2002 Caspian Sea Regional Policy Symposium Presentation Summary

LEVERAGING PREPONDERANCE: Agenda Control and Russia's Energy Statecraft in the Caspian Basin

Adam N. Stulberg
Assistant Professor
Sam Nunn School of International Affairs
Georgia Institute of Technology

Research Topic
Can Russia set the terms for ownership, development, and export of oil and natural gas in the energy rich Caspian Basin? Given Russia's overwhelming regional preponderance and strategic locus as a transit state, the proliferation of "insulated" regimes in the Caucasus and Central Asia, and the internal "weakness" of the Russian state, traditional theories of statecraft would lead us to expect that the answer is uniformly yes or no. Yet Moscow has succeeded at stranding Turkmenistan's gas sector, but failed miserably at stemming Azerbaijan's (and to a lesser extent Kazakhstan's) campaigns to woo foreign-financed oil projects and diversify main oil export routes that come at Russia's expense. This paper addresses the puzzle of Russia's variable energy leverage, and assesses the practical implications for unlocking Caspian energy wealth, promoting cooperation among littoral states, and furthering U.S.-Russian cooperative engagement in the larger Caspian region.

Argument and Research Design
This project seeks to explicate the mixed success of Russia's Caspian energy diplomacy by focusing on Moscow's agenda control in the oil and gas sectors. This refers to the capacity to induce acquiescence by lowering the costs of compliance, as opposed to denying or punishing defection by target states and firms. There are two key variables to Russia's agenda control: its global market power and the clarity of the government's regulatory authority in a specific energy sector. Together these factors specify the political discretion of the Russian government to recast the substantive appeal and anticipated costs of alternative energy policies for regional and domestic targets alike. From this I deduce that the greater Russia's agenda control in a specific energy sector, the greater its extra-territorial leverage across the Caspian Basin.

The hypothesis for agenda control is tested in structured, focused comparative case studies of the Russian government's successes and failures at securing the compliance of Azerbaijan, Kazakhstan, and Turkmenistan with its own policies towards the ownership, extraction, and transport of Caspian oil and gas resources. These cases were selected because of the significant variation in compliance with Russia's Caspian policies. They also constitute "easy" cases for alternative explanations for statecraft, given the asset specificity of both energy sectors, Russia's overwhelming relative power advantages, asymmetric interdependence in the region, and the conspicuous institutional weakness of the Russian and NIS governments. Data for the project is culled from primary and secondary sources, including published and unpublished government documents, interviews with Russian officials and energy executives, industry analyses, and regional and electronic media.

Preliminary Findings
Research to date confirms that Moscow's leverage over Caspian energy and pipeline politics is greatest where it can alter the opportunity costs of compliance for foreign and domestic targets, and weakest where it cannot preempt the choices available to these targets. In the gas sector, where adjustment costs in the global market are high and the Russian government possesses discrete authorities to determine national prices, tariffs, and pipeline access, Moscow is well positioned to realize preferred policies without having to overcome the resistance of Caspian targets or concentrated domestic lobbies. Conversely, in the oil sector, where alternative markets or suppliers exist and national pricing and contracting authorities are spread among competing government agencies and private actors, Moscow is less effective at wrangling concessions from challengers at home and abroad, despite possessing relative power advantages and array of domestic oversight mechanisms.

Impact on Caspian Regional Studies
Russia's statecraft is widely regarded as determining the extent to which Caspian energy competition augurs well for "peace pipelines," economic development, new forms of dependency, or windows of vulnerability in outstanding regional conflicts. Yet this study demonstrates that there are market and institutional factors that circumscribe Moscow's capacity to manipulate residual energy assets as instruments for inflaming regional instability and imposing neo-imperial solutions. Appreciation of this dynamic is potentially critical for assessing the interface between global, regional, and domestic pressures that shape strategic interaction in the Caspian Basin. This should prove particularly useful for evaluating the extent to which power and influence across the larger Caspian region have changed with shifts in political relations since September 11th.

The findings also illuminate practical guidelines for engaging Russian partners in joint energy and security ventures in the Caspian region. Because Moscow lacks market and institutional mechanisms to preempt the relatively high opportunity costs to compliance in the Russian oil sector, there are independent oil firms and local governments in Russia that can be induced to cooperate in Caspian energy ventures, such as the Baku-Ceyhan pipeline, without ceding a veto to neo-imperialist impulses in the Kremlin. Problems encountered with joint ventures, such as the Caspian Pipeline Consortium, have more to do with technical difficulties and competition within the Russian oil sector, than with Moscow's hegemonic leverage. However, because the inclusion of these Russian oil firms cannot be expected to "deliver" the Russian government's support for specific main oil pipelines, there is not much benefit from extending preferential terms for securing their participation. In contrast, because Moscow wields significant agenda control in the gas sector, there are real limits to independent Caspian gas initiatives that stray from a strategic path approved by the Russian government. Accordingly, Putin's capacities to realize the Eurasian Gas Initiative and to tap it as an instrument of leverage over gas dependent Caspian exporters and consumers are significant. The challenge for regional officials and potential investors is to craft alternative regional gas projects that are sensitive to Russia's interests in established markets, but that raise the opportunity costs to the Russian gas industry of impeding regional diversity and joint exploration of new markets in Afghanistan, Pakistan, India and the Far East.

Implications for the U.S. Policy Community
Uncertainty over Russia's influence in the Caspian Basin complicates pursuit of U.S. strategic interests in promoting global energy diversification, the independence and stability of regional states, U.S. economic interests, and the constructive engagement of Turkey and deterrence of Iranian offensives in the region. An underestimation of Russia's leverage risks alienating potential allies in Russia and provoking a rivalry that is destabilizing to the region. Yet undo deference to Russia's neo-imperialist ambitions and a preoccupation with the counter-terror campaign could compromise relations with Caspian states and inflame anti-American sentiments at a critical moment for Washington. The focus on Russia's agenda control could assist U.S. policymakers in averting these outcomes, suggesting that:

• Purposeful "containment" of Russia's energy influence in the region is unwarranted, as Moscow cannot effectively "lock in" Caspian oil and its dominance of the gas sector is not intrinsically detrimental to U.S. interests;

• Putin's Caspian pragmatism should be taken at face value, as it is grounded in Russia's national interests not pro-Western sympathies or regional altruism;

• There are significant market and institutional limits to Russian-Iranian rapprochement and to the success of a North-South axis in the oil sector;

• Russia's capacity to orchestrate a long-term Caspian counter-balance to OPEC is overstated and is significantly affected by the energy policies of other non-members, such as Mexico, Norway, and the U.S.;

• Promotion of a "Turkish gas transit hub" plays into Moscow's leverage, and diverts resources from enlisting Russia's participation in exploring mutually beneficial post-Taliban opportunities for developing and exporting Caspian gas to emerging Asian markets; and

• Continued support for "opening up" and deregulating the Russian oil sector, including the passage of effective production sharing legislation, promotes energy diversification in the Caspian region. Alternatively, new reforms that improve efficiency in Russia's gas sector risk strengthening Moscow's leverage in the Caspian Basin.