The Caspian Sea is an important, if often overlooked, region in regard to many of the challenges the U.S. faces around the world, such as a resurgent Russia, an emboldened Iran, wavering allies, growing China, and the rise of Islamic extremism. The Caspian Sea is at the heart of the Eurasian continent, and anything that is at the heart of something is, by definition, important. The region is a crucial geographical and cultural crossroads linking Europe and Asia and has proven strategically important for military and economic reasons for centuries.

The U.S. needs to develop a strategy for engagement in the region that promotes economic freedom, secures transit and production zones for energy resources, and is aware of the consequences of increased Russian, Iranian, and Chinese influence in the region working against Western interests.

The U.S. should have a frank, open, and constructive dialogue with its allies in the region when and where there are human rights issues—with the goal of long-term democratization. However, human rights should be just one part of a multifaceted relationship that considers broader U.S. strategic interests and stability in the region. If the U.S. pursues the correct policies, it can help to ensure that the countries in the region are stable, sovereign, and self-governing.

The Caspian Sea: An Overview

The Caspian Sea is the world’s largest inland body of water. There is a dispute about whether the Caspian is legally a sea or a lake. If it is considered a lake, the Caspian alone would account for 44 percent of the world’s lacustrine water. There are five Caspian littoral states: Russia, Azerbaijan, Iran, Turkmenistan, and Kazakhstan.

The Caspian Sea is connected to the outside world by the Volga River and two canals that pass through Russia: the Volga–Don Canal, which links the Caspian Sea with the Sea of Azov, and the Volga–Baltic Waterway, which links the Caspian Sea with the Baltic Sea.[1] There is also a proposal to create the so-called Eurasian Canal, which would transform the Kuma–Manych Canal (currently only an irrigation canal) into a shipping canal that would link the Caspian Sea and Black Sea.[2] If completed, this would be the shortest route from the Caspian Sea to the outside world.

The Caspian is located between Europe and Asia: two of the most energy-consuming markets in the world today. Billions of dollars are being invested to connect the region to the rest of the world. Like spokes on a wheel, new and modernized roads and rail lines are being constructed connecting the Caspian to Europe, East Asia, and India.

The resources located in and near the Caspian make the region of particular importance for locals and outsiders alike. The region has an estimated 48 billion barrels of oil and 292 trillion cubic feet of natural gas in proved and probable reserves.[3] In addition to oil and gas, the region is also home to more than 100 species of fish. Most important is the European sturgeon, which is listed as “critically endangered” by the International Union for Conservation of Nature.[4] Approximately 90 percent of the black and red caviar sold globally comes from the Caspian. However, decades of overfishing and large-scale pollution threaten the region’s fishing sector.[5]

The regional powers have contested control of the Caspian for centuries. The region is trapped between two former imperial powers: Iran and Russia. Turkey, a regional power, also exerts significant influence for historical and cultural reasons even though it is not a Caspian littoral country.[6]

The Caspian is in a rough neighborhood. Certain regions of Azerbaijan and the North Caucasus in southern Russia are used as recruiting and transit zones for terrorist groups, such as the so-called Islamic State (ISIS). After the Joint Comprehensive Plan of Action, commonly referred to as the Vienna Agreement, Iran will have more resources and confidence to act in the Caspian region than it has had in decades. Armenia continues to occupy almost 20 percent of Azerbaijan. Due to the lack of U.S. engagement, Baku has been cozying up to Moscow. Beijing has been courting Kazakhstan and Turkmenistan more than ever before.

 

Russia and Iran are the region’s biggest players. Yet in many ways Turkmenistan, Kazakhstan, and Azerbaijan are emerging regional actors in their own rights. As Russia and Iran become increasingly distracted by events outside the region (Ukraine and the Middle East), the roles of these three Caspian countries in the region and beyond will likely become more pronounced.

Today, more outside actors are in the region than ever before. The U.S. showed a lot of interest in the region immediately after the fall of the Berlin Wall and then again after the tragic events of 9/11, but has recently placed the region on the back burner. China is always looking for new economic and energy opportunities, and this remains its main motivation in the region today. Europe is also involved, but has little influence in the region. This is extremely shortsighted—and indeed a paradox—considering the economic and energy potential the region could offer Europe.

The Caspian region is religiously diverse and home to thriving Orthodox Christian, Muslim, Jewish, and Buddhist populations. The Ateshgah of Baku, Azerbaijan (commonly referred to as the Fire Temple of Baku) served as a Zoroastrian temple and was a pilgrimage destination for Hindus and Sikhs from as far away as India. Today, small pockets of Hindus and Zoroastrians still live in the region.

With the exception of Iran and the Republic of Dagestan—a federal subject of Russia, which accounts for two-thirds of Russia’s Caspian shoreline—radical Islam has not established roots in the Caspian region the same way as it has in the Middle East and North Africa, mainly due to do the secular nature of Azerbaijan, Turkmenistan, and Kazakhstan.

U.S. Interests in the Region

In terms of the region’s long history, the U.S. is a relative newcomer to the Caspian. Today, the U.S. interests in the Caspian region derive primarily from its security commitment to Europe’s NATO members, the war against transnational terrorism, and the desire to check Russian and Iranian influence in the region.

While none of the Caspian countries are in NATO and therefore receive no security guarantees, Azerbaijan, Kazakhstan, and Turkmenistan are members of NATO’s Partnership for Peace program.[7] To varying degrees all have helped NATO operations in Afghanistan: Turkmenistan probably the least, Azerbaijan the most.

A more important consideration for the U.S. is the potential of Caspian oil and gas to offset much of Europe’s dependency on Russia for its energy needs. This, in turn, directly affects Europe’s security and, potentially, U.S. treaty obligations under NATO.

The U.S. has four primary goals in the Caspian region:

1. Assisting the Caspian in becoming a stable and secure transit and production zone for energy resources;
2. Checking Russian and Iranian meddling in the region so the countries in the region are stable, sovereign, and self-governing;
3. Keeping radical Islam out; and
4. Resolving the frozen conflicts in the region because Moscow exerts most of its influence through these conflicts.

Yet even with these interests, U.S. engagement in the region remains minimal.

With Azerbaijan, Turkmenistan, and Kazakhstan, one of the biggest challenges facing Washington is the perceived transactional nature of relations between the U.S. and regional countries.

By the late 1990s, the U.S. lost much of its enthusiasm for engaging with the Caspian region that followed the fall of the Soviet Union. Immediately after the 9/11 attacks, the U.S. sought to reengage with the region to secure transit and basing rights in the Caucasus and Central Asia for operations in Afghanistan. Some countries in the region even sent troops to fight in Iraq and Afghanistan, opened transit routes, and offered basing support to the U.S. and NATO. While the countries in the region were looking for a long-term relationship, once the Afghan drawdown began and the U.S. pulled back from the region, it became clear that the U.S. was not interested in building enduring relations.

