Putting aside its humiliation, the Yeltsin government now struggles to settle this conflict "peacefully" given the upcoming presidential election and growing discontent among Western countries over Russia's human rights violations and aspirations to remain the dominant regional power in the Transcaucasus and Central Asia. Shared mostly by Western investors and analysts, qualms about regional p0litical stability and security will have a direct impact on the future of oil pipelines which transport oil from the Caspian basin countries to Western markets.

Ongoing uncertainty about regional peace and an agreeable settlement in Chechnya is something to be considered very carefully by all actors involved in the pipeline debate. The use of the existing Russian pipeline route passing through Chechnya may not be the first and only choice over other alternative routes.

As peace becomes more uncertain, the Turkish delegations have intensified their efforts to push the oil pipeline between Baku in Azerbaijan and Supsa in Georgia as a means of transporting early oil from the Caspian. The Azerbaijan International Oil Company (AIOC) has signed a protocol with the Azeri Petroleum Company, SOCAR, the Turkish Petroleum Company (TPAO), and the Georgian Petroleum Company (GIOC), to speed up the building of the Baku-Supsa pipeline.

Some analysts believed that the first oil from the Caspian will flow north, through Russia, as early as late 1996. It seems like it may not be the case, however, and that the optimal solution may be a dual pipeline. Presently, several aspects of this complex debate can be reviewed one more time in the aftermath of those recent developments in the region.

ECONOMIC ASPECTS

The most important reason for a dual-pipeline solution is a simple one: once oil starts flowing from the Caspian toward its final destination in the West, it is unthinkable to have disruptions in the supply line. The security of this major economic Investment is, and will be, the number one concern. The stakes can be measured by billions of dollars and foregone business opportunities. According to some reports, the AIOC consortium is supposed to invest around $U58 billion over a thirty-year period.

The Azeri and Chirag fields are believed to contain some 4 billion barrels of oil, with an extraction cost estimated at $USD18 billion, in addition to the value of security of the loans to be provided by international bankers and other multilateral institutions; no party to any pipeline can ignore the economic risks, therefore. The solution single pipeline or multi-pipeline system-must appropriately protect Western interests. Therefore, the best strategy is for investors to put their eggs in more than one basket.

On January 18, Azerbaijani President Aliyev and Russian Prime Minister Chernomyrdin signed an agreement on the transportation of the "early oil" from the Caspian, which is to be extracted from the Guneshli, Chirag and Azeri fields. Each party involved in this negotiation decided that all of the "early oil" will be exported to Western markets using the existing Baku-Novorossiysk line, which has an annual capacity flow of about 5 million ton.

Since Azerbaijan has been a traditional processing center for Soviet crude oil, the pipelines are already in place. However, pipelines entering Baku carry crude oil, while those leaving Baku carry only products. Now, Russians have to construct a pipeline between Baku and Novorossyisk with an annual capacity of9 million ton. That requires an Investment of $U557 million. An additional Investment of $US 108 million into this project will increase the export capacity to 24 million ton per year, excluding 7 million ton per year for domestic transportation capacity. Thus, Russians are shooting for more than enough capacity to handle the "early oil" and other Azeri, Kazak and Turkmen reserves under the Caspian. Russians argue that their route is the most economical alternative. However, the political risks involved in the Russian alternative are questionable to investors.

Initially, the Turkish government lobbied hard for a direct pipeline connecting Baku to the Mediterranean port of Ceyhan. In 1993, Mr. Elchibey, the first popularly elected president of Azerbaijan, signed an agreement with a Western consortium envisioning the Caspian oil to be transported to Ceyhan via either Georgia or Iran. Obviously, this agreement was not acceptable to Russia, and prompted Moscow to oust Elchibey from office and replace him with a seasoned Soviet era politician, Mr. Aliyev. With the shaky political climate in Georgia and continuing conflict in Armenia, Turkey's pipeline diplomacy turned to "pipedreams in Eurasia" throughout 1994 and early 1995.

As the Chechen conflict first erupted in December 1994, it became clear to the Turkish government that it was time to renew hopes for getting involved in the pipeline game. After so many turns and twists, TPAO's share has been raised in the consortium, and AIOC arrived into a dual-pipeline solution in October 1995. However, as mentioned above, the Russian-Azeri agreement represented a major blow for Turkish plans, at least until the two Chechen-related crises in Daghestan and the Black Sea erupted.

