MONTREAL - The armed conflict between Russian and Georgia has further exposed
the fragile position of the energy links running through the smaller country
from the Caspian Sea to developed market economies.
Russian forces are placed to disrupt oil flows through the Baku-Tbilisi-Ceyhan
(BTC) pipeline, which has carried Caspian Sea oil from Azerbaijan across
Georgia to Turkey since 2006, and the Baku-Tbilisi-Erzerum pipeline, which
opened last year and exports gas to Turkey, as well as the older Baku-Supsa
"early oil" line that runs to the Georgian Black Sea coast.
A fire in eastern Turkey that last week shut down the BTC
pipeline, the result of a bomb claimed by the Kurdistan Workers' Party (PKK),
has been extinguished, but there will be a three-week delay in lifting Azeri
oil from the Turkish terminal at Ceyhanon, on the East Mediterranean coast, as
the line is inspected, repaired, and tested.
The Russian troops occupying Georgia, effectively cutting the country in half
on Monday as they occupied the town of Gori on the main east-west highway and
not far from the BTC pipeline, could easily prevent it reopening on schedule.
Despite the supply disruption, the price of light sweet crude on the New York
Mercantile Exchange declined to under US$114 in electronic trading on Monday,
as traders continued to factor in decreased world demand as a result of
anticipated economic contraction.
Meanwhile, the Azeri state energy company SOCAR has ceased shipments to the
Georgian Black Sea ports of Batumi and Kulevi and will probably declare force
majeure to limit its liabilities.
As from Sunday, ships of Russia's Black Sea fleet were blockading Georgia's
Black Sea coast, after Russian military planes had bombed and significantly
damaged the oil loading terminal at Poti, which serves the Baku-Supsa line that
had been used for so-called "early oil" before the BTC entered into service and
was being refurbished in view of expanded capacity.
The BTC carries 850,000 barrels per day, or about 1% of world oil consumption.
However, as I have recently pointed out  it is difficult to underestimate
the role of the South Caucasus and Georgia in particular as a transit country
for Caspian Sea region energy resources to Europe, circumventing Russia. In
that context, the ongoing Russian invasion of Georgia has little to do with
South Ossetia, regardless of Moscow's pretentions to this effect.
The background to the Russian invasion predates Georgian President Mikheil
Saakashvili. South Ossetia had already in declared 1989 its secession from the
Georgian Soviet Socialist Republic to become its own Soviet republic; in
response, the Georgian Supreme Soviet in March 1990 nullified South Ossetiaís
autonomous status within Georgia.
By early 1991, when in March Soviet Georgia declared its independence, followed
the next month by the landslide election of Soviet-era dissent Zviad
Gamsakhurdia as first president of the post-Soviet Republic of Georgia, the
three-way military struggle in the region among Georgian, Russian, and Ossetian
forces had created tens of thousands of refugees.
Segments of the Russian armed forces had never forgiven USSR president Mikhail
Gorbachevís foreign minister and later Georgian president Eduard Shevardnadze
for abandoning the decades-long Soviet build-up of military power and
implementing the formerís foreign policy of rapprochement and conciliation with
the West, leading to the disintegration of the Soviet bloc in Europe and the
subsequent break-up of the Soviet Union itself.
Still, when Shevardnadze promised in late 1993 that Georgia would become a
member of the Commonwealth of Independent States, the post-Soviet Russian
military supported him against Gamsakhurdia, who was overthrown and later died
in mysterious circumstances that most observers believe to have been suicide.
Shevardnadze ruled without mandate for a few years, was finally elected
officially in November 1995, and stayed in power until his resignation in
November 2003 in the wake of the Rose Revolution that brought Saakashvili to
power. As a Communist Party apparatchik in the Soviet period,
Shevardnadze gained a deserved reputation as an opponent of corruption, but his
post-Soviet regime was rife with cronyism as political parties were not well
established, leaving him to depend upon patronage powers and clan and family
connections. He was not himself a conspicuous profiteer, but it seems much the
case that he protected many who were.
It was Shevardnadze, and not Saakashvili, who took the first concrete steps to
extricate Georgia from Russia's economic and hence political orbit, reanimating
the enmity of the armed forces of the Russian Federation, many of whose leaders
were held over from the late Soviet period and kept their animosity alive.
Most notably, Shevardnadze agreed in the 1990s with Azerbaijan's then-president
Heidar Aliev to promote construction of the Baku-Tbilisi-Ceyhan pipeline. The
BTC remains the only pipeline that circumvents Russia to transport Caspian Sea
energy resources to third countries. A Kazakhstan-China oil pipeline does not
originate near the Caspian and the two countries share the border that it
Saakashvili reinvigorated anti-corruption policies (from firing traffic police
for extortion to sending university exam papers overseas for grading to avoid
bribery), which in the economic realm had the effect also of making conditions
easier for small and medium-sized enterprises.
His relatively young and often Western-trained team overcame numerous
obstacles, such as a Russian embargo on imports of Georgian wine (a major
foreign exchange earner on the Russian market), imposed winter-time energy
embargoes (Russian firms control energy pipelines feeding Georgia as well as
electricity transmission lines in the country), and the like, to put the
country at least on a road towards prosperity.
Thus while the Russian ruble and equity market indices fell sharply on Friday
at the beginning of hostilities and continued lower on Monday, Georgia's Prime
Minister and former ABN AMRO banker Lado Gurgenidze went out of his way to
reassure ratings agencies, holding a conference call and personally emailing
Even so, Fitch and Standard & Poor's downgraded Georgian government bonds,
notwithstanding Tbilisi's assurance that there would be no default, and the
Georgia's 2012 Eurobond dropped over 5%.
The Russian markets rebounded slightly when Russian President Dmitry Medvedev
released a statement that the military conflict may be in its end phase,
somewhat calming foreign investors, but there is a general and well-founded
impression that Russia just does not care as much about foreign investment as
The Russian invasion is not about South Ossetia. It is about regime change in
Tbilisi, reimposing a 19th-century sphere of influence in the South Caucasus,
limiting the autonomy of the countries there, and through all these devices
maintaining control of energy transmission lines to the West.