In November 2015 Secretary of State John Kerry visited all five countries in Central Asia, including the Caspian states of Kazakhstan and Turkmenistan. However, nothing from his visit seemed to mark a change in U.S. policy toward the Caspian region. For many leaders in Central Asia and the Caspian region who have been disappointed by Washington’s disengagement in recent years, Kerry’s visit—almost one year after the end of NATO-led combat operations in Afghanistan—is probably too little, too late to fundamentally change the perception of the U.S. in the region.

The transactional nature of America’s relationship with regional countries was shortsighted for two reasons: First, it created the perception with countries in the region that as soon as the U.S. got what it wanted it would move on. Second, it has diminished any good will that the U.S. created in the region, and regaining trust in the region will prove even more difficult. Considering how important the region is to a broader Eurasia strategy dealing with Russia and Iran, this will have negative consequences for U.S. policy. Unless another unforeseen, game-changing event occurs—like 9/11—nothing suggests that the U.S. will reengage with the region at the level it should.

Outside Actors in the Caspian

The Caspian will continue to be a strategic chessboard for regional and global powers well into the future.

The region is important for Europe. If the Europeans are to achieve any significant energy diversification away from Russia, it would likely be through the Caspian. Therefore, the Caspian region threatens Russia’s role as a major energy supplier and, by extension, Moscow’s political influence over Europe.

The desire to secure alternative sources of energy is at the heart of European engagement in the Caspian. Yet, paradoxically, the European Union has little influence in the region and does not seem intent on changing this. During its recent EU presidency (during the first half of 2015), Latvia identified Central Asia as one of the main focuses. But with only six months, an EU presidency is not enough time to make a long-lasting impact. Luxembourg, which assumed the presidency after Latvia in July 2015, has not shown the same degree of interest in Central Asia.

The EU’s dealings with Russia and Iran focus on issues of global importance, such as Russia’s invasion of Ukraine and Iran’s nuclear program. Rarely does the EU show a willingness or desire to focus on Caspian-specific issues. In its relations with Azerbaijan, Kazakhstan, and Turkmenistan, the EU seems more interested in pushing its normative values in the region than in securing alternative sources of energy. Yet while the EU as an institution is not engaged in the region, some individual member states are. Europe’s bilateral relations with countries in the region are focused on pragmatic engagement based around energy and economic issues. In light of the Vienna Agreement with Iran, there will be a lot more European economic activity in the region.

Turkey’s main influence in the Caspian region derives primarily through its cultural, linguistic, and economic links with the three ethnically Turkic countries of Azerbaijan, Kazakhstan, and Turkmenistan. In particular, Ankara has very close relations with Baku. With its short nine-mile border Turkey provides a lifeline to Azerbaijan’s Nakhchivan Autonomous Republic, an exclave that is geographically surrounded by Armenia and Iran. Turkish companies have invested billions of dollars in the region.

China has invested heavily in a number of infrastructure projects in Central Asia. Most of China’s activity has taken place on the eastern shore of the Caspian. For the foreseeable future China’s activity in the Caspian will be a continuation of Beijing’s policy of pursing its economic interests wherever in the world they might be. Moscow is already keeping a close eye on Beijing’s motives in the region and views Beijing as a potential competitor for influence in the region in the same way Russia sees Iran.

Beyond a doubt Russia and Iran are the two biggest actors in the region.

Russia and the Caspian

Russia first became active in the Caspian region in the 18th century. During the subsequent years of Russian domination over the region, Moscow occasionally shared influence in the Caspian with the Persian Empire. After a series of military defeats to Russia, Persia all but relinquished its last vestiges of influence in the Caspian. By the late 19th century the Caspian Sea was essentially a Russian lake.

Since the breakup of the Soviet Union and the independence of the other three Caspian littoral states (Kazakhstan, Azerbaijan, and Turkmenistan) in 1991, Russia still sees itself as a leader in the region.

Today, Russia maximizes influence in the region through economic, diplomatic, and military means. Russia maintains the largest naval fleet on the Caspian Sea. Russian businesses and foreign investment are found in every Caspian country. Russian-backed organizations, such as the Collective Security Treaty Organization (CSTO)[8] and Eurasia Economic Union (EEU),[9] attempt to bind regional capitals to Moscow through a series of agreements and treaties, with mixed success.

The goals of Moscow in the Caspian today and for the foreseeable future are to:

1. Marginalize Western influence in the region. This is especially true of the U.S., EU, and NATO. Russia has generally succeeded in this. U.S. influence in the region is at an all-time low, and the EU has not completed a Trans-Caspian Gas Pipeline, one of its main priorities in the region. As an institution NATO has very limited relations with countries in the region.
2. Integrate the countries in the region into Russian-backed organizations. Russia has had limited success with the former Soviet Union states in the region, but not as much with Iran. Kazakhstan is a member of the CSTO. Azerbaijan left the organization in 1999, and Turkmenistan and Iran never joined. Only Kazakhstan is in the EEU. Only Azerbaijan and Kazakhstan are in the Commonwealth of Independent States (CIS).[10] Russian-inspired ideas, such as the creation of a joint Caspian naval force, have been met with skepticism by other Caspian countries.
3. Discourage outside investment in Turkmenistan, Azerbaijan, and Kazakhstan that could facilitate the flow of oil and gas to Western markets by bypassing Russia. This goal is probably the most important for Russia. The Kremlin mentality is that, if Europe is not buying oil and gas from Russia, it should not buy them from anywhere else in the region. Moscow pursues policies in the Caspian region that limit and, if possible, block oil and gas transiting through the region to Europe.
4. Increase economic activity with the other Caspian states. Russia’s trade with Azerbaijan, Iran, Kazakhstan, and Turkmenistan came to $33 billion in 2013.[11] Moscow’s desire to increase trade in the region is the main driver for several Russian-inspired transportation infrastructure projects in the Caspian—especially in light of Western sanctions over Ukraine.
5. Maintain regional hegemony over Iran. When economic sanctions against Iran are lifted or reduced, Iran will likely become more assertive in the region, no longer needing to rely on Moscow’s support on the international stage. This could become a future source of friction with Russia. But for now, as historical rivals in the Caucasus and Central Asia, Russia wants to check Iranian influence in the region, but this takes a back seat to Russia’s desire to keep Western influence out.

Russia also faces many internal challenges in the region. The Russian shore of the Caspian is ethnically and religiously diverse. The city of Astrakhan in the Astrakhan Oblast (region) has played an important role in the region’s history and is still at the center of Russian economic activity in the Caspian. While oil production across Russia’s Caspian region has declined in recent years, production has actually increased in the Astrakhan Oblast.[12]

To the west of the Astrakhan Oblast is the semi-autonomous Republic of Kalmykia. Kalmykia is home to the largest Buddhist Temple in Eurasia and is the only region in Europe where Buddhism is practiced by a plurality of its citizens.[13] It is also one of the poorest regions in Russia.[14] There are two main oil fields off Kalmykia’s coast, but the region produces the least amount oil and gas of Russia’s Caspian region.

