nonetheless remains
secular in its orientation.
Certainly the Iranian theocratic political
model has little appeal in Azerbaijani
society. Still, as far as Baku is concerned,
the Rouhani administration
has an opportunity to overturn some of
Tehran’s past policy mistakes. That was
the message from the meeting between
President Rouhani and President Ilham
Aliyev of Azerbaijan in Davos. However,
at that meeting Rouhani was also reported
to have spoken about a desire
on the part of Iran to assist Azerbaijan
in its oil and natural gas industries. Expressing
a desire for collaboration in
any field is commendable but Rouhani
and his government can achieve far
more vis-à-vis Azerbaijan if they pursue
the same narrow and focused approach
as they have seemingly begun
toward the United States.
Instead of homing in on oil and gas
cooperation – a field where Baku has
already had numerous successes in
the last 20 years and has established
foreign partnerships – Tehran should
introduce new initiatives where its capacity
to make a difference can make
a difference. One such initiative could
be linked to the frozen conflict over Armenian-occupied
Nagorno-Karabakh,

President of USA
Barack Obama.
which has pitted Armenia and Azerbaijan
against each other since the late
1980s.
By readjusting its stance and acting as
an external mediator seeking resolution
to the conflict – instead of shadowing
a Russian lead which is fundamentally
biased in favour of Armenia – Iran
can help shake up the status quo. The
Armenian occupation of Azerbaijani
lands is in the long-run unsustainable,
but Iran can still make a very positive
impact on its bilateral relations with
Baku if it can demonstrate its ability
to pursue genuinely neutral policies
in relation to that long-standing conflict.
To start with, that requires more
Iranian pressure on Yerevan to open
itself up to diplomatic resolution and
to prevent another round of military
clashes with Azerbaijan over the fate
of Nagorno-Karabakh.
THE ARMENIAN OCCUPATION OF AZERBAIJANI LANDS
IS IN THE LONG-RUN UNSUSTAINABLE, BUT IRAN CAN
STILL MAKE A VERY POSITIVE IMPACT ON ITS BILATERAL
RELATIONS WITH BAKU IF IT CAN DEMONSTRATE ITS
ABILITY TO PURSUE GENUINELY NEUTRAL POLICIES IN
RELATION TO THAT LONG-STANDING CONFLICT.
Regardless of the close history that
Iran also has with Armenia, the fact
remains that it is Azerbaijan that has
emerged as the economic engine of
the South Caucasus. From an Iranian
national interest it is thus Baku that
should be prioritized. Put simply, Russia’s
unconditional support for Armenia
might serve Moscow’s goals in the
Caucasus, but it makes little sense for
Tehran to pretend that Iranian and
Russian interests in this part of the
world overlap.
Meanwhile, by simultaneously improving
relations with the United States
13
CASPIAN REPORT, WINTER 2014

ALEX VATANKA
14

and Azerbaijan, the Iranians can feel
far less concerned about the Caucasus
as a potential zone of instability that
could threaten Tehran’s own interests.
Once it has, through concrete action,
improved the level of confidence in
its relations with Baku, the Rouhani
administration can initiate measures
aimed at outstanding disputes including
the final demarcation of the Caspian
Sea where both Azerbaijan and
Iran as littoral states are key players. It
Once such steps have been taken, President
Rouhani can confidently speak of
closer joint cooperation with Baku in
the energy field or tout the idea of Iran
as an outlet point for the landlocked
states of the South Caucasus that seek
to reach international markets. And
this is all within the realm of possibility.
Rouhani has himself put the process
in motion: by reducing tensions
with the United States, Iran will be less
reliant on Russia’s – albeit unreliable –
support. This change in the power dynamic
can free Tehran’s hands in the
South Caucasus in a way that has real
potential to improve political stability
in the region.
15
CASPIAN REPORT, WINTER 2014

FINAL INVESTMENT
DECISION FOR
SHAH DENIZ II BOOSTS
PROSPECTS FOR
SOUTHERN GAS CORRIDOR
GARETH M. WINROW
GARETH M. WINROW
INDEPENDENT RESEARCH ANALYST AND CONSULTANT,
OXFORD UNIVERSITY
16

The BP-led consortium working at the
field in the Azerbaijani sector of the
Caspian Sea pledged 28 billion USD
to ramp up production and for the
construction of a new pipeline across the
Caucasus.
At a signing ceremony attended by
ministers and energy officials in Baku
on 17 December 2013, the final investment
decision was taken to launch the
second phase of the development of
the Shah Deniz gas field. The BP-led
consortium working at the field in the
Azerbaijani sector of the Caspian Sea
pledged 28 billion USD to ramp up production
and for the construction of a
new pipeline across the Caucasus. This
will enable the annual delivery of an additional
6 billion cubic meters (bcm) of
gas to the Turkish market by 2018, and
a further 10 bcm to consumers in Europe
by 2019. Both the EU Commission
President, Jose Manuel Barroso, and the
EU Energy Commissioner, Günther Oettinger,
attended the ceremony together
with the Azerbaijani President Ilham
Aliyev. Barroso declared that the occasion
marked a “major milestone” for the
diversification of the EU’s energy supplies.
Oettinger noted the importance
of the ceremony for the development
of the so-called Southern Gas Corridor
(SGC), which he said could eventually
meet up to 20 percent of the EU’s gas
requirements.
BARROSO
DECLARED THAT
THE OCCASION
MARKED
A “MAJOR
MILESTONE”
FOR THE
DIVERSIFICATION
OF THE EU’S
ENERGY
SUPPLIES.
Clearly, the decision to expand production
at the Shah Deniz gas field is an
important step towards the realization
of the SGC. Work will also now proceed
on other legs of the SGC, namely
the Trans Anatolian Natural Gas Pipeline
(TANAP) and the Trans Adriatic
Pipeline (TAP). However, a number of
issues still need to be resolved with
regard to the future of the SGC. Will
the capacity of the corridor eventually
expand to meet 20 percent of the
EU’s gas demand Will the authorities
in Baku permit the use of Azerbaijani
territory for the transportation gas
from other sources such as Turkmenistan
in the future And how will the
gradual development of the SGC affect
Turkey’s energy needs and its ambitions
to become a key energy transit
state and major energy hub This article
will attempt to respond to these
and other questions in examining the
future prospects for the SGC.
THE SOUTHERN GAS CORRIDOR
EU member states have historically
imported gas along three corridors.
Gas is delivered by pipeline from Russia,
Norway and North Africa along the
eastern, northern and Mediterranean
corridors respectively. Identified as
a “priority project” by Brussels, the
SGC would transport gas from the Caspian
Basin, Central Asia, the Middle
East and the Eastern Mediterranean
to Europe. With European consum-
17
CASPIAN REPORT, WINTER 2014

GARETH M. WINROW
18
ers seeking to reduce their energy
dependence on Russia, the expected
decline in North Sea gas production,
and the real possibility of long-term
IDENTIFIED AS A “PRIORITY PROJECT” BY BRUSSELS, THE
SGC WOULD TRANSPORT GAS FROM THE CASPIAN BASIN,
CENTRAL ASIA, THE MIDDLE EAST AND THE EASTERN
MEDITERRANEAN TO EUROPE.
instability in North Africa in the wake
of the Arab revolutions, the SGC could
become an increasingly important
conduit for the supply of gas to the EU
market. In a communication released
in November 2010, the European
Commission stated that the SGC could
carry as much as 45-90 bcm annually
by 2020. 1 Brussels is hoping that the
SGC could become a significant channel
through which hydrocarbons are
transported to satisfy the EU’s growing
gas demand.
It is exceedingly difficult to predict the
future gas needs of EU member states
given the uncertainties concerning
growth in European economies, questions
over the possible impact of the socalled
shale gas revolution, and doubts
over the future of nuclear energy.
.It seems, though, that gas will be an
important “bridging fuel” over at least
the next two decades until renewable
forms of energy becomes more
mainstream. with imports currently
accounting for about 64 percent of the
eu’s gas needs, the european commission
has forecast that imports could
constitute up to 80 percent of europe’s
gas demand by 2030. According to
the International Energy Agency, the
annual gas demand in Europe could
increase from the current 526 bcm to
622 bcm by 2030.
At present, approximately one-third
of the EU’s gas needs are met by imports
from Russia. Mostly indexed to
the price of oil, Russian gas is becoming
more expensive. Disputes between
Moscow and Kyiv over gas pricing resulted
in the interruption of deliveries
of Russian natural gas to Europe at the
start of 2006 and 2009. Heavily dependent
on Russian gas imports, states in
Central and Eastern Europe remain
concerned that Moscow may in future
threaten to suspend gas deliveries in
order to secure political leverage. Energy
dependence on Russia would be
further increased if Gazprom and its
partners succeed in realizing the South
Stream project, which would bypass
Ukraine and deliver an additional 63
bcm to customers in Europe each year.
However, Brussels and Moscow must
first resolve problems with regard to
provisions of the Third Energy Package
– ie. on the “unbundling” of the
ownership of natural gas production
and transmission lines, third party access
to pipelines, and the setting of tariffs
– before the South Stream project
can be advanced.
Given that gas will remain an important
component of the energy mix
in Europe for the foreseeable future,
the realization of the SGC, could enable
EU member states to import gas
from alternative sources and thereby
help reduce energy dependence on
Russia. However, at least in its initial
envisioned phase, the SGC will not
1
. Energy Infrastructure Priorities for 2020 and beyond – A Blueprint for an Integrated European Energy
Network, European Commission, Brussels, 17 November 2010, COM (2010) 677 Final, p.32.

transport most of its gas to states in
Central and Eastern Europe, which
currently are so energy dependent on
Russia. Arguably, as discussed below,
the Russian-sponsored South Stream
project has already had an impact on
the development of the SGC. The future
of the SGC may also be connected
with the medium terms prospects of
the South Stream’s materialisation.
SHAH DENIZ: THE SECOND
PHASE OF DEVELOPMENT
The Shah Deniz gas field was discovered
70 kilometers offshore in the
Caspian Sea as recently as 1999. With
estimated reserves totalling 1.2 trillion
cubic meters (tcm), Shah Deniz is
Azerbaijan’s largest natural gas field.
An international consortium started to
produce gas and condensate from the
field in 2006. In its first phase of development,
Shah Deniz had the capacity
to produce annually 9 bcm of gas
and 50,000 barrels per day (bpd) of
condensate. Gas was delivered to markets
in Georgia and Turkey by means
of the 692 kilometer-long South Caucasus
Pipeline (SCP), also known as
the Baku-Tbilisi-Erzurum pipeline.
According to a sales agreement concluded
in 2001, Turkey is contracted to
receive up to 6.6 bcm each year from
the Shah Deniz field.
19
CASPIAN REPORT, WINTER 2014
The second phase of development at
Shah Deniz will increase annual production
by a further 16-17 bcm and
boost condensate output to 120,000
bpd. It will entail drilling an additional
26 subsea wells, laying subsea
pipelines, constructing two new
bridge-linked offshore platforms, and
expanding the terminal at Sangachal

Shah Deniz 2
FID Signing
Ceremony
GARETH M. WINROW
20
to accommodate new gas processing
and compression units. A new pipeline
will also be built to run parallel with
the SCP to transport increased gas volumes
to Georgia, Turkey and markets
in Europe. In September 2013, 25-year
gas sales agreements were finalized
with nine European energy companies
and utilities. At the signing ceremony
for the second phase of development
at Shah Deniz, it was also agreed to extend
operations at the gas field by 13
years to 2048 to enable appraisal work
THE REALIZATION OF THE SGC, COULD ENABLE EU
MEMBER STATES TO IMPORT GAS FROM ALTERNATIVE
SOURCES AND THEREBY HELP REDUCE ENERGY
DEPENDENCE ON RUSSIA.
to be carried out, which could lead to
further stages of development. The
Norwegian company Statoil, seeing
an opportunity to benefit financially
and limit its risk exposure, decided to
reduce its 25.5 percent stake at Shah
Deniz and in the SCP to 15.5 percent,
with the State Oil Company of Azerbaijan
(SOCAR) and BP agreeing to
purchase additional 6.7 percent and
3.3 percent respectively. Once implemented,
BP and SOCAR would then
own 28.8 percent and 16.7 percent
stakes in the Shah Deniz field and in
the SCP. 2
The expansion of the SCP network,
which involves laying a parallel gas
pipeline with an annual throughput
capacity of 17 bcm, is expected to be
completed by the end of 2018. This
will include the construction of two
compressor stations in Georgia to enable
the tripling of gas exports from
Shah Deniz. An official at SOCAR has
noted that if necessary, the annual
capacity of the SCP network could be
expanded to as much as 60 bcm. This
would presumably entail the construction
of further parallel pipelines.
What is clear is that the planned expansion
of the SCP in the second
phase of development at Shah Deniz
will not be able to accommodate future
production from other offshore
Azerbaijani gas fields. Azerbaijan has
proven gas reserves of over 2.55 tcm
and anticipated reserves estimated
at 6 tcm. Energy officials in Baku are
2
. The stakes of other consortium members working at Shah Deniz and in the development of
the SCP are as follows: Total, 10 percent; Lukoil, 10 percent; Naftiran Intertrade Company, 10
percent: and Turkish Petroleum, 9 percent.

talking about exporting up to 50 bcm
by 2025. At present, gas production is
limited to Shah Deniz, small volumes
of associated gas at the Azeri, Chirag
and Guneshli oil fields, and insignificant
volumes produced at the SOCARowned
Umid field. But the consortium
led by Total working at the Absheron
field is aiming to commence output
in 2020. With reserves estimated at
350 bcm, Absheron is expected to produce
3-5 bcm each year, initially. The
Umid field could export 6 bcm in the
medium term. Azerbaijan plans to develop
a number of other offshore Caspian
fields, including Shafag-Asiman,
Zafer-Mashal, Nakhichevan, and Araz-
Alov-Sharq. With only three drilling
rigs at the moment, the Azerbaijani authorities
are planning to construct four
floating drilling rigs over the next three
years at a total cost of $4 billion. Clearly,
officials in Baku will be seeking to ensure
that future gas production from
these fields, after meeting domestic
demand, will be exported to markets
in Turkey and beyond through an expanded
network of pipelines running
across the Caucasus.
AZERBAIJAN AND TURKMENISTAN
The SGC will eventually consist of several
interconnected legs. In its initial
form the corridor will run from the
Shah Deniz gas field to southern Italy
via the SCP, TANAP and TAP. The SGC
could be later expanded and developed,
for example, to hook up to more
consumers in northern Europe. The
corridor could also be connected with
other suppliers in the Caspian region,
the Gulf, and the eastern Mediterranean
as originally envisioned by the
European Commission. For instance,
Turkmenistan has expressed a definite
interest in linking up with and thereby
extending the SGC by lobbying for the
construction of a Trans-Caspian Gas
Pipeline (TCGP), which would connect
Turkmen gas fields with the SCP
network.
THE SECOND PHASE OF DEVELOPMENT AT SHAH DENIZ
WILL INCREASE ANNUAL PRODUCTION BY A FURTHER 16-
17 BCM AND BOOST CONDENSATE OUTPUT TO 120,000
BPD.
The construction of a $2-3 billion, 400
kilometer-long gas pipeline across the
Caspian Sea with an annual capacity
of 30-40 bcm has been on the drawing
board for some time. This could
connect with the massive Galkynysh
field in Turkmenistan which may hold
21 tcm of reserves. The authorities in
Ashgabat have declared that a 30 bcm
capacity East-West Turkmen pipeline
linking the Galkynysh field with the
Caspian will be ready by June 2015.
Turkmen officials refer to plans to export
180 bcm to various customers by
2030. But, concerned at the prospects
of competition from Turkmen gas exports
to Turkey and other markets,
Russia and Iran have opposed the construction
of a TCGP - ostensibly on environmental
grounds. Baku and Ashgabat
are also disputing the ownership of
certain oil and gas fields in the Caspian
Sea, and this has hindered talks on the
possible construction of a gas pipeline
connecting the Turkmen and Azerbaijani
shores of the Caspian. Nevertheless,
Ankara and Brussels have been lobbying
for the construction of a TCGP.
Agreements signed in 1998 and 1999
by Turkish and Turkmen officials anticipated
the export of 16 bcm of Turk-
21
CASPIAN REPORT, WINTER 2014

GARETH M. WINROW
22
men gas each year to Turkey and the
annual transit across Turkey of a further
14 bcm to consumers in Europe.
These deals have not been followed
through. However, at the signing of
the intergovernmental agreement
on TANAP in Istanbul in June 2012,
Turkish Prime Minister Recep Tayyip
Erdogan announced that in the future,
TANAP could carry Turkmen as well as
Azerbaijani gas. Turkey’s Energy Minister,
Taner Yildiz, noted that an article
in the intergovernmental agreement
permitted gas from non-Azerbaijani
sources to flow through TANAP as well.
Speaking in Ashgabat in March 2013,
Yildiz stated that Turkey was in favour
of incorporating 5-6 bcm of Turkmen
gas to TANAP. Two months later when
again in Ashgabat, Yildiz signed a
framework agreement of cooperation
with Turkmenistan to allow Turkmen
gas to transit Turkey and be delivered
to Europe. No specific volumes were
mentioned. More recently, Turkey’s
Foreign Minister, Ahmet Davutoglu,
has declared that Turkey is promoting
a trilateral initiative with Azerbaijan
and Turkmenistan to work on a TCGP.
TURKMENISTAN HAS EXPRESSED A DEFINITE INTEREST
IN LINKING UP WITH AND THEREBY EXTENDING THE SGC
BY LOBBYING FOR THE CONSTRUCTION OF A TRANS-
CASPIAN GAS PIPELINE (TCGP), WHICH WOULD CONNECT
TURKMEN GAS FIELDS WITH THE SCP NETWORK.
In an unprecedented move in September
2011, the European Council authorized
the European Commission to begin
negotiations with Azerbaijan and
Turkmenistan to provide the necessary
legal, regulatory and commercial
framework for the construction of a
TCGP. Ashgabat and Baku have also announced
that they are working on a bilateral
deal with regard to transit and
transport issues and infrastructure for
a TCGP. As of early January 2014, the
European Commission is awaiting the
results of an environmental impact
assessment on a TCGP which is being
carried out by independent international
experts.
THE TRANS ANATOLIAN NATURAL
GAS PIPELINE
TANAP will form the second section of
the SGC in its initial envisioned form.
In order to become a significant transit
state for the transportation of gas to
Europe, Turkey needs a dedicated gas
pipeline running east to west across
its territory. The Turkish gas grid only
has about 8 bcm of spare capacity. The
much-trumpeted Nabucco pipeline
was intended to address this issue.
This project had planned to construct
a pipeline network with an annual
capacity of 31 bcm running from Turkey’s
borders with Georgia and Iraq
to the energy hub at Baumgarten in
Austria. nabucco failed to materialize
because of its high costs and the fact
that the pipeline would not be filled to
capacity for many years because of the
lack of immediately available gas. Russian
backing for the rival South Stream
project had also raised serious doubts
about the need for the construction
of another large-scale gas pipeline to
deliver gas to Europe. The announcement
in November 2011 that Turkey
and Azerbaijan were committed to
build TANAP across Turkish territory
effectively killed off Nabucco.
Initially, TANAP will carry annually
16 bcm of gas along a 2000 kilometer
stretch running the length of Turkey.
Construction is expected to commence

23
CASPIAN REPORT, WINTER 2014
in 2014 and be completed in 2018.
There are plans to increase the capacity
to 23 bcm by 2023 and to 31 bcm
by 2026. Gas produced from other
Azerbaijani offshore fields in addition
to Shah Deniz could thus be accommodated.
If a second parallel pipeline
is built, capacity could be increased to
60 bcm. TANAP could cost as much as
$12 billion in its first phase of development.
With regard to the transit of gas
across Turkish territory, according to
the intergovernmental agreement on
TANAP, shareholders will pay the same
transit fees on a non-discriminatory
basis and will set transportation tariffs
for other companies that may use the
pipeline in the future.

GARETH M. WINROW
24
In practice, it seems that SOCAR is determined
to maintain a majority ownership
of TANAP to ensure that that it
will have the final say over which gas
NABUCCO FAILED TO MATERIALIZE BECAUSE OF ITS HIGH
COSTS AND THE FACT THAT THE PIPELINE WOULD NOT
BE FILLED TO CAPACITY FOR MANY YEARS BECAUSE OF
THE LACK OF IMMEDIATELY AVAILABLE GAS.
from what sources is transited across
Turkey. Originally, SOCAR held an 80
percent stake in TANAP with the remaining
20 percent divided between
the Turkish state pipeline corporation,
BOTAS (15 percent) and Turkish
Petroleum (5 percent). At the time of
writing, BP had acquired a 12 percent
stake by taking shares from SOCAR,
while Turkey was eager to increase its
share of ownership to 30 percent.
THE TRANS ADRIATIC PIPELINE
In its initial form, the third leg of the
SGC will consist of a pipeline connecting
Turkey with markets in Europe.
The Shah Deniz consortium had considered
four proposals for this third
section. The Interconnector Turkey-
Greece-Italy (ITGI) would have been
an extension of the already operational
Interconnector Turkey-Greece (ITG).
At the last minute, BP pushed for the
construction of the South East Europe
Pipeline (SEEP) which had aimed to
use as much as possible existing pipelines
to connect Turkey with Hungary.
The Nabucco West project – a downscaled,
shorter and cheaper version
of Nabucco – had been the apparent
favourite to secure the backing of the
Shah Deniz consortium. As in the case
of SEEP, Nabucco West would have
supplied gas to countries in Central
and Eastern Europe which are heavily
energy dependent on Russia.
Because of the shorter distance involved,
lower transit tariffs, and the
higher price that customers in Greece
and Italy were willing to pay, TAP was
eventually selected by the Shah Deniz
consortium in June 2013. In its initial
phase, TAP will consist of a 870 kilo-

meter long pipeline with an annual
capacity of 10 bcm which will hook up
to TANAP on the Turkish-Greek border
and will extend to southern Italy
via a route crossing Greece, Albania
and the Adriatic Sea. The pipeline can
easily be expanded to carry 20 bcm. It
has a built-in physical reverse-flow option
of 8 bcm to enable gas to be transported
westwards as well, in cases of
emergency. The pipeline could utilize
potential gas storage facilities in Albania.
The aim is to commence pipeline
construction in 2015 in order for TAP
to be ready to receive gas from Shah
Deniz via the SCP and TANAP in 2019.
Critics of TAP have pointed out that the
project will supply gas to the already
saturated market in Italy. However, the
promoters of TAP countered that they
intended to effectively extend the SGC
by connecting the pipeline to other
customers in northern, Central and
Eastern Europe. There are plans to
link TAP with consumers in northern
Italy through the Snam Rete network
and from there to the pipeline systems
in Switzerland, Austria, Germany, Belgium
and the UK. Axpo, a Swiss member
of the TAP consortium, owns gasfired
plants in northern Italy, while
another consortium partner, Fluxys,
operates several pipeline networks in
northern Europe. 3 The shareholders of
TAP have set up a joint working group
with the backers of the proposed
Ionian-Adriatic Pipeline (IAP). This
group is considering plans to connect
TAP with the IAP to provide gas to customers
in Montenegro, Bosnia-Herzegovina,
and Croatia. In turn, the TAP-
IAP network could link up with the
EU-backed West Balkan Ring to feed
gas to other consumers in Slovenia,
Macedonia and Kosovo. The Bulgarian
market will also be tapped by planned
pipeline interconnectors from Greece
as well as from Turkey.
BECAUSE OF THE SHORTER DISTANCE INVOLVED,
LOWER TRANSIT TARIFFS, AND THE HIGHER PRICE THAT
CUSTOMERS IN GREECE AND ITALY WERE WILLING TO PAY,
TAP WAS EVENTUALLY SELECTED BY THE SHAH DENIZ
CONSORTIUM IN JUNE 2013.
Most of these projects are still on the
drawing board and will not be realized
in the immediate future, with the exception
of the interconnectors to Bulgaria
which will carry small volumes.
Nevertheless, the final investment
decision for the expansion of work at
Shah Deniz has given added momentum
to companies involved in both the
TAP and TANAP projects.
THE ROLE OF TURKEY
Because of its geographical location,
Turkey is a crucial component
of the SGC. Turkish Petroleum has a
stake in the SCP and policy-makers
in Ankara are lobbying to increase
Turkey’s share in TANAP and to become
a partner in the TAP project.
BOTAS was reportedly offered a 15
percent stake in TAP in 2011. With
seven companies now participating
in the TAP project, it may be difficult
for BOTAS or Turkish Petroleum to
belatedly acquire a stake.
25
CASPIAN REPORT, WINTER 2014
3
. The stakes of other consortium members working at Shah Deniz and in the development of
the SCP are as follows: Total, 10 percent; Lukoil, 10 percent; Naftiran Intertrade Company, 10
percent: and Turkish Petroleum, 9 percent.

GARETH M. WINROW
26
The priority for Turkish officials is to
ensure that Turkey’s energy needs
are first met. Ambitions to become a
major energy transit and a key energy
hub are important but nevertheless
IF TANAP IS EVENTUALLY UPGRADED TO ACCOMMODATE
60 BCM OF GAS, THE SGC WOULD BECOME AN IMPORTANT
CONDUIT FOR THE TRANSPORTATION OF ENERGY TO
MARKETS IN THE EU.
secondary objectives. The realization
of TANAP will enable Turkey to
increase gas imports from Azerbaijan.
Although Turkmen gas is unlikely to
reach Turkish markets in the foreseeable
future, Turkey could soon be importing
fairly considerable volumes of
gas from Iraqi Kurdistan. This could
enable Ankara to reduce its dependence
on gas imports from Moscow.
According to the International Energy
Agency, in 2012 Turkey imported 45.3
bcm, 27 bcm of which was supplied
by Gazprom.
In order to become an important
gas transit state Turkey will need to
revise its Natural Gas Market Law to
provide for an effective gas transit regime
in line with the EU’s acquis. The
transit agreement concluded with
Azerbaijan for TANAP was in effect an
ad hoc arrangement. Furthermore, in
order to realize its ambitions of becoming
a major energy hub, Turkish
policy-makers will need to build more
pipelines and expand Turkey’s energy
infrastructure and accelerate work on
developing an energy stock exchange
in Istanbul to allow the open trading
of gas.
The realization of the SGC in its initial
format will go some way towards
meeting Turkey’s objectives with regard
to its energy policy. Azerbaijan,
though, will have the ultimate say over
which gas from what sources will be
transported via TANAP. The transportation
of gas to Europe via Turkey from
non-Azerbaijani sources may only
be possible in the longer term, when
TANAP could be greatly expanded.
Turkey’s backing for the South Stream
project is unlikely to endanger the
prospects for the SGC. After fierce
lobbying from Moscow, on December
28, 2011 Ankara finally agreed to the
construction of the offshore section
of the South Stream network through
Turkey’s exclusive economic zone in
the Black Sea. This will enable South
Stream to bypass Ukraine’s exclusive
economic zone. It is important to note,
however, that this agreement between
Turkey and Russia was only reached
after decisions had been taken to go
ahead with TANAP – ie., after important
progress had been made on realizing
the SGC. The official position
of Turkey is that South Stream and
TANAP are complementary rather
than rival projects, and will both help
to meet Europe’s rising energy needs.
CONCLUSION
The final investment decision for
the expansion of work at Shah Deniz
marked a new phase in plans to realize
the SGC. The details of the SGC in
its initial phase of development to
2019 have been significantly clarified.
It remains to be seen how the SGC can
be further developed, assuming that
Europe’s energy needs require the
further expansion of the corridor. Officials
in Baku will be eager to ensure
that Azerbaijan maintains control

over the transportation of hydrocarbons
along the SCP and TANAP. If
TANAP is eventually upgraded to accommodate
60 bcm of gas, the SGC
would become an important conduit
for the transportation of energy
to markets in the EU. A large-scale
expansion of TANAP could revive
projects such as the ITGI and Nabucco
West. Officials at the European
Commission repeatedly insist that
Nabucco West may still have a role
to play as gas demand in Europe continues
to rise. In its current form, TAP
can only be expanded to transport 20
bcm per year.
President of Azerbaijan
Ilham Aliyev and
President of European
Commission Jose Manuel
Barrosso
27
CASPIAN REPORT, WINTER 2014

ROBERT M. CUTLER
28
THE ROLE OF THE
SOUTHERN GAS CORRIDOR
IN PROSPECTS FOR
EUROPEAN ENERGY
SECURITY
ROBERT M. CUTLER
SENIOR RESEARCH FELLOW, INSTITUTE OF EUROPEAN, RUSSIAN
AND EURASIAN STUDIES, CARLETON UNIVERSITY, CANADA

Before discussing the Southern Gas Corridor (SGC),
it is important to define what this means. The SGC
is a policy initiative launched by the European
Commission (EC) in November 2009, discussed at
the EC’s May 2009 “Southern Corridor - New Silk
Road” summit in Prague.
1. WHAT IS THE SOUTHERN GAS
CORRIDOR
Before discussing the Southern Gas
Corridor (SGC), it is important to
define what this means. The SGC
is a policy initiative launched by
the European Commission (EC) in
November 2009, discussed at the EC’s
May 2009 “Southern Corridor - New
Silk Road” summit in Prague. The
Prague Summit had been intended to
solve, and indeed did solve, two of the
problems that had been standing in the
way of the planned Nabucco pipeline.
Those problems concerned the pricing
and the legal regime for Turkey’s
consumption of the gas that Nabucco
would have transported. 1
The EC’s formal declaration of the SGC
initiative through its Communication
“Second Strategic Energy Review - An
EU Energy Security and Solidarity
Action Plan” (COM/2008/781)
in November 2009, identified the
project’s partner countries, namely
those that could represent a supply
source of energy for the EU. Most
of these countries are located in
the Caspian Sea region (Azerbaijan,
Georgia, Kazakhstan, Turkey, and
Turkmenistan, as well as Uzbekistan
if and when political conditions
permit), though also in Southwest
Asia (Iraq; also Iran if and when
political conditions permit) along with
North Africa (Egypt and the Mashreq
countries/Levant).
Three pipelines designated within
the EU’s Trans-European Networks -
Energy (TEN-E) program as being “of
strategic importance” were originally
included in the SGC. These were the
Nabucco pipeline, the Interconnector
Turkey-Greece-Italy (ITGI), and the
White Stream pipeline (a now-dormant
undersea project from Georgia to the
Balkans). EU Energy Commissioner
29
CASPIAN REPORT, WINTER 2014
1
. The EU had insisted that Turkey pay the equivalent of European prices; Turkey had proposed a figure 15% less than that. The
compromise was the common-sense rule that Turkey’s price would be based on the cost of transportation to the point of
consumption. As for the legal regime, the EU abandoned its insistence that the norms of its acquis communautaire apply in
Turkey; rather, a middle ground within Turkish law was found.

