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Caucasus: Oil, Gas Quarrels Hurt Region's Ties

Boston, 26 January 1999 (RFE/RL) -- Cross-border disputes over energy and trade are highlighting the problems of doing business in the Caspian region and among the newly independent republics.

In several recent cases, agreements are being re-visited and trade is being frustrated. Squabbling over energy and prices is at the root of it all.

The most serious quarrel seems to be the disagreement between Russia and Ukraine over alleged diversions of gas. The problem may threaten a deal that has taken nearly two years to negotiate.

In early January, a complicated three-way arrangement cleared the way for both Turkmenistan and Russia to supply gas to Ukraine. The agreement would allow Turkmen gas to travel through Russian- controlled pipelines for the first time since March 1997.

Under the deal, Turkmenistan will receive only $36 per 1,000 cubic meters for the gas it sells to Ukraine, while Ukraine must pay Russia for the transit by handing over half of the gas.

After tough bargaining, Ukraine also agreed to buy some gas from Russia at $80 per 1,000 cubic meters while getting an additional quantity for delivering Russia's gas to Europe. The net result is that Ukraine will pay Russia far more to receive Turkmen gas than Russia pays for shipping its own gas across Ukraine.

Trouble erupted within days of the agreement when Russia announced a new tariff on its oil and gas exports. Ukraine protested, fearing higher costs. Days later, Russia's Gazprom accused Ukraine of diverting gas in December, a charge that Kiev denied. But because of the perennial problem of gas thefts, negotiated deals may mean little. Whenever prices get too high, they can be effectively adjusted by pilferage.

Similar pricing problems are affecting the shipment of Central Asian oil across the Caspian through Azerbaijan and Georgia to the Black Sea. The Turkish company Caspian TransCo said last month that it may stop shipping oil from Kazakhstan and Turkmenistan to the port of Batumi because transport costs are too high.

Azerbaijan and Georgia are charging $28 per ton in rail and other transit fees for the oil, making it unprofitable when oil prices have fallen so low. But Azerbaijan has refused to lower its $16 share of the charges, insisting that the revenue is needed to cover its costs. But in the highly competitive market created by falling oil demand, Azerbaijan may be tempted to use its geographical position to price Central Asia's oil out of Western markets.

The problem for Kazakhstan will be solved permanently when a pipeline is completed to Russia's port of Novorossiisk. But in the meantime, low oil prices and profits may set the Caspian countries against one another for the sake of very small rewards.

Border trade is also suffering as a result of a third dispute between Azerbaijan and Iran. Tehran recently claimed that Azerbaijan had suddenly slapped tariffs of 45 percent on Iranian goods, nearly halting border trade. Azerbaijani officials denied the charge, but the friction seems to have brought a bad end to fence-mending efforts after a conflict last month involving competing Caspian oil claims.

The latest series of problems in relations appears to have started in early December when Iran announced a Caspian exploration deal with Dutch and British firms. Azerbaijan protested, saying that the agreement infringed on its territorial waters. A fierce attack ensued in the Iranian press. Azerbaijan was said to be collaborating with the United States and Zionists. In a report disseminated by the official news agency IRNA, the Iran News derided the "little Stalins in Baku" and implied that Washington would abandon President Heydar Aliyev when he had served his purpose.

The two countries moved quickly to limit the diplomatic damage. In late December, Azeri National Assembly Speaker Murtuz Aleskerov toured Iran for an entire week, meeting with President Mohammed Khatami. A series of agreements were later ratified by Aliyev in Baku.

But Khatami could not keep from criticizing the Azeris for their links to the Israelis. For his part, Aleskerov could not restrain himself from complaining about the trade imbalance between the two countries, saying that Azeri exports to Iran account for only $50 million of the $240 million in bilateral trade.

It is likely that the tariffs are an attempt to even out the account. Iran has also complained that Azerbaijan has unilaterally closed some border trading centers, suggesting another possible protectionist tactic. The relations between the two countries are cyclical, with aggravations leading to recriminations, followed by efforts to restore historic ties.

While there may not be any permanent damage from any of these three episodes, the tensions demonstrate the difficulty of trade relations in the region. The effects of oil interests and plunging prices have only made matters worse.

If trade is difficult for these countries, it can only be tougher for Western investors who have none of the historic links that bind these nations to one another. Until the region can manage its disputes, it will continue to drive away investors instead of attracting them.

(Michael Lelyveld is national correspondent for the Journal of Commerce. He wrote this analysis for RFE/RL.)