To the southwest of the Republic of Kalmykia is the semi-autonomous Republic of Dagestan. It is estimated that one-third of the Caspian’s oil, and just under half of its natural gas is within 100 miles of the shore.[15] Dagestan accounts for two-thirds of Russia’s Caspian shoreline. Therefore, for oil and gas, Dagestan is Russia’s most important region in the Caspian. Dagestan has 20 oil and gas fields and an important oil refinery in Makhachkala, the republic’s capital and an important port on the Caspian that serves as a key transit point for oil produced in the Russian section of the Caspian Sea.[16]

Russia’s Caspian region is also fraught with political, religious, and ethnic tensions and instability. Located in the North Caucasus as well as the Caspian region, Dagestan’s population is predominately Sunni Muslim, and Makhachkala is the home of one of Russia’s largest mosques. The North Caucasus is the region’s powder keg and has a long history of defiance toward Moscow. There are legitimate concerns about the region’s long-term stability. Islamist terrorists from the self-proclaimed Caucasus Emirate have already attacked energy infrastructure, trains, planes, theaters, and hospitals across Russia and have sent foreign fighters to the Islamic State.

In an attempt to reduce the hostilities, the Russian government has implemented many economic and development programs and provided billions of dollars in aid to the North Caucasus in the past few years. However, this policy has met with mixed success.[17]

Another threat to stability in Dagestan is neighboring Chechnya. Historically, instability and conflict in Chechnya destabilizes or spills into Dagestan, just as it did in 1818 with the building of a Russian fort in Grozny (now the capital of Chechnya), the insurgency led by Imam Shamil in the middle of the 19th century during the Caucasian War, and more recently during the two Chechen Wars in the 1990s and early 2000s. A deteriorating security situation in Chechnya could impact Dagestan and would seriously jeopardize Russia’s oil and gas production in the Caspian region.

Iran and the Caspian

Iran is one of the established Eurasian powers and therefore sees itself as entitled to a special status in the Caspian region. While Iran competes with Russia for influence in the Caspian, Tehran also shares many of the same goals as Moscow, such as keeping foreign influence—especially the U.S.—out of the region.

The southern part of the Caspian Sea, which includes the Iranian section, is very deep and accounts for two-thirds of the sea’s total volume of water.[18] Oil and gas exploration and extraction in this section is extremely challenging. Until technological advances are made, this will remain the case.

Iran holds almost 10 percent of the world’s crude oil reserves and 17 percent of the world’s proved natural gas reserves, giving it the second-largest natural gas reserves in the world, behind Russia. About 70 percent of Iran’s crude oil reserves are located onshore, with the remainder mostly located offshore in the Persian Gulf.[19] Like Iran’s oil reserves, Iran’s natural gas reserves are also located away from the Caspian region. What few energy resources Iran has in the Caspian are difficult to extract, and production has been at a virtual standstill with international sanctions in place.

With the majority of Iran’s energy production far removed from the Caspian, Tehran’s interest in the region derives more from history and culture than from oil and gas. Luckily for the region, Iranian exports of its radical brand of Shia Islam have been less effective in the Caspian region than in the Middle East.

Although Iran occasionally meddles in the internal affairs of Azerbaijan, Tehran has come to realize that it cannot influence the Caspian region with religion as it does other parts of the world. Modern Iran does not appeal to the Muslims living to its north in the same way the Persian Empire once did. Most Muslim Turkmen in Central Asia are secular and are put off by Tehran’s fundamentalism. Regime oppression in Iran stifles the cultural appeal that Persian literature, music, and cinema once held in the region. Until the Iranian regime’s attitudes change or the regime changes, this will continue to be the case. Azerbaijan is perhaps the best example of this.

Azerbaijan is one of the predominately Shia areas that Iran has not been able to place under its influence. Azerbaijanis reject Tehran’s brand of extreme Islam and embrace religious freedom and secularism. Azerbaijan’s close relations with Israel are perhaps the manifestation of Baku’s rejection of Tehran’s influence.

Iran has coordinated and backed a number of high-profile terrorist events inside Azerbaijan, further souring relations between the two countries. In March 2012, Azerbaijan arrested 22 people hired by Iran to attack the U.S. and Israeli embassies in Baku. A few months prior, Azerbaijani security services prevented an Iranian-backed attack on a Jewish school in Baku.[20]

Even with the underlying religious friction, Iran and Azerbaijan maintain cordial, if at times tense, relations. Iran disputes many of Azerbaijan’s Caspian claims and has even used its navy to interfere with energy exploration operations. Azerbaijan sees Iran as a potential competitor for Europe’s energy market, especially with the lifting of international sanctions.

Iran’s closeness with Azerbaijan’s archenemy Armenia also makes Baku nervous. During the war in the Nagorno-Karabakh region in the early 1990s, Iran sided with Armenia as a way to marginalize Azerbaijan’s role in the region. Iran is expected to fund a major railway project and invest almost $100 million in an electricity deal in Armenia. As Yerevan and Tehran cooperate more closely, Baku will remain nervous.

Baku and Tehran cooperate when it is pragmatic and mutually beneficial for both. For example, Iran and Azerbaijan have revived an older oil swap agreement.[21] With this agreement Azerbaijan transports some of its oil to the Iranian Caspian port of Neka, where it then goes to refineries outside Tehran for domestic consumption. Iran then exports the same amount of crude from its southern oil fields near the Persian Gulf on behalf of Azerbaijan. Tehran has had similar agreements with other Caspian countries. With international sanctions to be lifted, such arrangements are likely to become more common.

Even though Iran’s activities in the Middle East take priority, Tehran is not idle in the Caspian region. Now that Iran has agreed to a deal on its nuclear weapons program, Tehran will likely become even more active in the Caspian Sea. The Vienna Agreement will directly affect Tehran’s policy toward the region in three ways:

1. More financial resources. Iran will regain access to between $100 billion and $150 billion in unfrozen assets once the Vienna Agreement takes effect. This does not include billions of dollars more that Iran will receive when sanctions are lifted. Consequently, Iran will have the resources to increase its influence in the Caspian region, especially in the naval sector and the construction of major infrastructure projects.
2. Less dependency on Russia. Now that Tehran is not completely beholden to Moscow for support, as it was during the nuclear talks, Iran will have flexibility to compete more aggressively with Russia for influence in the region. In particular, Iran might try to play a mediating role over the Nagorno-Karabakh conflict in a way that undermines Russia’s interests in the region.
3. More confidence on international stage. In the eyes of the Iranians, the Vienna Agreement was a diplomatic triumph. President Hassan Rouhani’s and Foreign Minister Mohammad Javad Zarif enjoy high domestic popularity. There is a feeling among those in the government that the experience of the Vienna Agreement can be replicated to advance Iran’s interests in other regions of the world in what Rouhani describes as a “third way” for Iranian foreign policy.[22] Of course, the Caspian is included.