ROBERT M. CUTLER
30
Günther Oettinger currently estimates
that in the long run, the SGC could
provide approximately 100 billion
cubic meters per year (bcm/y) to EU
countries, or a little less than 20% of
current total consumption.
ANOTHER PROPOSAL NOT FORMALLY INCLUDED IN
THE SGC IS THE AZERBAIJAN-GEORGIA-ROMANIA
INTERCONNECTOR (AGRI) PROJECT, WHICH WOULD
TRANSIT AZERBAIJANI NATURAL GAS TO THE KULEVI
TERMINAL ON THE BLACK SEA AND THEN BY TANKER TO
CONSTANTA, ROMANIA.
The Trans Anatolian Natural Gas
Pipeline (commonly known by its
Turkish initials, TANAP) has taken the
place of the Anatolian segment of the
planned Nabucco pipeline. As a joint
Azerbaijani-Turkish project, it does
not fall into the TEN-E framework of
the EU. However, because it essentially
replaces Nabucco’s role in transporting
Azerbaijani gas to Europe would
have done, it is generally included in
references to the SGC and in estimates
of the volumes of gas that the SGC may
transport to Europe.
The ITGI would have comprised the
Interconnector Turkey-Greece (ITG)
and the Interconnector Greece-Italy
(IGI). The first of these has been
constructed, and has been operational
for some time. The anticipated IGI
extension has now been replaced
by the Trans Adriatic Pipeline (TAP),
which was also formally included in
the SGC project.
The White Stream project was a later
addition to the SGC. This now-dormant
project would have transported
quantities of Caspian Basin natural gas
from its arrival in Georgia, under the
Black Sea to Romania. First proposed
in 2005, the original thought was to
transit Ukrainian waters and possibly
to have a pumping station there,
near Crimea. The possibility of gas
delivery to the country itself became
increasingly less likely towards the end
of the 2000s. Plans were redrawn for
an entirely underwater route across
the seabed. Originally conceived as a
mega-project depending on gas from
Turkmenistan, the production and
sale of which it sought to encourage,
it was then scaled down to 8 bcm/y
with the possibility of later scaling up
to 16, 24 and 32 bcm/y as needed. The
discovery of more gas in Azerbaijan’s
offshore provinces in the Caspian Sea
basin made this possible, but in the
end, other proposals multiplied, and
White Stream has been left on the
drawing board.
Another proposal not formally
included in the SGC is the Azerbaijan-
Georgia-Romania Interconnector
(AGRI) project, which would transit
Azerbaijani natural gas to the Kulevi
terminal on the Black Sea and then by
tanker to Constanta, Romania. The gas
could be transported either as liquefied
(LNG) or as compressed natural
gas. A four-way protocol on realizing
the AGRI project was signed in mid-
February 2011 between Azerbaijan,
Georgia, Hungary, and Romania.
Hungary’s participation was taken
as confirmation of the intention
to construct the Arad-Szeged
interconnector between Romania
and Hungary. A “proof of concept”
feasibility study for AGRI in 2010
was successful and produced a cost
estimate of between 1.2 billion and
4.5 billion euros, according to three

variants of the project for 2, 5, and 8
bcm/y.
Russia’s South Stream project is not
and never has been part of the EU’s
SGC initiative, despite occasional
journalistic and even analytical
reference to it as part of the Southern
Corridor. In fact, South Stream
(announced in 2007) was a means
of countering the original Nabucco
pipeline (joint venture agreement
signed in 2005). The aim was to render
Nabucco unnecessary, and in particular
to prevent the eventual construction of
a Trans-Caspian Gas Pipeline (TCGP)
that could, with Nabucco, create a
transit route between Central Asia and
Europe that entirely bypassed Russia.
RUSSIA’S SOUTH STREAM PROJECT IS NOT AND NEVER
HAS BEEN PART OF THE EU’S SGC INITIATIVE, DESPITE
OCCASIONAL JOURNALISTIC AND EVEN ANALYTICAL
REFERENCE TO IT AS PART OF THE SOUTHERN CORRIDOR.
TCGP with the Niyazov leadership in
Turkmenistan. Russia countered by
proposing the Blue Stream pipeline
to Turkey, which was successfully
negotiated and constructed. It is
currently operational, but it has never
operated at its planned capacity, and
never in an economical way.
2. THE SGC AND EUROPEAN
ENERGY SECURITY
2.1. General Orientation
Moscow had already employed a
similar geopolitical strategy in the
late 1990s – and with success. At
that time initial efforts were made
by U.S. companies to negotiate a
As recently as 2008, “most scenarios
assumed that European gas
demand would be well above 600
bcm in 2015 and around 700 bcm
by 2030, driven by the power sector.”
31
CASPIAN REPORT, WINTER 2014
Kjetil Tungland,
Managing
Director for the
Trans Adriatic
Pipeline.

Taner Yildiz,
Minister
of Energy
and Natural
Resources of
Turkey.
ROBERT M. CUTLER
32
Demand in 2010 was 567 bcm, 8 per
cent above the 2009 level, which was
down 6 per cent from 2008 due to the
economic crisis. However, that rise
was due largely to a hard winter, and
demand in 2011 was down 8 per cent
year-on-year again. In 2012, demand
was down another 2 per cent, not
much above 500 bcm. (Reliable statistics
for 2013 are not yet available.)
New demand is unlikely to come
from the residential/commercial
sector, which represents about twofifths
of European gas consumption,
and industry has never quite recovered
from the economic crisis. Indices
on production in manufacturing
are below their 2007 levels in most
European countries; this translates
into lower energy consumption. 2
The much lower gas prices in North
America have hit the EU’s chemical
and fertilizer industry, which is unlikely
to recover at least in the medium
term, unless the economic outlook
improves significantly. Although
there will be significant decommissionings
of nuclear and also coalfired
plants by the end of the decade,
the degree to which this will drive
an increase in gas demand is not
yet clear. This is partly due to North
America’s much lower gas prices. The
U.S. is exporting cheap coal, creating
what some call a new “golden age
of coal” in Europe, carbon emission
prices notwithstanding. European
gas-fired plants are not competitive
in comparison with coal-fired plants,
and they have also been hit by the
continuing strong growth in renewables.
Consequently, gas-fired plants
in the European power-generation
sector are experiencing low growth
in electricity demand.
2.2. Southeastern Europe
The purpose of the EU’s Energy Community
is to extend the internal energy
market of the EU to Southeast
2
. Anne-Sophie Corbeau, “European Gas: A Lost Decade” IEA Energy, No. 4 (Spring 2013), p. 32.

Europe and beyond by pursuing and
supporting the implementation of
the relevant EU acquis communautaire,
including the development of
a complementary regulatory framework
and the liberalization of the national
energy markets in line with the
acquis. While plans for the Nabucco
pipeline were being elaborated, Turkey
decided not to join the Energy
Community, in order to preserve its
national prerogatives regarding the
conditions for transit and sale of gas
crossing its borders.
AZERBAIJAN WOULD BE NOT ONLY THE GAS SUPPLIER
BUT ALSO THE SELLER. BAKU WAS PARTICULARLY
INSISTENT ON THIS POINT DURING THE LONG
NEGOTIATIONS WITH ANKARA OVER THE TERMS FOR
TRANSIT OF SHAH DENIZ TWO NATURAL GAS, AND IT
WAS FINALLY AGREED UPON.
The Energy Community (previously
named the Energy Community of
South East Europe, then the European
Energy Community) comprises,
besides the EU: Albania, Bosnia and
Herzegovina, Kosovo, Macedonia,
Moldova, Montenegro, Serbia, and
Ukraine. If we omit Ukraine, which
is not a member of any possible construction
of Southeast Europe, and
add the EU members Bulgaria, Greece,
and Romania, then we have a list of
those countries in that region which
are candidates for Azerbaijani gas
transited by TANAP through Turkey.
under discussion were in the range
of 1 to 3 bcm/y, with the possibility of
this initial amount rising to 5 bcm/y.
Since this quantity exceeds Bulgaria’s
needs, it opens the way for transit or
resale to other countries in Southeastern
Europe. These countries
happen to be some of those worst
affected by Russia’s several winter
cutoffs of gas to Ukraine. The construction
of a small number of relatively
inexpensive reversible interconnectors
in the region such as the
IGB (and including, for example, the
already completed Arad-Szeged line
from Romania to Hungary) could lead
to the implementation of a gas ring in
Southeast Europe. Azerbaijan would
be not only the gas supplier but also
the seller. Baku was particularly insistent
on this point during the long
negotiations with Ankara over the
terms for transit of Shah Deniz Two
natural gas, and it was finally agreed
upon.
Indeed, sources in BP at the time told
various press agencies that “other
participants” would be welcome in
the project, and that every country
along the pipeline’s route would have
the option to purchase the gas transiting
its borders. This would have
been an extremely attractive aspect
of the proposal to Azerbaijan, which
had strongly insisted that it be not
only the supplier but also the direct
seller of its gas.
33
CASPIAN REPORT, WINTER 20144
In November 2011, Bulgaria and Turkey
agreed on a natural gas contract
to supply (presumably) Azerbaijani
gas via the ITG to a 115-kilometer Interconnector
Greece-Bulgaria (IGB),
which is effectively an extension of
the former. The volumes originally
An extensive practical feasibility
study was completed in January
2009. It projected a gas supply deficit
of 15.0 bcm in 2015 and 29.4 bcm in
2025 for the nine countries: EU members
Bulgaria and Romania; plus Energy
Community members, Albania,

ROBERT M. CUTLER
34
Bosnia-Herzegovina, Croatia, Kosovo,
Macedonia, Montenegro, and Serbia.
It should be noted that Romania accounts
for about two-thirds of these
totals, and Bulgaria for a third of remainder.
However, these figures appear
to have been predicated on precrisis
conditions.
The supply gap then projected among
the SEE-7 countries (i.e. excluding EU
members Romania and Bulgaria)
was 3.0 bcm for 2010, 4.0 bcm for
2015, 6.5 bcm for 2020, and 8.0 bcm
for 2025. 3 However, by 2012 this
gap was already close to 4.5 bcm, of
which Serbia and Croatia together accounted
for nearly six-sevenths. The
extremely harsh winter in the region
accounted for this strong demand,
against a background of otherwise
reduced consumption due to the economic
crisis. 4
At the penultimate stage of pipeline
selection for Shah Deniz Two, in September
2011, a BP-proposed pipeline
project called the South East Europe
Pipeline (SEEP) was announced. It
would have run from eastern Turkey
to eastern Austria through Bulgaria,
Romania, and Hungary. However,
there were conflicting reports
naming either Croatia or Slovenia
as transit countries; other reports
named neither of them. Yet neither
was actually required, since the destination
gas hub of Baumgarten an der
March is in eastern Austria, about 65
kilometers from the country’s border
with Hungary.
Croatia and Slovenia are, along with
their neighbors, among those European
countries with the least diversified
gas supply. Consequently
the mention of them as purchasers
would have gone hand in hand with
the construction of relatively inexpensive
bi-directional gas interconnectors,
creating a gas ring in the
region and increasing the energy
security of all involved. The European
Commission endorsed such
engineering projects in principle as
early as 2008 under the umbrella of
its “supergrid” project, permitting
EU member states to share electric
power from different sources. 5 Only
with Lithuania’s recently concluded
presidency of the EC, however, with
its specific Energy Agenda, were
those projects in Southeast Europe finally
included in the EU budget under
a regular heading for completion.
2.3. South Stream and the SGC
Moscow continues to insist that South
Stream is none of the EU’s business,
3
. See “Projected supply gap in seven SEE markets,” Figure 13 in the original feasibility study, South East
Europe: Regional Gasification Stud; Final Report, p. 49. The study was executed by a consortium
of four industry consulting firms and is available at . Compare Anastasios Giamouridis and Spiros Paleoyannis, Security of Gas
Supply in South Eastern Europe: Potential Contribution of Planned Pipelines, LNG, and Storage, NG-
52 (Oxford: Oxford Institute of Energy Studies, July 2011). All URLs cite were retrieved and verified
on 21 February 2014, unless otherwise stated.
4
. For details, see Energy Community Secretariat, Annual Report on the Implementation of the Acquis
under the Treaty Establishing the Energy Community, September 2012, < http://www.energycommunity.org/pls/portal/docs/1770178.PDF>.
5
. For an introduction and background, see Energy Community, “Gas Ring Concept,” .

Shah Deniz
offshore
platform.
and that Russia can build the pipeline
because it has bilateral intergovernmental
agreements in place with the
states concerned. The EC says that it
is not as simple as that. The EC has
determined that the seven respective
bilateral agreements between Russia
and Austria, Bulgaria, Croatia, Greece,
Hungary, Serbia, and Slovenia fail
to comply with the obligations that
these respective countries have assumed
by committing to respect EU
law.
In December 2013, EU Energy Commissioner
Oettinger met with the
energy ministers of the seven concerned
states and obtained from
them a mandate for the EC to lead
the re-negotiations with Russia for
THE EC HAS DETERMINED THAT THE SEVEN RESPECTIVE
BILATERAL AGREEMENTS BETWEEN RUSSIA AND AUSTRIA,
BULGARIA, CROATIA, GREECE, HUNGARY, SERBIA, AND
SLOVENIA FAIL TO COMPLY WITH THE OBLIGATIONS
THAT THESE RESPECTIVE COUNTRIES HAVE ASSUMED BY
COMMITTING TO RESPECT EU LAW.
the necessary modification of the bilateral
agreements. There are three
questions, at least, that need to be
addressed. First, since Gazprom both
produces and supplies the gas, it cannot,
under the Third Energy Packages
unbundling provisions, also own the
transmission network. Second, following
the principle of non-discriminatory
access, Gazprom cannot be
the only shipper to use the pipeline.
Third, the tariff structure requires
attention.
These seven countries are all in a difficult
position, but Bulgaria and also
Serbia most of all. If they had to honour
the agreements as signed, the result
would be massive expenditure on
the pipeline. But once operations, the
pipeline would be subject to the provisions
of the Third Energy Package.
Yet if the pipeline is not built, then the
countries concerned are still on the
hook for the obligations that they assumed
through their respective bilateral
agreements with Russia, which in
35
CASPIAN REPORT, WINTER 2014

ROBERT M. CUTLER
turn could seek enormous financial
penalties for breach of contract.
Meanwhile at the end of January, the
Netherlands-based company South
Stream Transport issued contracts
for the supply of 75,000 steel pipes
for the pipeline. Of this quantity, Europipe
(Germany) is to provide half,
OMK (Russia) a little over a third, and
Severstal’s Izhora Pipe Mill (Russia)
the remainder. 6 Metinvest, a metals
products company that is part
of Rinat Akhmetov’s SCM Group in
Ukraine, received not part of the
contract. However, it is probably not
a coincidence that a day later, Akhmetov’s
wavering over whether to
support Ukraine’s President Viktor
Yanukovych began to tilt into more
open opposition. 7 It was deputies
from his faction of the Party of Regions
who provided the crucial number
required for the quota in the Rada
on February 20, when the first anti-
Yanukovych votes were taken and
decrees and laws adopted.
The first pipes will be sent to storage
yards on the Bulgarian coast
within months, suggesting that Russia
has every intention to lay them
and present both Bulgaria and the EU
with a fait accompli. Russia continues
36
SOCAR
President
Rovnag
Abdullayev and
BP Regional
President
Gordon Birrell
signing FID of
Shah Deniz 2.
6
. Alexandra Carrera, “South Stream Transport orders 75,000 steel pipes for offshore pipeline,”
Oil & Gas Technology, 30 January 2014, .
7
. Gazprom, by contrast, in February quoted its own Project Management Departure head Leonid
Chugunov, to the effect that these and other companies were still competing with one another for
the contracts. The contradiction is resolved if one understands that the 75,000 pipes of 12 meters
each refer only to the first 16 bcm/y line of 931 kilometers, out of the four planned that will provide
the total 63 bcm/y project design, whereas Chugunov must be referring to contracts for all four
lines. The original interview was published in Russian late last year as part of the article: Denis Kirilllov,
“’Iuzhnyi Potiok’: Na shag vperedi,” Gazprom, 2013, No. 11, pp. 6-9. (The issue is available in Russian
at .) This article
was republished by itself in English translation, only on 19 February 2014, electronically at .

officially to insist that EU rules should
not apply to projects such as pipelines
that are not entirely on European
territory. This is a modification
in presentation, but not in substance,
of the previous Russian position that
South Stream should be a considered
as part of the pipeline on Russian territory,
of which it is asserted to be an
extension, and therefore not subject
to EU rules.
THE LEAST EXPENSIVE OPTION FOR BRINGING CYPRUS’S
GAS TO MARKET IS A SHORT PIPELINE TO TURKEY.
energy province may hold as many
as 3.4 trillion cubic meters (Tcm) of
natural gas, which, for comparison,
represents almost six times the EU’s
total annual gas consumption in recent
years, plus an additional 1.7 million
barrels of gas condensate.
In this respect, the South Stream
project is entirely different from the
North Stream. In the latter instance,
exemptions were requested and
granted from the application of the
Third Energy Package before the start
of the project. That did not happen
with respect to South Stream. The EC
recently invited Russia to make an application
for the exemption of South
Stream, but Russia declined. The EC
now, upon reflection, considers that
exemption from unbundling could
come only in the distant future, when
the allocation of gas capacities to different
segments of the pipeline is begun.
In response, Gazprom continues
to maintain that there are no barriers
to South Stream’s construction or
operation.
3. THE EASTERN MEDITERRA-
NEAN AND NORTHERN IRAQI
PROSPECTS FOR THE SGC
3.1. The Eastern Mediterranean
According to the U.S. Geological Service,
the entire East Mediterranean
The least expensive option for bringing
Cyprus’s gas to market is a short
pipeline to Turkey. Of course, the
unresolved political situation in the
island remains a major obstacle.
However early February saw the announcement
of the resumption - after
an 18-month hiatus - of the peace
negotiations (officially reunification
talks) between Cypriot Greek and Cypriot
Turkish leaders. The basic principles
that are announced will govern
a settlement that will then be subject
to exhaustive negotiations over subsequent
months. The negotiations
are take place under U.N. auspices
with the European Commission (EC)
ready to provide support, including
through the presence of a personal
representative of EC President Jose
Barroso. 8
Last year, Turkish officials suggested
that the financial crisis in Cyprus,
which required a 10 billion euro
bailout from the EU with IMF participation,
presented an opportunity to
end the island’s division. 9 Recently,
Turkish Energy Minister Taner
37
CASPIAN REPORT, WINTER 2014
8
. “EU hails resuming of Cyprus reunification talks,” EurActiv, 11 February 2014, < http://www.euractiv.
com/global-europe/eu-hails-resuming-cyprus-reunifi-news-533418>.
9
. “Turkey says Cyprus crisis is chance to end division,” EurActiv, 05 April 2013, .

ROBERT M. CUTLER
38
AT THE SAME TIME, THE ENERGY COOPERATION COULD
REPRESENT THE OPPORTUNITY FOR RECONCILIATION
BETWEEN THE TWO NATURAL GEOPOLITICAL PARTNERS,
AND EVEN A MAJOR TRILATERAL CYPRUS-ISRAEL-TURKEY
DEAL.
Yildiz remarked on the possibilities
for “the opening of the way for
energy-related projects.” In particular,
he added that, “a pipeline that
would carry Cypriot gas to Europe
via Turkey could be built, just like
the way we carry water to Cyprus
with pipelines.” The main obstacle
here is not the technical specifications,
but rather the political feasibility
and financing. The first meetings
on the new political negotiation
platform will take place before the
end of February. Turkey has taken
the decision to press for an accelerated
agreement process. 10
Another export option for Cyprus is
a pipeline to Greece via Crete, the
so-called EastMed pipeline that
the EC designated in October 2013
as a “project of common interest”,
and therefore a potential candidate
for funding. However, the East-
Med pipeline would bypass Turkey.
There are also concerns about the
depth of the Mediterranean, which
could make construction uneconomical
due to the associated engineering
challenges.
Nicosia itself seems to favour
construction of an LNG terminal
at Vassiliko, but to justify even a
small-scale LNG plant costing €8-
10 billion would require between
1.5 and 2 times the quantity of gas
now expected from the Aphrodite
field. A possibility is to include Israeli
natural gas from adjacent sites.
Israel’s recent discoveries include
the 535 bcm Leviathan field and the
285 bcm Tamar field. Forty per cent
of Israel’s natural gas resources will
be made available for export.
The fact that Texas-based Noble Energy
is the lead company in both the
Cypriot and Israeli consortia would
facilitate such a scheme. A 40-kilometer
pipeline between the two
countries is all that would be necessary.
However, Israel would not
venture into such a project in the
absence of a solution to the Cyprus
conflict, and even then the problematic
diplomatic relations with Turkey
could pose an obstacle. At the
same time, the energy cooperation
could represent the opportunity for
reconciliation between the two natural
geopolitical partners, and even
a major trilateral Cyprus-Israel-Turkey
deal.
Owing to its access to capital and
strong rule-of-law protections, Israel
is the most likely source of additional
gas flows from the Eastern
Mediterranean. While current conditions
in the region are not conducive
to quick progress, increased
natural gas trade within the region
and in connection with the Southern
Corridor can promote long-term
economic development and stability.
10
. Büşra Özerli, “Turkey presses for quick finish in Cyprus peace talks,” Today’s Zaman, 16 February
2014, .

EUROPEAN NATURAL GAS DEMAND
Eu27 gas demand bcm/year
IRAQ NATURAL GAS RESERVES
3.2 tcm (total)
7.5-8.5 bcm
636 bcm
567 bcm 2.1 tcm
1.0 tcm
524 bcm
bcm/y
bcm/y
2005 2010 2020 Under KRG control Middle-South Iraq Probable reserves estimations
Kaynak : http://www.ce.uw.edu.pl/pliki/pw/y13_zieniewicz.pdf
Kaynak : http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/02/NG-82.pdf
3.2. Northern Iraq
In 2009, Iraqi Prime Minister Nouri
al-Maliki attended the signing of the
Nabucco Pipeline Intergovernmental
Agreement in Ankara and stated
that Iraq could contribute up to 15
bcm to the Southern Corridor, raising
hopes that Iraq was on its way
to becoming a major supplier to
Europe. Nearly two-thirds of Iraq’s
gas resources lie in the south, so the
political and financial issues around
the exploitation, transportation, and
sale of oil resources from the Kurdistan
Regional Government (KRG)
in the north need not apply. Nevertheless,
Baghdad’s plans have been
complicated by the KRG’s exploration
of possibilities of supplying
natural gas to Turkey.
The U.S. Energy Information Administration,
part of the Department
of Energy, estimates that Iraq has
3.2 Tcm of confirmed gas reserves,
making it the twelfth largest holder
in the world, while the Paris-based
International Energy Agency estimates
total confirmed and unconfirmed
reserves at between 7.5 and
8.5 Tcm. However, three-quarters of
the gas is associated with crude oil
deposits, and the majority of that is
flared. Thus Iraq has sought to reduce
that waste in favour of export,
domestic consumption and re-injection
to increase oil recovery.
Until late last year, little progress
had been made towards this goal
due to entrenched disagreements
over energy revenue sharing between
the central government in
Baghdad and the Kurdistan Regional
Government (KRG), as well as dwindling
progress on domestic electrification
and investment in domestic
gas infrastructure.
The autonomous region’s prime
minister and top energy official travelled
to Baghdad this February, intensifying
efforts to settle the longrunning
dispute. The disagreement
concerns revenue-sharing of the
proceeds from exports of oil from
Kurdistan via a new pipeline to Turkey,
constructed due to the interminable
delays around Nabucco, which
39
CASPIAN REPORT, WINTER 2014

ROBERT M. CUTLER
40
had been the first choice for transit.
11 On February 19 th of this year,
Iraq’s Deputy Prime Minister for
energy Hussain al-Shahristani was
quoted as saying that Iraqi Kurdistan
had agreed to export crude via
the country’s central oil marketing
body, the State Oil Marketing Organization
(SOMO).
Since late last year, oil had been
pumped through a pipeline to the
Turkish port of Ceyhan, where it was
kept in storage rather than being
sold, in order to allow time to reach
an agreement. That is the agreement
that is now being reported. The Deputy
Prime Minister for energy said,
potentially removing a major sticking
point in a resource row with the
central government.
Azerbaijan’s Foreign Minister Elmar
Mammadyarov, who also visited
Baghdad in February, has offered Iraq
access to the SGC via TANAP. Iraqi gas
is ready to be delivered in 2016, while
TANAP will not enter into service before
2018-19. 12
4. CONCLUSION
Natural gas from Shah Deniz Two
through the SGC is important to Europe
for diversifying its energy supply.
The EU imports slightly over half of its
energy supply, including two-thirds of
its natural gas. Natural gas represents
EASTERN MEDITERRANEAN NATURAL GAS RESERVES
Recoverable Gas Reserves in the Levant Basin: 3.4 tcm
Proven Reserves: 1000-1206 bcm
a. Israel
b.Cyprus
535 bcm
bcm/proven-recoverable
285 bcm
102-170 bcm
114-127 bcm
50 bcm
28 bcm
Leviathan
Tamar Aphrodite Tanin, Mari-B, Noa, Karish Palestine
Dalit, Dolphin,
Shimshon
11
. Ahmed Rasheed, “UPDATE 2-Iraq says Kurds agree to export oil via central marketing body,”
Reuters, 19 February 2014, .
For background, see Robert M. Cutler “Iraq opens the door to
Nabucco,” Asia Times OnLine, 6 January 2011, .
12
. Compare: Viktoriia Panfilova, “Gazovye kombinatsii Baku i Ankary,” Vestnik Kavkaza, 14 February
2014, ; and
“Azerbaijan offers Iraq access to Europe gas pipelines,” Agence France-Presse, 10 February 2014,
.
See also Gulmira Rzayeva, Natural Gas in the Turkish Domestic Energy Market:
Policies and Challenges, NG-82 (Oxford: Oxford Institute for Energy Studies, February 2014), at
.

one-quarter of the EU’s primary energy
supply, and so imported natural
gas represents one-sixth of EU energy
consumption, although of course the
proportion varies widely from country
to country. The EU’s gas consumption
as a proportion of total energy is
expected to rise to nearly one-third
by the end of the next decade, when
imports will rise to account for over
three-quarters of gas consumption,
equivalent to one-quarter of all EU
energy consumption. Thus imported
natural gas as a proportion of total
energy consumption in the EU will increase
by half over the next 15 years.
decade. The EU’s proposed 2030
package will be discussed at a European
summit of EU Heads of State in
March. 13 41
Europe’s gas demand will increase
during the next decade and a half
even faster than expected, if Energy
Commissioner Oettinger’s opposition
to a planned 40 per cent cut in
carbon dioxide emissions across the
EU by 2030 is endorsed. He believes
EUROPE’S GAS DEMAND WILL INCREASE DURING
THE NEXT DECADE AND A HALF EVEN FASTER THAN
EXPECTED, IF ENERGY COMMISSIONER OETTINGER’S
OPPOSITION TO A PLANNED 40 PER CENT CUT IN
CARBON DIOXIDE EMISSIONS ACROSS THE EU BY 2030 IS
ENDORSED.
CASPIAN REPORT, WINTER 2014
that this is necessary to keep prices
competitive with rivals fuelled by inexpensive
American shale gas. However,
he faces stiff opposition from the
European Parliament as well as from
a number of Member States. Last year
he had advocated that there should
be no new taxes on energy within
the EU, and that current taxes should
not be raised until the end of the next
13
. See “EU sets out ‘walk now, sprint later’ 2030 clean energy vision”, EurActiv, 23 January 2014, ; and “Oettinger rallies opposition to 2030 CO2 target,” EurActiv,
29 January 2014, .