The Turkish government, now encouraged by these developments, is heavily pushing for the construction of the second pipeline between Baku and the Georgian port of Supsa via Tbilisi in an attempt to revert to previous events. Turkey is as aware as Russia of the fact that "the first project that emerges as the solid front-runner will pull capital away from the other and it will pick up momentum."1 The second place contestant in this race will obtain less funds for its venture. 

The Baku-Supsa line proposed by the Turkish delegation-which met with World Bank officials for possible funding in Washington, DC last February-will have a capacity of6 million ton per year. This line's investment cost is $US 239 million. The Turks want to finance part of the deal, and promise to find the rest of the blinds. They have one major condition, however: this deal will only be the first step towards building the ultimate Tbilisi-Ceyhan pipeline.

The critical element in the Turkish proposal deals with feasibility. If the early oil has to flow through two pipelines, then the financial figures may be less than satisfactory. The economic level of oil to be transported through the Tbilisi-Ceyhan pipeline is estimated to be no less than 35 million ton per year. However, according to optimistic forecasts, by early 1997 the oil to be exported from the Azeri fields is going to be 400 thousand ton, which will reach the 5-million ton level by the year 2000. These are the short-term prospects for Turkey. The expected revenues from the oil transportation may be roughly calculated as follows: the fees are $US 16 per ton of oil transported. By the year 2000, the total revenues may be near $U580 million per year. The Baku-Supsa pipeline may not break-even before 2002-assuming the revenues will be split evenly between two pipelines.

Evidently, Turkey adheres to the principle that one should "build it up, and oil will flow." That is possible if the anticipated 4045 million ton per year in the Azeri oil output is reached by the year 2010. The oil analysts expect an additional 1,520 million ton per year to be extracted from Shakh Sea in the Caspian. Finally, Kazak and Turkmen projects can be added to the total volume of production in the South Caspian. The Tbilisi-Ceyhan pipeline may be quite a viable project when these forecast levels are reached.

To sum up the economic aspects, it would be fair to say that in the short run, the Russian alternative, Baku-Novorossiysk line does not seem to bring any significant advantage to the Turkish proposal of transporting via the Baku-Supsa line. Both can be considered equal candidates-assuming that none of them will be the sole carrier. In the long run, supporting the Tbilisi-Ceyhan pipeline as an alternative needs to be carefully considered against building a second pipeline parallel to the current Baku-Novorossiysk line. Other factors may increase or reduce the attraction of both future projects to a great extent. However, in terms of an economic game, the first mover will have a tremendous advantage. The project which will start first may overshadow the other one fairly easily.

POLITICAL ASPECTS

An extremely complicated and problematic historical and political inheritance has made the Caucasus one of the most unreliable regions even during the age of the great empires. Transcaucasia and the North Caucasus, with their more than fifty indigenous peoples and languages and controversial boundaries, have been resisting these hegemonic expansions within one of the most puzzling and anarchic "games" in history. Thus the policies of "Russification," "Ottomanism," "Persian expansion," and as an outsider, "Kaiserreicher Nationalism" have only been temporarily successful and have left the region prone to instability due to endless rivalries.

Today, the region again is in the news due to its unstable transition period following the Soviet collapse and, most importantly, its abundant, unexploited natural reserves.

With its first penetration into the area in the 7th and 8th centuries, Islam merged with the wild character of the ethnic figures of the mountains and created one of the most resistant guerrilla cultures and legacies under the banner of Sheikh Shamil. This tradition created the "North Caucasian Barrier" in Russia. Apparently, Russian imperialism is bent on repeating its mistakes by ignoring this historical reality and employing century-old ways of terminating this barrier in Chechnya, forgetting that military solutions have always failed to win over all the lands comprising the Caucasus.

Due to its isolation from the West, Iran appears neglected in regard to Caspian Sea pipeline politics, leaving Turkey as the second major player besides Russia in this "New Great Game." Far from being as competent as the Ottomans, Turkey is too weak to carry on a major power responsibility in the region because of its serious economic and political problems. However, its geopolitical location and cultural and historical ties with the Turco-Muslim societies of the Caucasus, represent the historical rivalry legacy of the Ottomans in the area. Its control over the Turkish Straits brings a definite advantage, but historical and current problems with Armenia create another "barrier," this time making it nearly impossible for Turkey to reach a single-power dominance.

It should be noted that the transportation of Caspian oil is an issue which neither Turkey nor Russia can afford to monopolize. Such attempts have been proven to fail historically, and will undoubtedly leave the region as unstable as it has always been throughout the ongoing rivalries. Compromise must replace competition in the pipeline interests, otherwise a more provoked Caucasus will bring poverty and bloodshed to everyone in the region, with no clear winner-including the real masters of these oil and gas-rich areas of the world. The dual-pipeline solution remains, therefore, the only strategy for a prosperous "compromise" between Russia and Turkey.