As Europe looks for alternatives to Russian energy resources, it should be cautious about the role Iran might play if the Vienna Agreement comes into force. Iran has identified nearly 50 new oil and natural gas projects worth $185 billion once international sanctions are lifted. At least some of these projects will send Iranian oil and natural gas into Europe via the network of pipelines in the South Caucasus and Turkey.

Iranian Minister of Information and Communications Technology Mahmoud Vaezi has publicly said that he hopes that Iran will soon export energy to Europe.[23] Even though the Vienna Agreement offers the potential of exporting Iranian natural gas to Europe, this will be easier said than done thanks to the fraught relations between Tehran and its neighbors. For example, under the terms of use for the Trans-Anatolian Natural Gas Pipeline (TANAP), both Ankara and Baku must agree before a third-party (e.g., Iran) can transport natural gas through the pipeline.[24] Since Azerbaijan—and Turkmenistan, if the Trans-Caspian Gas Pipeline is ever realized—views Iran as an unhealthy competitor for Europe’s energy markets, Baku is unlikely to agree to allow Iranian gas into the Trans-Anatolian Natural Gas Pipeline.

The Eastern Shore: Kazakhstan and Turkmenistan

On the eastern shore of the Caspian Sea are Kazakhstan and Turkmenistan. Kazakhstan and Turkmenistan have enjoyed one of the warmest bilateral relations of the Central Asian states and share many of the same challenges in the region,[25] including falling energy revenues, difficulty exporting energy resources to global markets, and meddling by Russia and China.

Kazakhstan. In 2015, Kazakhstan celebrated the 550th anniversary of the founding of the Kazakh Khanate, which is considered the foundation on which modern-day Kazakhstan is built.[26] Although dominated by Russia for almost 200 years, since regaining its independence in 1991, Kazakhstan has developed its own regional policy that tries to be distinct from Russia’s policy. Even so, Astana retains close ties with Moscow through membership in the Russian-backed EEU and the CSTO. Kazakhstan joined the World Trade Organization in 2015.

Nearly 25 percent of Kazakhstan’s population of 17 million are Russian. Most of the Russian population lives along Kazakhstan’s 4,250-mile border with Russia. After Russia annexed Crimea in early 2014, some in Kazakhstan became nervous that parts of their country might be next. Provocative comments by senior officials in Moscow have heightened this fear. In 2014, Vladimir Putin even suggested, “The Kazakhs had no statehood.”[27]

As the largest economy in Central Asia, Kazakhstan attracts most of the region’s trade and investment. Although the Kazakh economy is not in recession, growth in recent years has been slower than expected. The economies of Kazakhstan and Russia are closely linked, so Western economic sanctions on Russia have had a negative trickle-down effect in Kazakhstan. The drop in the price of crude oil has also had a negative impact.

Kazakh President Nursultan Nazarbayev has called for the creation of a free trade zone among the countries of the Caspian Sea, but the climate of mistrust that plagues the region makes this unlikely to happen anytime soon.[28] Of the five Caspian countries, Kazakhstan ranks number one in economic freedom according to the 2015 Index of Economic Freedom, published by The Heritage Foundation and The Wall Street Journal.[29]

 

Kazakhstan has been an oil producer since 1911 and is the largest oil producer in the post-Soviet space after the Russian Federation.[30] Over the years, Kazakhstan has enjoyed modest economic prosperity and stability based mostly on exploitation of its abundant mineral wealth, primarily hydrocarbons, but also ferrous and nonferrous metals, including uranium. (Kazakhstan is the world’s largest producer of uranium.)

Kazakhstan’s Kashagan oil field in the Caspian Sea—one of the world’s largest-ever oil discoveries—is still not back in operation after production halted only 18 days after starting in September 2013. The start of production in September 2013 was itself a delay of eight years from the originally planned production date. Production is not expected to restart until 2017.[31]

Turkmenistan. To the south of Kazakhstan is Turkmenistan, perhaps one of the world’s most closed societies after North Korea. In 2012, President Gurbanguly Berdymukhammedov was reelected to a second five-year term with 97 percent of the vote in elections that international observers regarded as flawed.[32] The presidency tightly controls all three branches of government, the economy, social services, and the mass media.

In foreign relations Turkmenistan leans toward isolationism and self-described “permanent neutrality.”[33] While Ashgabat has cordial relations with its Caspian neighbors, it has refrained from joining the EEU or the CSTO. Even so, Turkmenistan has been a member of NATO’s Partnership for Peace program since the mid-1990s. While the Turkmen government will not admit it publicly, it has provided limited logistical support for U.S.-led combat operations in Afghanistan.[34]

Berdymukhammedov has encouraged some foreign investment in the energy sector, especially from Russia, China, and Iran. Like Kazakhstan, Turkmenistan has felt the negative effects of Russia’s poor economic performance. Turkmenistan holds some of the world’s largest natural gas reserves, but has only a few options for exporting these resources to the rest of the world. Currently, Turkmenistan’s gas exports depend heavily on China and Russia.

Turkmenistan is already feeling the impact of this dependency. Russia has reduced its imports of Turkmen gas in 2015, and Ashgabat is concerned that Chinese demand could decrease as Beijing pursues other energy options. The situation is unlikely to improve. As international sanctions on Iran are lifted, Turkmenistan will have another competitor on the global energy market.

Finding an economically viable way to export gas to Europe would go a long way in helping Turkmenistan diversify its energy export market. Fortunately, there are signs that Ashgabat is serious about building the Trans-Caspian Gas Pipeline. Turkmenistan and Turkey have signed a framework agreement to supply gas to the proposed TANAP. Turkmenistan is also building pipeline infrastructure to the Caspian shoreline.[35] It is only logical that both of these recent measures are designed eventually to build a pipeline through the Caspian to Azerbaijan.

Azerbaijan: An Important Piece of the Puzzle

Baku, the capital of Azerbaijan, is arguably the most important city on the Caspian Sea. It is home to the Caspian’s largest port and serves as the transportation hub for goods shipped between Europe and Central Asia. When Peter the Great captured Baku in 1723 during a war with Persia, he described the captured city as “the key to all our business” in the region.[36] Ever since the first oil well was drilled just outside Baku in 1846, the city has been vital to the region’s oil and gas industry. For Europe, Azerbaijan provides a significant oil and gas alternative to Russia.

The Armenian Occupation. Everything the regime in Azerbaijan does must be seen through the lens of Armenia’s occupation of Nagorno-Karabakh. The occupied region accounts for almost 20 percent of Azerbaijan’s territory and is one of the main drivers of foreign and domestic policy in Baku.

The conflict between Armenia and Azerbaijan started in 1988 when Armenia made territorial claims on Azerbaijan’s Karabakh Autonomous Oblast. By 1992, Armenian forces and Armenian-backed militias occupied almost 20 percent of Azerbaijan, including the Nagorno-Karabakh region and all or part of Lachin, Kelbajar, Agdam, Fizuli, Jebrayil, Qubatli, and Zangelan provinces.

