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 -------------- ¶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 -------------- ¶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 -------------- ¶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 MOSCOW 00000564 002 OF 003 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 -------------- ¶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 -------------- ¶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 MOSCOW 00000564 003 OF 003 ultimately put Russian-Azerbaijani relations on a healthier basis. BURNS