ROMAN RUKOMEDA
42
UKRAINE’S ENERGY SECTOR
IN 2014: NEW CHANCES OR
LOST OPPORTUNITIES
ROMAN RUKOMEDA
EXPERT, CENTER ON ENERGY AND ECONOMY, HASEN

The defining moment for the development of the
energy market and system in Ukraine in 2014 was
the new agreement signed between Presidents
Viktor Yanukovych and Vladimir Putin in
December 2013.
At the outset of 2013, Ukraine had
fairly positive prospects in terms
of diversification of energy sources
and the development of alternative
energy and energy efficiency
programs. But after a new gas deal
between Ukrainian president Viktor
Yanukovych and Russian president
Vladimir Putin in December 2013,
there are growing risks of a return
to deep dependency on Russia and
a decline in most of the programs
devoted to diversification, alternative
energy and energy efficiency. The
first half of 2014, in light of the
internal political crisis in Ukraine,
will demonstrate how the Ukrainian
government old or new one will
make use of the opportunities in the
energy sphere, and how the system of
relations between the EU, Russia and
transnational energy corporations
will develop.
The rapid changes in the modern
world thanks to new technologies for
resource production, communication
and manufacture is leading to
dynamic changes on the markets
and of political dynamics. At the
same time, energy remains the key
one. Taking into account the growing
THERE ARE
GROWING RISKS
OF A RETURN
TO DEEP
DEPENDENCY
ON RUSSIA AND
A DECLINE IN
MOST OF THE
PROGRAMS
DEVOTED TO
DIVERSIFICATION,
ALTERNATIVE
ENERGY AND
ENERGY
EFFICIENCY.
interdependency between countries
and regions in Europe, Ukraine is
transforming and modernizing its
energy sphere. It has the capacity to
become a European leader in shale
gas and deep sea shelf natural gas
production in the medium term. At
the same time the challenges around
relations between Ukraine and Russia
in the energy sphere have not yet been
overcome.
BREAKING POINT
The defining moment for the development
of the energy market and
system in Ukraine in 2014 was the
new agreement signed between
Presidents Viktor Yanukovych and
Vladimir Putin in December 2013,
after the Yanukovych’s unexpected
refusal to sign the EU Association
Agreement at the Vilnius Eastern
Partnership summit.
According to the new deal, Russia
has promised to reduce the price of
natural gas exported to Ukraine from
420 USD per thousand cubic meters
to 268.50 USD. The Russian president
announced this step as temporary
measure. Putin has also agreed
43
CASPIAN REPORT, WINTER 2014

ROMAN RUKOMEDA
44
to lend Ukraine 15 billion USD, 1 by
investing in Ukrainian government
bonds from the Russian National
Welfare Fund. The first tranche of 3
billion USD has already gone through.
Now preparations are underway for
IN GENERAL, UKRAINIAN FOREIGN POLICY SHIFT AWAY
FROM THE EU AND TOWARD RUSSIA HAS AFFECTED ALL
ASPECTS OF RELATIONS AND COOPERATION BETWEEN
KYIV AND MOSCOW.
the second step, although the Russian
government has announced that
they are waiting until the situation in
Ukraine has stabilized.
In general, Ukrainian foreign policy
shift away from the EU and toward
Russia has affected all aspects of relations
and cooperation between Kyiv
and Moscow. One of those issues is
the sensitive matter of Russian gas
transit to the EU market. There is
direct link between the transit volumes
of gas and the level of cooperation
with Moscow, as this issue is
more political then economic. For example,
the transit of Russian natural
gas to Europe via Ukraine increased
by 3.2%, or 1.9 billion cubic meters,
to 86.1 bcm in 2013 from 84.2 bcm
in 2012. The shipment includes supplies
to the EU and Moldova. In total,
Ukraine is capable of shipping up to
120 bcm of gas annually to EU via its
pipelines. 2
An additional point on the new
Ukrainian – Russian gas agreement
relates to the presence of Russian
gas in the Ukrainian market. In 2013,
Ukraine reduced Russian natural
gas imports by 15%, or 4.9 bcm, to
about 28 bcm from 32.9 bcm in 2012.
About 8 bcm was bought by the company
Ostchem, which is affiliated
with one of Ukraine’s major big business
figures, Dmytro Firtash. This
year, after the new gas deal, Ukrainian
government representatives
announced that the annual volume
of Russian gas planned for purchase
is about 33-35 bcm. Clearly, Russia
is trying to stimulate an increase
of Russian gas exports in Ukraine.
This situation creates a huge number
of risks to other sectors of the
Ukrainian energy system, which has
started to develop during the high
prices on Russian gas the reduction
of its consumption.
GENERAL PERSPECTIVE
Starting from the last “gas war”
between Ukraine and Russia at the
beginning of 2009, Ukraine’s practical
policy seriously changed, especially
with the victory of Viktor Yanukovych
in the 2010 presidential elections. The
main platform for new the Ukrainian
policy became energy. The energy
sphere continues to be the object of
geopolitical interest among the US, EU
and Russia, as the world enters the age
of new hydro carbonates production
technologies, including shale gas,
deep shelf gas, coal bed methane and
methane hydrates. Revolutionary
new ways of obtaining oil and gas are
1
. Russia Promises Ukraine Cheaper Gas, $15 Billion Loan - http://www.voanews.com/content/russiapromises-ukraine-cheaper-gas-15-billion-loan/1811836.html
2
. Transit of Russian natural gas via Ukraine up 3.2% on year in 2013 - http://russia.platts.com/
latest-news/natural-gas/kiev/transit-of-russian-natural-gas-via-ukraine-up-26609556

changing the traditional markets of gas
and oil suppliers, transiting countries
and consumers. In this situation,
Ukraine is preparing for its new role -
being part of the energy belt between
the European Union, Russia and
Caspian region.
As mentioned above, the volume of
Russian natural gas used annually
by Ukraine was rapidly decreasing.
Until the end of 2013, the stated goal
of the government and the president
was to significantly reduce Russian
gas dependence by 2020. Ukraine
bought 41 bcm of Russian gas in 2010,
33 bcm in 2012 and 28 bcm in 2013.
To compensate for those reductions,
Ukraine increased gas imports from
the EU (Poland, Hungary and later
Slovakia and Romania), increased
its own gas production to 21 bcm in
2012 and up to 22 bcm in 2013, and
also started to substitute gas with
coal. As Europe’s the fourth largest
coal producer, Ukraine is seeking to
increase the use of coal in the country’s
energy mix. Ukraine’s coal reserves
UKRAINE IS PREPARING FOR ITS NEW ROLE - BEING PART
OF THE ENERGY BELT BETWEEN THE EUROPEAN UNION,
RUSSIA AND CASPIAN REGION.
account for around 117 billion tons
or 4% of the world’s total. According
to this, the Ukrainian and Chinese
governments and companies agreed
to build three plants, which produce
gas from the coal. This technology
was implemented in China with the
help of Shell Company. After that,
Chinese companies started to export
such technology to other countries,
including Ukraine.
At the same time Ukrainian authorities
are now making high stakes at shale
gas production in Ukraine (two
major shale gas fields in Eastern and
Western parts of the country operated
by Shell and Chevron) and deep sea
shelf production on the gas field close
to the Romanian border, operated by
ExxonMobil, as well as other shelf
fields operated by Eni and Total.
45
CASPIAN REPORT, WINTER 2014

Maidan Square,
Ukraine.
ROMAN RUKOMEDA
46
In addition, according to Ukraine’s
updated energy strategy, there are
governmental plans to increase
Ukrainian natural gas production
from 20 bcm in 2010 up to 44.4 bcm
in 2030, and reduce gas import to 5
bcm per year. The rapid increase of
gas production is planned based on
the development of deep sea shelf (the
deposits of the Black Sea shelf from
the Ukrainian side are estimated at
4-13 tcm) and shale gas production.
Increasing internal gas production also
allows the Ukrainian government to
sell its part (currently the population
is consuming about 15 bcm annually
while the rest, about 7-8 bcm per year,
can be sold) to Ukrainian companies or
abroad at high prices.
ENERGY TRENDS
The increasing of reverse imports of
gas from the EU: At the end of 2013,
one of the latest energy trends in
Ukraine was the increasing of gas imports
from Eastern EU states according
to a contract with German company
RWE Supply & Trading. Having
analysed all gas transportation routes
where switching to reverse mode
was possible, Ukraine declared that it
could diversify 100 percent of its gas
import. Ukraine started purchasing
gas from the EU in November 2012.
On May 15, 2013, it started importing
gas from Slovakia in test mode.
The total annual volume of gas that
can be delivered through the reverse
supplies from Europe to Ukraine can
reach over 30 billion cubic meters annually,
reported the Ukrainian Energy
Ministry in July 2013. But as usual,
the key issue is price.
In general, in 2013, according to
Energy Minister Eduard Stavytsky,
Ukraine planned to import about 2
bcm of natural gas from EU countries.
The price was lower than the price for
Russian gas at 30-60 USD (about 340-
370 USD per thousand cubic meters),
until October-November 2013, when
the gas price rose before the winter
period. The price of Russian gas in the

third quarter of 2013 was 420 USD
per thousand cubic meters.
In October 2013 Ukraine also announced
that it was preparing to
sign an agreement with Romania on
gas imports. The Slovakian route to
Ukraine is the biggest one, so Ukraine
is still counting on the help of the European
Energy Community in order
to open this route in 2014. According
to Stavytsky, the Slovakian route
would be able to transport up to 20
bcm of gas annually to Ukraine. But
now, the Slovakian reverse gas route
is under question. There is no need
for this contract, as the price for European
gas through Slovakia would
be over 268 USD per thousand cubic
meters. Also, Slovakian operators will
think twice before signing the agreement
with any Ukrainian company, as
there is no guarantee from Ukraine
on the duration and the volumes of
gas it needs. And why should Slovakia
spoil its relations with Gazprom
if the Ukrainian contract is high risk
and without any guarantee of long
term profitability
Starting from September 2013, the
volume of imported gas from Hungary
reached 15 million cubic meters
per day. From Poland, Ukraine
was importing natural gas starting
from January 2013. Until the new
gas agreement with Russia, Ukraine
planned to increase the level of gas
imports from the EU to 7 bcm, while
decreasing gas imports from Russia
to 20 bcm (from 28 bcm in 2013).
The total annual volume of gas that
can be delivered through the reverse
supplies from Europe to Ukraine
could reach over 30 billion cubic meters,
reported the Energy Ministry in
July 2013. And such opportunities
remain open to Ukraine if Russia returns
to the policy of high gas prices.
This could still happen if a pro-Western
new government came to power,
and Ukraine were to change its foreign
policy again, in favour of signing
the Association Agreement.
AFTER THE LAUNCH OF THE SECOND PHASE TANAP-
TAP PROJECT, UKRAINE COULD IMPORT UP TO 5 BCM OF
CASPIAN GAS. IT CAN BE DELIVERED TO THE UKRAINIAN
MARKET THROUGH BULGARIA AND ROMANIA USING
EXISTING PIPELINES.
In any case, at the beginning of 2014,
Stavytsky noted that for price reasons,
Ukraine at this stage intends to
import natural gas only from Russian
Federation and not Europe. Stavytsky
also reported that Ukraine intends
to sign an agreement on reverse gas
supplies from Slovakia, as the issues
of diversification of fuel supplies to
the country remains topical despite
the agreements reached with Russia
on discounted gas price. 3 This situation
opens up Ukraine as a prospective
market for Caspian gas. After the
launch of the second phase TANAP-
TAP project, Ukraine could import
up to 5 bcm of Caspian gas. It can be
delivered to the Ukrainian market
through Bulgaria and Romania using
existing pipelines. Thus the technical
possibility for this step exists, but the
real needs of Ukrainian gas consumption
(including for the Caspian gas)
are very much unclear as the growing
47
CASPIAN REPORT, WINTER 2014
3
. Ukraine rejects reverse gas - http://www.uniworld.org.ua/en/news/%7Bnews%7D/2014/01/09/
1646.html

ROMAN RUKOMEDA
48
economic crisis could significantly reduce
gas consumption.
UKRAINE, ONE OF AN ESTIMATED 32 COUNTRIES WITH
EXTRACTABLE SHALE RESERVES, HAS UP TO 1.2 TRILLION
CUBIC METERS OF SHALE GAS ACCORDING TO THE US
ENERGY INFORMATION AGENCY.
Development of shale gas: Ukraine
is a pioneer in the European shale
gas market production. Ukraine, one
of an estimated 32 countries with
extractable shale reserves, has up to
1.2 trillion cubic meters of shale gas
according to the US Energy Information
Agency.
A Production Sharing Agreement
(PSA) between Shell and the Ukrainian
government was signed in February
2013. According to that, Shell
is planning to drill the first testing
wells in the Eastern Ukrainian shale
gas field Yuzivske (situated in the
Dnieper-Donetsk oil and gas basin at
the territory of Donetsk and Kharkiv
regions) in the next 2-3 years, with
approximate investments at the level
of 400 million USD. 4 The field size
is 7,886 square km. If shale gas volumes
are confirmed (the expected
amount of shale gas at Yuzivske is
estimated at 1 tcm) then the level of
investments in Ukrainian shale gas
production will reach 10 billion USD
and Ukraine would be able to receive
about 5-10 bcm of shale gas in
5-7 years. According to preliminary
plans, drilling at the field will start in
the first half of 2014. The company
expects to produce shale gas as early
as 2015.
Ukraine’s agreement with international
company Royal Dutch Shell
remains inviolable, confirmed Ukrainian
government. Moreover, cooperation
with the largest international
company will be expanded.
A second major deal was announced
in May 2012 with Chevron, to explore
the Oleske field in Ivano-Frankivisk
Oblast in western Ukraine, beginning
in 2017. The government contract
allocates approximately 150 million
USD for studies and another 2.8
billion USD for developing any findings.
5 On November 5, 2013, Chevron
Ukraine B.V. and Nadra Oleska LLC
signed the production-sharing agreement
on the Oleska shale gas deposit,
located in Lviv and Ivano-Frankivsk
regions.
Chevron Ukraine B.V. will begin
operations on the Oleska shale gas
no earlier than the third quarter
of 2014, Ukrainian Ecology and
Natural Resources Minister Oleh
Proskuriakov announced. The operating
agreement, which will be
signed in the near future, is being
finalized. After that, the company
will have 90 days to present its work
program for 2014 to the inter-ministerial
commission for productionsharing
agreements. In addition,
the company must undergo envi-
4
. Shell sees no risks to investing in Ukraine - http://ua-energy.org/en/post/35946
5
. Ukrainian Gas Diversification: Shale And LNG Considerations http://www.eurasiareview.com/
03092013-ukrainian-gas-diversification-shale-and-lng-considerations-analysis/

onmental monitoring and expert
review. 6
As well as the leading shale gas production
companies, there are also
others with plans for Ukraine. For example,
Italian Eni and British Cadogan
are planning to sink first shale
gas prospecting well by the middle of
2014.
A PRODUCTION SHARING AGREEMENT (PSA) BETWEEN
SHELL AND THE UKRAINIAN GOVERNMENT WAS SIGNED
IN FEBRUARY 2013.
The British exploration company
JKX Oil & Gas has recently finished
its 10-stage hydraulic fracturing
campaign in Ukraine. The company’s
CEO Paul Davies said that only
one of the 10 hydraulic fracturing
operations carried out in Ukraine
was unsuccessful. JKX started its
multistage hydraulic fracturing
operation at its Rudenkovskoye license
area in eastern Ukraine in July
2013.
There should be greater awareness
that shale gas in Ukraine is still a
risky investment and could end up in
failure. Ukraine risks following in the
footsteps of Poland, which had promising
initial shale forecasts but disappointing
early extraction attempts.
However, Lane Energy Poland, an oil
and gas exploration company controlled
by ConocoPhillips, is now
extracting some 8,000 cubic meters
of shale gas per day at a test well in
northern Poland, an amount unseen
in Europe to date. 7 Thus Poland is
still at the front line of shale gas exploration
and production in Europe.
Ukraine, however, is not yet at the
stage that Poland reached before
failure, so all deals and exploration
contracts must be viewed in light of
possible failure.
49
CASPIAN REPORT, WINTER 2014
6
. Chevron operations at Ukraine’s Oleska shale won’t begin before July 1 - Ecology Minister - http://en.interfax.com.ua/
news/economic/186358.html
7
. Poland’s shale gas hopes buoyed by promising test output - http://www.reuters.com/article/2013/ 08/28/
poland-shale-idUSL6N0GT0OI20130828

ROMAN RUKOMEDA
50
Successful shale gas production will
promote shale gas in Europe and
enable a number of EU countries
(especially the UK and Germany)
implement new technologies in their
shale gas fields. It also should be
mentioned that European Commission
published guidelines on shale
gas exploration, which aim to provide
greater clarity for the extractive
industry and rule out the prospect of
cumbersome EU-level restrictions
on hydraulic fracturing (known as
fracking).
Before the Commission, under pressure
from environmentalists and
some member states that have
banned fracking, including France,
had been considering binding EUwide
rules covering environmental
damage and safety. The Commission’s
environment department had
even drafted possible legislation
to that effect. But there have been
warnings from the oil and gas industries,
and pro-shale countries such as
Poland and the UK, that adding red
tape would inhibit exploration and
prevent the EU from taking advantage
of an indigenous, low-carbon
(compared to coal) energy source.
The guidelines are supposed to help
co-ordinate the national policies of
the member states that choose to
extract shale gas, but other member
states will be free to ban exploration,
according to a draft of the proposal.
However, it stipulates that if the Commission
finds that member states are
not following the recommendations,
the EU could make them legally binding
in 2015.
The recommendations include conducting
site inspections to examine if
there is groundwater contamination,
restricting drilling in areas prone to
flooding or earthquakes, and monitoring
methane emissions. Member
states have been told to begin applying
the principles within six months.
From December 2014 they should inform
the Commission each year about
measures they have put in place. The

Commission will monitor adherence
to the recommendations in a publicly
available scoreboard, which will be
used to review the effectiveness of
the voluntary approach in 2016. The
International Association of Oil and
Gas Producers said the guidelines are
“a step in the right direction” .8
Thus it is possible to say that in spite
of new gas agreements with Russia,
shale gas production is developing in
Ukraine without any serious risks. It
is doubtful that the Ukrainian government
will slow down its cooperation
with transnational energy companies,
as they are the biggest investors in
the Ukrainian energy sector, which
urgently needs modernization.
Development of deep sea shelf gas
production: Another possible route
to Ukrainian energy independence is
deep sea gas production. One of the
most promising gas fields is Scythian
(close to the Romanian border). The
Scythian field is enormous (16,698
square kilometers) and adjacent and
geologically similar to where Exxon-
Mobil and OMV are exploring off Romania’s
coast.
The PSA between ExxonMobil, the
Texas-based oil giant (the consortium
also includes Shell, OMV) and
the Ukrainian government (Nadra
Ukrayiny) is being prepared and is
supposed to be signed in the first half
of 2014 (previously planned for November
2013). The signing of a gas
PSA between Ukraine and an international
consortium led by U.S. major
Exxon Mobil has been postponed
for the second time in a row due to
mass anti-government protests in
Ukraine and political crisis. From
UKRAINE IS ESTIMATED TO POSSESS THE FOURTH-
LARGEST SHALE GAS RESERVES IN EUROPE.
the start of the project, the amount of
the gas produced in Ukraine’s shelf
can reach to 4 bcm in coming 3-5
years. ExxonMobil will spend $735
million drilling two deep-water oil
wells off Ukraine’s Black Sea coast. 9
The number of foreign companies
that are coming to Ukraine’s shallow
sea shelf is also increasing. Italian
Eni has already put in request for the
production of oil and gas on the shallow
Black Sea shelf fields.
Ukraine is estimated to possess the
fourth-largest shale gas reserves in
Europe. The planned exploration
projects in Ukraine are by attempt
of the country to rid itself of energy
dependency on Russia and to create
a balanced energy diversification of
gas supply.
Deep sea shelf gas production will
be the fastest way for Ukraine to increase
domestic gas production. It
could launch a new wave of shelf gas
production in the Black Sea region.
LNG terminal project: In view of the
importance of gas import diversification,
the Office of the President of
Ukraine established the Ukrainian
LNG Terminal National Project to
51
CASPIAN REPORT, WINTER 2014
8
. http://www.europeanvoice.com/article/2014/january/eu-unveils-shale-gas-guidelines/79361.aspx
9 .
. Tale of two seas may be key to Europe’s future - http://www.thenational.ae/business/energy/
tale-of-two-seas-may-be-key-to-europes-future

ROMAN RUKOMEDA
52
develop a LNG terminal on the Black
Sea coast. Ukraine is planning to construct
a liquefied natural gas (LNG)
regasification terminal with annual
capacity of 10 bcm. However, it is not
expected to come online before 2018,
although Ukrainian officials are aiming
for 2015. The government has actively
courted Azerbaijan and Qatar
for long-term LNG supplies.
At the beginning of April 2013, Excelerate
Energy LLC launched the
preparation of engineering work for
the LNG Terminal National Project.
The service agreement was signed
on April 16 2013 in Houston, Texas
between the “LNG Terminal National
Project” State-owned Enterprise of
Ukraine and Excelerate Energy LLC,
a global market leader of FSRU.
The Agreement was the next step
after signing the Framework Agreement
on cooperation on November
26, 2012 during a formal ceremony
to launch the construction of LNG
terminal. The LNG Terminal National
Project anticipates that it will be possible
within the next year to install a
floating storage and regasification
unit (FSRU) in “Yuzhnuy” Port near
Odessa with a total capacity of 5
bcm. 10
In total, the system will cost approximately
1 billion USD. According to
the National Project’s leadership
team, if it is successfully integrated
into Ukraine’s domestic gas infrastructure
and can regularly receive
LNG deliveries, it could lower
Ukraine’s imported gas price by 15-
20%. Via the Ukrainian LNG Terminal
National Project, the Ukrainian
government has a 25% stake in the
endeavour and maintains that the
estimated investment payback period
is 8-9 years.
UKRAINE IS PLANNING TO CONSTRUCT A LIQUEFIED
NATURAL GAS (LNG) REGASIFICATION TERMINAL WITH
ANNUAL CAPACITY OF 10 BCM.
The LNG project will have two
phases. The first of these will be the
delivery of FSRU to Ukraine’s “Yuzhnuy”
port in 2014. The second stage
will include the construction of an
onshore terminal and storage facility
with the capability of receiving large
LNG tankers (178000 cubic meters).
According to information provided
by the Coordinating Council of the
Ukrainian LNG Terminal National
Project, it will be composed of three
180,000 cubic metres tanks, a total
LNG storage capacity of 540,000 m3,
doubling the capacity of the FSRU
alone, and a send-out capacity of
10 billion m3 per year (1,141,553
Nm3/h.) This phase will cost approximately
962 million USD, paid
for by an investor consortium and
scheduled for completion by 2018. 11
At the beginning of September 2013,
the Head of the State Agency for Investment
and National Projects of
10
. American company Excelerate Energy began preparation of engineering works for Ukrainian National project “LNG
Terminal” - http://www.ukrproject.gov.ua/en/news/american-company-excelerate-energy-began-preparation
-engineering-works-ukrainian-national-proje
11
. Ukrainian Gas Diversification: Shale And LNG Considerations http://www.eurasiareview.com/03092013-ukrainian-gasdiversification
-shale-and-lng-considerations-analysis/

Ukraine, Vladyslav Kaskiv, gave his
assurance that in 2014 a new LNGterminal
will be built at “Yuzhnuy”
port. In August 2013, the American
company Excelerate Energy LP sent
a technical report to the Ukrainian
side approving the possibility of
placing the FSRU platform for accepting
and refining LNG in the port
of “Yuzhnuy”. Now, the State Agency
for Investment and National Projects
of Ukraine is preparing all the documents
for renting the LNG platform
in “Yuzhnuy”.
The biggest risk for the project is
negotiating with Turkey about the
crossing of the Bosporus and Dardanelles
straits by LNG tankers. A compromise
can be reached if Ukraine
will also participate in constructing
new LNG terminals in Turkey, or partially
consume the LNG from existing
terminals (Marmara BOTAS LNG Terminal
and Aliaga LNG Terminal) in
the future. The other possible route
to Ukrainian-Turkish energy cooperation
could be by bringing Turkey
into the circle of shareholders of the
new LNG-terminal in Ukraine.
The new gas price agreement with
Russia will definitely postpone the
KNG-terminal project, as the country
will have enough cheap Russian
gas. Interest in this project can be
revived once Russia increases the
gas price for Ukraine, bringing it
to the same level as the European
price.
The gas hub project: After launching
the shale gas production
projects and deep shelf gas projects
in Ukraine, there will be an opportunity
to increase gas production
in 5-7 years to an annual total of
30 bcm. That means the complete
reduction of gas dependency for
Ukraine, with a view to transformation
from gas importer to gas
exporter. Ukraine has the biggest
natural gas capacity with 31 bcm in
Europe.
53
CASPIAN REPORT, WINTER 2014

ROMAN RUKOMEDA
54
Additionally, the US is interested in
creating a gas hub in Ukraine as their
companies (Chevron, ExxonMobil
and others) are entering Ukrainian
market and can produce rather big
amount of natural gas up to 5-10
bcm annually in 2020, so it will optimal
for them to sell their gas at a
Ukrainian gas hub. The newly appointed
US Ambassador to Ukraine,
Geoffrey R. Pyatt, has already announced
that the US will support the
creation of a gas hub, and that American
companies are ready to bring
high energy production technologies
and investments to Ukraine.
The Ukrainian government is working
on making Ukraine the new East
European gas hub on the basis of
newly produced gas, developed gas
transportation system and gas storages.
That also will open additional
THE UKRAINIAN GOVERNMENT IS WORKING ON MAKING
UKRAINE THE NEW EAST EUROPEAN GAS HUB ON THE
BASIS OF NEWLY PRODUCED GAS, DEVELOPED GAS
TRANSPORTATION SYSTEM AND GAS STORAGES.
opportunities to Caspian gas producers.
But so far, the impact of the new
gas agreement with Russia - which
will reduce the volume of reverse
gas in Ukraine and slow down the
projects of expensive gas production
on the sea shelves – looks likely to
postpone the fulfilment of this vision.
CONCLUSIONS
There are many perspectives and opportunities
in the energy sector still
open to Ukraine. Increasing reverse
gas flows from EU, shale gas production,
the development of new fields
on the Black Sea shelf as well as the
creation of new gas hub in Ukraine
are all opportunities that Ukraine
can pursue in 2014.
The new agreements signed by
Ukraine and Russia in December
2013 have created a trap for Ukraine,
which now has the option of cheap
Russian gas and will slow down its
projects directed at gas diversification.
The first victim of this policy is

the gas reverse with Europe, which
was completely halted in the first
days of 2014. Hopefully, the Ukrainian
government understands the
importance of saving some volumes
of gas reverse and open reverse
routed for Ukraine, as Russia gives
no guarantee against the possible
increase of gas prices to the level of
400-450 USD per thousand cubic
meters.
The Ukrainian market remains important
for Caspian gas. By the time
of TAP-TANAP launch, Ukraine will
have the gas agreement with Russian
Federation ended in 2019, so
Caspian gas in Ukraine could meet a
market niche at the level of 5 bcm annual
or even more.
The new energy policy of the Ukrainian
government could lead to a
serious reduction of Russian gas dependency
and could make Ukraine a
gas producer in the East European
region. This plan was connected to
the idea of making the country a gas
energy hub. Among the promoters of
the gas hub project are the American
energy companies, which have plans
to sell Ukrainian shale gas and deep
sea shelf gas. But now this plan is under
question.
55
CASPIAN REPORT, WINTER 2014
Shale gas is the sphere where
Ukraine could become a leader
among European states. So far, the
shale gas projects are successfully
developing in Ukraine and there are
good chances for their successful realization
within 3-5 years. This will
have an important impact on the energy
security of Eastern Europe.