During 1992–1993, the U.N. Security Council adopted four resolutions on the Nagorno-Karabakh war.[37] Each resolution confirmed the territorial integrity of Azerbaijan to include Nagorno-Karabakh and the seven surrounding districts and called on the withdrawal of all occupying Armenian forces from Azerbaijani territory.

A cease-fire agreement was signed in 1994, and the conflict has been described as “frozen” since then. Since August 2014, violence has noticeably increased along the Line of Contact between Armenian and Azerbaijani forces. Although the Nagorno-Karabakh region is inland and hundreds of miles from the Caspian, the conflict can still affect the region. The Baku–Tbilisi–Ceyhan pipeline and the South Caucasus Pipeline run within several miles of the front lines, and any major outbreak of warfare would immediately threaten them.

The most likely scenario for the Nagorno-Karabakh conflict is maintaining the status quo. The Minsk Group,[38] which was tasked with bringing a lasting peace to the war, is now defunct thanks to the breakdown in Western relations with Russia over Ukraine. Russia gains too much influence in Yerevan and Baku, especially with lucrative defense contracts with both sides, to want to see the conflict resolved anytime soon.

Azerbaijan has been arming heavily, and its defense budget now equals half of Armenia’s gross domestic product (GDP). Azerbaijan might use military force to liberate the Nagorno-Karabakh region and the seven surrounding districts. However, such a dramatic move by Azerbaijan would not happen unless one of four things happened first:

• The price of oil and gas decreases so much that disrupting Azerbaijani energy exports from a war would not be a concern;
• Azerbaijan’s energy resources eventually run out, making stability of the energy sector no longer a concern;
• Daily exchanges of fire by both Armenia and Azerbaijan could unintentionally lead to a full-scale war; or
• Armenian forces launch a major military offensive.

U.S.–Azerbaijani Relations. Azerbaijan is an important U.S. partner for a number of reasons. Azerbaijan is a strong supporter of Israel. It was a staunch ally during the Iraq and Afghanistan campaigns, and Baku has contributed greatly to U.S. counterterrorism efforts since 9/11. Azerbaijan is part of NATO’s Partnership for Peace program and participates in Alliance training exercises and officer exchanges. Although Azerbaijan is not actively seeking to join NATO, it participates in NATO-led missions and has close relations with other NATO members and partners, including Turkey and Georgia.

Azerbaijan emerged on the world stage as a major energy power during the 1990s. In 1994, it signed the “Contract of the Century” agreement with BP and 10 other international oil companies to open up the country’s vast resources in the Caspian Sea. Since 1994, Azerbaijan’s GDP has increased 16 times. Even the non-oil sector of the economy has increased tenfold.[39]

Although Azerbaijan is a Muslim-majority country, it is a very secular society. Azerbaijan has a very close relationship with Israel and Turkey and views Iran with distrust and suspicion. Azerbaijan has a thriving Jewish population estimated to be 20,000 strong[40] and is home to the largest all-Jewish settlement outside Israel.

U.S.–Azerbaijani relations were probably at their closest after the 9/11 attacks. However, three recent events have dampened relations and forced Baku to hedge its bets with closer ties with Russia:

1. The perceived lackluster U.S. response to Russia’s 2008 invasion of Georgia. After the invasion, policymakers in Baku started to question American power and influence in the region.
2. The U.S. drawdown in Afghanistan and the subsequent disengagement in the region. There is a feeling that the U.S. got what it wanted for the war in Afghanistan, and now the U.S. no longer needs Azerbaijan as a partner.
3. The Western response to Russia’s invasion and annexation of Crimea and eastern Ukraine. These events made the U.S. and the West look weak in a part of the world where strength and power are respected.

The sum of these events equals an Azerbaijan that is more cautious and mindful of its place in the region. Globally, Azerbaijan is trying to keep a balance in its relations with the West and Russia. Regionally, Azerbaijan has sought to keep a balance between Russia and Iran while striving to preserve its autonomy or independence as much as possible.

The U.S.–Azerbaijani relationship is perhaps the most acute example of declining American influence in the region.[41] It is also an example of a lopsided policy pursued by Washington heavily focused on lofty human rights goals, often at the expense of strategic American interests in the region.

Rightly or wrongly, there is a feeling in Baku that Azerbaijan is singled out for sustained criticism by the West—mainly by Europe, but also by the U.S.—in contrast to the almost complete silence which greets the human rights activities of China and Saudi Arabia. However, in recent years there have been legitimate concerns about freedom of the press and the slow speed of democratizing in Azerbaijan due to a number of high-profile arrests of prominent journalists. In December 2014, Azerbaijani authorities closed Radio Free Europe/Radio Liberty’s bureau in Baku as part of a larger crackdown on international organizations operating in the country.[42] In addition, international organizations have come under government scrutiny. In June 2015, the Azerbaijani government forced the Organization for Security and Co-operation in Europe to close its Baku bureau.[43] These are worrying developments for U.S.–Azerbaijani relations.

The state of human rights in Azerbaijan should not be the sole driver of U.S. engagement with Baku. The U.S. engages with numerous countries around the world that are strategically important for security, economic, or energy reasons, but have less than stellar human rights records. U.S. engagement with Azerbaijan needs to take a multifaceted approach that involves energy, security, human rights, and geopolitical concerns. While some of Baku’s recent actions against certain elements of the media and other international organizations are concerning, these incidents should not trump other aspects of U.S.–Azerbaijani relations.

Dr. Svante E. Cornell, director of the Central Asia–Caucasus Institute and Silk Road Studies Program at Johns Hopkins University, summarized U.S.–Azerbaijani relations best during a recent House Foreign Affairs Committee hearing:

It is important to recall that America’s relationship with Azerbaijan, like all former Soviet states, was built on several components. A constructive dialogue on human rights and democracy was one of these. Another was American engagement in supporting the development of the east–west energy corridor, which enabled Azerbaijan to market its resources independently. A third was close cooperation on security issues, which included America’s efforts to help resolve the Armenian–Azerbaijani conflict, as well as bilateral cooperation on defense, security, intelligence sharing and counter-terrorism.

These three areas, then, formed a tripod upon which U.S. policy was based. But in the past decade, that tripod has for all practical purposes faltered. American engagement in energy issues was strong down to the completion of initial pipeline infrastructure ten years ago; it has declined since then. The position of a U.S. Special Envoy for Eurasian Energy has been abolished; and America’s role in the efforts to bring Caspian natural gas to Europe is minimal. Security interests gained salience after 9/11, but began a slow decline after 2003 as U.S. attention shifted to Iraq and European governments were unwilling to pick up the slack. Not least, U.S. leadership in resolving the Armenian–Azerbaijani conflict has been missing.

