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In this section, we publish the weekly analysis of the major events taking place in the Caucasus and beyond. The Caucasus Update is written by our Senior Editor Alexander Jackson. Click here to subscribe.

The last two weeks has seen Russia’s access to European energy supplies grow stronger still. On June 24 Gazprom, the state energy giant, signed a deal with Nigeria to create a joint oil and gas venture, giving Russia influence over Europe’s African energy supplies (Financial Times, June 26). Meanwhile in Baku on June 30, President Medvedev and Gazprom boss Alexei Miller managed to take a step towards locking in Azeri gas supplies for export to Russia (BBC News, June 29). All of this occurs whilst Russia holds the biggest military exercises since the fall of the USSR just across the border from Georgia, and the week before President Obama flies to Moscow to try and cut a deal with the Kremlin over Afghanistan and Iran. So much for the theory that Russia is somehow ‘on its knees’. This analysis, which held that Russia’s faltering economy made it unwilling or unable to assert itself in foreign policy, has been proved wrong in two different ways.

Firstly, and most importantly, Russia’s geopolitical ambitions are not tied solely to the price of oil and gas. Whether the oil price is $20 a barrel or $120 a barrel, Moscow can act confidently across Eurasia and indeed the wider world. In the long run, low prices will of course deal serious damage to Russia’s economy, but it to assume that Russia’s support of Iran, or its willingness (or otherwise) to attack Georgia is predicated entirely on energy prices is short-sighted. To put the shoe on the other foot, no commentators have seriously suggested that the breakdown on Wall Street would cause the US to withdraw from Afghanistan.

There is another reason. To a small extent, Russia’s assertiveness is influenced by energy markets. But as recent weeks have shown, these prices are very elastic. Oil prices are now at around $70 a barrel, and if prices continue to rise Russia’s coffers could soon be filling up again. Clearly there are other economic factors to take into account, such as world credit markets, but the raw power of Russia’s economy – oil and gas – is likely to recover relatively quickly.

In any case, Moscow’s stranglehold on European energy supplies means that Europe is as dependent on Russia as Russia is on Europe. If Russia decided to raise its rates above market levels in order to offset a depressed price, there is very little that the EU could do beyond complain loudly. This is particularly true in light of the Nigeria and Azerbaijan deals. The first commits Gazprom to investing $2.5 billion into Nigeria’s huge oil and gas and develop infrastructure.

The agreement in Baku is probably more significant in the long-run. The Kremlin will buy up 500 million cubic metres of Azeri gas for export to southern Russia – a tiny amount, but the price of $350 per thousand cubic metres is significantly high. The second part of the deal is much bigger, although not immediate. It makes the Kremlin a priority buyer for gas from Phase Two of the Shah Deniz field – the gas which is, to date, the only confirmed source of gas for the ill-fated Nabucco pipeline. European buyers would therefore have to outbid Gazprom to get Shah Deniz Phase Two gas, which looks near-impossible given existing concerns about the project’s cost. (In another unwelcome development, on June 25 a senior official from Kazakhstan dismissed Nabucco, which suggests that another potential supplier has pulled out (RFE/RL, June 25)).

The sale of 500 million cubic metres to Dagestan looks like a placeholder deal, which will reassure Baku that Gazprom is serious about paying European market prices for Azeri gas whilst not forcing the energy giant to commit to Shah Deniz too early (Phase Two is, after all, only due to open in 2016). From Baku’s point of view the deal also forces its would-be European partners to take its commercial demands seriously. If and when a competitive bidding round develops for Phase Two, Azerbaijan can be assured of some very rich rewards.

Novruz Mammadov, the head of the foreign relations department in the Azerbaijani presidency, insisted that the agreement was purely economic (APA, June 30). But as always in the Caspian region, the deal was also a political affair. After all, the agreement was announced by the two countries’ presidents and seems to have been the primary purpose for President Medvedev’s visit (the other documents that were signed were routine memoranda).

The fact that the deal came just a week before Barack Obama’s Moscow visit was almost certainly a coincidence. Nonetheless, for Baku it may serve as a useful reminder to Washington that Azerbaijan should not be neglected, for geopolitical and energy reasons (Eurasia Daily Monitor, July 2). Since April, when President Obama seemed briefly involved in the Turkish-Armenian thaw, US attention to the Caucasus has slipped. The stalling of the rapprochement between Ankara and Yerevan is one reason; the need to engage Russia on the big questions (Afghanistan, Iran, NATO) rather than trying to solve the tangled problems of the Caucasus is another.

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