RUSSIA-AZERBAIJAN DYSPEPSIA: EAT TOMATOES AND GET

S E C R E T SECTION 01 OF 03 MOSCOW 000564

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/08/2017
TAGS: PREL ETRD PREF AJ AM GG RS
SUBJECT: RUSSIA-AZERBAIJAN DYSPEPSIA: EAT TOMATOES AND GET
GAS

Classified By: Ambassador William J. Burns. Reason: 1.4 (b, d)

Summary
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1. (C) Russian press articles and Embassy Baku's
interlocutors have played up deteriorating
Russian-Azerbaijani relations. They cite Gazprom's increase
in the price of gas deliveries to Azerbaijan, Azerbaijan's
refusal to send crude oil via the Baku-Novorossiysk pipeline;
and the Russian ban on non-Russians working in retail sales,
which disproportionately affects Azeri vendors of fruit and
vegetables. These actions come against a backdrop of general
Azerbaijani nervousness over how the Kosovo outcome might
affect Russia's policy towards the Nagorno-Karabakh conflict.
Both Russians and Azerbaijanis here calmly play down the
political content of recent moves, though beneath the surface
the Azeris seem furious at the ban on market vendors. In
reality, the oil and gas actions put energy relations on a
commercial footing, getting away from earlier
politically-motivated special deals. Russia imposed the ban
on vendors for purely internal political reasons (pandering
to xenophobia),without regard for how it might affect
Azerbaijan -- and therein, perhaps, lies its significance for
Russian-Azerbaijani relations. End Summary.

Energy Flows
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2. (C) Both the Russian and Azerbaijani press have headlined
deteriorating Russian-Azerbaijani relations for the last
month. The alleged deterioration started last December, when
Azerbaijan made clear it would supply Georgia with natural
gas from its Shah Deniz allotment at prices lower than
Gazprom's demanded USD 235/tcm. Gazprom set the price for
Georgia at a European commercial level, having failed to
persuade Georgia to sell its strategic pipelines in exchange
for cheaper gas. Gazprom's imperative is to make up in
foreign prices what it loses on the two thirds of its
production that it sells domestically for USD 42/tcm. It has
shown it is not interested in differentiating between friends
and foes (though it is willing to reduce the price -- for now
-- to any country that hands over its pipeline system -- the
offer Georgia rejected was similar to those Belarus and
Armenia accepted).


3. (C) When Gazprom realized the Azerbaijanis were going to
help Georgia, it slapped the same price on Azerbaijan, which
had been receiving a concessional rate of USD 110. Gazprom
also reduced the amount offered from 4.5 bcm/year to 1.5 to
make it harder for Azerbaijan to spare gas for Georgia. In
the end, Azerbaijan refused to buy any gas from Gazprom.
This suited Gazprom, which is increasingly focused on its gas
production problems.


4. (C) Evening the score for Gazprom's imposing a commercial
rate on gas, Azerbaijan put its oil exports through Russia
onto a purely commercial basis. Azerbaijan had been pumping
crude through the 100,000 bbl/day capacity Baku-Novorossiysk
"Northern Early Oil" pipeline. This pipeline originated as a
political gesture to Russia, a Heydar Aliyev move in the
early 1990s to neutralize Russian opposition to Aliyev's
deals with western oil companies, at that time still a
suspicious novelty in the Caucasus. By now, however, the
flow resulted in a loss for Azerbaijan, according to
Azerbaijani DCM in Moscow Javad Akhundov. On this route the
high-quality Azerbaijani crude was blended with lower quality
West Siberian oil. The Azerbaijanis were compensated based
on the price of the aggregated oil, not the value of their
own crude. Diverting the Baku-Novorossiysk crude to BTC
would also make the latter pipeline more economical sooner,
since for now it was operating at only two thirds to three
quarters of its 1 million bbl/day capacity.

The Mandarins of the Kremlin
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5. (C) The other set of irritants involves Azerbaijanis
working in Russia. They dominate the Moscow market trade in
fruit and vegetables. PM Fradkov signed a decree in January
banning foreign traders from Russian markets starting in
April. (Until April, foreigners can make up to 40 percent of
the sales personnel; it is unclear what happens if they make
up, say, 55 percent: who decides which 15 percent lose their
jobs?) That decision appears to have been taken to co-opt
growing xenophobic nationalist feelings in Russia.
Azerbaijanis are the main victims of the decree in Moscow (in
the Far East the Chinese suffer the most). However, a quick
look at markets in Moscow shows that while Azerbaijanis are
fewer, so too are Dagestanis and other Russian citizens of
"Caucasian ancestry." Muscovites tell us the net results are

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fewer fruits and vegetables at higher prices, and hellish
lines at Moscow's two centers for processing undocumented
workers.