EBRU TURHAN
56
FROM ECONOMY TO
DOMESTIC POLITICS:
THE GERMAN ATTITUDE
TOWARDS TURKEY’S EU
MEMBERSHIP
EBRU TURHAN
MERCATOR-IPC FELLOW, ISTANBUL POLICY CENTER,
SABANCI UNIVERSITY

The unique and deep-rooted dialogue
between Turkey and Germany rests
upon multidimensional bilateral
relations determined by strong economic
cooperation, political dialogue and
cultural exchanges.
INTRODUCTION
The unique and deep-rooted dialogue
between Turkey and Germany rests
upon multidimensional bilateral
relations determined by strong
economic cooperation, political
dialogue and cultural exchanges.
The official German attitude
towards Turkish membership in the
European Union (EU) has always
been an important dynamic in
German-Turkish relations. German
preferences for Turkey’s membership
prospect significantly shape the
scope, intensity and characteristics of
Turkey - EU relations. This is mainly
due to German influence within the
EU in terms of agenda-setting, policyshaping
and decision-making, as
facilitated by German economic and
political power. 1
What are the key determinants
of German preferences regarding
Turkey’s accession to the EU This
paper argues that at the present time,
national interests play a decisive
NATIONAL
INTERESTS
PLAY A
DECISIVE
ROLE IN THE
OFFICIAL
GERMAN
ATTITUDE
TOWARDS
TURKISH
MEMBERSHIP IN
THE EU.
role in the official German attitude
towards Turkish membership in the
EU. In view of Turkey’s quite limited
progress in recent years in the
fulfilment of the Copenhagen political
criteria and the continuing problems
related to Turkey’s perception as a
“European” country, in particular, by
the majority of the German Christian
Democrats and their Bavarian
partners, German Social Democrats, 2
strategic calculations define German
preferences and consequently
contribute significantly to the
trajectory of Turkey’s EU course.
The paper makes recourse to an indepth
analysis of last year’s German-
Turkish dialogue in view of Turkey’s
EU accession process. It traces the
interaction between leading German
and Turkish decision-makers in
politics and economics in view
of changing global and regional
parameters as well as the interaction
of the German government with the
EU institutions concerning Turkey’s
EU accession process.
57
CASPIAN REPORT, WINTER 2014
1
. See on German power within the EU Simon Bulmer and William E. Paterson, “Germany and the European Union: from ‘tamed
power’ to normalized power”, International Affairs, Vol. 86, No. 5, 2010, pp. 1051-1073; Jonas Tallberg, “Bargaining Power in the
European Council”, Journal of Common Market Studies, Vol. 46, No. 3, 2008, pp. 685-708; Andrew Moravcsik, “Europe After the
Crisis”, Foreign Affairs, Vol. 91, No. 3, 2012, pp. 54-68
2
. See for example “Schäuble: Türkei ist nicht mehr Europa”, Die Presse, 03.07.2013

EBRU TURHAN
58
GERMAN-TURKISH RELATIONS
AT A GLANCE
Germany is defined as Turkey’s leading
trading partner, with bilateral
trade having reached a new record of
EUR 32.1 billion in 2012, despite the
financial crisis in Europe. The number
of Turkish and German companies
with German capital operating
in Turkey has risen to nearly 6,000,
while Turkish companies have been
increasingly involved in investments
in Germany and setting up businesses
in sectors of strategic importance for
both countries. The two countries
cooperate under the umbrella of various
leading international organizations
including the North Atlantic
Treaty Organization (NATO), G20 and
the Organization for Security and Cooperation
in Europe (OSCE), and have
recently launched the German-Turkish
Strategic Dialogue Mechanism in
order to nurture bilateral cooperation
on key issues of common interest,
including the supply of energy
security, the fight against terrorism
and extremism as well as foreign and
security policy. 3
The nearly three million people of
Turkish origin residing in Germany
also add an important dimension to
the German-Turkish dialogue. The
intensity of the bilateral relations are
also demonstrated by frequent mutual
high-level visits. German Chancellor
Angela Merkel’s most recent
visit to Turkey was in February 2013.
Prime Minister Erdogan paid an official
visit to Berlin on 4 February 2014
and held meetings with Chancellor
Merkel, Foreign Minister Frank-Walter
Steinmeier and Vice-chancellor
Sigmar Gabriel, where the leaders
focused on issues of strategic importance
such as the acceleration of Turkey’s
EU accession process, regional
and international matters, and German-Turkish
economic cooperation.
THE GERMAN “FACTOR” IN EU-
TURKEY RELATIONS
THE EUROPEAN COUNCIL HAS ONLY BEEN IN A POSITION
TO MAKE A POSITIVE DECISION ON THE ACCELERATION
OF TURKEY’S EU ACCESSION PROCESS WHEN THE
GERMAN GOVERNMENT HAS EXPLICITLY SPOKEN UP ON
TURKEY’S BEHALF.
Important decisions pertaining to
Turkey’s EU accession process are
taken at the gatherings of the European
Council or the Council of the
European Union, also known as the
Council of Ministers. The intergovernmental
structure of these bodies
brings to the forefront the impact of
Member States’ enlargement politics.
Within the framework of intergovernmental
gatherings the Member States
negotiate their preferences, which reflect
national objectives. Negotiation
power is predominantly determined
by the presence of asymmetrical interdependence
between the Member
States. 4 With its multiple capabilities
in both economic and political terms,
Germany has assumed a leadership
3
. Auswärtiges Amt, Joint Declaration between the Federal Foreign Office of the Federal Republic of Germany and the Ministry
of Foreign Affairs of the Republic of Turkey on the establishment of a Strategic Dialogue Mechanism, 12 May 2013, Berlin.
4
. Andrew Moravcsik, The Choice for Europe: Social Purpose and State Power from Messina to Maastricht,
(New York: Ithaca), 1998, p. 61

European
Parliament.
role, along with France and the UK, in
bargaining processes related to EU
enlargement. Germany’s leadership
role in the EU has expanded since the
start of the Eurozone crisis, and this
will have important implications for
Turkey’s EU accession process. This
paper will touch upon this issue in the
subsequent sections.
The European Council has only been
in a position to make a positive decision
on the acceleration of Turkey’s
EU accession process when the German
government has explicitly spoken
up on Turkey’s behalf. 5 Accordingly,
throughout Turkey’s extended EU accession
process, successive Turkish
governments have paid particular attention
to Germany’s attitude towards
Turkish membership in the EU, and
deemed Germany responsible for both
positive and negative developments
related to its EU bid. This has greatly
influenced German-Turkish bilateral
relations. Two examples might be
useful to illustrate the negative implications
of German opposition to the
strengthening of Turkey’s EU prospects
for German-Turkish bilateral
dialogue.
The first example takes us back to
1997. In December of that year, the
European Council rejected Turkey’s
candidacy application. As far as the
preferences of the biggest three Member
States were concerned, the British
and French governments supported
Turkey’s inclusion in the list of the
candidates along with the countries
of the Central and Eastern Europe.
But the German government under
the leadership of Chancellor Helmut
Kohl strictly opposed the approval of
Turkish candidacy in Luxembourg. 6
Following the Luxembourg Summit,
the dialogue between Germany
59
CASPIAN REPORT, WINTER 2014
5
. Ebru Turhan, The European Council Decisions Related to Turkey’s Accession to the EU: Interests vs.
Norms, (Baden-Baden: Nomos Verlagsgesellschaft), 2012, p. 361
6
. Ibid., pp. 197-200.

Prime Minister
of Turkey Recep
Tayyip Erdogan
and German
Chancellor Angela
Merkel.
EBRU TURHAN
60
and Turkey reached a low point in
1998. Turkish Prime Minister Mesut
Yilmaz deemed German Chancellor
Kohl responsible for the EU’s decision
and made a highly inappropriate comparison
between Kohl’s support for
the Eastward enlargement and Adolf
Hitler’s expansionist policies towards
Eastern Europe:
“The Germans are following the same
strategy as before. They believe in a
Lebensraum. This means that the Central
and Eastern European countries
are of strategic importance for Europe
and Germany as their backyard…Their
final goal is to include these countries
in NATO and the EU and divide Europe
between Bulgaria and Turkey”. 7
Chapter 22 related to regional policy.
Germany’s veto on Chapter 22 was
just supported by the Netherlands and
Austria. EU foreign ministers backed
the German proposal to postpone the
talks with Turkey until after the presentation
of the progress report. The
release of the report was scheduled for
after the German federal elections. Following
this, German-Turkish relations
deteriorated. Germany and Turkey
summoned each other’s ambassadors
over increasing bilateral tensions. The
then EU Affairs Minister, Egemen Bağış,
declared that Turkey would probably
never become an EU member, due to
prejudiced attitudes from members,
suggesting the Turkish government’s
frustration with the German attitude. 8
Another striking example of Germany’s
key role in EU-Turkey relations is more
recent. At the end of May 2013, the
Merkel government voiced its opposition
to restarting the accession negotiations
with Turkey in June 2013, as
originally promised by the EU. Accordingly,
it vetoed the opening of talks on
DYNAMICS BEHIND GERMAN
PREFERENCES
These two examples demonstrate that
Ankara closely follows Germany’s attitude
towards Turkish membership in
the EU and perceives German preferences
as a decisive factor in EU-Turkey
7
. “Turkish PM says Germany seeks ‘Lebensraum’ via EU”, Reuters, 6 March 1998
8
. See for details Ebru Turhan , “German Interests and Turkey’s EU Bid”, Hürriyet Daily News,
27 November 2013

elations and Turkey’s EU accession
process.
But what are the key determinants of
German preferences on Turkey’s accession
to the EU This paper argues
that at the present time, national interests
play a major role in the official
German position on Turkey’s EU bid.
A brief analysis of last year’s German-
Turkish dialogue in view of Turkey’s
EU accession process gives some hints
on the German government’s pragmatic
and interest-oriented approach
to EU-Turkey relations.
CHANCELLOR MERKEL’S VISIT TO
TURKEY: CALL FOR THE REVIVAL
OF EU-TURKEY RELATIONS
In February 2013, Chancellor Angela
Merkel visited Turkey accompanied by
an exceptionally high-level business
delegation. One day prior to her departure
to Turkey, Merkel called in her
weekly video podcast for the opening
of a new chapter in EU-Turkey negotiations
despite her personal hesitation.
She stated:
“I think a long negotiating path lies
ahead of us. Although I am sceptical, I
agreed with the continuation of membership
discussions. We are engaging
in these with an open result…In recent
times, negotiations stalled somewhat
and I am in favor of opening a new
chapter in order to move forward.” 9
The German Chancellor’s support
for the reopening of membership
negotiations with Turkey following
a three-year freeze came at the right
time, when leading representatives of
the German business world have been
intending to enhance bilateral economic
ties with their Turkish counterparts
and initiate new partnerships
THE CHANGE OF HEART IN BERLIN PRESUMABLY HAD TO
DO WITH THE GERMAN GOVERNMENT’S INTENTION TO
PREVENT THE POLITICAL DIFFERENCES BETWEEN THE
TWO COUNTRIES FROM AFFECTING THE FUTURE OF
BILATERAL ECONOMIC COOPERATION.
within the framework of the visit. The
change of heart in Berlin presumably
had to do with the German government’s
intention to prevent the political
differences between the two
countries from affecting the future of
bilateral economic cooperation. The
German business world has attached
great importance to the maintenance
and deepening of bilateral ties with
Turkey since the outbreak of the
Eurozone crisis, in view of Turkey’s
dynamic economy. This interest has
also been demonstrated by frequent
visits to Turkey by the German ministers
for economy and other related
departments since in the wake of the
Eurozone crisis. The ministers have
been accompanied by high-level business
delegations. 10 The visits have laid
the foundations for new partnerships.
In fact, right after the visit of Chancellor
Merkel to Turkey in February
2013, important German-Turkish
joint ventures were established and
investments were made in particular
61
CASPIAN REPORT, WINTER 2014
9
. Alexandra Hudson, “Merkel backs new EU talks for Turkey but has doubts“, Reuters, 23 February 2013
10
. Selected visits to Turkey since the start of the Eurozone crisis: 29 April-5 May 2012, Jörg Bode,
Lower Saxony; 13-15 March 2013, Martin Zeil, Bavaria and 4-9 September 2013, Garrelt Duin,
North Rhine-Westphalia.

in the sectors of energy and water and
waste management.
GERMAN CHRISTIAN DEMOCRATS
REDISCOVER TURKEY
EBRU TURHAN
62
SUPPORT FROM THE GERMAN
BUSINESS WORLD FOR TURKEY’S
EU MEMBERSHIP
As part of her trip, Merkel attended the
Second Turkish-German CEO Forum
jointly organized by TUSIAD and its
German counterpart BDI, Federation
of German Industries. During her talk
the German Chancellor applauded Turkey’s
economic boom and called for increased
cooperation particularly in the
fields of energy and infrastructure. 11
Following the BDI forum, the voice of
the German industry, a press release
demanded for the first time in many
years a quick decision pertaining to
Turkish membership in the EU, stating
that the future architecture of the EU
might “offer the opportunity for a new
European geometry”. 12 With this statement,
the German business world is
presumably envisioning the construction
of a more flexible and multi-tier
EU-structure in the near future, where
Turkey can contribute to the EU’s economic
stability. This statement is also a
good example of the pressure exerted
by various domestic actors and groups
on the German government in relation
to German interests in Turkey’s EU accession
process.
GUNTHER OETTINGER, EUROPEAN COMMISSIONER FOR
ENERGY, CRITICIZED THE LONG-DRAWN-OUT PROCESS
OF TURKEY’S ACCESSION TO THE EU.
A few days prior to and during the visit
of the German Chancellor to Turkey, a
kind of rapprochement between the
German Christian Democrats and
Turkey took place. At that time, highlevel
members of Merkel’s ruling
Christian Democratic Union (CDU) and
CDU-near experts openly expressed
their support for Turkey’s EU bid.
They furthermore began to highlight
Turkey’s importance for Europe’s
economic stability and growth, to
question the use of the concept
of “privileged partnership”, and to
signal the opening of new chapters in
Turkey’s accession talks in the near
future.
For instance, Günther Oettinger,
European Commissioner for Energy,
criticized the long-drawn-out process
of Turkey’s accession to the EU and
said, “I would like to bet that one
day in the next decade a German
chancellor and his or her counterpart
in Paris will have to crawl to Ankara on
their knees to beg the Turks, ‘Friends,
come to us”. 13 Ruprecht Polenz, the
then Chairman of the Foreign Affairs
Committee in the German Bundestag,
remarked, “It is clear to most people
in my party that the idea of ‘privileged
partnership’ is defunct”. 14 In a similar
vein, Hans-Georg Pöttering, former
President of the European Parliament
(EP) and recent Chairman of the CDUnear
Konrad Adenauer Foundation
11
. “Merkel’s Difficult Dialogue with Erdogan“, Deutsche Welle, 23 February 2013
12
. “Grillo: German industry supports continuation of negotiations on membership”, 25 February
2013, http://www.bdi.eu/BDI_english/568_959.htm
13
. “Oettinger kritisiert EU-Kurs zur Türkei“, Bild Zeitung, 20 February 2013
14
. Daniela Vates, “Polenz will die Türkei an die EU binden”, Frankfurter Rundschau, 23 February 2013

Foreign Minister
of Turkey Ahmet
Davutoglu and
his German
counterpart Frank-
Walter Steinmeier.
highlighted common German-Turkish
interests and possibilities for bilateral
partnerships in various areas such
as the resolution of the conflict in the
Middle East and the adoption of a
successful development policy vis-àvis
Africa. He furthermore emphasized
that two new chapters in Turkey’s
accession talks with the EU might be
opened during the Irish Presidency. 15
It looks like high-profile German
Christian Democrats are increasingly
acknowledging Turkey’s significance
for both European and German
economies and the stability in the
European periphery, in light of the
Eurozone crisis, the Arab Revolutions,
and the Syria conflict. In line with
these developments, the German and
Turkish Foreign Ministries established
the German-Turkish Strategic
Dialogue Mechanism in May 2013. The
IT LOOKS LIKE HIGH-PROFILE GERMAN CHRISTIAN
DEMOCRATS ARE INCREASINGLY ACKNOWLEDGING
TURKEY’S SIGNIFICANCE FOR BOTH EUROPEAN AND
GERMAN ECONOMIES AND THE STABILITY IN THE
EUROPEAN PERIPHERY, IN LIGHT OF THE EUROZONE
CRISIS, THE ARAB REVOLUTIONS, AND THE SYRIA
CONFLICT.
mechanism seeks to enhance the close
bilateral cooperation between the
two governments in strategic matters
such as foreign and security policy, the
fight against terrorism and extremism,
energy, regional and international
issues. 16
THE DEATH OF THE “PRIVILEGED
PARTNERSHIP”
A few months later, German Christian
Democrats and their Bavarian
sister party, Christian Social Union
63
CASPIAN REPORT, WINTER 2014
15
. Ismail Cevik, “Die Türkei erlebt eine außergewöhnliche Phase der politischen Stabilität“, DTJ, 22 February
2013
16
. Auswärtiges Amt, op.cit.

EBRU TURHAN
64
(CSU) dropped the use of the term
“privileged partnership” in the 2013
CDU/CSU election program, pointing
to the need for a strong cooperation
between Turkey and the EU as well
as close strategic collaboration on
foreign and security policy matters.
A decade ago, the German conservatives
started to promote the concept
of a privileged partnership with Turkey
instead of full EU membership.
Strategic calculations played a key
role in this change of heart. Although
the CDU/CSU remains skeptical about
Turkey’s full membership in the EU, it
abandoned this concept primarily
due to increasing criticism from the
Turkish political and economic circles
and its own party base about the inappropriateness
of the concept. 17 “Privileged
partnership” has been a concept
without clear content. German politicians
had difficulty explaining exactly
what it meant because Turkey and
Germany/EU have been already been
enjoying a privileged partnership - in
terms of their bilateral cooperation -
for decades. Accordingly, Turkish political
and economic circles have been
increasingly frustrated and irritated
with the use of this term. Merkel’s
CDU intends to prevent this concept
from affecting the future of cooperation
between Germany and Turkey.
GERMAN VETO ON CHAPTER 22:
A MATTER OF DOMESTIC POLITICS
Although Turkish political, economic
and social circles were expecting the
relaunch of accession talks between
Turkey and the EU in June 2013, as
promised by the EU, Germany vetoed
the opening of Chapter 22 related to
regional policy. The German opposition
to the revitalization of EU-Turkey
relations should be assessed in view
of the pre-election atmosphere and
17
. See for criticism from the CDU’s own party base about the inappropriateness of the terminology for
Turkey’s EU accession process Vates, op.cit.

Chancellor Merkel’s efforts to satisfy
conservative voters. German federal
elections were also approaching.
With the veto, Merkel avoided German
conservatives’ criticism of her
party’s traditional Turkey policy, and
subsequently a loss of last-minute
votes. The German veto also attracted
heavy criticism from European leaders.
Carl Bildt, Sweden’s Foreign Minister
stated:
“German elections are a good thing,
but it cannot be an excuse to postpone
everything else in Europe.” 18
Carl Bildt’s statement seemed to regard
the role of Turkey’s EU accession
process in the German federal
elections and German government’s
business-like approach to EU-Turkey
relations.
The official reason for the German
veto and the EU decision not to restart
negotiations until after the release of
the progress report was the Turkish
government’s handling of the Gezi
Park protests. However, it should not
be forgotten that only three Member
States vetoed the opening of Chapter
22: Germany, Austria, and the Netherlands.
These are three Member States
with high Turkish migrant populations,
where the “Turkish issue” has
always played an important role in
domestic politics. Another interesting
point is that two of these three countries
- Germany along with Austria
- were in pre-election mode. In a similar
vein, Eurosceptic and anti-immigration
parties were gaining strength:
in Germany, the recently established
the Alternative for Germany (AfD)
THE OFFICIAL REASON FOR THE GERMAN VETO AND THE
EU DECISION NOT TO RESTART NEGOTIATIONS UNTIL
AFTER THE RELEASE OF THE PROGRESS REPORT WAS
THE TURKISH GOVERNMENT’S HANDLING OF THE GEZI
PARK PROTESTS.
and in Austria, the Freedom Party of
Austria (FPÖ). Thus, centre-right parties
could have easily lost some votes
if their voter bases had noticed a drift
from the parties’ traditional Turkey
policies.
POST-ELECTION ATMOSPHERE:
RENEWED INTEREST IN TURKEY’S
ECONOMIC AND POLITICAL
STABILITY
In the aftermath of the German federal
elections, the German government
not only dropped its veto on
Chapter 22, but called for talks on
Chapters 23 and 24. These chapters
focus on judiciary, fundamental
rights, justice, freedom and security.
They are of utmost importance for
Turkey’s democratization process
and the maintenance of a stable political
environment. Turkey’s political
stability is very important
for Germany. Around 6000 German
companies currently operate in Turkey,
and most manage their regional
operations from Turkey. The political
turmoil during the Gezi Park
protests revealed the strong connection
between political and economic
stability; the Turkish stock market
experienced its biggest daily drop in
a decade and the Turkish lira lost its
value. Such incidents greatly affected
German companies’ performance in
Turkey. Accordingly, Markus Kerber,
65
CASPIAN REPORT, WINTER 2014
18
. Bruno Waterfield, “EU delays Turkish membership talks amid protests”, The Telegraph, 25 June 2013

EBRU TURHAN
66
Director General of the Federation of
German Industries, warned Turkey
about the economic implications of
political stability. 19
GERMANY AND TURKEY TO
EXPAND ENERGY COOPERATION
Turkey is a very important country for
German companies. It is a production
base and regional hub as well as a big
market due to the significant Turkish
domestic demand. Various German
companies achieve their world-wide
and Europe-wide records in sales
growth in Turkey. In 2013, Mercedes-
Benz achieved a sales record in
Turkey with an annual increase in
sales of almost 58 percent compared
with 2012. 20 Leading German energy
giants such as E.ON, RWE and EnBW
are experiencing great difficulties
at home and expect shrinking gains
due to the German energy transition,
and so are shifting their focus to
developing counties such as Turkey.
The recently established German-
Turkish Energy Forum also reflects
the significance of cooperation in
the field of energy. The annual forum
is a new platform, which seeks to
enhance dialogue on energy matters
between the two countries.
IN 2013, MERCEDES-BENZ ACHIEVED A SALES RECORD
IN TURKEY WITH AN ANNUAL INCREASE IN SALES OF
ALMOST 58 PERCENT COMPARED WITH 2012.
Cooperation in energy matters is
of interest for both countries. With
its comprehensive know-how
Germany can support the further
development of the Turkish energy
industry and contribute to enhanced
energy efficiency and the expansion
of renewable energies. Turkey is an
important hub for raw material imports
and plays a key role in the supply of
energy security both in Germany and
the rest of Europe. Other sectors of
strategic importance for German-
Turkish economic cooperation include
but not limited to the automotive,
transportation, textile, and chemical
industries, along with water and waste
management. It should come as no
surprise, therefore, that during the Gezi
protests, the Federation of German
Industries warned Turkey about the
economic implications of the incidents.
The German call to open Chapters 23
and 24 should be evaluated in view of
the direct effects of the political and
economic instability in Turkey for
Germany.
CONCLUSION: GERMAN
INTERESTS AND THE FUTURE OF
TURKEY-EU RELATIONS
The in-depth analysis of last year’s
German-Turkish dialogue in view of
Turkey’s EU accession process elucidated
the key role of interests in
the construction of German preferences
pertaining to Turkey’s EU bid,
and, consequently the trajectory and
characteristics of Turkey’s EU accession
process. In the aftermath of
this analysis, one question remains:
What factors will determine German
19
. “Gewaltsame Proteste: Deutsche Wirtschaft sorgt sich um Stabilität in der Türkei”, Spiegel Online, 18
June 2013”
20
.“Mercedes-Benz on record course”, http://www.daimler.com/dccom/ 0-5-7153-1-1663631-1-0-0-
0-0-0-0-0-0-0-0-0-0-0-0.html

Campaign event of
Angela Merkel.
interests and thus influence German
preferences on Turkey’s EU accession
process in the near future
Two developments should be closely
followed.
The first relates to the future of Europe.
Germany’s emergence as the
EU’s undisputed economic and political
leader since the onset of the Eurozone
crisis, the rise of right-wing
extremism and Eurosceptic parties in
Europe following the European sovereign
debt crisis will influence the
future of Turkey-EU relations.
Germany’s increasing leadership
within the EU will enhance its influence
in the debates on the future
architecture of the EU. This will undoubtedly
influence Turkey’s EU accession
process and Turkey’s place
in the future Europe. German help in
the Eurozone crisis comes with conditions
attached and an assertive foreign
policy that seeks to protect Germany’s
domestic interests. Since the
onset of the Eurozone crisis, Chancellor
Merkel has been regarded in Germany
as well as by other nations as
the leading defender of German interests.
The “Iron Chancellor” or “Frau
Germania,” as she is known in Europe,
took a surprisingly tough attitude on
the European sovereign debt crisis
and appeared initially reluctant to offer
financial aid to countries in crisis.
In this way, she was able to lay down
strict rules for financial aid. 21
While Chancellor Merkel has gained
significant popularity as the defender
of German interests, the Eurozone crisis
has culminated in increased public
hostility in most Member States towards
European integration and the
further enlargement of the EU, paving
the way for the rise of Eurosceptic
and anti-immigration parties. In Ger-
67
CASPIAN REPORT, WINTER 2014
21
. Ebru Turhan, “The 2013 German Federal Elections: Key Determinants and Implications for German-
Turkish Relations”, IPC-Mercator Policy Brief, November 2013, pp. 3-4

European Central
Bank , Germany.
EBRU TURHAN
68
many, the recently established AfD
surprisingly won 4.7 percent of the
vote at the German federal elections,
losing out on securing parliamentary
seats by a slight margin. The party
is expected to be quite successful at
the EP elections in May 2014. With
increasing public hostility towards
European integration and the rise of
Eurosceptic parties, it will be very
hard for Angela Merkel, the defender
of German interests, to pursue a liberal
enlargement policy.
The second important factor in shaping
German preferences on Turkey’s
EU accession process will be the domestic
political situation in Turkey.
It is highly likely that the current political
turmoil in Turkey will in fact
enhance the German support for the
acceleration of Turkey’s EU accession

process. The latest events demonstrated
to both Germany and other
Member States the importance of the
EU conditionality in the context of the
accession process for Turkey’s stability
and democracy. Turkey’s current
political crisis, which emerged in the
wake of a graft probe on 17 December
2013, united German Christian
Democrats and Social Democrats for
perhaps the first time in Germany’s
contemporary political history, in the
belief that Turkey’s EU accession process
should be accelerated by opening
Chapters 23 and 24. Following
the eruption of the political turmoil,
Andreas Schokenhoff, Deputy Head
of the CDU/CSU Faction in the German
Parliament, stated that Turkey
needed the EU prospects in order to
finalize the reform process. 22 In a similar
vein, Elmar Brok, CDU member
and Chairman of the EP Committee
on Foreign Affairs, called for the quick
opening of Chapters 23 and 24. 23
The Social Democrats, for their part,
stated in their draft resolution for the
EP elections that Turkey’s EU accession
negotiations should continue
with the clear aim of accession. 24
It is highly likely that we are entering
an era of a closer EU-Turkey relationship,
with strong German backing,
given that a democratic Turkey that is
anchored to the EU serves Germany’s
national interests.
69
CASPIAN REPORT, WINTER 2014
22
. “Enge Bindung an die Türkei”, die Welt, 27 December 2013
23
. “Druck aus Europa wächst”, Handelsblatt, 28 December 2013
23
. “SPD nimmt Banken ins Visier”, Handelsblatt, 18 January 2014

