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LEVICK Business Intelligence

July 13, 2016

Geopolitics in the Caspian Sea

Extracting resources and doing business in the Caspian Sea is as risky and complicated an endeavor as it is potentially lucrative.

The Caspian Sea is the world’s largest inland body of water and one of the oldest and most important oil- and natural gas-producing regions on earth. However, a range of geopolitical and security risks – including the potential for outright conflict and troublesome relationships with countries spilling outside the region – have prevented bordering states as well as international companies from taking full advantage of the sea’s vast riches.

Today, the sea is dominated by Russia, and to a lesser extent by Iran. Russia not only maintains the largest and most sophisticated naval presence on the Caspian, but also leverages its dominant influence over several regional organizations to bind its Caspian neighbors to Moscow politically and economically. Iran, meanwhile, has employed its navy to interfere with the energy exploration operations of its neighbors, like Azerbaijan, to bolster its position amid regional adversaries. While Iran and Russia may have varying priorities in the Caspian Sea, they have bonded over a shared distaste for additional pipelines to Europe and a desire to block the spread of Western influence in the region.

Russia’s interference with energy exports to Europe has consequently fueled a close partnership between Kazakhstan and Turkmenistan, which together constitute the entirety of the Caspian’s eastern shore. Kazakhstan, boasting the largest economy in Central Asia, has continuously called for the creation of a free trade zone among Caspian countries, but the region’s climate of mistrust and stifling red tape makes this endeavor unlikely in the near term.

Turkmenistan has geared up to compete on the global energy stage – notwithstanding the country’s heavy dependence on Russia for gas exports, and in December 2015, Turkmenistan completed a pipeline connecting its largest gas field with the Caspian coast. Souring relations with Russia, instigated when Russia stopped purchasing Turkmen gas, led Turkmenistan to eschew Russia’s initial involvement and build the pipeline on its own. Russia has viewed Turkmenistan’s endeavors as an attempt to circumvent Moscow’s monopoly on selling gas to Europe, and has scrambled to block any further efforts for energy independence.

The port in Azerbaijan’s capital Baku, meanwhile, serves as a vital transportation hub for goods shipped between Europe and Central Asia. For Europe, Azerbaijan provides a significant oil and gas alternative to Russia. Nonetheless, Western companies would do well to approach opportunities in Azerbaijan with caution. Azerbaijan stands at risk of being caught in the crossfire if tensions between Russia and Turkey escalate, and Iran’s support for Armenia – Azerbaijan’s traditional enemy – could also make Azerbaijan a target. Azerbaijan’s high levels of corruption, and the ease by which international terrorist groups hide in and transit through its territory, further intensify the risks associated with doing business in Baku.

If delicately handled (from the Western perspective), Azerbaijan – and the entire Caspian region – could be a tremendous asset for international oil companies seeking to provide Europe with reliable, alternative sources of future energy. However, companies seeking opportunity in the Caspian Sea should diligently assess the risks associated with unfolding political and security developments. Shifting political and military alliances, as well as innumerable security and economic risks, could have grave commercial implications for Caspian Sea business operations.

For further information about LEVICK Business Intelligence’s political and regulatory risk capabilities – including obtaining a complete copy of this report or others – please visit us online at http://levick.com/practices/business-intelligence or contact us directly at LEVICKIntelligence@LEVICK.com. A complete list of our Political Risk Updates can be found under the Political & Regulatory Risk tab. 

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