As a result, for most practical purposes, the promotion of democracy and human rights has been the only leg of U.S. policy proceeding at full speed, leading to an imbalance in the tripod that forms the underpinning of American strategy.[44]

One major sticking point in the U.S. and Azerbaijan relationship came in 1992 when Congress passed Section 907 of the Freedom Support Act as a result of the influential Armenian lobby. In sum, Section 907 prevents the U.S. from providing military aid to Azerbaijan and identifies Azerbaijan as the aggressor in its war with Armenia. This latter point is curious considering that Armenia is occupying almost 20 percent of the territory recognized by the international community as being part of Azerbaijan and that 622,892 Azerbaijanis are currently classified as internally displaced people as a result of the war in the early 1990s.[45]

After the attacks of 9/11, the Bush Administration recognized the important role that Azerbaijan would play in the campaign in Afghanistan (and later Iraq) and annually waived Section 907. The Obama Administration continued waiving Section 907. Azerbaijan is the only former Soviet Republic that has restrictions placed on it like Section 907. Even the most casual observer can see that the origins of Section 907 were politically motivated by certain lobby groups and not connected to larger U.S. strategy or goals in the region.

Azerbaijan will continue to be a regional economic leader in the South Caucasus and an important economic actor in the Caspian region. If correct policies are pursued, Azerbaijan will serve as an important alternative source of energy for Europe well into the future.

Azerbaijan will continue to look to the West. But it also realizes that while the U.S. might come and go in the region, Russia and Iran are there to stay. This is why the U.S. and Europe need to stay engaged with Azerbaijan and encourage Azerbaijan to maintain good relations with its neighbors, but also to stay focused on deeper cooperation with the West.

Oil and Gas and Caspian Ownership

An estimated 48 billion barrels of oil and 292 trillion cubic feet of natural gas in proved and probable reserves are in the Caspian region.[46] In terms of total global proved and probable reserves, this is a relatively small amount. However, each barrel of oil and cubic foot of gas that Europe can buy from Azerbaijan, Kazakhstan, or Turkmenistan is one less that it must depend on from Russia.

The Caspian countries’ ability to increase their energy exports depends on five factors:

1. The possible increase in domestic energy consumption. Obviously, if domestic demand outpaces production, the Caspian region can export less oil and gas.
2. The price of oil. The drop in the cost of crude is affecting the global industry. In the past 12 months, the oil and gas sector has lost an estimated 70,000 jobs and cancelled $200 billion in spending on new projects.[47] The Caspian region, where production costs are already high for geographical and political reasons, is not immune to this.
3. The rate at which additional export infrastructure can be built and made operational. The Caspian’s geographical location makes transporting oil and gas out of the region into the global market a challenge. Building key pipeline, rail, and other transit projects will require substantial investment. This is probably the main factor preventing Europe from fulfilling more of its energy needs from the region.
4. The degree to which regional cooperation deepens. The history of the region, coupled with religious and cultural differences, fosters distrust between many of the Caspian countries and with outside countries wanting to do business in the region.
5. The region’s stability and security. Stability is required to encourage foreign investment in the region. Foreign investment is needed to build the infrastructure required to export oil and gas. The same applies for oil and gas exploration and extraction.

Overarching the region’s economic, security, and energy challenges is the issue of Caspian ownership. During the reign of the Soviet Union, ownership of the Caspian was divided between Russia and Persia (later Iran). After the collapse of the Soviet Union, Azerbaijan, Kazakhstan, and Turkmenistan emerged as sovereign and independent states without an agreement on how to divide or share the Caspian Sea among the five littoral countries.

The debate about how to delineate the Caspian Sea has continued for more than 25 years. The unsettled question is whether the Caspian is a lake or a sea and which of two sets of public international law apply to the Caspian: the law of the sea if it is a sea or customary international law governing border lakes if it is a lake.

If the law of the sea is applied with the coastline and equidistance measurements used to determine each country’s economic exclusive zone, Kazakhstan would be the big winner receiving an estimated 29.9 percent of the Caspian. Azerbaijan would control 20.7 percent; Turkmenistan, 19.2 percent; Russia, 15.6 percent; and Iran, only 14.6 percent.[48]

If the Caspian is considered to be a lake, then each country would control 15 nautical miles from its shore for mineral exploration and then another 10 nautical miles for fishing. Everything else would be shared jointly between all the littoral countries. Furthermore, any major decision affecting the Caspian, such as the construction of a pipeline, would first need to be approved by all littoral countries.

In particular, ownership of the seabed is a highly contentious issue. Currently, most of the proved oil and gas is located close to the coastline and is easily extracted. This makes the ownership of the Caspian Sea less of an issue right now than it will be in the future. However, as new technology becomes affordable and available, new fields will be exploited further away from the shore. This is why an agreement delineating the waters is so important.

Negotiations on the issue of Caspian Sea ownership are held at the deputy-foreign-minister level within the framework of the Special Working Group on the convention on the legal status of the Caspian Sea. This Special Working Group most recently met in Moscow in September 2015 with little agreement other than to continue meeting.[49] The next big opportunity for the Caspian countries to come to some sort of agreement will be during the fifth Caspian summit slated for sometime in 2016 in Kazakhstan.[50]

Even though each year brings new rhetoric about how an agreement will soon be reached, nothing has changed in the geopolitical situation to suggest that the upcoming meeting in Kazakhstan will end the deadlock between the Caspian states.

 

 

Even with the “lake or sea” dispute, the Caspian countries have made modest progress on agreeing on certain sections of the seabed. For example, in 2014 at the fourth Caspian Summit in Astrakhan, the leaders of the Caspian states agreed that each country will have sovereignty out to 15 nautical miles from the shore for mineral exploration and production and fishing rights for an additional 10 nautical miles beyond the 15-mile zone.[51]

Each Caspian country takes a different position on the status of the Caspian for reasons of national interest.

Azerbaijan and Kazakhstan want to delineate the seabed based on the law of the sea. This is not surprising because the two countries would be the biggest winners under this scenario. In 2002, Azerbaijan and Kazakhstan signed agreements with Russia recognizing national sectors based on lines drawn in the middle of the sea halfway between each state.

Turkmenistan has not been as active as its neighbors in resolving the issue of Caspian ownership. In May 2015, Turkmenistan and Kazakhstan reportedly agreed on Caspian maritime borders.[52] The maritime border between Turkmenistan and Azerbaijan is disputed, primarily over the ownership of the Kapaz or Serdar oil field[53] in the Caspian.[54] The Turkmen–Iranian maritime border also remains in dispute.

During the 1990s, Russia was unable to form a single position largely due to an internal dispute. The Russian Ministry of Foreign Affairs (MFA) considers the Caspian to be a lake, believing this is the best way to preserve Russia’s dominant geopolitical role in the region. On the other side, the Ministry of Fuel and Power and the oil and gas companies, such as Yukos and Gazprom, are driven more by financial considerations than anything else. To this end, the Ministry of Fuel and Power and the oil and gas lobby generally support dividing the Caspian along the lines of the law of the sea because this would allow Russian companies to compete for more lucrative contracts.