TURKISH PETROLEUM
MARKET IS RESHAPED
BY THE NEW DRAFT ON
PETROLEUM MARKET
AYHAN ERDEM
EXPERT, CENTER ON ENERGY AND ECONOMY, HASEN
AYHAN ERDEM
70

Recently Turkey has taken crucial steps in the
energy field, particularly in connection with its
foreign policy. Natural gas and oil purchase and
transportation agreements with Azerbaijan, Iraq,
Russia and Iran are the main indicators
of these steps.
The Energy Market Regulatory Authority
(EMRA) fulfils its duties and
exercises its authority in accordance
with Law No. 4628 on the Organization
and Duties of Energy Market
Regulatory Authority. Its specific duties
are provided in the Law on the
Natural Gas Market (No. 4646, 2001),
Petroleum Market Law (No. 5015,
2003), the Law on the Liquefied Petroleum
Gas (No. 5307, 2005), and
the Law on the Electricity Market (No.
6446, 2013).
Recently Turkey has taken crucial
steps in the energy field, particularly
in connection with its foreign
policy. Natural gas and oil purchase
and transportation agreements with
Azerbaijan, Iraq, Russia and Iran are
the main indicators of these steps.
In this regard, it seems necessary to
gather those laws under a single policy
umbrella, relieve EMRA’s burden,
assign certain competences to local
governments, and transfer certain
competences and duties to the Ministry
of Energy.
In April 2014, the Ministry of Energy
Draft Law on the Petroleum Market
is expected to be submitted to the
Turkish Grand National Assembly
(TBMM). According to this draft, prepared
by the General Directorate of
Petroleum Affairs (PİGEM), the petroleum
market will be place under
the rule of the Ministry of Energy, and
the petroleum sector will be restructured.
The details of the restructuring
are presented in a separate text in the
draft. The most important issues are
as follows:
• Autogas LPG, Autogas CNG and Autogas
LNG are included in the definition
of petroleum;
• Determining independent dealerships
and granting import permits for
these dealers,
• Changing the definition of petroleum;
• Canceling dealer licenses;
• Transferring authorities to local
governments;
71
CASPIAN REPORT, WINTER 2014

• Removing the obligation of 60 thousand
tons for distributors;
• Limiting the 45% market share;
• Establishment of distribution companies
by refineries;
Under the current Petroleum Market
Law No. 5015, Article 2, the definition
of petroleum covers petroleum products,
naptha (except for raw material,
solvent naptha) kerosene, jet fuel, diesel,
fuel-oil, and other products determined
by the Institution. In the new
draft, Autogas LPG, Autogas LNG and
Autogas CNG are also included in the
definiton.
AYHAN ERDEM
72
• Freedom of promotion;
• Transferring bottled LPG and market
surveillance authority to the Ministry
of Industry;
• Publishing regulations within 6
months.
The draft proposes fundamental
changes in many areas, such as transferring
the automation system to the
Ministry and amending the Law on
the Organization and Duties of the
Ministry of Energy and Natural Resources
to make the Ministry responsible
for regulating the petroleum
market . In addition, the Law on the
Petroleum Market No. 5015 and the
Law on the LPG Market No. 5307 are
to be abolished.
Detailed information on the abovementioned
issues is set out below:
DEFINITION OF PETROLEUM
This draft includes the regulation of
oil, LNG and CNG markets. Bulk and
bottled use of LPG and LNG is not included
in the scope of the law; thus
petroleum, auto LPG, auto LNG and
auto CNG markets are gathered under
the umbrella of a single law.
DEFINITION OF INDEPENDENT
DEALERSHIP
A dealership is defined as a natural and
legal person possessing the necessary
equipment to operate a dealership; in
the current law (Art. 2) a dealership is
defined as with and without stations.
The dealers are obliged to draw up a
contract with a distributor company
to be able to issue sales. They are described
as contracted dealers, as they
make exclusive contracts.
ACCORDING TO THE DRAFT, NATURAL AND LEGAL
ENTITIES THAT ARE ESTABLISHED IN COMPLIANCE
WITH THE REGULATIONS CONCERNING BUSINESS
ESTABLISHMENT, WORK, TECHNICAL, QUALITY AND
SECURITY ISSUES WITHOUT HAVING DRAWN UP A
CONTRACT WITH ANY PETROLEUM DISTRIBUTION
COMPANY ARE DEFINED AS INDEPENDENT DEALERS.
However, the new draft coins a new
definition, that of an “independent
dealership”. According to the draft,
natural and legal entities that are established
in compliance with the regulations
concerning business establishment,
work, technical, quality and
security issues without having drawn
up a contract with any petroleum distribution
company are defined as independent
dealers.
Distributors shall inform the Ministry
about the dealer, the dealership
agreement and termination of the
agreement within two working days

following the signing and termination
of the agreement. They must employ
the same practices across their own
stations and the stations run by their
contracted dealer. They shall not distribute
petroleum to the dealers of
other distributors except for independent
dealers.
IMPORT PERMIT FOR
INDEPENDENT DEALERS
The draft stipulates that independent
dealers can import petroleum only for
their dealership activities. Moreover,
they will be able to establish storage
and transit facilities that are subject to
authorisation.
On the other hand, they will be obliged
to establish and operate necessary automation
infrastructure in order to prevent
the sale of illegal petroleum in their
stations, in accordance with the principles
set out by the Ministry.
60.000-TON OBLIGATION OF FOR
DISTRIBUTORS
According to the Petroleum Market Law
No. 5015 (Art. 9), distributors must
provide the institution with dealership
information and a distribution projection
for a minimum of 60.000-ton white
product annually (gasoline, diesel). This
draft removes this obligation.
45-PERCENT AND 15-PERCENT
RESTRICTION TO DISTRIBUTORS’
MARKET SHARE
According to the current law, distributors
can open dealerships both under
their ownership and under contract.
The distributor’s sales volume
via its stations may not exceed 15%
of its domestic market share. Domestic
market share of distributors may
not exceed 45% of the total domestic
market. The distributor’s practices
should be the same across its sta-
73
CASPIAN REPORT, WINTER 2014
STAR Refinery in
Aliaga, Izmir.

Turkish Petroleum
Corporation.
AYHAN ERDEM
74
tions, subsidies and dealer stations.
(Art.7) According to the new draft,
these limitations will remain in force.
CHANGES TO DISTANCE
RESTRICTION
Under the current law (Art.8), distances
between petroleum and LPG
stations are regulated by the directive
adopted by the Council that
entered into force on 1.1.2005. According
to this directive, the distance
between petroleum and LPG stations
should be at least ten kilometers on
inter-city roads, and at least one kilometer
on inner-city roads. According
to the new draft, there should
not be more than one petroleum
station in areas with a radius of at
least 500 meters on inner-city roads,
and the distance between stations
shall be more than 10 kilometers
on inter-city roads in the same direction.
Before 01.01.2005, according
to the provisions of the Urban
Improvement Law No. 3194 dated
03.05.1985, there is no distance restriction
on petroleum sector dealership
applications for places with
valid construction permits, building
use permits, or for places which are
registered as petroleum or LPG stations
in the master plan.
FREEDOM OF PROMOTION
RETURNS
Under the current law, distributors
will clearly and transparently inform
dealers about promotion campaigns
which they organize with the participation
of dealers. They shall also
submit the documents related to the
cost of the campaign. Participation
of dealers is optional (Art.9). However,
the promotion practice was
terminated by a Board decision. The
new draft brings back freedom of
promotion.
LICENCES FROM THE MINISTRY
In the current law, the Energy Market
Regulatory Board has the authority to
grant licences, update, suspend and

halt transactions related to cancellation
(Art.3). In line with the new draft,
the Ministry of Energy will acquire
this competence. In the petroleum
market, it will be obligatory to gain
permission for downstream licences,
as well as self-contained storage and
dealership licences. Securities will be
taken for all licences and permits. The
Ministry of Energy will be liable for
granting licences, updating, suspending
and stopping transactions related
to cancellation. Entities found guilty of
smuggling will not be granted licences,
self-contained storage or dealership
permits.
REFINERIES MAY BECOME
DISTRIBUTORS
The current Petroleum Market Law
No. 5015 (Art.5) states that, “The refining
undertaking licensee may carry
out liquid fuel distribution activities
via its distribution company. The refining
undertaking licensee should
offer, on category basis, the same conditions
to those demanding liquid fuel
from himself as he does to his own
distribution company.” This article is
included in the new draft as it is, and
it is clearly stated that the refining
undertaking licensee can establish a
petroleum distribution company.
NATIONAL PETROLEUM STOCK
WILL BE SHAPED BY SUPPLEMEN-
TARY PETROLEUM STOCK
According to the current Petroleum
Market Law No. 5015 (Article 16),
definitions relating to national oil
stock are as follows:
For the purposes of sustaining continuation
in the market, preventing
risks in times of crisis or extraordinary
cases, a petroleum stock must
be kept at the level equal to at least
90 days’ worth, measured against the
previous year’s net import for average
daily consumption.
IN THE PETROLEUM MARKET, IT WILL BE OBLIGATORY
TO GAIN PERMISSION FOR DOWNSTREAM LICENCES, AS
WELL AS SELF-CONTAINED STORAGE AND DEALERSHIP
LICENCES.
The national petroleum stock is obtained
through the requirement that
refinery, liquid fuel and LPG distribution
licensees maintain a minimum
of 20 times the average daily supply
at their own storage or licensed storage
facilities, whether as a whole or
separately according to their status.
Loaded tankers within territorial
waters are to be transferred to refineries
and storages and crude oil, and
semi-products in refineries shall be
deemed part of the national stock liability.
The national petroleum stock
may be kept tax-free according to the
status of the storage location and relative
to the provision of the allowance
of the legislation.
Liquid fuel and LPG distribution licensees’
20 days’ supply, except for
the portion in the bottom of their
tanks, shall be taken as the minimum
operational stock of the company and
deemed part of the national petroleum
stock. In addition, eligible consumers
that consume 20,000 tons or
more of each type of liquid fuel each
year in a consumption facility shall
be obliged to stock an amount in
their storage to meet 15-days of their
consumption, and this stock shall be
considered as part of the national petroleum
stock.
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CASPIAN REPORT, WINTER 2014

AYHAN ERDEM
76
The supplementary portion of the
national petroleum stock shall be
retained by refining undertakings
and any funding need that may arise
as a result of the acquisition of such
supplementary portion; financing expenses
and stocking and maintenance
costs of such stocks shall be covered
by the income added to the consumer
prices (determined by the Board at a
maximum of 10 US Dollars/ton) and
the income at the utilization of the
refining undertakings. In the event of
imports other than refining undertakings,
such income shall be paid to the
refining undertaking by the importer.
Refining undertakings are obliged to
provide the Authority with information
regarding the accounting of this
income every year. The income shall
be drawn to the level to cover the
maintenance costs, once sufficient
storage facilities and stocks have
been provided.
THE NATIONAL PETROLEUM STOCK MAY BE KEPT TAX-
FREE ACCORDING TO THE STATUS OF THE STORAGE
LOCATION AND RELATIVE TO THE PROVISION OF THE
ALLOWANCE OF THE LEGISLATION.
The Council of Ministers shall be authorized
to render decisions to determine
and increase the actual number
of days of the national petroleum
stock, to manage and impose liabilities
on national petroleum stock, the
term, type and volume of the national
petroleum stock and to determine
the location of stocking; procurement
of petroleum and services regarding
the national petroleum stock; to take
other decisions and measures regarding
stock and stocking, to perform
sales from the national petroleum
stocks, to prepare proposals to be
submitted to the Council of Ministers
and to determine the procedures and
principles regarding the activities of
the Commission established according
to this Law.
The Authority shall be authorized to
inspect the stocks that refineries, liquid
fuel and LPG distributor licencees
are obliged to maintain, and to regulate
the product type and the conversion
of the products without causing
any decrease in volume. (Additional
paragraph: 28/3/2013-6455/42 art.)
According to the new draft, stock
keeping will be regulated by the General
Directorate of Petroleum Affairs
under the Ministry of Energy. According
to the law, the supplementary
petroleum stock shall be determined
by the General Directorate in accordance
with the remaining amount
after deducting the obligatory petroleum
stock from the national petroleum
stock. The General Directorate
calculates these stocks every year by
assessing the obligatory stock levels
reported by the Authority. A five-year
transmission period has been set for
keeping the amount of supplementary
petroleum stock within national
petroleum stock at a rate of one hundred.
The Council of Ministers shall be
authorized to reset this period.
The General Directorate shall determine
the type and amount of required
supplementary petroleum
stock in each calendar year and
make an offer to related entities to
sign a contract. Those who signed
contracts with the General Directorate
may either keep the supplementary
petroleum stocks in their stores,
or in a storage location owned by

other companies that have a storage
licence in Turkey.
Crude oil and petroleum products
loaded in the tankers of abovementioned
obligators in Turkey’s territorial
waters waiting to be unloaded
to refineries and stores shall be regarded
as supplementary petroleum
stock. Semi-products in refineries
shall be divided into product types
and handled as part of the supplementary
petroleum stock liability. Fuels
such as biodiesel and bioethanol
which are allowed to be sold as liquid
fuel or blended with liquid fuel by
the Authority shall also be included
within the scope of this regulation.
Supplementary petroleum stock obligators
may enter their stock into the
market subject to the approval of the
General Directorate on the condition
that they do not drop below their determined
stock amount. Procedures
and principles shall be regulated
by legislation for making up for the
shortfall in stocks due to putting the
supplementary petroleum stock onto
A FIVE-YEAR TRANSMISSION PERIOD HAS BEEN SET
FOR KEEPING THE AMOUNT OF SUPPLEMENTARY
PETROLEUM STOCK WITHIN NATIONAL PETROLEUM
STOCK AT A RATE OF ONE HUNDRED.
the market in part or in whole. Supplementary
petroleum stock obligators
shall carry out nationalization
transactions and pay the required
taxes for the products in their stocks
subject to delivery within the country
for any reason.
Procurement, transportation and
storage of supplementary petroleum
stock, services purchased for this
purpose, and related contracts shall
be exempt from taxes and funds. In
case obligators offer additional storage,
these offers shall be evaluated
by the General Directorate separately
from market conditions. Offers to be
made in this regard shall not be less
than a stock-keeping calendar. The
National Petroleum Stock Advisory
Committee shall meet upon the request
of the Ministry in order to submit
observations and provide advice
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CASPIAN REPORT, WINTER 2014

AYHAN ERDEM
78
concerning the national petroleum
stock. In case of a crisis, the Emergency
Stock Board shall meet as soon
as possible in order to take the necessary
decisions; procedures and principles
in this regard shall be regulated
by the relevant legislation.
Income share shall be collected in
order to meet the expenses related
to the necessary sourcing, financing
expenses, storing and maintenance
costs for the procurement of supplementary
petroleum stock. Income
share shall be determined by the Ministry
at a maximum of twenty USD /
ton. The Council of Ministers shall be
authorized to increase or decrease
this amount. The income share shall
be added to consumer prices. Income
share shall be paid by refining undertaking
licencees during sales, and
by others during imports. Regarding
income share payments, exemptions
or reductions will not be available to
institutions and organizations. Procedures
and principles related to the
collection, spending and accounting
of income share shall be regulated
by legislation. In case the difference
between the procurement price and
supply price of supplementary petroleum
stock is positive, the difference
shall be transferred to the income
share account of the Ministry. In case
this difference is negative, it shall be
paid to the supplementary petroleum
stock obligator within thirty days at
the latest. Legal interest is charged
for finances, storing and maintenance
expenses related to supplementary
stock which are not paid to the obligator
on time.
NATIONAL MARKER
According to the current Petroleum
Market Law No. 5015 with regard to
national marker, (Article 18- (Revised
first article: 28/3/2013-6455/43
art.); “Refining undertakings and
distribution undertakings shall add
a marker, the conditions and quality
of which shall be determined by
the Authority, to the liquid fuel to be
marketed in Turkey at the exit point
Turkish Grand
National Assembly
(TBMM).

Distributors shall have the authority
to distribute liquid fuel, and shall
carry out storage, filling, transportation
and marketing activities in case
it is registered in their licences. The
new draft sets forth the concept of
self-contained storage. Self-contained
storage owners shall obtain
permissions from municipalities
within the borders of the metropolitan
municipality, municipality and
municipal adjacent areas. Permission
will be obtained from municipalities
because special provincial adminisof
the refinery or at the customs entry
point. National marker adding points
for liquid fuel which will be converted
to biofuel primary production centers
shall be determined by the Authority.
This shall be carried out by independent
supervision companies according
to the procedures and principles
to be determined by the Authority. Licencees
and independent supervision
companies shall be jointly responsible
for the irregularities related to
national marker adding.
Licencees obliged to add national
markers shall submit their marketing
projections of the current year in November
to the Authority. The national
marker to be provided by the Authority
according to these projections
shall be delivered to related licencees
and independent dealers in order to
be added to the liquid fuel according
to the procedures and principles to be
set forth by the Authority.
The Authority shall establish an audit
system by national marker based
on administrative and technological
methods. In the event that an authorized
official files an application, the
Governor’s offices are responsible for
gathering the samples from consumers
and vendors for auditing purposes
and ensuring their security. If sample
testing determines that the national
marker does not meet the required
standard and level, and if is determined
by laboratory analysis that the
samples are not compliant with the
technical regulations, the provisions
of Article 19 shall be applied.
According to the new draft, national
marker requirements will apply to
all liquid fuels except for autogas
LPG, autogas LNG and autogas CNG.
National marker adding points for
liquid fuel which will be converted to
biofuel primary production centers
shall be determined by the Ministry.
Licencees or independent dealers
and their independent supervision
companies shall be jointly responsible
for irregularities related to national
marker adding.
PROCUREMENT, TRANSPORTATION AND STORAGE
OF SUPPLEMENTARY PETROLEUM STOCK, SERVICES
PURCHASED FOR THIS PURPOSE, AND RELATED
CONTRACTS SHALL BE EXEMPT FROM TAXES AND
FUNDS.
Licencees obliged to add a national
marker shall submit their marketing
projections for the current year in November
to the Ministry. The national
marker to be provided by the Ministry
according to these projections
shall be delivered to related licencees
and independent dealers in order to
be added to the liquid fuel according
to the procedures and principles set
forth by the Authority.
SELF-CONTAINED STORAGES ON
THE WAY
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CASPIAN REPORT, WINTER 2014

AYHAN ERDEM
80
trations will be abolished by the new
Metropolitan Municipality Law in
March 2014.
“PERMISSION” RATHER THAN
“LICENCES” FOR DEALERS: FROM
LOCAL AUTHORITIES
The licence requirement will be replaced
with a permission requirement
for dealers. According to the
draft, dealers shall obtain permission
from municipalities within the
borders of the metropolitan municipality,
municipality and municipal
adjacent areas.
Refuelling for vehicles shall only be
carried out in liquid fuel stations
that have the necessary equipment.
However, factories, construction areas,
transportation fleets and other
places with similar needs which
have the storage and refuelling capacity
for their own vehicles shall
be granted refuelling permission by
municipalities within the borders of
the metropolitan municipality, municipality
and municipal adjacent
areas or by special provincial administrations
(or Metropolitan Municipalities)
outside those authorities’
jurisdiction.
AUTOMATION ACCESS UNDER
THE MINISTRY
Distributors shall be obliged to implement
effective quality control audits
for the activities carried out under their
registered trademarks, and to establish
and implement an audit system including
technological methods to prevent
the sales of illegal liquid fuel by their
dealers in accordance with the principles
set out by the Ministry.
With the draft, licencees undertaking
distribution and independent
dealers shall be obliged to ensure the
Ministry’s access to the automation
system they establish in their liquid
fuel stations. The Ministry shall ensure
the direct access of the Ministry
of Science, Industry and Technology,
Ministry of Customs and Trade,
Ministry of Interior, Ministry of Finance,
Ministry of Transport, Maritime
Affairs and Communications,
and other related public institutions
and organizations to this system as
necessitated by their authority and
duties. The Ministry shall provide
the requested information and documents
to abovementioned public
institutions and organizations as necessitated
by their duties.
WITH THE DRAFT, LICENCEES UNDERTAKING
DISTRIBUTION AND INDEPENDENT DEALERS SHALL BE
OBLIGED TO ENSURE THE MINISTRY’S ACCESS TO THE
AUTOMATION SYSTEM THEY ESTABLISH IN THEIR LIQUID
FUEL STATIONS.
Database, software, hardware and
automation infrastructure related
to the functioning of petroleum and
LPG markets by EMRA (Energy Market
Regulatory Authority) shall be
transferred to the Ministry within
one month at the latest following the
effective date of related regulations.
NOTIFICATIONS TO THE MINISTRY
According to the new draft, notification
obligations shall be determined
by the Ministry in order to collect
information regarding market activities.
Appointed Ministry personnel
shall be authorized to access all
kinds of papers, documents and commodities
including books, to take

samples or copies, request written
or verbal statements related to the
subject, produce necessary reports,
and audit the facilities and their operation
before market parties and/or
facilities.
MARKET SURVEILLANCE BY THE
MINISTRY OF INDUSTRY
According to the new draft, the
Ministry of Science, Industry and
Technology shall be authorized to
inspect the liquid fuel market activities.
Financial expenses related to
equipment and materials required
for inspection BY the Ministry of Science,
Industry and Technology shall
be covered by the tax to be collected
from the sector.
The Ministry shall provide allowance,
materials and equipment to the relevant
Ministries, Governorates, laboratories,
research institutions and
organizations for market surveillance
and inspection. In this regard,
the Ministry shall purchase services
from related institutions and organizations.
It shall establish accredited
static and mobile laboratories in
cooperation with Turkish Accreditation
Agency, and allocate resources
for this purpose.
BOTTLED LPG TO THE MINISTRY
OF INDUSTRY
According to the new draft, the
Ministry of Science, Industry and
Technology shall be liable for technical
regulations for storage, refilling
facilities, transportation, bottle
manufacturing, bottle examination,
reparation and maintenance related
to LPG and CNG services; procedures
and principles binding LPG and CNG
bottle dealers, bulk and bottle users;
and market surveillance and inspection
for these activities within the
framework of the legislation to be
issued by the Ministry of Science, Industry
and Technology. Permissions
related to import and export of LPG
required for bulk and bottled LPG
activities shall be jointly granted by
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CASPIAN REPORT, WINTER 2014

AYHAN ERDEM
82
the Ministry of Science, Industry and
Technology and the Ministry of Customs
and Trade.
NON-PETROLEUM PRODUCTS TO
THE MINISTRY OF INDUSTRY
The current law (Art.9) states that
“The activities including the import
and export of petroleum products
excluding liquid fuel (solvent, lube
oil and base oil, asphalt, solvent
naphtha etc.) shall be performed as
per the regulations to be issued by
the Authority.”
Under the new draft, procedures
and principles related to the import,
export, market surveillance and inspection
of petroleum products and
chemicals used in the industry, production
of pharmaceutical preparations,
manufacturing of lube oil excluding
liquid fuel (solvent, lube oil
and base oil, asphalti solvent naphtha
etc.) shall be performed by the
Ministry of Science, Industry and
Technology within the framework
of the legislation to be issued by the
Ministry of Customs and Trade, Ministry
of Economy, Ministry of Finance,
and the Ministry of Science, Industry
and Technology.
IN CONCLUSION
I cannot say exactly when New Draft
will be submitted to the Council of
Ministers. However, it has been mentioned
that it will be discussed at the
TBMM in April 2014.
In my opinion, a siginificant number
of people will be unhappy with the
implications of this draft. Some of the
new provisions related to distance
restrictions, freedom of promotion,
the 60,000-ton obligation, transfer of
licences to local authorities, the independent
dealership concept, bypassing
EMRA and transferring its competences
to the General Directorate
of Petroleum Affairs under the Ministry
of Energy as before will displease
companies with high market shares,
and some of those provisions will

not serve the interests of companies
with lower market shares.
Distribution companies with high
market shares that are not happy
with the provision to limit the duration
of agreements such as utilization
agreements to 5 years will not
welcome the provisions such as the
freedom of promotion, changing the
liquid fuel definition, allowing refineries
to become distributors, and
abolishing the 45-percent market
share restriction. Decreasing the
distances, abolishing the 60,000-ton
obligation, the concern about an increased
number of distributors in
the market, transfer of licences to
local authorities rather than EMRA,
and most importantly the emergence
of independent dealers will be
definitely come as unwelcome news
for most parties. This draft may be
approved in its current form, but
we should remember that when it
is submitted to the TBMM, some articles
may be removed or amended.
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ROVSHAN IBRAHIMOV
84
TURKISH-ARMENIAN
RAPPROCHEMENT:
DEFINING THE PROCESS
AND ITS IMPACT ON
RELATIONS BETWEEN
AZERBAIJAN AND TURKEY
ROVSHAN IBRAHIMOV
HEAD OF FOREIGN POLICY ANALYSIS DEPARTMENT,
CENTER FOR STRATEGIC STUDIES UNDER THE PRESIDENT OF
THE REPUBLIC OF AZERBAIJAN

Turkey was the first country to recognize the
independence of Azerbaijan on
November 9, 1991.
KEY FACTORS IN THE RELATION-
SHIP BETWEEN AZERBAIJAN AND
TURKEY: A BRIEF HISTORICAL
OVERVIEW
Relations between Turkey and Azerbaijan
have always been especially
close and are better expressed by the
expression first used by Azerbaijani
President Heydar Aliyev during his official
visit to Turkey in February 1994
as “one nation, two states”. This is primarily
due to historical and cultural
reasons; the people of both countries
have common roots. In this regard,
since Azerbaijan regained independence
in 1991, common historical,
ethnic and religious roots between
these two states have significantly
shaped the emerging relationship.
One example of this is the tradition
whereby whenever a new government
in Turkey or Azerbaijan comes
to power, the new leaders make their
first official visits to Azerbaijan and
Turkey, respectively. This practice continues
to this day, and has been broken
with only in exceptional cases.
Turkey was the first country to recognize
the independence of Azerbaijan
on November 9, 1991 and diplomatic
relations between the two
countries were established on January
14, 1992. 1 At the early stage of the
relations between the two countries,
Idealistic factors prevailed. This was
especially apparent under President
Elchibey, who had a Pan-Turkic vision.
However, with time, sentimentality
receded and the relationship between
Turkey and Azerbaijan was formed on
a more pragmatic basis. Azerbaijan
began to realize that Turkey does not
have the capacity to facilitate broader
reforms in the economy and to lead
the conflict resolution process for the
Nagorno-Karabakh conflict. Primarily,
this was due to the inability to predict
the development of the events after
the collapse of the Soviet Union. Another
reason is Turkey’s limited political
and economic resources, which
prevented it from responding to the
new political conditions. 2 As a result
of miscalculations and mistaken policies,
the pro-Turkish government led
by Elchibey collapsed and was replaced
by veteran former Soviet politician
Heydar Aliyev.
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CASPIAN REPORT, WINTER 2014
1
. Azerbaijan - Turkey relations, official site of Ministry of Foreign Affairs of Azerbaijan Republic, http://www.mfa.gov.az/files/file/
Azerbaijan%20-%20Turkey%20relations.pdf
2
. Rovshan Ibrahimov, The extend and Limits of Turkey`s Soft Power in Azerbaijan, Turkey Country Report, 2013, Rethink Institute,
Washington DC, p. 58.