6. (C) Putin addressed the Council on National Projects on
October 5, the day he ordered Fradkov to draw up the
restrictive legislation. He said the tougher measures were
aimed at protecting the interests of "the population -- the
native population -- of Russia." As the Azerbaijani DCM
asked rhetorically, "How can you say that any one ethnic
group is the "native" population of Russia?"



7. (C) The Azerbaijani reaction in Moscow to the ban on
foreigner market traders has been calm on the surface. The
DCM in Moscow, Javanshir Akhundov, told us the Embassy is
busy helping Azerbaijanis formulate papers correctly, and
expects many of the estimated two million Azeris in Russia to
adopt Russian citizenship (according to Akhundov, some
640,000 emigrants from Azerbaijan already have Russian
citizenship, not counting ethnic Azeris from Dagestan).
Russia's Nagorno-Karabakh negotiator Yuri Merzlyakov told us
he expects the Russian decree to result neither in large
outflows of Azeris -- he said "they will find a way"
(presumably through judicious bribery) to take care of their
visa, work and residence problems) -- nor in any real damage
to Russian-Azerbaijani relations. Merzlyakov added that
Azerbaijanis have started talking about taking action against
the Gabala early-warning radar and signals intelligence site,
the one military installation Russia still maintains in
Azerbaijan. However, he expected the Russians to close the
site down within the next two years and move its functions
back to Russian territory.

The Karabakh Factor
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8. (C) Russia has linked Kosovo final status to the "frozen
conflicts" (although GOR officials tell us that Kosovo is a
precedent they do not want to employ). But Russian officials
carefully omit mention of Nagorno-Karabakh when they make
this linkage, speaking only of Abkhazia, South Ossetia and
Transnistria. That exception may not be tenable, given the
large and influential pro-Armenian community in Russia, which
will try to ensure that Russia takes the position on
Nagorno-Karabakh that it takes on the other three conflicts.
We mentioned this dilemma to a Russian MFA official; he
answered, "We're working on it" -- i.e., on de-linking
Nagorno-Karabakh from the others.


9. (C) We asked MFA 4th CIS Department Deputy Director
Dmitriy Tarabrin whether the Azerbaijanis had approached
Russia with their concerns. He said that Nagorno-Karabakh is
different because the "Great Powers" are collaborating on a
resolution (implying the opposite holds true for the other
conflicts),and that Azerbaijan understands this. The Kosovo
link must also be seen against the background of general
Russian strategic alliance with Armenia, the influential
Armenian diaspora in Russia, and the long-standing
Azerbaijani plaint that Russia could easily resolve the
Karabakh issue in Azerbaijan's favor if only it wanted to.
This "old song" (as Merzlyakov put it) had been silent for a
few years, as Russia cooperated with France and the U.S. in
the Minsk Group, and as it became clear that the key to
resolving the conflict lies within the region itself, not in
Moscow. It has resurfaced, however, now that all parties are
waiting to see what Moscow will do on Kosovo, and against the
background of the economic and migration irritants detailed
above.

Comment
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10. (C) The Russian actions affecting Azerbaijan appear to
have been taken for policy goals unrelated to Azerbaijan --
Georgia, xenophobia -- without consideration of whether there
would be an effect on Azerbaijan. The net result of Russian
and Azerbaijani energy actions over the last two months has
been to eliminate concessions motivated by political
friendship and put energy relations on a market basis.
Russia has been used to doling out politically motivated
economic favors to keep countries such as Azerbaijan close.
Gazprom's political influence appears to have led to a move
away from such favors, at least in the energy field.
Gazprom's eye on the bottom line meshed nicely with the
Kremlin's aim of keeping pressure on Georgia. Azerbaijan per
se was almost irrelevant to the process in political terms,
as it was also to the internal politics of nationalist
xenophobia. Azerbaijan's inability to gain leverage in the
face of these two great imperatives -- Gazprom and the 2008
elections -- may be frustrating to Azerbaijanis, but it may

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ultimately put Russian-Azerbaijani relations on a healthier
basis.

BURNS