Energy salvation won’t come from the Potemkin petrostate of Azerbaijan

Russia’s war against Ukraine has roiled global energy markets, fueled inflation, and prompted the European Union to seek alternatives to Russian natural gas. Hat in undignified hand, it looks to the kleptocracy in Azerbaijan. It should look further, fast. Here’s why.

First, replacing reliance on Vladimir Putin’s Russia with reliance on Ilham Aliyev’s Azerbaijan is nothing more than another Faustian deal(moreover, the two regimes signed a far-reaching alliance just days before the invasion). Second, this undermines sanctions imposed against Russia because Russia’s Lukoil now owns some 20% of Azerbaijan’s crucial Shah Deniz pipeline after a sale earlier this year.

Regrets over two decades of enabling Putin should have given this kind of cynicism a bad enough name that Europe, a union founded on values, should not rush to repeat it.

But the main reason Europe should cool its jets is practical: it is highly unlikely that Azerbaijan can actually deliver much, despite considerable fanfare about its supposed abilities.

Indeed, that is rather evident in the deal inked in recent days in Baku in which Azerbaijan promised to double its delivery of natural gas to Europe — to 20 billion cubic meters a year. Visiting European commission president Ursula von der Leyen called it “a new chapter in our energy cooperation with Azerbaijan, a key partner in our efforts to move away from Russian fossil fuels.”

How key a partner? How significant are the additional 10 billion cubic meters? The number sounds large, but here’s the context: Europe’s annual natural gas consumption is around 400 billion cubic meters, and Russia has supplied between a third and half of that. Moreover, even this modest (but prettily packaged) goal is presented in the context of a target date 15 years a way — a time when today’s troubles will have been replaced by new ones unrelated to Ukraine.

Idealists may ask why Europe would aid and abet another a dictator for so little return. But even the more cynical may wonder why Azerbaijan, whose ruling family is embroiled in a series of international and domestic corruption scandals, would not want to do more to further its rehabilitation. Why would Aliyev not give Europe its due?

Because he cannot — as recent studies of Azerbaijan’s energy economy produced by respected global institutions demonstrate. It is something of a Potemkin petrostate.

According to a report by the Oxford Institute for Energy Studies, Azerbaijan has very limited capacity to produce more gas for Europe, and certainly cannot deliver it economically. It cites the “high cost of delivering Azeri gas to Europe (and) of expanding the Southern Gas Corridor” as well as the complications of the required exploration and development in the Caspian Sea.

Natural gas already being delivered to Italy, for example, comes at nearly twice the cost of delivering gas from Russia — and three times that of delivery from Algeria. Though Azerbaijani gas has been competitive in Turkey, it is not competitive in the European market.

The Oxford report concludes that “even the most optimistic assumptions about upstream development do not suggest that substantial quantities of additional gas will be available in the 2020s. There are no plausible scenarios under which the transport infrastructure expansion will be completed in this decade.” And the International Crisis Group notes in its country summary that “oil revenues are levelling off and are projected to gradually decline within a few years, which could lead to economic problems and growing public frustration.”

Azerbaijan’s flaunting of oil wealth is essentially a public relations stunt. What wealth there is has propped up a dictatorial regime, enabling the Aliyev family to consolidate power over the past decade by means of brutal repression.

Freedom House’s Democracy Index judges Azerbaijan to be one of the most repressive countries on earth (ranking 141 out of 167), noting that “authorities have carried out an extensive crackdown on civil liberties in recent years, leaving little room for independent expression or activism.” Bertelsmann’s Transformation Index similarly ranked Azerbaijan very near the bottom of the world class, noting in its most recent report that in the past year “the consolidation of authoritarian rule continued.”

The IMF affirms that an expected decline in oil production is projected to lead to Azerbaijan becoming a net debtor nation by 2030. Since Azerbaijan has not saved oil revenues to mitigate for the transition to a post-oil future, its state expenditure remains primarily reliant on oil revenues. Indeed, Azerbaijan ranks near the bottom of oil-producing countries in over-reliance on oil for state expenditures (see chart).

A continuous axiom within rentier states, and specifically with those that have very little economic diversification, is the relationship between economic decline and domestic instability. In this context, Azerbaijan becomes extremely vulnerable to economic shocks, and by extension, domestic shocks.

Indeed, forecasting models from the IMF suggest there is the considerable risk of domestic instability in Azerbaijan. The World Bank has consistently downgraded Azerbaijan’s political stability rating as well — giving it a -0.75 score on a scale of -2.5 to 2.5. It is a remarkable feat for a country whose dictatorship is specifically laser-focused on creating stability at all cost.

Of course, the Aliyev regime is a menace not just to its people but to the neighboring country of Armenia, which was attacked by Azerbaijan in 2020. There is every reason to believe that the Aliyevs will lash out at Armenia again should they need to divert attention from domestic dissatisfactions. Therefore the world — and Azerbaijan’s neighbors — should monitor carefully the fluctuations in level and degree of both repression and public unrest in Azerbaijan.

And meanwhile, the Aliyevs’ facade of building a strong state and economy should fool no one.

Certainly there is no reason for Europe to cozy up to such an odious actor on the world stage. There are more promising pathways to bringing in new oil — whether by pipeline or by liquefied natural gas delivered by sea — from North Africa, the Eastern Mediterranean, the Persian Gulf and other places.

Europe may be able to extract a bit more natural gas from Azerbaijan — but this is so far from a panacea that the excruciating immorality of it cannot possibly be worth selling Europe’s already tormented soul.

(This article was published in Le Figaro)