ROVSHAN IBRAHIMOV
86
A NEW PERIOD IN BILATERAL RELATIONS WAS MARKED
BY PRAGMATISM IN THEIR ATTITUDES TOWARDS EACH
OTHER.
From this point, bilateral relations
began to develop based on pragmatic
policies and in the service of both
states’ national interests. This development
track was driven mainly by
the implementation of joint regional
transportation projects. In other
words, common economic interests
started to develop. A new period in
bilateral relations was marked by
pragmatism in their attitudes towards
each other. Azerbaijan clearly understood
what Turkey can provide, but
was even more aware of what she cannot.
At the same time, Azerbaijan fully
supported Turkey and its position on
the international scene in all matters
related to its national interests. The
same position is shared by Turkey,
repeatedly becoming an advocate of
Azerbaijan’s interests in the international
arena.
This trend continued after Ilham Aliyev
was elected President of Azerbaijan
on October 15, 2003. Ilham Aliyev
continued the foreign policy direction
of his father Heydar Aliyev, while expanding
the scope of cooperation. The
economic component in the relations
between the two countries has become
increasingly strong. In major
cases, political relations have also
been formed on the basis of joint economic
projects. The construction of
the Baku-Tbilisi-Ceyhan oil pipeline,
which has great strategic importance,
was a milestone in this sense; the first
oil from Azeri-Chirag-Guneshli fields
began to arrive in Ceyhan on May
2005. Consequently, on December 13,
2007 Baku-Tbilisi-Erzurum gas pipeline
was put into operation, supplying
gas from the Azerbaijani Shah Deniz
field to the western markets. 3
Another example of cooperation between
Turkey, Azerbaijan and also
Georgia, which plays a key role in the
implementation of regional transport
projects, is the Baku-Tbilisi-Ahalkalaki-Kars
railway project. After its
completion and the construction of
the tunnel passing under the Turkish
straits, this route will provide the
unobstructed movement of trains
from China all across Europe – right to
London. 4
A NEW COURSE IN TURKISH
FOREIGN POLICY AND RELATIONS
WITH ARMENIA
Bilateral relations continue to develop
across all spheres. However, as in any
such closely interwoven relationship,
since 2008 differences on a number of
issues have begun to appear between
Azerbaijan and Turkey. The grounds
for these emerging differences were
the political and economic changes in
Turkey and Azerbaijan that resulted
from their rapid development. These
3
. Ровшан Ибрагимов, Энергетический Потенциал Азербайджана: Может Ли Он Быть
Использован Как Альтернатива России, 19.12.2006, http://www.eurasianhome.org/xml/t/expert.
xmllang=ru&nic=expert&pid=905.
4
. Ровшан Ибрагимов, Железная Дорога Баку-Тбилиси-Карс: Геополитическая Расстановка
В Регионе Южного Кавказа, 04.12.2007, http://www.eurasianhome.org/xml/t/expert.
xmllang=ru&nic=expert&pid=1353

Co-chairs of the
Minsk Group
Ambassador
Robert Bradtke of
the United States,
Ambassador
Bernard Fassier
of France and
Ambassador
Igor Popov of
the Russian
Federation.
include changes in the traditional
Turkish foreign policy, and Azerbaijan’s
desire to be more active in the
international arena, and to use its
energy resources to achieve its national
interests. As a consequence, the
changes and diversification of areas of
interests and activities have led to an
increased number of differences.
REGARDING TURKEY, THE FIRST STEP OF ITS NEW
REGIONAL POLICY WAS TO DEVELOP A STRATEGY
AIMED AT IMPROVING RELATIONS WITH NEIGHBOURING
COUNTRIES.
Regarding Turkey, the first step of its
new regional policy was to develop a
strategy aimed at improving relations
with neighbouring countries. It is no
secret that during the different eras of
its existence, the Turkish Republic has
faced all kinds of disagreements with
its neighbours. From this perspective,
a new formula was derived for relations
with its neighbours: “zero” problems.
In other words, the aim is to find
a formula for the resolution of controversies
and to establish provisions for
the further development of relations.
With this policy, Turkey expected to
eliminate or completely resolve the
problems arising from relations with
neighbouring states. The main objective
of this new strategy was to avoid
simply “freezing” the existing problems,
and rather intensifying of efforts
to solve problems with a win-win approach
through peaceful means. 5
It is in this perspective that Turkey
was considering changing its policy towards
Armenia. Turkey’s new foreign
policy in relation to Armenia was being
described as “from zero relations
to zero problems”. Turkey was determined
to resolve the existing problems
with Armenia. With the adoption
of a new foreign policy, Turkey
started unilaterally to look for ways to
87
CASPIAN REPORT, WINTER 2014
5
. For more information see: Policy of Zero Problems with our Neighbors, Official site of the Ministry of Foreign Affairs Republic of
Turkey, http://www.mfa.gov.tr/policy-of-zero-problems-with-our-neighbors.en.mfa

James Warlick,
Deputy Special
Representative for
Afghanistan and
Pakistan, speaks
during a joint press
conference with
Eklil Hakimi, Afghan
Ambassador to
Washington, at the
Foreign Ministry in
Kabul.
ROVSHAN IBRAHIMOV
88
resolve problems with Armenia and
take confidence-building measures. 6
In order to fully understand Turkey’s
attempt to establish an atmosphere of
trust with Armenia, it is necessary to
define the existing problems between
the two countries.
IT IS WORTH NOTING THAT DESPITE THE ABSENCE OF
DIPLOMATIC RELATIONS, THE BORDER BETWEEN THE
TWO COUNTRIES WAS OPENED AND TURKEY EVEN
DISPATCHED FOOD AID AND CONTRIBUTED TO THE
DELIVERY OF WESTERN HUMANITARIAN ASSISTANCE TO
ARMENIA THROUGH ITS TERRITORY.
Conflict between the two sides predates
Armenia’s post-Soviet independence.
Thus the problems that Turkey
sought to resolve extend far beyond
the borders of this small country. This
conflict has both temporal and spatial
aspects. The problems have a historical
background and also go beyond relations
at the intergovernmental level.
The possible development of bilateral
relations also depends on the situation
in the region as a whole. Despite the
fact that Turkey was the first country
to recognise Armenia’s independence
on 16 December 1991 7 , diplomatic
relations between the two countries
have not been established. One of the
reasons for this is Armenia’s demand
that Turkey recognise incidents that
occurred in 1915 in the Ottoman Empire
as an act of genocide committed
against Armenians. This requirement
was reflected in the declaration of independence
of Armenia. According to
paragraph 11 of this declaration: The
Republic of Armenia stands in support
of the task of achieving international
recognition of the 1915 Genocide in
Ottoman Turkey and Western Arme-
6
. Relations between Turkey and Armenia, Official site of the Ministry of Foreign Affairs Republic of Turkey,
http://www.mfa.gov.tr/relations-between-turkey-and-armenia.en.mfa
7
. According to the official Armenian sources, on 24 December 1991, Official site of Ministry of Foreign
Affairs of the Republic of Armenia, http://www.mfa.am/en/country-by-country/tr/.

nia. 8 By using the concept of territorial
definition as Western Armenia in the
text of the declaration, the newly created
state also expressed its territorial
claims against Turkey.
The Western Armenia described in
the declaration indicates territory
that is part of modern Turkey. The
conflicting opinions regarding the
evaluation of the 1915 events, and the
possible responsibility to be borne
by Turkey, prevented the formation
of diplomatic relations. 9 It is worth
noting that despite the absence of
diplomatic relations, the border between
the two countries was opened
and Turkey even dispatched food aid
and contributed to the delivery of
Western humanitarian assistance to
Armenia through its territory. 10 The
Turkish border was closed later, due
to another important factor that also
limited the relationship between Turkey
and Armenia: the Armenian-Azerbaijani
Nagorno-Karabakh conflict,
which originated during the time of
the USSR. In this conflict, Turkey has
demonstrated solidarity with Azerbaijan,
whose territory is occupied by Armenia.
This solidarity was manifested
when Turkey closed its border with
Armenia after it occupied Kelbajar
district (near Nagorno-Karabakh) in
April 1993. After the adoption of UN
Security Council Resolution 822 on
April 30 1993, which demanded the
immediate withdrawal of Armenia’s
occupying forces from Kelbajar and
other recently occupied areas of Azerbaijan
11 , Turkey joined Azerbaijan in
imposing an economic embargo on
Armenia and the border between the
two states was closed.
WITH THE ADOPTION OF A NEW FOREIGN POLICY, TURKEY
STARTED UNILATERALLY TO LOOK FOR WAYS TO RESOLVE
PROBLEMS WITH ARMENIA AND TAKE CONFIDENCE-
BUILDING MEASURES.
The absence of bilateral relations
continued until 2008. Then, with the
change of foreign policy, Turkey also
intended to look for ways to form
relations with Armenia. In its turn,
Armenia, which faces economic difficulties,
also hoped to start a process
that would lead to the establishment
of the diplomatic relations and opening
the border without any preconditions.
Such an opportunity came by
chance, and was immediately acted
upon. Both countries’ national football
teams were in the same group of
the European zone of qualification for
the 2010 FIFA World Cup competition.
This circumstance marked the beginning
of a rapprochement between
the states; the process later became
known as “football diplomacy”. This
process started with an invitation by
Armenian President Serzh Sargsyan to
his Turkish counterpart Abdullah Gul
to attend the first match between the
two national teams, held on Septem-
89
CASPIAN REPORT, WINTER 2014
8
. Armenian Declaration of Independence, http://www.gov.am/en/independence/.
9
. Svante E. Cornell, Turkish-Armenian Relations: Wrong Priority, Wrong Approach, HASEN, p., 109, http://
www.academia.edu/4876695/Turkish-Armenian_Relations_Wrong_Priority_Wrong_Approach
10
. Kemal Kirisci, New Patterns of Turkish Foreign Policy Behavior, edu. Cigdem Balim et al, Turkey: Political,
Social and Economic Changes in the 1990s, Leiden, 1995, p. 18.
11
. Resolution 822 (1993) Adopted by the Security Council at its 3205th meeting, 30.04.1993, http://www.
refworld.org/cgi-bin/texis/vtx/rwmaindocid=3b00f15764.

ROVSHAN IBRAHIMOV
90
THE RAPPROCHEMENT WAS CONSIDERED BY TURKEY
AS A PURELY BILATERAL MATTER. THAT IS THE MAIN FACT
THAT LED TO DISAGREEMENTS BETWEEN TURKEY AND
AZERBAIJAN, WHICH WAS UNEASY ABOUT THE PROCESS.
ber 6, 2008 in Yerevan. Abdullah Gul
became the first Turkish president
to visit this country. At this stage, the
parties had not come to any agreement.
The visit was symbolic and was
the first step in the process of forming
a relationship. A year later, on October
14, 2009, Sargsyan arrived in Bursa
to watch the return match. After the
match, the delegations of both sides
were considering the development of
bilateral relations. 12
During the following negotiations,
Turkey saw the opening of its border
with Armenia, without setting any
preconditions, as one of the optimal
tools for rapprochement. Turkey believed
that if the border were opened,
relations would rapidly develop, including
economic ones. Turkey believed
that establishing closer political
and economic relations with Armenia
would make it possible to create an
appropriate environment for discussion
of the “1915 events”, described
by Armenians as an act of genocide. It
was believed that after the opening of
the border, visits to Turkey by Armenians
would increase, along with economic
relations and the influx of Turkish
investment. Turkey believed that
these developments can change the
Armenian position on the recognition
of the genocide. This is also important
because in 2015 – the centenary of the
tragedy - remembrance events will be
held. It is expected that Armenians all
over the world will hold large-scale
events that may damage the Turkey’s
image. In this regard, Turkey intends
to, at least partially, neutralize the effects
of the anticipated large-scale
propaganda related to this date by improving
relations with Armenia. Over
time, close relations with Armenia
may compel Yerevan to reconsider its
attitude towards Turkey. Turkey also
believes that improving bilateral relations
can eventually have a positive
influence on the powerful Armenian
Diaspora.
AZERBAIJAN’S REACTION
TO THE TURKISH-ARMENIAN
RAPPROCHEMENT
The rapprochement was considered
by Turkey as a purely bilateral matter.
That is the main fact that led to
disagreements between Turkey and
Azerbaijan, which was uneasy about
the process. Azerbaijan has closely
followed the development of relations
between the two countries. The harbinger
of disagreement between Turkey
and Azerbaijan was the unofficial
visit by Turkish President Abdullah
Gul to Yerevan. Then this visit transformed
into the negotiation process,
which was expected to lead to the
possible opening of the border. It was
assumed that Turkey would open its
borders with Armenia by April 24, a
day of remembrance for the 1915 victims.
Azerbaijan immediately reacted
negatively. The controversy erupted
during the return match between
12
. Каринэ Симонян, Георг Стамболцян, В Бурсе состоялись армяно-турецкие переговоры,http://www.
armenialiberty.org/content/article/1851953.html

Russian President
Vladimir Putin
and Armenian
President Serzh
Sarkisian.
Turkish and Armenian football teams
in Bursa. Turkey, wanted to avoid extra
disagreement with the Armenian
side regarding Turkish support for
Azerbaijan in the Nagorno-Karabakh
conflict, Azerbaijani flags were barred
from the stadium. Supporters with
flags gathered at the entrance to the
stadium. Azerbaijani TV channels
showed how Azerbaijani flags had
been thrown in a box with an unmarked
restroom image. There was
uproar in Azerbaijan. In response,
Turkish flags were lowered at the Martyrs’
Alley in Baku, the burial place of
the Turkish soldiers who died fighting
for the liberation of Baku in 1918.
The scandal was resolved after oneday
visit to Baku by the Minister of
Foreign Affairs of Turkey Ahmet Davutoglu,
on October 22, 2009, and then
visits by parliamentary delegations
from both countries. In Turkey, those
responsible for the disrespectful treatment
of the flag of Azerbaijan were
punished. The incident prompted a
push for the development of new policies
for relations between Turkey and
Azerbaijan.
It should be noted that Azerbaijan
does not oppose Turkish initiatives
towards Armenia, and believes that
this is a domestic matter for Turkey.
Opposition emerged because Turkey
was planning to open its border
with Armenia in the absence of any
progress on the Nagorno Karabakh
conflict resolution - the reason the
IT SHOULD BE NOTED THAT AZERBAIJAN DOES NOT
OPPOSE TURKISH INITIATIVES TOWARDS ARMENIA,
AND BELIEVES THAT THIS IS A DOMESTIC MATTER FOR
TURKEY. OPPOSITION EMERGED BECAUSE TURKEY WAS
PLANNING TO OPEN ITS BORDER WITH ARMENIA IN
THE ABSENCE OF ANY PROGRESS ON THE NAGORNO
KARABAKH CONFLICT RESOLUTION - THE REASON THE
BORDER WAS ORIGINALLY CLOSED.
border was originally closed. Azerbaijan
reminded the Turkish side that the
decision to close the border with Armenia
by Turkey was made because of
91
CASPIAN REPORT, WINTER 2014

Turkish Prime
Minister Recep
Tayyip Erdogan
with Armenian
President Serzh
Sarkisian during
the Nuclear
Security Summit.
ROVSHAN IBRAHIMOV
92
the occupation of Azerbaijani territories
by Armenia. Azerbaijan reminded
Turkey that the occupation of the territories
continues and any new conditions
for the opening of the border
between the two countries have not
appeared.
Azerbaijan’s view was that Turkey
should not consider opening the
border solely within the context
of bilateral relations between Turkey
and Armenia; rather, it must be
linked to the liberation of the occupied
territories. Azerbaijan believed
that Turkey was not seeing the
whole picture of the intertwining
interests of the various forces in the
South Caucasus and the situation
around Nagorno-Karabakh conflict.
In this case, any change in the current
situation could complicate all
Azerbaijan’s efforts to ensure the
return of its territories. Interests
of third countries in the region are
one of the main reasons that the
Nagorno-Karabakh conflict has still
not be resolved. Azerbaijan has to
manoeuvre within a narrow space,
while trying to retain the ability to
independently conduct its domestic
and foreign policy in accordance
with its national interests. Furthermore,
the policy of closed borders
and economic sanctions against Armenia
is the main tool in forcing this
country to liberate the occupied territories
and to reach a speedy resolution
agreement. If Turkey opens its
border, Azerbaijan would lose one
of the few levers for the peaceful
resolution of the Nagorno-Karabakh
conflict. Azerbaijan pursues a policy
of excluding Armenia from regional
economic projects, stating that this is
possible only after the liberation of
the occupied territories. This policy
would lose its effectiveness if the
border with Turkey were opened.
Moreover, opening the border could
encourage Armenia to prolong the
conflict resolution process, since
some of the economic and political
pressure would be off. For this reason,
the reaction in Azerbaijan has
been very harsh.

ADJUSTMENTS TO THE TURKISH
POSITION AND THE NEXT STEPS
Azerbaijan’s reaction was respected
in Turkey. The Azerbaijani position
and concerns did not go unanswered
and Turkey adjusted its approach
in relation to its policy on Armenia.
The bilateral nature of these relations
regained a regional view, and
the development of relations has not
threatened Azerbaijan’s interests.
On May 12 2009, the Prime-Minister
of Turkey, Recep Tayyip Erdogan,
visited Baku. He assured Azerbaijan
that without progress on the issue of
the Nagorno-Karabakh conflict, Turkey
will not open its borders with
Armenia.
The Turkish Prime Minister stated
that: “The Azerbaijan-Turkey fraternal
relations have never been the
subject of discussions. The Turkey-
Armenia border has been closed
due to Nagorno-Karabakh’s occupation
and will not be solved until
it liberated”. 13 The same assurance
was made by the Turkish president,
Abdullah Gul. These statements and
guarantees from high level Turkish
officials were precisely what Azerbaijan
wanted to hear. These statements
were enough to convince
Azerbaijan that the opening of borders
between Turkey and Armenia
will be conducted in line with the
policy created in 1993. This may
explain the fact that after the signing
of the Zurich Protocols between
Turkey and Armenia in October
2009, the official reaction by Azerbaijan
was discreet; the parties had
reached a mutual understanding on
this matter.
GIVEN THE FACT THAT THE CURRENT LEADERS OF
ARMENIA, WHO ARE FROM KARABAKH, ARE NOT WILLING
TO COMPROMISE ON THIS ISSUE, THE INVOLVEMENT
OF EXTERNAL ACTORS WHO ARE INTERESTED IN
MAINTAINING THE CURRENT STATUS QUO FURTHER
COMPLICATES THE SITUATION.
The promises made by high-ranking
Turkish officials to the Azerbaijani
side were also connected with optimism
that Ankara would be able to
convince Armenia to withdraw from
the occupied territories around Nagorno-Karabakh
before opening the
borders. However, with the intensification
of negotiations with Armenia,
Turkey began to understand the importance
of the involvement of third
countries in the resolution of the
Nagorno-Karabakh conflict. Given the
fact that the current leaders of Armenia,
who are from Karabakh, are not
willing to compromise on this issue,
the involvement of external actors
who are interested in maintaining
the current status quo further complicates
the situation. Considering
this, just a week after his visit to Baku,
Prime Minister Erdogan discussed
the Nagorno-Karabakh problem with
his Russian counterpart Vladimir
Putin in Sochi. During the joint news
conference, Erdogan said that: “Turkey
and Russia have responsibilities
in the region. We have to take steps
for the peace and wellbeing of the
93
CASPIAN REPORT, WINTER 2014
13
. Shamhal Abilov, Turkish Prime Minister Recep Tayyip Erdogan’s Baku Visit: Relations Back on the
Track, 13.05.2009, http://www.turkishweekly.net/news/76650/turkish-prime-minister-recep-tayyiperdogan-39-s-baku-visit-relations-back-on-the-track.html

ROVSHAN IBRAHIMOV
94
region. This includes the Nagorno-
Karabakh problem, the Middle East
dispute, the Cyprus problem”. Erdogan
urged Russia and other OSCE
Minsk Group Co-chairs to participate
more actively in the resolution of the
conflict. Additionally, Erdogan stated
that the formation of relations with
Armenia depends on the resolution of
the Nagorno-Karabakh conflict. However,
Russia’s reaction was not the one
that Turkey expected. In his turn, Russian
Prime-Minister Putin said that a
compromise on the Nagorno-Karabakh
problem should be found by the
parties themselves. At the same time,
Putin maintained that it is necessary
to distinguish between issues such as
the opening of the border between
Turkey and Armenia and the resolution
of the Nagorno-Karabakh conflict,
and that both issues should not be
considered within the same context. 14
Erdogan thereafter realized that he
did not have the support of Russia.
Without interrupting the formation
of relations with Armenia, Turkey
continued to seek possible ways out
of this impasse. Attempts to intensify
the process of liberation of the occupied
territories and the creation of relations
with Armenia continued after
the signing of the Protocols.
On December 9, 2009, Turkish Prime
Minister Erdogan visited the United
States. During his meeting with President
Obama, the resolution of the
Nagorno-Karabakh conflict and the
future of the Turkish-Armenian protocols
were central topics of discussion.
Prime Minister Erdogan said
that the normalization of Turkish-
Armenian relations depend on the
Armenia-Azerbaijan negotiations. Resolving
Nagorno-Karabakh and liberating
the Azerbaijani districts will be
the first step toward the Turkish-Armenian
rapprochement. He appealed
to President Obama that the U.S. to
intervene in the Karabakh situation.
Turkey wants to see the liberation of
five occupied districts before opening
the border with Armenia. 15 Despite
the efforts of Turkey to persuade the
U.S. to take more active steps in resolving
the conflict, it failed to change
the country’s general policies towards
the South Caucasus. It became
clear that the signing of the protocols
has turned into an empty gesture.
On October 10, 2009 in Zurich, Switzerland,
the Ministers of Foreign Affairs
of Turkey Ahmet Davudoglu and
Armenia Eduard Nalbandyan signed
the “Protocol on the establishment
of diplomatic relations between the
Republic of Turkey and the Republic
of Armenia” and “Protocol on Development
of Relations Between the
Republic of Turkey and The Republic
of Armenia”. The Protocols were
welcomed by the international community.
The EU’s High Representative
for the Common Foreign and Security
Policy, Javier Solana, as well as the
14
. Erdoğan seeks Russian backing in Karabakh peace efforts, 18.05.2009, http://www.todayszaman.com/
news-175614-erdogan-seeks-russian-backing-in-karabakh-peace-efforts.html
15
. Rovshan Ibrahimov, 27.09.2009, Turkish-Armenian Rapprochement and Disagreements with
Azerbaijan: A View from Baku, http://www.turkishweekly.net/columnist/3258/turkish-armenianrapprochement-and-disagreements-with-azerbaijan-a-view-from-baku.html

Ministers of Foreign Affairs of Russia,
the U.S. and France, Sergey Lavrov,
Hillary Clinton Bernard Kouchner,
who all represent the states that are
co-chairing the OSCE Minsk Group on
the resolution of the Nagorno-Karabakh
conflict, attended the signing. 16
Despite the importance of this event,
it did not lead to further rapprochement.
Both protocols, to enter into
force, needed to be ratified by the legislatures
of both states in two months
after the signature. However, neither
country’s parliament has done so. As
previously stated by officials, Turkey
argued that the ratification could
be possible if Armenia withdraws
from the occupied districts adjacent
to the Nagorno-Karabakh. Armenia
AZERBAIJAN BELIEVES THAT THE PROCESS OF
RAPPROCHEMENT BETWEEN TURKEY AND ARMENIA
SHOULD TAKE INTO ACCOUNT THE RESOLUTION OF THE
NAGORNO-KARABAKH CONFLICT.
reacted negatively to Turkey’s demands,
explaining that these requirements
should not be preconditions.
In addition, Armenia believes that the
borders were closed unilaterally and
therefore, Turkey must open them
without additional requirements.
Taking into account Turkey’s demands,
as well as the call of the Political
Council of the parties-members of
the ruling coalition, on April 22, 2010
Armenian President Serzh Sargsyan
signed a decree suspending the ratification
of the Protocols. 17
95
CASPIAN REPORT, WINTER 2014
16
. Armenia and Turkey normalise ties, 10.10.2009, http://news.bbc.co.uk/2/hi/8299712.stm
17
. Armenian-Turkish Bilateral Relations, Official Site of the Ministry of Foreign Affairs of the Republic of Armenia, http://www.mfa.
am/en/country-by-country/tr/.

A monument
to the Khojaly
victims in Baku,
Azerbaijan.
ROVSHAN IBRAHIMOV
96
SUMMARY
It is worth examining the reasons for
divergence between Azerbaijani and
Turkish policy in the region. It is clear
that Azerbaijan’s reaction came as a
surprise for Turkey. There are several
reasons for this.
First and foremost, Azerbaijan believes
that the process of rapprochement
between Turkey and Armenia
should take into account the resolution
of the Nagorno-Karabakh conflict.
Since 1993, liberating territories
has been the condition for opening
the border. In 2008, this situation
changed. That is why, in April 2008,
there were protests against Turkey
in Azerbaijan. In Baku, it was believed
that public outcry would stop Turkey
from opening the border. This hypothesis
proved correct. Prime-Minister
Erdogan pledged not to open the border
until there is progress on the Karabakh
issue.
The second misunderstanding between
the parties was based on Turkey’s
view that Azerbaijan has no

clear policy on the resolution of the
Nagorno-Karabakh problem, which
prompted Turkey to take steps to
change the status quo in the region. In
turn, the Azerbaijani side expressed
the view that Turkey launched its proposal
without a clear view of the situation
in and around Nagorno-Karabakh
and the South Caucasus as a whole.
Azerbaijan repeatedly tried to change
the situation by means of military
operations, until 1994, and until
now through negotiations. In 1999,
some agreement could have been
reached. However, the terrorist act
in the Armenian parliament halted
the process: the key actors representing
Armenia in the negotiations were
shot. The third countries, primarily
Russia, are interested in preserving
the current status quo in the region.
Moscow does not have an interest in
the conflict resolution in favour of either
one of the parties. Because of the
inference by external powers, Azerbaijan
cannot resolve the problem.
Therefore, Azerbaijan has pursued
a tactic of economic warfare against
Armenia, namely the embargo and
its exclusion from regional projects.
Critical energy transport corridors as
the Baku-Tbilisi-Ceyhan oil and Baku-
Tbilisi-Erzurum gas pipelines bypass
ARMENIA IS HEAVILY DEPENDENT, POLITICALLY
AND ECONOMICALLY, ON RUSSIA AND UNABLE TO
INDEPENDENTLY PURSUE ITS NATIONAL INTERESTS.
open seas and lacking in natural resources,
the Armenian economy cannot
survive under these conditions. If
the Turkish border were opened, the
effect of the Azerbaijani sanctions
could be mitigated.
Another factor is that Azerbaijan is
sceptical that opening the borders
will enable Turkey to achieve its goals
towards Armenia. The main reason
for this scepticism is that Armenia
is heavily dependent, politically and
economically, on Russia and unable
to independently pursue its national
interests. The genocide issue is the
main issue not only for Armenia but
also – and to an even greater extent -
for the Armenian Diaspora. Without
active contact with the Diaspora, it is
impossible to change perceptions of
the 1915 events solely through developing
bilateral relations with Armenia.
Neither the Armenian government
nor any national interest groups have
the capacity to influence the Diaspora’s
priorities.
Recent developments have once more
confirmed that Turkey, in order to
achieve its goals towards Armenia
and make progress in the Nagorno-
Karabakh conflict, needs to take into
the account the interest of the third
powers. If this is not achieved, Turkish
initiatives towards solution of the
Nagorno-Karabakh conflict will fail,
and as a result, rapprochement with
Armenia will also be delayed.
97
CASPIAN REPORT, WINTER 2014
Armenian territories, despite the fact
that this is the shortest and more
economic route. A further example
of Armenia’s isolation from regional
cooperation is the Baku-Tbilisi-Kars
railway project. Without access to the

SERGII TOLSTOV
98
THE WEST AND UKRAINE
CURRENT TRENDS,
TREATMENTS AND
ATTITUDES
SERGII TOLSTOV
DIRECTOR OF THE INSTITUTE FOR POLITICAL ANALYSIS
AND INTERNATIONAL STUDIES

Taking into account the complexity of these
problems, it is pertinent to confine the analysis to
general aspects, retracing the behaviour of the EU
as well as the US behaviour, looking at the factors
which led to the current tensions in Ukraine’s
relations with its Western partners.
In assessing the latest events in
Ukraine, Western analysts and media
has focused on several main issues:
(1) the reasons behind Kiev’s refusal
to sign the Association Agreement in
Vilnius; (2) aggravation of anti-governmental
sentiments and emergence
of the permanent opposition camp in
the centre of Kiev; (3) methods which
should be used to put pressure on the
Ukrainian authorities; (4) rethinking of
the EU policy within the framework of
the “Eastern Partnership” program.
Taking into account the complexity of
these problems, it is pertinent to confine
the analysis to general aspects, retracing
the behaviour of the EU as well
as the US behaviour, looking at the factors
which led to the current tensions
in Ukraine’s relations with its Western
partners.
Initially, the European Commission
and the majority of European politicians
considered the EU policy toward
Ukraine as not requiring the provision
of hands-on assistance but allowing
it to take a tight control over Kiev’s
“progress” toward European integration.
THE POSITION
OF THE EU
GOVERNING
BODIES IN
RELATION TO
UKRAINE HAS
NEVER BEEN
UNAMBIGUOUSLY
FAVOURABLE,
NOR BUILT UP ON
RECOGNITION OF
UKRAINE AS AN
EQUAL PARTNER.
The European Neighbourhood Policy
offered to the countries of Eastern
Europe did not envisage any financial
support to compensate for costs of
adapting to the European market, or
anything comparable to the financial
support given to Mediterranean counties,
which are the source of mass illegal
and uncontrolled immigration to
the EU. It was envisioned that integration
to the European market would be
a sufficient incentive for local politicians
and business groups. Brussels
considered that the Association prospects
would help to overcome internal
obstacles on the way to gradual rapprochement
of the Eastern European
countries with the EU in the form
of a distinct political and economic
protectorate.
The position of the EU governing bodies
in relation to Ukraine has never
been unambiguously favourable, nor
built up on recognition of Ukraine as
an equal partner. Since Yanukovich
was elected as president, Ukrainian
government policy has systematically
been criticized against a background
of favourable treatment of Ukrainian
99
CASPIAN REPORT, WINTER 2014

