New pipeline and railway projects in the Caucasus are the engines of its economic development. They are also geopolitically vital for the region and the world. The Baku-Tbilisi-Ceyhan (BTC) pipeline, in operation since 2005, is a prime example of infrastructure development in the Caucasus, said Jonathan Elkind, Principal Deputy Assistant Secretary for Policy and International Affairs, U.S. Department of Energy, during his keynote address at a 2 April 2013 conference at the Woodrow Wilson Center cosponsored by the Center’s Kennan Institute and the Institute for the Analysis of Global Security.

The conference, “Connecting the Caucasus with the World: Railways & Pipelines,” focused on the large-scale infrastructure projects and their consequences for the region. Elkind noted that the necessary legal agreements forged for projects like BTC create a foundation for cooperation and stability in the region, thereby fostering economic stability and protecting the sovereignty of the nations in the region. Future projects, such as the “Southern Corridor” for gas pipelines, have the potential to build on past success, must have a strong commercial basis, and commercial and governmental interests must align if the necessary cooperation is to be achieved.

Separate panels on oil and gas pipelines and a new rail project, Baku-Tbilisi-Kars (or Iron Silk Road), supported Elkind’s analysis of the need for commercial viability and intergovernmental cooperation to align for projects to succeed.

During the first panel, moderated by William Pomeranz, Acting Director of the Kennan Institute, it was observed that both transnational rail and pipeline projects require complex political agreements and have security implications. The difference is that energy companies are more at the mercy of geography, and must therefore have a greater tolerance for risk and ability to finance projects than transport companies. Richard Herold, Executive Counsel, Global Government Affairs and Policy, GE Transportation stated that energy companies are bound to the Caucasus because “that’s where the resources are, and that’s where the transportation routes must be.” Herold also noted that the unfortunate truth is that most international business does not find the Caucasus attractive because rule of law, political stability, and free trade are lacking.

Senior embassy representatives from Azerbaijan, Armenia, and Georgia presented their nation’s views on the political and economic aspects of the rail project. Nargiz Gurbanova, Deputy Chief of Mission and Economic Counselor of the Embassy of Azerbaijan, stated that development projects in the region are tied to projections of power and the spread of influence. Despite this tendency, Gurbanova stated that “cooperation on separate projects should not jeopardize the spirit and value of regional integration and cooperation.” “The Northern Distribution Network (NDN) project has prompted the countries in the region to look deeper into development of national transport capabilities.” The development of transportation capabilities has become a national interest of Azerbaijan and the Caucasus as a whole.

Armenia’s exclusion from current pipeline and rail route plans was highlighted in the context of the two decade territorial dispute between Azerbaijan and Armenia, and was the subject of contentious discussion. Andranik Hovhannisyan, Counselor of the Embassy of Armenia, said that Armenia’s geographic location has endowed the country with great potential for transportation and economic development. Conflict in the region, however, remains a key challenge thwarting this potential. He noted that “infrastructure projects are mutually beneficial,” and regional conflict should be resolved in the interest of potential economic benefits. Rivalries remain, however, noted Hovhannisyan. For example, the Baku–Tbilisi–Kars (BTK) railway has a “highly contentious political nature,” because it is seen by Armenia as an attempt by Azerbaijan to bypass and isolate Armenia from regional economic projects. Deputy Chief of Mission of the Embassy of Georgia, David Rakviashvili, stated that despite the importance of geography in defining the relationship of the Caucasus to the international community, “the political decisions and choices of both Georgia and its neighbors have shaped the state of affairs in the region.”

Consensus did coalesce around the concepts that the region is an important transit location, both north-south and east-west, and that the region’s full potential will never be fully realized until frozen conflicts such as those between Azerbaijan and Armenia and between Russia and Goergia reach some settlement. Herold noted that focusing on who is to blame in these conflicts does not solve the problem. Instead, Herold stressed that those in the Caucasus must overcome their “victim identity” in order to overcome differences and thereby make the region more conducive to development and attractive to international business.

The second panel, moderated by Ariel Cohen, Senior Research Fellow for Russian and Eurasian Studies and International Energy Policy at Heritage Foundation, focused on pipeline politics and economics. The political importance of pipelines for building regional cooperation was again stressed, along with the benefits of greater intergovernmental cooperation and economic development. Justin Friedman, Director of the Office of Caucasus Affairs and Regional Conflicts of the U.S. Department of State, stated that “natural gas has increasingly become a global commodity, promising a greater potential for economic development in the Caucasus.” He stressed that realizing this potential can foster regional economic integration while instilling the values of “freedom and economic competition” in the Caucasus. Friedman noted that integration is mutually beneficial in the Caucasus in the forms of infrastructure improvement and trade facilitation.

Timur Soylemez, Deputy Chief of Mission of the Embassy of Turkey, referred to the BTC pipeline as a project that “shows the international community that the region can cooperate and overcome political issues in the interests of such projects.” He stressed the importance of regional social, political, and economic integration because “energy security does not exist in a vacuum; it also exists in a political atmosphere.” This reality can also be beneficial to the region as it is a promising source of energy for Europe because the “diversification of energy supply is crucial for security.”

The panelists also noted that the uncertain picture for oil and gas markets in the future makes it very difficult to predict whether particular new pipeline routes for oil or gas to the European market, all priced in the billions, make economic sense. Charles K. Ebinger, Director of Energy Security Initiative at Brookings Institution, observed that the shale gas boom in the United States raises the potential for similar shale gas development in Europe, especially Eastern Europe, and is pushing down the price for natural gas. As a result, “the changing nature of the international gas market is a challenge.” In addition, there are new large gas deposits being explored in North Africa and elsewhere. All these unfolding shocks are challenging the economic basis for gas pipelines. The economic slowdown in Europe, combined with European efforts to diversify energy supply and the uncertainty of new supply in the Caspian basin, also complicates the future viability of oil pipelines. An added factor is that demand for energy in India and China is projected to rise far faster—should new pipelines travel east, and not west?

Greg Saunders, Senior Director of International Affairs for BP, offered a more promising view for energy from the Caucasus when he contended that there is and will be growing demand for natural gas. According to Saunders, “Azerbaijan has the most attractive supply of natural gas for export to Europe.” The demand for that energy will more than keep pace with the potential increases in supply. For context, Saunders predicted that rising energy consumption will add the equivalent of another United States and China to global demand.

During his lunch keynote address, Ambassador Khazar Ibrahim, Head of the Mission of the Republic of Azerbaijan to NATO, expressed his nation’s hopes for the improved economic development and regional stability that the rail and pipeline projects can bring. He acknowledged that steps need to be taken to improve the climate for those projects to proceed, including the challenges of lingering conflict in the region. But he expressed his optimism as a diplomat that successful implementation of large-scale projects will proceed and change the dynamics of the region toward an improving economic and political environment.

Cosponsored by the Woodrow Wilson Center’s Kennan Institute and the Institute for the Analysis of Global Security

Event photos.