Azerbaijan keeps trade option open amid sanctions busting accusations

Azerbaijan has positioned itself as a significant energy trade partner for the EU following Russia’s invasion of Ukraine, amid accusations that Baku would be involved in ‘laundering’ sanctioned Russian gas and oil.

Thanks to Baku’s cooperation with Moscow on these issues, Azerbaijan has not seen Russian disinformation operations of the kind Moscow is conducting in other former Soviet countries in the neighbourhood. And so far, this has not raised eyebrows in Brussels.

European Commission President Ursula von der Leyen signed a Memorandum of Understanding with Azerbaijani President Ilham Aliyev on her visit to Baku in July 2022 in the field of energy and described the country as a trustworthy partner.

The memorandum envisages doubling imports of Azerbaijani natural gas to at least 20 billion cubic metres per year by 2027 via the Southern Gas Corridor (SGC), a 3,000-kilometre chain of pipelines delivering gas to the bloc.

Nonetheless, Azerbaijan’s efforts to ramp up production and meet EU demand may face challenges without depending on Russian imports.

In November 2022, Azerbaijan disclosed a deal with Russia’s state gas producer and exporter Gazprom to supply a total of 1 billion cubic metres of Russian gas to Azerbaijan until March 2023.

The deal reportedly allows Azerbaijan to fulfil its domestic energy needs while simultaneously meeting its export obligations to Europe using its own gas resources.

Baku is not bound by EU-imposed sanctions on Russian gas and retains the freedom to import.

However, Azerbaijan’s immediate recourse to purchasing gas from Moscow may prove unsustainable in the medium to long term.

The EU’s need for alternative energy sources has so far prevented official objections to Baku’s “gas laundromat,” which seemingly contradicts Brussels’s efforts to reduce reliance on Russia. However, the bloc is likely to push for measures to ensure that its alternative gas supply infrastructure is not reliant on subsidiary deals with the Kremlin.

Moreover, critical infrastructure essential for the extraction and transport of gas from the Caspian Sea to Europe is jointly owned by Lukoil, a private Russian oil and gas behemoth closely associated with the Putin government.

Lukoil holds the second-largest stake in Azerbaijan’s primary Shah Deniz gas field, owning 20% of the shares, which is poised to be the primary source of exports in the coming decades.

Additionally, Lukoil is a shareholder in the South Caucasus Pipeline, the easternmost segment of the Southern Gas Corridor (SGC), and holds a 15.992% share in the Azerbaijan Gas Supply Company, which handles the shipment and sale of Azerbaijani fossil gas earmarked for Europe via the SGC.

Furthermore, Azerbaijan’s state-run oil company, SOCAR, has been reportedly using its own newly acquired tankers to transport Russian oil to its Star refinery in Turkey. This move allows for cost savings on freight for Moscow-sourced oil transport, according to traders and London Stock Exchange Group data.

In October 2023, SOCAR signed a comprehensive agreement with Russia’s Lukoil to process large quantities of Russian crude oil at its Star refinery in Turkey at up to 200,000 barrels per day and lend SOCAR $1.5 billion.

Star had suspended Russian oil purchases in mid-2023 due to pressure from Western banks but resumed imports around the time of the loan deal with Lukoil.

Three Azeri-flagged Aframax-type tankers — Karabakh, Shusha, and Zangezur — have been transporting Russian oil from the Baltic port of Primorsk to Turkey’s Nemrut Bay terminal since November. SOCAR stated that it had acquired the tankers last year through a joint venture with Azeri state shipping firm ASCO.

Amid the Kremlin’s quest for new markets in the face of increasing Western sanctions, Baku and Moscow are enhancing their bilateral economic relations.

Russian Prime Minister Mikhail Mishustin earlier this month held discussions with President Ilham Aliyev, with an emphasis on increasing bilateral trade volume.

Additionally, Rovshan Najaf, president of Azerbaijan’s SOCAR, recently met with Alexey Miller, head of Gazprom, to discuss expanding cooperation between the two energy giants. These developments signal a potential change in regional energy dynamics.

In response to a question from members of the European Parliament (MEPs) advocating for sanctions against Azerbaijan, including on gas imports, Elman Nasirov, a member of the ruling party who sits on the Azerbaijani Parliament’s International Relations and Interparliamentary Relations Committee, told the local news agency Turan:

“They will not be able to achieve anything with sanctions against Azerbaijan. Consider this, sanctions were imposed on Russia, yet its economy is experiencing growth today.”

“Many European capitals have been covered by demonstrations because the opposite side of the sanctions has shown itself and the European economy has entered a very tense phase,” he added.

This article is part of the FREIHEIT media project on Europe’s Neighbourhood, funded by the European Media and Information Fund (EMIF).

[Edited by Alexandra Brzozowski/Zoran Radosavljevic]

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