SERGII TOLSTOV
100
AFTER TYMOSHENKO WAS SENTENCED TO PRISON IN
2011, SELECTIVE PROSECUTION OF THE OPPOSITION
LEADERS ON POLITICAL GROUNDS WAS THE MAIN
DRIVING FORCE OF THE EU’S APPROACH TO UKRAINE’S
POLITICS THROUGHOUT 2012.
opposition leaders. While criticising
the internal policy actions of official
Kiev (e.g. the legally questionable formation
of the parliamentary majority,
returning the Constitution to its 1996
version), the leaders of a number of
the EU countries, demonstrated solidarity
with Yulia Tymoshenko, who is
regarded as the Ukrainian opposition
leader and the chief representative of
the “pro-European” faction in Ukrainian
politics.
After Tymoshenko was sentenced to
prison in 2011, selective prosecution
of the opposition leaders on political
grounds was the main driving force of
the EU’s approach to Ukraine’s politics
throughout 2012. There were even
attempts at a diplomatic boycott and
calls to disrupt the Euro 2012 Football
Championship.
Regardless of the fact that in 2013, the
Ukrainian authorities demonstrated
their readiness to sign the Association
Agreement, the subject of Tymoshenko’s
release dominated the statements
of the EU official representatives. This
allowed the European politicians to
avoid discussing a number of practical
issues including those related to the
practical preparation of Ukraine’s economic
and political association with
the EU. Thus, the policy of “vertical”
management and dictate in relation to
Ukraine was perceived in Brussels and
the capitals of European countries as
wholly natural and reasonable. There
are also serious grounds to think that
the emphasis on the subjects of releasing
Tymoshenko and conducting
deeper political reforms in Ukraine
was considered by the European politicians
constitute a form of political propaganda.
These tactics allowed them
to avoid discussing the subject of direct
territorial and normative competition
between European and Eurasian integration
projects.
Yanukovich and most members of the
Ukrainian government were considered
by the EU and US as more like
technical figures ensuring the performance
of certain functions (first and
foremost, preparation and signing of
the Association Agreement). This approach
allowed the European politicians
and the US administration to
reckon on conducting the required
political adjustments once the Agreement
with Ukraine was signed and had
entered into force (with the assumption
of the casting of candidates for the
presidency in 2015 elections, support
to those figures who will be more useful
and reliable from the point of ensuring
EU interests and conducting the
relevant policy).
In the course of the current crisis, the
US essentially has an optional role. The
US administration is to obtain guarantees
from the Ukrainian authorities to
refrain from forceful suppression of the
“Opposition Maidan” in downtown Kiev,
aimed at pushing Yanukovich to negotiate
with the opposition and form a new
government.
The basic tasks were:
• removal from power of the persons
comprising president’s closest circle

• weakening the executive authorities’
law enforcement bloc;
• including the opposition representatives
among the government members
and strengthening representation of
oligarchic groups oriented at immediate
signing of the Association Agreement
with the EU.
It is worth noting that for the majority
of European politicians, the refusal
of President Yanukovich to sign the
Association Agreement with the EU
came as a total surprise. The main reason
is that the EU perceives itself as
the main political player, actually as a
superpower, and is not used to similar
demonstrations of political force by its
weaker partners.
The EU leaders preferred not to go
into details and purposely ignored
the direct connection of this decision
with the deterioration of the economic
situation in Ukraine and tangible economic
losses resulting from decreasing
exports to Russia which by the
2013 results valued at over 25%. This
is why Brussels explained the change
of position by Yanukovich as the result
of political-economic pressure from
Putin.
The European Commission must take
into account that before signing any
agreement, any international legal
person may refuse to sign the agreed
draft of a document and insist on
changing its conditions. However, the
EU leaders did not bring themselves to
publicly acknowledge Ukraine’s right
here since this acknowledgement
could put into doubt the complicated
and bulky procedure of preparing
bilateral documents with other countries,
where the European Commission
is responsible for determining the
dates and the format of signing treaties
and agreements.
Brussels cannot punish Kiev for refusing
to sign the Agreement with the EU
by imposing sanctions. At the same
time, the European Commission did
101
CASPIAN REPORT, WINTER 2014
Former Prime
Minister of Ukraine
Yulia Tymoshenko.

Former President
of Ukraine Viktor
Yanukovych.
SERGII TOLSTOV
102
not plan to provide Kiev with any economic
aid.
The basic principles and the rules of
the “Eastern Partnership” program
were approved in 2008-2009. According
to these rules the Eastern European
partners of the EU are not considered
as candidate members of the
THE EU LEADERSHIP OBVIOUSLY DOES NOT WANT TO
GET INVOLVED IN DISPUTES WITH MOSCOW AND WILL
AVOID A DIRECT CONFLICT.
EU (unlike the countries of the former
Yugoslavia). The principles of solidarity
specified by the Treaty on the Functioning
of the European Union for the
member-countries are not extended
to them. Allocation of funds within
the “Eastern Partnership” program is
defined in the 7-year EU budget. Further,
the “Eastern Partnership” countries
are not eligible for loans from the
European Central Bank.
The European Commission declares
as before that it has no intention to
enter into trilateral negotiations with
Russia and Ukraine on trilateral economic
relations and harmonization
of trade conditions between the EU,
Ukraine and Russia. Some European
politicians say that these negotiations
could have been held if Ukraine had
signed the Association Agreement
with the EU (and if, apparently, this
Agreement had entered into force)
but such arguments are unpersuasive.
The European Commission and the
US administration could potentially
revise the conditions to allow for the
extension to Ukraine of the new IMF
new credit program.
Thus, the refusal by Yanukovich to
sign the Association Agreement damaged
the international prestige of
the EU. The actions of the Armenian
leadership and later those of Ukraine
questioned the efficiency and productivity
of the “Eastern partnership”
program and the EU’s political influence
in Eastern Europe.

The EU leadership obviously does not
want to get involved in disputes with
Moscow and will avoid a direct conflict,
though some of the right-wing
representatives will try to instigate
more serious conflict around the differences
between the EU and Russia.
The European Commission clearly
intends to resume and strengthen
its influence in Ukraine. The most efficient
way of doing this was deemed
to be direct participation of the EU
governance bodies’ representatives
in negotiations between the Ukrainian
authorities and the opposition.
Precisely this form of cooperation has
already been offered by Catherin Ashton
during her visit to Kiev and was
supported by most of the European
parliament deputies.
By delaying the handling of the political
crisis in Ukraine, the US and the
EU actually added to the internal economic
problems in Ukraine and used
the country’s approach to default as
leverage to enable them to force official
Kiev to change the make up of
the government. With this perspective
any new Cabinet of Ministers of
Ukraine could have a coalition character.
It would include the opposition
representatives enjoying the confidence
of Washington and Brussels
and delegates from the main oligarchic
groups who act as the main US
and EU allies in the existing balance
of forces and interests. 1
As a result, Kiev could not have
avoided signing a new memorandum
with the IMF on the credit program
for $15 billion. That is, the new government
could easily have coped
with the debts to the IMF and payments
to other creditors due in 2014,
but this bargain would have resulted
in cutting down the opportunities of
the government to adjust the financial
policy, worsening the living standards,
decreasing state capabilities
in the social security sphere, curtailing
production on the local market
with “dear” money and high prices
for gas being delivered from Russia.
The Foreign Ministers of Poland and
Sweden R. Sikorski and C. Bildt have
already offered Azarov a “Council on
Reforms and European Integration”.
This body is expected to be founded
by the EU and the IMF, with the supposed
“participation” of representatives
of Ukraine to be engaged in
obtaining and allocating the IMF
credit and ensuring relevant microeconomic
conditions. 2
Therein lies the EU’s response to the
Ukrainian government’s proposal to
continue with the negotiations. To
begin with, the European politicians
advised the Ukrainian government
to fulfil the IMF requirements. But
by fulfilling the IMF requirements
the president and the government of
Ukraine would have lost the voters
support, and so Sikorski and Bildt
103
CASPIAN REPORT, WINTER 2014
1
. It was assumed that with the help of “Maidan” the opposition leaders would deliver the terms of their
ultimatum to V. Yanukovich that would allow him to retain his nominal powers till 2015 subject to
forming the technical government with relatively proportional representation of the basic oligarchic
groups and restoration of the 2004 version of the Ukrainian Constitution.
2
. Słojewska A., Stankiewicz A. Unia oferuje mediację // Reczpospolita. 06.12.2013. - http://www.rp.pl/
artykul/11,1070336-Unia-oferuje-mediacje.htmlp=1

SERGII TOLSTOV
104
proposed a way of shifting the responsibility
to the external supranational
body.
Yanukovich’s visit to Moscow (17 December
2013) secured the strategic
advantages of the governmental authorities
over both the “Maidan” and
the opposition. Any ultimatums from
the opposition delivered to the president
and the government including
the requirement to hold pre-time
elections approved by the European
parliament resolution dated 12 December
2013 lose their relevance.
Having resolved the financial deficit
problems through the support
of Russia’s leadership, Yanukovich
can potentially resolve the political
problems as well.
In relations with Brussels, official
Kiev is definitely not interested in
maintaining or increasing the tensions.
However, the text of the Association
Agreement (especially as
regards the Free Trade Zone and
appendices about the quotas and
the interim periods) can hardly be
signed in its current form. The same
applies to the negotiations with the
IMF, which Kiev will be able to pay
out its debts.
In the current situation, a real and
practical way of rendering assistance
to the Ukrainian society from
the European politicians could be
finding a new format for relations
that reflect the autonomous status
of Ukraine in the European security
balance and recognition that its economic
ties with the CIS market space
are of vital importance.
CONCLUDING REMARKS
1. The developments in the fall of
2013 convincingly demonstrated
the failures of the Ukrainian government’s
plans to create an asymmetric
free trade regime in several strategic
directions. The main reason for the
failure of this foreign economic strategy
was the absolute disagreement on
the side of the EU and Russia with Kiev’s
intentions and proposals reflecting
the vital importance of intensive
links with both market spaces. This
was accompanied by the sharpening
of territorial competition between
the European and Eurasian integration
projects. According to the EU, the
extension of the European economic
standards to the countries of the
“Eastern partnership” was considered
as a pretext for their gradual accession
to the EU economic space without
applying the program of four basic
market freedoms to its members.
Russia’s leadership refused to build
up relations between the Customs
Union and Ukraine based on “3+1”
formula. In connection with this, the
Russian government has discovered
in Kiev’s plans an attempt to create
within the framework of the CIS Free
Trade Zone a zone of uncontrolled reexport
of goods of European and, evidently,
Asian origin including the engineering
products of group assembly.
2. . Introduction of customs restrictions
on Ukrainian exports to Russia
in August-September 2013 demonstrated
the vulnerability of the Ukrainian
economy and its critical dependence
on its commodity exports on
the Russian market. In this connection
it is worth noting that according

Protests in Maidan,
Ukraine.
to preliminary estimates, Ukrainian
exports to Russia in 2013 decreased
by approximately 25 or 30 per cent of
their value compared with 2012. The
current situation further confirms the
external imbalance between Ukraine
and the EU.
3. If we consider the structure of
Ukraine’s economy, the pattern of
trade between Ukraine and the EU
cannot be regarded as a decisive
impetus for European integration,
especially against the background
of the EU’s complete refusal to recognize
Ukraine’s membership prospects.
The terms of the Agreement
with the EU regarding the free trade
area between the EU and Ukraine
could lead to even greater imbalance
in foreign trade and negative balance
growth for Ukraine, significantly limiting
its ability to determine its own
trade and economic regimes in relations
with third countries.
4. In the event of creating a FTA between
the EU and Ukraine in the
INTRODUCTION OF CUSTOMS RESTRICTIONS ON
UKRAINIAN EXPORTS TO RUSSIA IN AUGUST-SEPTEMBER
2013 DEMONSTRATED THE VULNERABILITY OF THE
UKRAINIAN ECONOMY AND ITS CRITICAL DEPENDENCE
ON ITS COMMODITY EXPORTS ON THE RUSSIAN MARKET.
current pre-agreed set of conditions,
the introduction by the Customs
Union of increased import duties for
the Ukrainian goods cannot be compensated
by partial liberalization
of trade with the EU. Rather it will
merely increase the total losses in
the Ukraine and in budget revenues
and foreign trade, bringing them to
unacceptable levels. Ukraine, however,
still intends to continue negotiations
with the EU and declares
plans to revise the conditions related
to the signing and implementation of
the Association Agreement.
5. As part of its general political positioning,
the Ukrainian government
continues to adhere to the policy
of maintaining a relative balance
in its relations with Russia and the
EU (“East” and “West”). From the
105
CASPIAN REPORT, WINTER 2014

SERGII TOLSTOV
106
Emergency
parliament
session in
Ukraine.
standpoint of economic relations
the removal of barriers in trade with
the CIS countries and the Customs
Union, and to intensify programs
of industrial cooperation and joint
production projects with Russian
companies. Given the challenges of
modernizing the economy and the
industrial base, this area is undoubtedly
strategic. As regards the declared
intention to resume negotiations
with the EU, the Ukrainian side
proposes to clarify the conditions of
implementation and the transitional
provisions of the Association Agreement.
This may be regarded primarily
as an attempt to avoid a crisis in
relations with Brussels and convince
the European Commission of the
need to continue the dialogue.
6. The important prerequisite for
re-evaluating the existing obstacles
in bilateral cooperation between
Ukraine and Russia was the adjustment
of gas deliveries terms. In addition,
at the preparation stage for the
Sixth meeting of the Russian-Ukrainian
Interstate Commission, Putin
did not insist on Ukraine joining the
Customs Union in the short term.
This position allows Ukraine to count
on maintaining a certain balance in
relations with the EU, if the European
Commission demonstrates
relative flexibility and at minimum
the inclination to take into account
the economic and political interests
of Ukraine as an important partner
rather than a country against which
a neo-colonial model of resource
absorption and external management
is applied. On the other hand,
the absence of the requirement for
Ukraine’s entry into the Customs
Union avoids the need for complete
renegotiation of Ukraine’s participation
in the WTO and enables it to focus
on sectoral projects in relations
with the countries of the Customs
Union.
7. The important thesis which is
traditionally considered in the foreign
policy of Ukraine is to avoid the
critical deterioration of relations

etween Kiev, the EU and the US, including
the strengthening of external
pressure and possible imposition of
sanctions against members of the
Ukrainian government, representatives
of business and law enforcement
structures. Apparently, in relations
with the EU, the government
relies on the support of the moderates
who wish to avoid a new “cold
war” and are not willing to tolerate
a complete failure of “the eastern direction”
of the European Neighbourhood
Policy. In this case, from the
point of view of Kiev it is important
to try and resume the negotiation
process with the European Commission
before the European Parliament
elections in May 2014 and the forthcoming
rotation of the executive bodies
of the European Union - no matter
how effective these negotiations may
be.
plans and prospects towards Russia
and the Eurasian integration project,
the strategic choice for the Ukrainian
society remains extremely complex
uncomfortable and constantly postponed,
although objectively a profitable
and attractive solution.
107
Another obvious motive behind
these tactics is the attempt to maintain
a political balance between the
main political and economic vectors,
including Russia and the West.
This seems important in the terms
of maintaining the basic aims and
parameters reflecting Ukraine’s positioning
in the European context.
CASPIAN REPORT, WINTER 2014
8. These circumstances suggest the
complex and forced revision of the
main landmarks of Ukraine’s foreign
economic policy that will inevitably
take into account the rate of formation
and the degree of effectiveness of the
Eurasian Economic Union, the general
climate in relations between the US,
the EU and Russia as well as the development
and character of the EU-Russia
dialogue. For several reasons, despite
the actual turn of Ukraine’s economic

CASPIAN

ESSAYS

ENERGY BILL OF TURKEY
AND SUSTAINABLE
ECONOMIC GROWTH
ASSOC. PROF. DR. FATIH MACIT
FATIH MACIT
SENIOR FELLOW, CENTER ON ENERGY AND ECONOMY, HASEN
110

The recent numbers released by Turkish
Statistical Institute confirmed again Turkey’s
high level of dependence on imported
energy and the danger that this creates for
long-term sustainable economic growth and
financial stability.
The recent numbers released by
Turkish Statistical Institute confirmed
again Turkey’s high level of
dependence on imported energy
and the danger that this creates for
long-term sustainable economic
growth and financial stability. According
to the figures, the total energy
imports of Turkey in 2013 has
reached to 55.9 billion dollars which
makes about 22.2% of total imports
and about 56% of total trade deficit
of the country. The good news is
that although the economic growth
rate is expected to be higher in 2013
compared to 2012, the total energy
imports of Turkey have declined by
7% in 2013.
Turkish economy has realized significant
macroeconomic developments
TURKISH
ECONOMY
HAS REALIZED
SIGNIFICANT
MACRO
ECONOMIC
DEVELOPMENTS
OVER THE LAST
TEN YEARS.
over the last ten years. Large budget
deficits and high inflation rates were
the two main important problems of
1990s. Fiscal discipline that has been
adopted by the AK Party government
considerably reduced the public sector
borrowing requirement and this
in turn led to a decline in the interest
rates. Along with the decline in
the interest rates, inflation rate went
down to single digit levels. The economy
was severely hit in 2009 global
economic crisis but as opposed to
developed economies there was a
very sharp and quick recovery in
2010 and 2011.
By the end of 2011, the authorities
have realized an important economic
problem of Turkey when the
current account deficit reached to 75
billion dollars which is about 10% of
Turkey’s GDP in that year. High level
of current account deficit makes
Turkey highly dependent on foreign
savings in order to be able to realize
economic growth. This creates an
important macroeconomic deadlock
for the economy in terms of creating
a trade-off between economic
growth and current account deficit.
111
CASPIAN REPORT, WINTER 2014

ASSOC. PROF. DR. FATIH MACIT
112
Another important dimension of the
issue is that Turkey finances his current
account deficit mainly by portfolio
investment and this creates risk
for financial stability.
THE NUMBERS REVEAL THAT DEPENDENCE ON IMPORTED
ENERGY IS HIGHLY RESPONSIBLE FOR TURKEY’S HIGH
LEVEL OF CURRENT ACCOUNT DEFICIT.
The numbers reveal that dependence
on imported energy is highly
responsible for Turkey’s high level
of current account deficit. As one can
see in the figure once you exclude
the energy imports of Turkey, there
is in fact a current account surplus.
For instance, in 2012 the current
deficit was around 48.5 billion dollars
but once you subtract the energy
bill the balance turns into an
11.6 billion dollars surplus. These
figures confirm that in order to get
into a path of long-term sustainable
growth, Turkey needs to take significant
initiatives to reduce the energy
bill of the country.
There are a couple of medium-term
and long-term steps that need to be
considered in this process. In terms
of natural gas imports, Turkey needs
to diversify supply sources in order

to increase his bargaining position
and therefore reduce the unit price
that he pays. In this regard, Southern
Gas Corridor that has been initiated
by TANAP project is an important
chance for Turkey. A second aspect
of natural gas imports is related with
electricity production structure.
About 50% of electricity production
is made in power plants that use
natural gas. Turkey needs to look for
alternative energy sources to substitute
for natural gas that includes
nuclear power and renewables.
Energy efficiency is another important
aspect that Turkey needs to consider
in terms of reducing the energy
bill. European Union significantly
benefited from improvements in energy
efficiency over the past decade
and Turkey can take lessons from
this. 113
CASPIAN REPORT, WINTER 2014

EMIN AKHUNDZADA
114
IRAN’S NUCLEAR DEAL
WITH THE WEST AND ITS
REGIONAL IMPACTS
EMIN AKHUNDZADA
ACADEMICS AND RESEARCH COORDINATOR, HASEN

The tension between the West and Iran
reached its peak during Ahmadinejad’s presidency.
With harsh statements against the
US and Israel, Ahmadinejad at various points
brought the parties to the brink of war.
Relations between Iran and the West
significantly deteriorated as a result
of the 1979 Iran Islam revolution
and the hostage crisis, but things got
worse as Iran developed its nuclear
programme. The West regarded
Iran as a threat to the region, and
tried to persuade it to abandon its
nuclear operations. However, Iran
has consistently claimed that its
nuclear operations are being carried
out for peaceful means. The tension
between the West and Iran reached
its peak during Ahmadinejad’s presidency.
With harsh statements against
the US and Israel, Ahmadinejad at
various points brought the parties
to the brink of war. Bilateral tensions
were reduced and harsh statements
were replaced with mutual goodwill
gestures when Hasan Rouhani
was elected as the new president in
August 2013. As a result, a 6-month
interim deal on Iran’s nuclear program
has been signed between Iran
and the G5+1 countries in Geneva.
According to the deal, Iran will suspend
its nuclear programme to a
significant extent, dispose of its 20%
enriched uranium, resume uranium
enrichment activities only at a rate
OBAMA
OPPOSES
NUCLEAR
ARMAMENT,
AND IS
CONCERNED
ABOUT A
POSSIBLE
ARMS RACE IN
THE REGION IF
IRAN CREATES
A REGIONAL
SECURITY
DILEMMA BY
ACQUIRING
NUCLEAR
WEAPONS.
of 5%. In return, the international
community will reduce the sanctions
around $7 billion. If the parties
do not fulfil their obligations within
6 months, an extension of 6 months
will be granted.
What has pushed the parties to reach
a deal after years of tensions
BENEFITS OF THE DEAL FOR THE
WEST, PARTICULARLY THE US
• Obama opposes nuclear armament,
and is concerned about a possible
arms race in the region if Iran creates
a regional security dilemma by
acquiring nuclear weapons.
• Economic costs for the US as a result
of operations in Afghanistan and
Iraq are high, and 2008 world economic
crisis also caused trouble for
the US economy. Thus, the US does
not want another war. Moreover,
Iran is very different from Iraq, and
a possible war with Iran would not
only be a major blow for the US economy
but would also cause instability
in the region. In this case, the US is
choosing peace over war.
115
CASPIAN REPORT, WINTER 2014

EMIN AKHUNDZADA
116
• Given that the US is scheduled to
withdraw from Afghanistan in the
second half of 2014, it needs Iran’s
support to help fill the gaps that
will emerge in the region after the
withdrawal.
• Illegal organizations emerged in
Syria with the civil war, and the risk
of their expansion to other countries
is of great concern for the US. A significant
number of militants came
from Central Asian Republics to
Syria to fight for Al-Qaida, posing serious
threats to surrounding states.
Iran’s support is essential to bringing
an end to the Syrian civil war and
maintaining a permanent peace.
• US regards Iran as a huge threat to
the region (as well as to Washington)
and believes that it can integrate Iran
into the system and deter it from
supporting illegal organizations.
• A possible deal with Iran may help
resolve other problems in the region,
such as the Israel-Palestine issue.
BENEFITS OF THE DEAL FOR IRAN
• Relations between Iran and the
West were approaching a breaking
point during Ahmadinejad’s presidency,
creating serious risks for Iran.
Iran wanted to avoid the increasing
tension. In this regard, it has been
claimed that Iran is seeking to reduce
tension via the nuclear deal, to
gain time if US attack seems likely, or
to prevent a possible attack.
• Iran has serious economic problems
due to the Western-sponsored
embargo, and also due to its financial
support for the Assad regime during
the Syrian civil war. This directly affected
popular support for the regime,
and threatened its stability. In
order to improve its economic situation
and to eliminate the domestic
political threat to the regime, Iran
needed to establish peace with the
West.
IRAN HAS SERIOUS ECONOMIC PROBLEMS DUE TO THE
WESTERN-SPONSORED EMBARGO, AND ALSO DUE TO
ITS FINANCIAL SUPPORT FOR THE ASSAD REGIME DURING
THE SYRIAN CIVIL WAR.
• Iran’s energy export revenues of
approximately $100 billion could
not be transferred to Iran due to
sanctions, because Iran’s energy exports
to related countries were only
paid to a local bank in that country’s
currency. This amount corresponds
to roughly 20% of Iran’s GDP. Thus,
Iran wants to reach a deal with the
West so it can have access to its assets
abroad.
• Iran has the 4 th largest oil reserves
and 2 nd largest natural gas reserves
in the world. According to BP statistics,
Iran has a total of 33.6 trillion
cubic meters of natural gas reserves,
and about half of these reserves are
located in the South Pars field. Iran
shares the South Pars natural gas
field with Qatar. While Qatar uses
this field quite efficiently, Iran’s production
rate is relatively low because
technology it will use in production
is licensed by US. As Iran does
not have this technology, it cannot
reach the desired rate of production.
Moreover, oil production in Iran has
significantly declined, as it was unable
to sell oil due to the embargoes,

EU Foreign Policy
Chief Catherine
Ashton and Iranian
Foreign Minister
Javad Mohammad
Zarif at EU 5+1
Talks.
which almost terminated production
in many oil wells.
• Iran has about 10 pipeline projects
to export its energy resources to
countries such as India, Pakistan, Afghanistan,
China, United Arab Emirates,
Kuwait Iraq and Syria. But Iran
has not managed to realize any of
these projects. Therefore, the country
wants to increase its production
by ending the embargoes and boosting
energy exports.
• Iran wants to deliver natural gas to
Europe. There are two ways in which
this can be done: either through
Turkey-Greece or through Armenia-
Georgia and Ukraine. In order to
achieve this goal, Iran needs to normalize
its relations with the West.
POSSIBLE REGIONAL IMPACTS OF
THE DEAL BETWEEN THE WEST
AND IRAN
• If all parties fulfil their obligations
and permanent peace is maintained
between Iran and the West, regional
peace will benefit. Iran’s suspension
of nuclear activities will also come
as a relief to other countries. If Iran
managed to produce nuclear weapons,
it would trigger arms race in the
region and lead to a fragile political
situation.
• If permanent peace is established
between Iran and the West, the possibility
of war will come to an end.
War between the US and Iran would
cause instability in the region. A besieged
Iran would try to obtain all
kinds of weapons in order to protect
itself, and chemical weapons would
clearly have negative consequences.
THE DEAL BETWEEN IRAN AND THE WEST IS PROVISIONAL,
WHICH INDICATES THAT THE DEAL IS ACTUALLY QUITE
FRAGILE.
• It would pave the way for various
problems in the region, notably in relation
to the Syria, Iraq and Palestine
issues.
117
CASPIAN REPORT, WINTER 2014

EMIN AKHUNDZADA
118
• If Iran could be integrated into the
international system, it would be
more easily controlled by the West.
Moreover, permanent peace between
the parties would weaken the
guardianship system in Iran.
On the other hand, for the US, the
Middle East has lost the appeal it
once had. With its domestic shale
gas production, the US is now able
to meet its natural gas demand; it
may even export gas in the near fu-

ture. The US imports oil mostly from
Mexico and Canada. Thus, Washington’s
main problem in the upcoming
period will be China. In this case, if
the US disregards the Middle East,
Iran will have more influence in the
region. Iran has increased its presence
in areas from which the US has
withdrawn. This may also reduce
Turkey’s regional influence.
In conclusion, the deal between Iran
and the West is provisional, which
indicates that the deal is actually
quite fragile. Radical change in bilateral
relations is not expected as
long the regime continues to exist,
because the deal is made on a pragmatic
basis. Hostility against the
West, particularly against the US, is
one of the crucial elements of the
regime’s domestic and foreign policies.
If Iran wants to push for radical
change in its relations with the West,
it must first of all restructure its constitution
as well as its domestic and
foreign policy, because Iran’s nuclear
program is not the only reason for
the tensions with the West.
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MESUT HAKKI CAŞIN
120
TURNING THE
RUSSIAN NAVAL
FLEET BACK TO WARM
MEDITERRANEAN WATERS
TRANSFORMATION TO A
NEW RIVALRY WITH THE
WEST
MESUT HAKKI ÇAŞIN
SENIOR FELLOW, CENTER ON FOREIGN POLICY AND SECURITY,
HASEN