In particular, there are two crucial issues which need a lot of attention. One is regional security and stability. The United States and the European Union realize that Russian domination and possible expansionist dreams must be contained. The ties of Russia with an increasingly more pragmatic Iranian regime, due to its own economic and social distress, may not be so welcome by the West and even contradictory to its crucial interests. Thus, they could be better off to see a rapprochement and cooperation between Turkey and Russia in the future rather than an alliance between Russia and Iran.

The second issue at stake is the internal stability of all the countries involved in this Transcaucasian/Eurasian game. As discussed above, Russia and Turkey may pay more attention to their own domestic conflicts and have extra incentives to solve them, namely Chechen and Kurdish rebellions, since the latter groups may endanger their possible pipeline dreams. For Azerbaijan, in addition to enormous economic benefits, the oil deal also represents a major political gain. Economic considerations prompted the West, and particularly the United States, to insert itself into the Transcaucasian picture and play an important part- not only in negotiating the petroleum accord, but also in making efforts to block Russia from assuming the dominant role in attempts to resolve the dominant Nagorno-Karabakh conflict.

Yet, the political survival of Georgia, Armenia, Kazakstan and Turkmenistan, as "independent" states depends on their ability to "cut their umbilical cord" with Russia. The vast ex-Sovietic economic nexus still remains a monkey on their back. In terms of ending their economic, and therefore political, dependence on Russia, an alternative route by-passing this latter is quite crucial.

When the Baku-Batumi railroad connected the Black Sea to Caspian shores for purely military reasons in the early 19th century, it was surprising how significantly it transformed the economic prosperity and priorities of the Transcaucasus. Baku oil was becoming available on the world market. Mostly European countries were demanding the oil at that time. Today, however, the European Union, with its rising energy needs, remains the major prospective consumer for the region's natural resource supply. This phenomenon might push 

European forces to accept Russia and its hegemony over the region in order to guarantee the flow of oil. Russian hegemonic power however, would certainly pose a threat to American traditional interests in the "extended Middle East" along with Turkey, Iran and Southwest Asia. Presumably this explains America's strong support of Turkey' 5 interests in pipeline politics, and President Clinton's last-minute call to Baku to advocate a dual-pipeline formula. The United States has also been a loyal supporter of Turkey's membership in the European Union, which may bring more endorsement within the Union for a "compromise" over Caspian oil between Russia and Turkey, in the form of a dual pipeline project.

CONCLUSION

The economic analysis of the pipeline debate emphasizes the current benefits of playing a non-cooperative game between Russia and Turkey. The initial mover on the deal will clearly tilt the compass toward the initial runner in collecting the grand prize. Once one of the two proposed pipelines will be in place, the former may give the latter a second-class status. That is why both Russia and Turkey seem to work extremely hard these days to obtain the approval of AIOC and the Western investors to initiate their project.

The pure economic arguments of the debate however, do explain and solve this complex issue up to a certain point. The deciding factor is the political stability in the Transcaucasus. Without any stability, the oil would not flow anywhere, and every player in the game will lose. The contest will be dominated by politics. 

Given that the Chechen crisis is poorly managed by President Yeltsin and his government, Turkey has reasons and hope to revive the second pipeline. However, Russia's next steps in this game cannot be fully predicted. The current government in Russia seems to realize that a cooperative game with Turkey may be more beneficial and would not object much to a second pipeline built and operated by Turks and going through Georgia. The peace proposal of Russia in Chechnya and recent talks between Turkey and Armenia regarding Nagorno-Karabakh and border issues need to be carefully monitored. While trying to establish peaceful resolutions to these issues, both Russian and Turkish governments have intensified their efforts to clean their houses from the "plague of terrorism" (Chechen or Kurdish) to stand out as the front-runner.

Two developments need to be carefully watched and analyzed in the near future. One is the Russian presidential elections in June. A less-cooperative course of action may be chosen, should the Communists and the extreme right manage to elect someone else besides President Yeltsin. The other development issue is the possible change in Turkey's Foreign policy and domestic agendas-specially towards the credit issue-and its pipeline diplomacy, which may be revised by the new government headed by Prime Minister Yilmaz.

References:

M. Ogutcu, "Eurasian Energy Prospects and Politics," Futures, Vol.27: No.1, pp. 37-63, 57.