The new year has already established two new trends in Caspian Sea geo-economics and BTC pipeline politics as well as confirmed an old one. Two important new trends are an improvement in Turkmenistan’s finances and the refusal of BTC pipeline politics to erase it from the drawing board. The old trend, which is accentuated, is Iran’s economic isolation.

1. BTC Pipeline Politics and Turkmenistan’s Finances

Conflicts between Turkmenistan and Russia led to closure of the Soviet-era pipeline between the two countries over a year and a half ago. Ashgabat has suffered great economic loss and payments problems since then. The reports of Turkmenistan’s choice of a trans-Caspian pipeline for export of natural gas to Turkey, in preference to the overland Iranian route, are not smoke signals. They are confirmed by BP-Dutch Shell’s announcement of an indefinite postponement in plans to construct a gas export pipeline from Turkmenistan to Turkey via Iran. Now that President Niyazov has decided that the U.S. government can offer most to increase its gas exports, Russia has agreed new terms for the use of old pipeline through Russia.

Although the decision for the trans-Caspian pipeline is a significant success for U.S. economic diplomacy in the region, it does not represent the imposition of American will upon recalcitrant partners. Natural gas for Turkey is the most dynamic energy market in the region and will remain so for some time to come. Turkey is already building one new pipeline for natural gas from Iran. No doubt Ankara preferred to avoid Iranian control over the totality of Turkish imports.

2. BTC Pipeline Politics: Baku-Ceyhan is Dead, Long Live Baku-Ceyhan!

An Iranian proposal to construct the BTC pipeline through northwestern Iran, communicated in early November at international conference in Tehran, was recently formally rejected by Azerbaijan. Yet BTC pipeline politics refuses to allow the project die, despite the eulogies almost universally presented in its name last autumn. In November, Turkey revised downward its proposed transit fees and changed other terms for the pipeline’s operation to make the route more viable on a commercial basis.

Rather than take a negative decision, the AIOC has in recent months repeatedly elected to postpone its decision. As reported in this Monitor two weeks ago, it now appears that it will not approve its plan for the next stage of operations, scheduled for presentation late last year, until late 1999. In current circumstances, this is a no-cost option.

We should not rule out, in the end, the possibility that the Baku-Supsa line will be extended southward through Ajaria into Turkey and from there, by one route or another, to Ceyhan. The port of Batumi in Georgia could then be called into service. Even the later prospect of connecting the Novorossiisk terminal by another spur to Supsa, providing economic incentive for the settlement of the conflict in Abkhazia, is not beyond the realm of belief.

3. BTC Pipeline Politics and the Sources of Iran’s Isolation

It is certainly true that relations between Iran and Azerbaijan have been difficult ever since Azerbaijan, under heavy American pressure, excluded Iran several years ago from participation in the exploration of its Caspian deposits. Yet Azerbaijan has on its own initiative recently signed contracts for the exploration, in the south Caspian, of energy fields whose ownership Iran contests.

Azerbaijan also looks for the good relations with Israel that Turkey already enjoys. All other things being equal, there should be a natural economic alliance between business circles in Iran and those in Israel. However, the influence of theocratic circles in Tehran has led to Israel’s being named as an enemy of Iran. Indeed, Israel is the one country that Iran formally prohibited from foreign direct investment.

The government of President Mohammad Khatami declares that it is seeking to institute the “rule of law”: but this will take time. Iran lacks the legal infrastructure that the transition from centralized planning by the countries in Central and Eastern Europe has shown to be necessary. These include accounting law, land-ownership law, bankruptcy law, insurance law and inheritance law, to name but a few.

The increasing isolation of Iranian economic policy is not just Washington’s doing. Reformists in Tehran may be right to suggest that only limiting the arbitrary power of unelected figures in the country will enhance the international confidence necessary to promote foreign direct investment.

[First published in FSU Oil & Gas Monitor, No. 14 (9 January 1999): 4–5.]