After WW-II the Mediterranean Region was one
of the most important areas of strategic struggle
between the naval forces of the US and USSR.
They aimed at containing the influence of the
other, and the two superpowers also competed in
the search for allies in the region.
After WW-II the Mediterranean Region
was one of the most important areas
of strategic struggle between the
naval forces of the US and USSR. They
aimed at containing the influence of
the other, and the two superpowers
also competed in the search for allies
in the region. From the western or
NATO perspective, the Mediterranean
Region was seen as NATO’s ‘southern
flank’, and the West’s main military
instrument in the region was the US
Sixth Fleet. During the Cold War period,
the Soviet Naval task force had
the 5th Mediterranean squadron of
50 naval ships operating in the Mediterranean
Sea including the Turkish
Straits alerted powerful Black Sea
fleet about 200 war ships and submarines.
Soviet Union’s closest allies
were the progressive or radical Arab
states, such as Algeria, Libya, Syria,
and Egypt under Nasser. The Syrian
port city of Tartus served as the Soviet
Union’s only permanent maritime
base in the Mediterranean. Same as
the formerly Black Sea and Azov Sea
ports in Odessa, Illichivsk, Nikolayev
and Mariupol were economically very
important during Soviet times. These
ports provided more than 20% of
export supplies to the Soviet Union.
AFTER 1991,
RUSSIA HAS
BEEN BACK TO
ITS COASTAL
AND RATHER
LIMITED
ACCESS TO
THE BALTIC
AND BLACK
SEAS.
Trans-European gas pipelines “Bratstvo”
and “Soyuz”, and the oil pipeline
“Druzhba” run across the Ukrainian
territory. For Moscow, these facilities
had significant importance as
economic links with European states,
and remain very important for Russia
today.
After 1991, Russia has been back to
its coastal and rather limited access
to the Baltic and Black Seas. Suddenly
emerging; economic and other difficulties
forced Russia to withdraw its
navy from many regions of the world,
including the Mediterranean. However,
in maritime law and balance of
power perspective, both the United
States and Russia need Turkey, since
the capacity to keep the control of the
Turkish Straits was vested in Turkey
according to 1936 Montreux Convention.
After the dissolution of USSR,
Ukraine and Russia divided 50% of
their naval fleets in the Black Sea. But,
70% of Russian naval fleet stays in
Ukrainian sea bases. Russia also dislike
US bases in Bulgaria and Romania
which are former Soviet allies but
today new NATO members deployed
missiles, aircraft, ships in the Black
Sea . In this context, Russia joined the
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MESUT HAKKI CAŞIN
122
Black Sea Harmony and Blackseafor
military exercises with coastal states
in order to cooperatively promote security
and stability in the Black Sea
maritime region, strengthen friendship
and good neighborly relations.
RUSSIA USED HIS BLACK SEA FLEET IN 2008 GEORGIA
WAR THAT BOMBARDED GEORGIAN PORTS, AND
DESTROYED AS MANY AS EIGHT SHIPS IN THE PORT OF
POTI.
Contrary to the Yeltsin administration’s
role in the region, Russia under
Vladimir Putin has emerged as
an increasingly significant player in
the Mediterranean region. Since the
dissolution of the Soviet Union, the
US has deployed additional military
forces in the Middle East after 1991
Gulf War and following the Iraq invasion
of 2003. In terms of naval military
capabilities, Obama administration
has focused on 2011 Libya operation,
gunboat diplomacy in the Iran Gulf
and finally in 2013 Syrian chemical
weapons crisis. In the theoretical perspective,
Waltz’s idea of international
politics, the anarchy of the international
system means that its units can
rely on no one for their security and
continued existence. The fundamental
incentive is consequently self-help:
trust no one and fend for yourself.
The security of any given unit will be
at risk if the power of the other units
in the system increases. We must remember
that these assertive developments
spread out to Caucasus and
Black Sea. Russia used his Black Sea
Fleet in 2008 Georgia War that bombarded
Georgian ports, and destroyed
as many as eight ships in the port of
Poti. Georgian successes in shooting
down up to five Russian aircraft
(possibly including one Tupolev-22
Backfire reconnaissance aircraft, and
three Sukhoi Su-25 Frogfoot and one
Su-27 Flanker fighters) may in part
have been attributable to the use of
SA-5 surface to-air missiles. Moscow
believed that such equipment could
only have been supplied by Ukraine-
Russia being the only other nation
possessing such equipment. The actions
of Russia’s Black Sea Fleet effectively
drew Ukraine into the conflict.
Regarding these issues we have to
focus on some academic arguments,
such as: Why Russia decided to establish
a new Mediterranean Naval
fleet How big will the new fleet be
showing Russian flag in Mediterranean
waters Will Russia create a
new sea power capacity reflecting a
Cold War rivalry with Pentagon Will
Russia aim at making new surprise
offers such as Cyprus in exchange for
an army base or Syria bases Does
Russia intend to create Mediterranean
fleet in order to protect Syria
against possible Western military
intervention Considering NATO naval
power and US 6th Mediterranean
fleet, is this power enough for Russia
to increase the combined military capabilities
to permit making certain
strategic decisions
Just at this critical point, Sergei Karaganov
argued that “not so long ago
Russia was almost a failed state. Now
it is one of the world’s three big powers
again.” ‘Yes, we can say that Russia
is back. President Vladimir Putin
wants the world to acknowledge that
Russia remains as a global power. Recently
he is making his stand in Syria.
“Russia is returning to the Arab world
because the Arab states are asking
us to. They want someone to rely on

other than the US and Saudi Arabia,”
says Sergei Markov, a frequent foreign
policy adviser to President Vladimir
Putin. I hope the first issue, for
Russian vital interests in the region,
is to regain its strategic importance.
Especially, in the energy and military
sectors, Russia has shown a renewed
interest in the Mediterranean Region
and also stepped up its efforts
to establish closer relations with the
countries on the southern shores of
the Mediterranean Sea. Even though
the traditional East and West antagonism
was primarily ideological and
military in nature today, it will challenge
the oil and gas relations in the
Mediterranean region in the near
future. In the framework of the New
National Security Strategy of the Russian
Federation, Russia’s natural resources
are of crucial importance not
only for Russia’s renewed influence
on the global stage, but also as a potential
source of discord and even of
military conflict between countries.
Putin at the UN Security Council, in an
opening address to a Security Council
PUTIN ADMINISTRATION IS PLANNING TO DEPLOY
ITS WARSHIPS IN THE MEDITERRANEAN SEA ON A
PERMANENT BASIS.
session on international energy security,
emphasized that ‘energy is, at
least today, the most important motive
for world economic progress. The
present and future prosperity of Russia
depends directly on the place we
occupy in the global energy context’.
Russia, with Gazprom, tries to initiate
joint projects after the signing of the
MoU, which reportedly was left to expire
by inaction on the Algerian side.
For the EU, Algeria is currently the
most important non-Russian lifeline
for its natural gas supplies. Signing of
a possible collusion between Algeria
and Russia will frighten EU countries,
whereas stronger EU-Algerian energy
cooperation will cut into Russia’s main
gas export market.
The attractiveness of Libya’s oil resources
are seen particularly in the
low cost of oil extraction, the high
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CASPIAN REPORT, WINTER 2014
President of Russia
Vladimir Putin.

MESUT HAKKI CAŞIN
124
quality of Libyan oil, and its proximity
to European markets. Libya
also currently supplies 3% of EU’s
gas demand especially to the Italian
market via Greenstream underwater
pipeline connecting to Sicily. During
the 2008 President Putin’s visit to
Libya, the parties decided to cancel
Libya’s Soviet-era debts, arms sales
as well as cooperation in the fields of
energy and infrastructure. In 2008,
Russian President Vladimir Putin
wrote off Libya’s $4.5 billion debt in
exchange for new deals for Russian
arms manufacturers. Putin also facilitated
deals for Russian oil company
Gazprom Neft and railroad monopoly
Russian Railways. Russia’s renewed
attempts to sell arms to Libya are futile.
In March 2013, Russian oil company
Tatneft announced that it was
returning to its operations in Libya.
Russian investment in Iraq gained
new momentum in the 2013 summer
after the visit of central and regional
government authorities to Moscow
and St Petersburg. Russian energy
giants Gazprom Neft, Lukoil, and Rosneft
signed new contracts in Iraq’s
southern fields, which are controlled
by Baghdad’s federal government,
as well as in the northern fields controlled
by Erbil’s Barzani government.
With a surprise maneuver Russia has
offered closer economic partnership
to Bashar Assad with Syria energy
sector. The Syrian government has
signed a joint development agreement
with a Russian energy company
to explore oil and gas in the 2190 km.
area on the Syrian territorial waters in
the Mediterranean Sea. This may be a
close assistance message from Kremlin
and Syria to the Western world
just before the 2014 Geneva Conference
that will shape the near future of
the civil war. On the other hand, just
before this event, Moscow and Beirut
have signed a memorandum of un-

derstanding on cooperation in the energy
sphere after a meeting between
Russian Energy Minister Alexander
Novak and his Lebanese counterpart
Gebran Bassil. The Russian firms are
among the 46 international oil companies
which were selected to bid for
exploring gas offshore and estimated
to have spent over $120 million on
the bids already. The tender includes
10 hydrocarbon-rich blocks off the
Lebanese coast. US energy experts
estimated about 1.7 billion barrels
of undiscovered oil and 122 trillion
cubic feet of gas resources in the deployed
reserves in Levant Basin that
Russia focused on very carefully to
discriminate against other candidate
actors in the Mediterranean basin. All
these events also negatively affects
and results in seeing the red lights
for Israel’s new energy projects in the
region.
Secondly, Putin administration is
planning to deploy its warships in
the Mediterranean Sea on a permanent
basis. Admiral of the Fleet Viktor
Chirkov said that “Russia will be
building up its Mediterranean fleet
until it is deemed sufficient to perform
the task set.” Within the structure
of the Mediterranean task force
unit, Russia intends to have about a
dozen ships and submarines. Russia
has launched its new state-of-the-art
advanced stealth technology, making
it virtually undetectable when
submerged Varshavyanka-class
submarine, which set sail from a St
Petersburg shipyard to become the
first of six diesel-electric stealth subs
delivered to the Russian Black Sea
fleet. In addition, Mistral helicopter
carriers that Russia purchased from
France can also be involved in the
project. Russia’s missile-carrying
cruiser “Moskva”, ‘aircraft carrier
OF COURSE TURNING THE RUSSIAN NAVAL FLEET BACK
IN THE MEDITERRANEAN SEA COULD STRATEGICALLY
ACT AS A DETERRENT TO NATO FORCES AND INCREASE
RUSSIA’S LEVERAGE.
killer’ “Varyag” and battle cruiser
“Pyotr Veliky” deployed in autumn
2013 in Mediterranean waters.
Of course turning the Russian naval
fleet back in the Mediterranean Sea
could strategically act as a deterrent
to NATO forces and increase Russia’s
leverage. Russia is deepening its military
collaboration, including arms
sales, with several countries along
the southern rim of the Mediterranean.
In this context, USSR was Syria’s
practically only supplier of weapons,
selling the country arms worth more
than 34 billion USD since the end of
the Second World War. In 2006, Syria
received 200 Igla air defense missiles,
anti-ship missiles, advanced fighter
aircraft, such as MiG-31s and MiG-
29s. However, after 9/11 attacks and
pirates in Somalia, Russia has participated
in NATO’s anti-terror operation,
Operation Active Endeavour. In terms
of trade protection, reports suggest
that, with Russia reliant on sea lines
of communication for the delivery of
up to 60% of its foreign trade, maritime
piracy could be as large an issue
for Russia as for Western states. Russia
has also shown growing interest
in acquiring military hardware from
Israel, in particular unmanned spy
planes, given Israel’s leading technology
in this area. Russia has started
fulfilling its recent arms exports contract
with Iraq. Iraqi Prime Minister
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MESUT HAKKI CAŞIN
Nuri al-Maliki signed an arms package
purchase agreement with Russia
worth $4.2 billion during a visit to
Moscow in October 2012. Russia is
delivering 10 Mi-28NE attack helicopters
and 50 Pantsyr-S1 gun-missile
short-range air defense systems to
Iraq as part of a $4.2 billion contract
with Baghdad that has become vital
for Moscow arms exports to the Mediterranean
basin. Moreover, Kremlin is
negotiating its biggest weapons deals
with Egypt since the Cold War. Indeed,
Egypt is seeking as much as $2 billion
of Russian weaponry, including MiG-
29 fighter planes, air-defense systems
and anti-tank missiles. The talks
came as a Russian warship docked at
an Egyptian base on the Red Sea may
be a new signal that strengthening
links between the navies of the two
countries.
To sum up, we can expect two opposing
predictions about Russia’s new
naval force strategy: In the first alternative,
we may speculate that in the
light of Russia’s attempt to establish
regional naval power aims to counter
balance US and NATO hegemony
through enlargement and military
integration in the Mediterranean Re-
126

gion. The second scenario entails an
expansion of Russian naval power
projection capabilities such as large
surface missile destroyers, aircraft
carriers, new submarines, and particularly
amphibious forces may aim
at keeping the flag flying in the long
term in the Mediterranean. But the
only main difference from the Cold
War beyond ideologies is that this
fleet aims at protecting the new Russian
pragmatic economic vital interest
that balancing capability to his allies
and territories in prestige inside
the energy politics. We can argue that
Russia could influence strategic cooperation
with Mediterranean states
from Algeria, Libya, Iraq, Syria, and
Lebanon using energy cards. Russia
can afford to lose its prestige among
the Arabs and gain a major political
and economic advantage in Southern
Europe and Eastern Mediterranean. 127
CASPIAN REPORT, WINTER 2014

LEGAL AND ILLEGAL
MONEY TRANSFERS AS
RUSSIAN FOREIGN POLICY
INSTRUMENTS
FATIH OZBAY
SENIOR FELLOW, CENTER ON FOREIGN POLICY AND SECURITY,
HASEN
FATIH OZBAY
128

Migrants who are mostly coming from former
Soviet republics are one of the most important
challenges for Russia. It is indicated
that there are approximately 11-12 million
migrants in Russia.
Migrants who are mostly coming
from former Soviet republics are one
of the most important challenges for
Russia. It is indicated that there are
approximately 11-12 million migrants
in Russia. Most of them come
from Caucasian and Central Asian
republics. Russia takes tougher decisions
about migrants every day;
increases the requirements, rules
and controls. Russia Federal Migration
Service officials announced
that the number of foreigners who
are forbidden to enter the country
is 435 thousand in 2013. It has serious
humanitarian, psychological and
political impacts as well as crucial
economic consequences both for
Russia and other related countries.
Migrants who are forbidden to enter
Russia are mostly coming from
Southern Caucasian and Central
Asian republics. The number of illegal
migrants is expected to further
increase in 2014. When such increasing
number of migrants is prohibited
to enter the country, CIS countries
will be badly affected as they have
foreign exchange earnings via migrants.
Sometimes serious protests
arise against migrants due to their
SOMETIMES
SERIOUS
PROTESTS
ARISE AGAINST
MIGRANTS
DUE TO THEIR
ADAPTATION
PROBLEMS
TO RUSSIA
AND BEING
INVOLVED IN
CRIME AS WELL
AS RACIST
ATTITUDES AND
XENOPHOBIA.
adaptation problems to Russia and
being involved in crime as well as
racist attitudes and xenophobia.
A large part of these migrants comes
to Russia mostly from former Soviet
Republics with the aim of being
employed and sending money
to their families. Money transfers
by migrants in Russia are a great
source of income for their countries.
It is similar to the importance of foreign
currency that is regularly sent
by Turkish workers in Europe for
the Turkish economy. Russia is disturbed
by these millions of migrants;
but it is also aware of its advantage
for the country. It sometimes oppresses
these countries by threatening
them with prohibiting their
entrance, deporting them, obstructing
money transfers, etc. Countries
which are economically dependent
on foreign currencies sent by their
citizens working in Russia may be
forced to retreat against Moscow’s
oppressions.
According to the January-September
2013 data published by Russian
Central Bank, the amount of “le-
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FATIH OZBAY
130
A LARGE PART OF THESE MIGRANTS COMES TO RUSSIA
MOSTLY FROM FORMER SOVIET REPUBLICS WITH THE AIM
OF BEING EMPLOYED AND SENDING MONEY TO THEIR
FAMILIES.
gal” money transfer from Russia to
CIS countries is $15 billion. Among
these countries, Kyrgyzstan, Tajikistan,
Uzbekistan, Ukraine and Georgia
are the most prominent, followed
by Other Central Asian and Caucasian
countries. For example, money
transfer from Russia to Uzbekistan is
$5 billion, to Tajikistan is $3 billion in
2013. Ukraine and Kyrgyzstan follow
these countries. Actually numbers
can describe it the best. The amount
of money transferred to Tajikistan
corresponds to 46.4% of the Gross
Domestic Product of Tajikistan!
Other countries are not much different
than Tajikistan. With this perspective,
we can better understand
how Russia holds this power against
those countries and how fragile this
issue is.
Russia, which is highly aware of this
advantage and what may happen if it
uses this advantage, does not hesitate
to directly or indirectly remind
that leverage to related countries
when appropriate, and even use it
when necessary. This attitude causes
problems, disputes and even crises
between Russia and the related
country/countries. Georgia experienced
it after the August 2008 War.
Recently other countries were also
oppressed due to their relations with
the EU. This leverage is particularly
useful for convincing former Soviet
Republics to be a part of Russian
projects such as “Customs Union”
and “Eurasian Union” which are economic
in appearance but political
in reality. For these countries, Moscow
acts as if it has set a time limit
to make a decision until 2015. One
of the answers to the question why
Russia is very influential on former
Soviet Republics lies behind this reality.
The results of the recent Gallup
poll about the Soviet Union with the
citizens of 11 former Soviet Republics
is highly relevant to our subject.
One of the questions asked in this
poll was whether the dissolution of
the Soviet Union was beneficial for
your country or not. The rate of people
who said that the dissolution of
USSR was destructive for their country
is 66% in Armenia, 61% in Kyrgyzstan,
56% in Ukraine, and 52% in
Tajikistan. The rate of migrants coming
to Russia is also the highest in
these countries which are the most
dependent on money transfers from
their citizens in Russia. Again, these
rates indicate that Russia’s leverage
is highly strong.
So far we have discussed the “legal”
money transfers from Russia. On the
other side of the coin, there are “illegal”
money transfers from Russia.
Russia manages to use this issue as
a successful foreign policy instrument.
Illegal money transfers from
a country are called “Illicit Financial
Outflows”. Shortly, it is used for
the money which is exported from
a country via crime, corruption or
tax evasion and which never comes
back to that country. With Illicit Financial
Outflows, money is exported
from a country in unrecorded, illegal
ways. Global Financial Integrity
(GFI) organization in Washington
examines illicit financial flows every

Kremlin Palace,
Russia.
year. GFI’s report “Illicit Financial
Flows from Developing Countries:
2002-2011” has been recently published.
According to the report, illicit
cash flow from developing countries
between 2002 and 2011 was $5.9
trillion. In 2011 a total of $946.7 billion
was exported to other countries/
places illegally from source countries
and never came back. As stated,
the amount of illicit financial flows
in China between 2002 and 2011 is
$1.08 trillion, which is the highest
among others. The second highest
ACCORDING TO THE JANUARY-SEPTEMBER 2013 DATA
PUBLISHED BY RUSSIAN CENTRAL BANK, THE AMOUNT
OF “LEGAL” MONEY TRANSFER FROM RUSSIA TO CIS
COUNTRIES IS $15 BILLION.
amount is $881 billion in Russia. As
indicated in the report, already high
illegal dollar flow from Russia increased
incrementally from 2002 to
2011.
Russia needs to take measures
against illicit financial flows. Head of
State V. Putin signed the law for preventing
illicit financial flows in July
2013. The aim of this law is to prevent
financing of international terror with
unrecorded money and also prevent
money laundering. At this point, we
need to mention about illicit money.
Illicit money is defined as all kinds
of economic interests, assets and
revenues obtained with criminal
activities. Money laundering can be
described as concealing the source of
illicit income and make it look like it
is obtained from a legal source. Illicit
money is strictly monitored at the
national and international level as it
is the source of threats such as terror,
international organized crimes, drug
trafficking, corruption, etc. Financial
Action Task Force (FATF) should be
discussed at this point. FATF was established
with the aim of preventing
money laundering in 1989 under the
leadership of G-7 states. Today, FATF
has 36 members in total; 34 states
and 2 organizations. Russia became
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Cathedral of Saint
Vasily, Russia.
FATIH OZBAY
132
a full member of FATF in 2003. It not
only became a full member but also
gained ground in its fight against
money laundering and assumed the
term presidency of FATF between
July 2013 and July 2014. Russia
wants to show the world its determination
to turn a new page in financial
terms. Putin’s signing of the law
for preventing illicit financial flows
in July 2013 is remarkable in this
regard.
FATF monitors previously convicted
countries under two different lists as
“black list” and “grey list” in terms of
money laundering. As of 2013, there
are 17 countries in FATF’s black list.
Term president Russia was included
in the black list until 2002. There
are 22 countries in the grey list.
Moreover, the Eurasian Group (EAG)
which was established in 2004 with
Russia’s initiative is a part of FATF. As
the sub-unit of FATF, EAG’s aim can
be summarized as fighting against
money laundering and terror financing
in Eurasia. Russia is highly active
here. After becoming a FATF member,
Russia is intensely working on

emoving CIS countries from black
and grey lists. It even achieved this;
now there is not a single CIS country
in the black list as of 2013 thanks to
Russia’s efforts. Today, only Tajikistan
and Kyrgyzstan are included in
the grey list. Turkmenistan was the
last country to be removed from the
grey list in June 2013. Russia even
gives support to CIS countries in order
prevent them from being added
to those lists. As it can be observed,
Putin’s Russia has utilised different
financial tools as foreign policy
instruments.
133
CASPIAN REPORT, WINTER 2014

POLO MAGRI
134
THE SOUTHERN
CORRIDOR RELEVANCE
FOR ITALY
PAOLO MAGRI
DIRECTOR, ITALIAN INSTITUTE FOR INTERNATIONAL
POLITICAL STUDIES (ISPI)

Italy is a country with a limited endowment
of natural resources, which traditionally had
to resort to the international supply of raw
materials in order to sustain its economic
growth.
Italy is a country with a limited endowment
of natural resources, which traditionally
had to resort to the international
supply of raw materials in order
to sustain its economic growth.
Since the ‘50s – hence even before the
disjunction from ownership of energy
resources necessary to support economic
development became a structural
feature for main European economies
– the geopolitics of energy supply
has been one of the pillars of Italian
foreign projection. Indeed, energy
policy became one of the main drivers
of the Italian foreign policy at different
stages during the second half of the last
century.
Even today, Italian level of dependency
on import is about 25 percentage
points above the European average:
more than 80% of the energy
consumed in the country is imported,
while the European average is little
more than 55%. Moreover, in the case
of petroleum and natural gas, this level
exceeds 90%, with a slow but steady
upward trend.
The importance of this data is even
more striking in view of two elements:
First of all, looking at the national energy
mix, oil and natural gas represent
approximately 35% each of the total
consumption. After setting aside a
comeback to nuclear energy, Italian
energy mix is bound to change only
marginally during the course of the
decade, despite the development of
renewables.
Secondly, the final use of hydrocarbons
is becoming increasingly strategic, especially
in the case of natural gas. Indeed
natural gas-fired power plants
account for around 50% of the Italian
electricity production and they represent
an unavoidable complement to
renewable energy sources. Hence, notwithstanding
the normal fluctuations
in the market, the stability of gas supplies
is essential to ensure the production
of electricity.
However, dependency on external suppliers
of fossil fuels does not in itself
pose a threat to energy security, at least
not as long as the consumer party has
access to a sufficiently stable and diversified
supply network. Hence openness
135
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POLO MAGRI
136
THE OPENING OF SOUTHERN CORRIDOR ON THE ONE
HAND REFLECTS LONG-TERM TRENDS OF ITALIAN
ENERGY AND FOREIGN POLICY AND, ON THE OTHER,
STRENGTHENS THEM SIGNIFICANTLY, ADDING A
FOURTH GAS SUPPLY CHANNEL TO THE ONES ALREADY
FUNCTIONING – FROM NORTHERN EUROPE, NORTHERN
AFRICA AND RUSSIA.
to international trade in hydrocarbons
and the diversification of supply channels
have been and remain the key for
Italy to ensure both economic sustainability
and national energy security. It
is in this framework that the opening
of a supply channel from the Caspian
Sea through the Trans Adriatic Pipeline
(TAP) has become a priority for Italy.
The opening of Southern Corridor on
the one hand reflects long-term trends
of Italian energy and foreign policy and,
on the other, strengthens them significantly,
adding a fourth gas supply
channel to the ones already functioning
– from Northern Europe, Northern
Africa and Russia. Besides the opportunity
to diversify sources and routes,
Italy sees in the SC also an opportunity
to “increase the supply of gas and the
number of suppliers competing in the
Italian market, with benefits to consumers
and businesses in terms of
price competitiveness” (Zanonato, Italian
Minister for Development).
It is not therefore by chance that, ever
since the emerging of the debate
around the possibility of opening an
energy axis from the Caspian to the
EU markets (2003) Italian governments
spared no efforts in order to
put forward Italian candidacy to host
the infrastructure. The Government
adopted thereafter a flexible approach,
shifting the support from ITGI to TAP
(after the exclusion of the first project
from the competition) and showing a
long-lasting political commitment to
the cooperation with their Eastern political
counterparties, regardless of the
nationality of the companies involved.
Diversification of suppliers, diversification
of supply channels and increased
market competition are not the only
benefits that the TAP will ensure Italy.
Indeed, we see the Southern Corridor
as an evolving concept, designed to
benefit from the potential increase
of Azerbaijani gas output as well as
from the future contribution of other
producing countries – being them in
Central Asia, Middle East or Eastern
Mediterranean. The scalability scheduled
for infrastructure running along
the Southern Corridor – from TANAP
to TAP – responds to this vision.
Under this perspective, the Southern
Corridor is fully in line with another
Italian energy policy traditional goal
–achieved in the past in the oil sector
and which seems now to be achievable
also in the gas one: to act as a hub for
the distribution of gas in Central and
Southern Europe, activating export or
transit flows liable.
The fact that among the buyers of the
Shah Deniz gas there are two Italian
companies (Enel and Hera) alongside
French, Swiss, Spanish and German
ones shows the concreteness of this
perspective and feasibility of this goal
– as well as the European value of the
project.
Financial, geopolitical and political
difficulties of this project should not
be underestimated but there is space
for optimism given the relevance of
TAP and the SC for all the countries

involved which goes far beyond mere
economic benefits. TAP can foster intergovernmental
entente and cooperation
among involved partners from the
Caspian shore to the Italian one and
represents the backbone of bilateral
and multilateral relations which will
flourish far beyond the energy sectors.
This is a point of special relevance for
Italy, which has always been committed
in maintaining stable relations with
energy supplier and transit countries,
through the promotion of an interdependence
balancing the supply of energy
with the export of other products,
the transfer of technology and investment,
in order to secure a long term
sustainability to bilateral relations.
137
CASPIAN REPORT, WINTER 2014

CASPIAN
CALL FOR PAPERS
CALL FOR PAPERS
138
Caspian Strategy Institute calls for individual policy paper proposals for its Caspian
Report journal. Caspian Report aims to facilitate dialogue and exchange of ideas
between policy makers, scholars and researchers whose research is related to
Caspian, Central Asia, Caucasus, Turkey and broader Eurasia. The program aims to
contribute to the diversity of voices and analytical perspectives on abovementioned
geographies. For further information, visit www.hazar.org
We welcome individual paper proposals on policy-relevant issues from disciplines
such as history, political science, international relations, public policy, economics,
sociology, and conflict resolution. While papers can be from a broad range of topics,
we emphasize that the subject matter should have policy implications.
Please submit your paper and a short bio page as separate word document
attachments to paper@hazar.org by April 15, 2014.
www.hazar.org

139
CASPIAN REPORT, FALL 2014

www.hazar.org