Moscow’s incoherent position has evolved into one that is best described as “common waters, divided bottom.”[55] With this policy, Russia wants to maintain surface navigational rights (and therefore naval supremacy) in the Caspian while taking a more pragmatic approach to oil and gas exploration and ownership. Generally speaking, Azerbaijan and Kazakhstan have at least implicitly agreed to Russia’s “common waters, divided bottom” approach.

Even though Russia has delineated its maritime borders with both neighboring countries, it is still in Moscow’s interests that the southern section of the Caspian remains disputed among Azerbaijan, Iran, and Turkmenistan. An ongoing dispute will help Russia to maintain its control over the transit of gas from Central Asia to Europe.

As the Caspian country with the shortest coastline, Iran’s position is straightforward. It considers the Caspian to be a lake. To back up its claim, Tehran argues that the 1921 Treaty of Friendship and 1940 Soviet–Iranian Trade and Navigation Agreement have primacy in terms of the Caspian’s legal status until the five littoral states reach a new agreement. Iran’s reliance on these former treaties is curious because neither treaty makes any reference to seabed ownership or its use.

The outcome of the “lake or sea” debate will greatly affect future pipelines transporting oil and gas from Central Asia to Europe. The construction of a Trans-Caspian Gas Pipeline is something that Turkmenistan and Europe need, and something that Russia and Iran seek to avoid. This could have serious implications for energy policy and geopolitics.

The lack of clear delineation of the waters has led to multiple disputes over oil and gas ownership and the risk of military confrontation. Until there is agreement on Caspian Sea ownership, the possibility for armed conflict in the region remains real.

Over the past decade there have been several large-scale military training exercises in the region, some unilateral, others multilateral. Russia has even used warships operating in the Caspian to conduct cruise missile strikes against targets in Syria almost 900 miles away. It is worth pointing out that the use of Caspian-based naval assets to strike targets in Syria had less to do with achieving military effect than it did about Caspian geo-politics. These missile strikes sent a strong signal to the other Caspian countries that Russia is the dominant military power in the region. However, while Russia maintains the largest naval presence in the Caspian, the other littoral countries have also been investing in new ships, anti-ship missiles, and submarines.

Iran is expected to invest more in its Caspian naval capability, especially after Tehran receives a windfall of billions of dollars as a result of the Vienna Agreement. In a recent interview, Rear Admiral Habibollah Sayyari, commander of the Iranian Navy, said that the Caspian has a special status in the development of Iran’s naval capabilities.[56]

A Transport Hub of Eurasia

In 1906, the region’s first oil pipeline was completed, connecting Baku on the Caspian Sea with Batumi on the Black Sea. More than 100 years later, this pipeline, measuring a mere eight inches in diameter, has been replaced with a modern network of natural gas and oil pipelines connecting the heart of Asia with Europe. With proper investment and the correct policies, oil, gas, and other goods will be flowing in all directions from the Caspian region.

The Trans-Afghanistan Pipeline project, commonly referred to as the Turkmenistan–Afghanistan–Pakistan–India Pipeline (TAPI) could fundamentally change the natural gas connectivity of Central Asia.[57] This proposed 1,100-mile pipeline could carry natural gas from Turkmenistan to India and help to block Russian and Chinese hegemony over the region’s energy market.[58] Construction on the TAPI was delayed by more than a decade for security concerns, particularly in Afghanistan, and because of legal issues in Turkmenistan. Both roadblocks have been resolved satisfactorily, and construction is expected to begin in early 2016.[59]

It is strategically important for Europe to access as much oil and gas from the region as possible. Europe already imports oil and gas from the Caspian, primarily from Azerbaijan, but it desperately needs oil and gas from Central Asia, too, as a way to bypass Russia and Iran.

A pipeline is the only economically viable way to move natural gas across the Caspian Sea. Transporting natural gas by ship as liquefied natural gas is profitable only after 1,200 miles or more, and the distance between Turkmenbashi, Turkmenistan, and Baku is only 170 miles. The idea of a Trans-Caspian Gas Pipeline has not become a reality because of the dispute over Caspian ownership. It is in neither Iran’s nor Russia’s interest to see the Trans-Caspian Gas Pipeline realized. Turkmenistan and Azerbaijan will not move ahead with the project due to concerns that Russia and Iran might militarily disrupt the construction of the pipeline or at least act in a way that might discourage investors in the pipeline program.

Completing the Trans-Caspian Gas Pipeline promises several benefits. The most obvious is providing Europe with another alternative to Russian gas. The pipeline would also improve regional stability by calming Azerbaijani–Turkmen relations, which have been strained in the Caspian over the past few years. From Ashgabat’s perspective, a Trans-Caspian Gas Pipeline would also help to diversify its energy export market, which is dependent on Russian and Chinese imports.[60]

Notwithstanding the lack of a Trans-Caspian Gas Pipeline, new pipelines are being built and upgraded that will help to decrease Europe’s reliance on Russia for its energy. In March 2015, construction started on the Trans-Anatolian Natural Gas Pipeline, further linking Azerbaijan to Turkey.[61] Construction is expected to be finished by 2018. It will then link with the Trans-Adriatic Pipeline, which will run from the Turkish–Greek border to Italy via Albania and the Adriatic Sea when it is completed in 2020.[62]

These new gas pipelines, in addition to the existing South Caucasus Pipeline, comprise the Southern Gas Corridor. Once fully operational, the Southern Gas Corridor will be a network of pipelines running 2,100 miles across seven countries, supplying 60 billion cubic meters of natural gas to Europe.[63]

In addition to pipelines, new rail networks are being upgraded, extended, and built. Rail lines form the main basis of the International North–South Transport Corridor, which is expected to reduce transit costs between Russia in the north and India in the south and everything in between. The Caspian countries are an important part of the International North–South Transport Corridor project.

The Kars–Tbilisi–Baku railway, the modern-day successor to the Transcaucasian Railway, is expected to be finished in 2015. In the long term, it is expected to move 15 million tons of freight and 3 million passengers each year.[64] That is the equivalent in passengers of moving the entire population of Armenia by train each year.

New rail lines and pipelines are not just being built and modernized on the western side of the Caspian. China’s checkbook diplomacy commonly associated with Africa also applies to Central Asia. Beijing is investing billions of dollars in projects, not only to upgrade and modernize rail networks, pipelines, and roads, but also to encourage cultural exchanges—all with the goal of maximizing Chinese influence in the region.

At the heart of China’s activity in the region is Beijing’s One-Belt, One-Road (OBOR) initiative.[65] The OBOR initiative aims to connect the countries of Central Asia along the historic Silk Road to facilitate the flow of Chinese markets with Europe. The land-based part of OBOR is called the Silk Road Economic Belt.

