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Caucasus: Azerbaijan Refuses to Pay Penalty To Russia

Azerbaijan has refused to pay a penalty for failing to use a Russian pipeline. RFE/RL's Michael Lelyveld reports that this dispute could be a new cause for tensions between the two countries and in the Caucasus.

Boston, 6 July 2000 (RFE/RL) -- Azerbaijan has refused to pay Russian pipeline fines, sending a defiant message to Moscow in the face of a threat to its economy and energy security.

On Tuesday, Azerbaijan Prime Minister Artur Rasizade vowed that his government would not meet the demands of the Russian state pipeline company Transneft for 29 million dollars in penalties to compensate for Baku's failure to ship oil under a contract.

Rasizade told a press conference, in his words, "Whether Transneft demands 29 million (dollars) or any other amount, we are still not going to pay."

The refusal follows a statement by Transneft head Semyon Vainshtok that the company would invoke the terms of a 1996 contract, calling for Azerbaijan to send 2.3 million tons of oil through a line to Novorossiysk this year. Azerbaijan has supplied only about 340,000 tons and has now stopped all shipments to prepare for its winter fuel needs.

The friction comes less than three weeks after the secretary of the Russian Security Council, Sergei Ivanov, declared in Baku that there were "no unresolved issues between Azerbaijan and Russia" and that the country was the only CIS state that did not owe money to Moscow. That official position now appears to have been reversed.

It is not clear whether the oil dispute will bring an end to Azerbaijan President Heidar Aliev's attempts to restore good relations with Russia since the election of President Vladimir Putin. Aliyev frequently charged the government of former President Boris Yeltsin with pressuring Baku. The threatened fines could be a sign that Putin is now following the same course.

A review of events leading up to the current controversy suggests that Russian officials have known for months that Azerbaijan would have trouble in supplying oil for the pipeline, leaving it open to fines. The question is whether the Putin government deliberately planned to take advantage of Baku's situation to gain the upper hand.

Azerbaijan's problem first surfaced in January, when the country ran out of fuel for its power plants, forcing electricity rationing. Much of the country's oil was already committed for export by Western companies, using a line through Georgia, which charges cheaper transit rates.

Azerbaijan has huge exploration efforts underway for Caspian oil and gas, but its current production is relatively small, making it susceptible to shortages in the near term. That problem was apparently unclear to Azerbaijani officials when they signed the contract with Transneft. Even as recently as last year, Azerbaijan sold what it thought would be excess fuel to Ukraine for its grain harvest.

The problem of bad planning was obscured last year by the war in Chechnya, which shut down the Russian line. But Putin's government may have understood Azerbaijan's weakness when it committed to building a bypass line around Chechnya at a cost of 160 million dollars.

Azerbaijan's predicament was certainly known in March when the pipeline was nearing completion. On March 27, Transneft vice-president Sergei Grigoriev was asked about sources of oil for the new line. Grigoriev told the Reuters news agency that "Azerbaijan is keeping silent, as it does not seem to have surplus oil." Grigoriev added that the country would have trouble meeting its contract commitment.

It now seems that the period of warming relations between Aliyev and Putin may have been an effort to keep the Russian pressure from becoming public. Now Rasizade has brought it out in the open, it is unclear whether Moscow will suspend its penalties to smooth things over again. If not, the disagreement could be the start of a new chapter in tensions between the two countries and in the Caucasus as a whole.

Azerbaijan's problem stands in contrast to the strong financial report it received in the past week from Fitch IBCA, an international bond rating agency. Azerbaijan received a better credit rating than Russia, but the report did not appear to take the fines into account.

In the longer term, Russia would like to expand the Novorossiysk route into a main export pipeline from the Caspian, competing with the U.S.-backed route from Baku to Ceyhan. Russian influence over Azerbaijan and its exports could make Baku-Ceyhan more difficult.

On Monday, Georgian President Eduard Shevardnadze told reporters that construction of the Baku-Cyehan pipeline is scheduled to start in September. If that is the case, a Russian strategy to pressure Azerbaijan would be particularly well-timed.

In recent days, Azerbaijani officials have returned to the idea of buying gas from Iran to cover the fuel shortages at its power plants. Previously, officials had discussed gas purchases that would come through a Russian line to Baku. The change may reflect a realization that Russia could gain even more leverage as the source of Azerbaijan's gas in the winter. A line from Iran would still have to be rebuilt as an alternative.

Azerbaijan may now be faced with the choice of Russian debt claims or destabilizing power shortages. For now, it appears to prefer pressure from Moscow rather than complaints from its citizens.