Russia proposed building a railway that would encircle the Caspian Sea with the goal of linking all of the main Caspian port cities by rail. The eastern semi-circle linking Kazakhstan, Turkmenistan, and Iran was completed in 2014. The western half linking Azerbaijan and Iran is expected to be finished in 2016.[66]

Moscow has long sought to control the flow of oil and gas to Europe and has never liked pipelines that bypass Russian territory to transport oil and gas to Europe. The Kremlin’s mentality is that, if Europe is not buying oil and gas from Russia, it should not be buying it from anywhere else. To this end, where Europe is able to import from other sources, Russia has shown that it can easily pose an indirect risk to their supply.

For example, at their closest points, the Baku–Tbilisi–Ceyhan pipeline, South Caucasus Pipeline, and the Kars–Tbilisi–Baku railway run within about eight miles of the Line of Contact between Armenian-occupied Nagorno-Karabakh and Azerbaijani forces.[67] This is one of the reasons why Russia will ensure that the conflict in Nagorno-Karabakh will not be resolved anytime soon.

Russia has also recently annexed a small chunk of Georgia that places a one-mile segment of the BP-operated Baku–Supsa oil pipeline, which transports oil from the Caspian Sea to the Black Sea, inside Russian-occupied territory.[68]

What the U.S. Should Do

The Caspian Sea is an important, if often overlooked, region in regard to many of the challenges that the U.S. faces around the world, such as a resurgent Russia, an emboldened Iran, wavering allies, a growing China, and the rise of Islamic extremism.

America can take a number of steps to safeguard its political, economic, and security interests in the region. The United States should:

• Show a more visible presence in the region. While John Kerry’s recent trip to Central Asia is a good first step, the U.S. must build on his visit. Occasional Cabinet-level visits need to be followed up with regular visits by senior officials from all areas of government including diplomatic, defense, economic, energy, and trade sectors of the U.S. government.
• Support a peaceful and speedy resolution of Caspian Sea ownership. It is in America’s interest and the interest of its European allies to resolve the legal status of the Caspian Sea and demarcate the maritime borders. Finding an agreement to the Caspian dispute will remove a potential source of instability and help to advance economic and energy opportunities in the region. It will also help with Europe’s energy security.
• Strike a balance between promoting human rights and safeguarding other U.S. strategic interests. The U.S. should have frank, open, and constructive discussions with its allies in the region when and where there are human rights issues—with the goal of long-term democratization. However, human rights should be just one part of a multifaceted relationship that considers broader U.S. strategic interests and stability in the region.
• Offer political support for the construction of TAPI. Whenever possible the U.S. should support Caspian energy diversification projects. In the long run, this promotes economic freedom, strengthens regional stability, and breaks regional dependency on Chinese and Russian markets.
• Offer political support for the construction of the Trans-Caspian Gas Pipeline and the Southern Gas Corridor project. As Europe seeks alternatives to Russian gas, the Southern Gas Corridor and completion of a Trans-Caspian Gas Pipeline will play important roles. Furthermore, the construction of the Trans-Caspian Gas Pipeline will help to ease regional tensions between Azerbaijan and Turkmenistan.
• Encourage Caspian countries to diversify their economies. The U.S. should promote economic policies in the region that lead to diversified local economies. The areas of focus should be in the agriculture, manufacturing, and services sectors. This is especially important in light of recent oil prices.
• Encourage countries in the region to stay away from Russian-dominated organizations. Russia’s Eurasian Economic Union and the Collective Security Treaty Organization are retrograde structures that serve only the interests of Russia at the expense of the other member states. The U.S. should encourage countries in the region to maintain cordial, but not subservient relations with Russia.
• Promote economic freedom in the region. Azerbaijan, Kazakhstan, and Turkmenistan are strategically poised for economic growth because they supply raw materials to the Chinese and East Asian markets, which are expanding. U.S. businesses should take advantage of opportunities in the Caspian region, as Russia and China are already doing.
• Engage more with Azerbaijan. The U.S. should pursue a pragmatic relationship with Baku based on strategic and regional mutual interests. There are some legitimate human rights concerns in Azerbaijan, but in the long run only U.S. engagement, not constant criticism, will return Baku to the path toward good governance.
• Help regional countries to improve their security and defense capabilities. In the Caspian region sovereignty equals security. This means respecting other countries’ sovereignty and being able to defend one’s own sovereignty. The U.S. should work bilaterally and, when appropriate, through NATO to improve the security and military capabilities of partners in the region. In some cases, such as Turkmenistan, the U.S. should seek to deepen defense ties, but not in an overt or public way.
• Counter the rise of Islamist extremism in the region. The U.S. should work with Caspian countries to prevent the region from becoming a transit zone and recruiting ground for Islamist extremists, especially ISIS. This could include capacity building in the security sector and better intelligence sharing between the U.S. and the countries in the region when national caveats allow.
• Monitor the situation in Nagorno-Karabakh and Armenia’s close ties with Russia. Peace talks over Nagorno-Karabakh have been stalled for years, and the U.S. can do very little to bring the parties back to the negotiating table. However, remaining silent on the matter offers implicit approval of the status quo. The U.S. should continue to call for a peaceful solution to the conflict that includes the withdrawal of Armenian forces from all Azerbaijani territories.
• Discourage Europe from becoming dependent on Iranian oil and gas. Some in Europe are keen to import Iranian oil and gas and might even see this as a credible alternative to Russia. Yet nothing in the past 35 years has shown that Iran can be a trusted partner. Europe should avoid the temptation to import Iranian oil and gas because any degree of dependency on Tehran will further weaken Europe’s energy security.
• Provide military and security assistance to all deserving allies in the region. The U.S. government’s decision to provide military assistance to another country should be based on American security interests and not certain pressure groups lobbying Congress. Section 907 of the Freedom Support Act is an unfair impediment to this.

Geopolitical Importance

Russia and Iran, the two major powers in the region, view the Caspian with different priorities, but they share the same goal of maximizing their influence over Azerbaijan, Turkmenistan, and Kazakhstan and reducing the influence of the West.

On the back of the Vienna Agreement, Iran will become more active in the Caspian region. Kazakhstan will remain nervous about Moscow’s designs on the predominately ethnic Russian part of the country, and Astana will see its membership in the Eurasian Economic Union as more of a liability than a benefit. Nothing suggests that Turkmenistan will open its society, but if the Trans-Caspian Gas Pipeline can be realized, Ashgabat will play a huge role in helping Europe to reduce its dependence on Russia for energy. Azerbaijan’s geostrategic position presents many benefits for Europe and by extension for the United States, and Baku will continue to play an important role in the region. However, unless the countries of the Caspian start to diversify their economies in light of the recent drop in crude oil prices, their futures could be bleak.

The Caspian region has been, is, and will continue to be an area of geopolitical importance and competition. If the U.S. is to have a grand strategy to deal with a resurgent Russia and an emboldened Iran and to improve Europe’s energy security, policymakers in Washington cannot ignore the Caspian region.

—Luke Coffey is Margaret Thatcher Fellow in the Margaret Thatcher Center for Freedom, of the Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy, at The Heritage Foundation.