Ursula von der Leyen, president of the European Commision, and  Ilham Aliyev, president of Azerbaijan, meeting in Bakoe, Juliy 18 2022

There’s a war raging in Europe: for the first time since 1968, a European country has been invaded. What consequences will this war have for the Netherlands and Europe? Read more

There’s a war raging in Europe: for the first time since 1968, a European country has been invaded. What consequences will this war have for the Netherlands and Europe? 

In this dossier, we focus on how money flows to and from Russia. We analyse the role which the Netherlands plays in the chess game of the Russian rulers and wealthy oligarchs – in Groningen, at the Zuidas and in The Hague.

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Ursula von der Leyen, president of the European Commision, and Ilham Aliyev, president of Azerbaijan, meeting in Bakoe, Juliy 18 2022 © Presidential Administration of Azerbaijan / Xinhua News Agency

The EU and ‘partner’ Azerbaijan: gas first, morals second

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To make it through the winter without Russian gas, the European Union is frantically searching for new suppliers. Recently, the European Commission struck a deal with a country that has a dubious reputation regarding corruption and human rights: Azerbaijan. A controversial step for the European community of values.

Ruthless wildfires, boiling city centres, crowded beaches – in Europe, a cold winter seems far away. However, the financial markets paint a different picture. With the increasing likelihood that Russia will completely shut off the gas tap to Europe in retaliation for sanctions over the war in Ukraine, gas prices are soaring to unprecedented heights.

Thie rise has led to clear language from the European Commission (EC): ‘Russia is blackmailing us, Russia is using gas as a weapon,’ President Ursula von der Leyen said at a press conference on July 20th in Brussels. ‘We have to be ready for the possibility that Russia will stop supplying gas altogether this winter.’ On Twitter, she added: ‘We have to address our energy security at EU level. EU countries should do their best now to save 15% of annual gas consumption. Right now the goal is aspirational. In case of a European alert, the 15% are binding.’ 

It is doubtful whether this mandate will actually be enforced. However, currently there is an agreement between the Member States to realise the desired savings voluntarily, in the period between September and March.

Shopping in the Caucasus

Meanwhile, the EC has been searching for alternatives to Russian gas for months, determined to minimise the impact of the gas crisis on European citizens and businesses. The EC is ‘shopping’ for suppliers that can spare even the smallest bit of gas or oil. One of the countries the Commission is working with is Azerbaijan, an oil state in the Caucasus, located between Turkey and Russia.

During a visit to its capital Baku, in a lush green palace garden far from the outlying areas where pump jacks and gas flares dot the landscape, Commission President Ursula von der Leyen and President of Azerbaijan Ilham Aliyev signed a strategic agreement that will considerably strengthen the existing ties between the EU and Azerbaijan.

Von der Leyen called it the next step in the process of breaking free from Russia’s stranglehold on Europe’s gas system and appealed to its ‘trustworthy partner’ Azerbaijan. The country pledged to gradually double its gas exports to the EU over a five-year period.

Immediately after its signing, the agreement proved to be controversial: the deal will yield relatively little extra gas. In addition, several NGOs accused the EU of failing to take into account its own goals concerning climate and the promotion of democracy in neighbouring countries.

​However, the ties between the European Union and Azerbaijan are anything but new. What kind of country is the EU doing business with? And why?

Troubled project

The strategic friendship between the EU and Azerbaijan has a long history, but it got a boost after the annexation of Crimea by Russia in 2014. Russia’s aggressive foreign policy raised the alarms in a number of countries in Central Europe – countries like Bulgaria that are almost completely dependent on Russian gas.

In 2014, Europe was dependent on imports for 67 per cent of its natural gas needs, almost half of it imported from Russia. The annexation of Crimea led to new impetus being given to the development of a somewhat troubled gas project around the Mediterranean Sea: the Southern Gas Corridor (SGC).

‘All those different pieces of pipeline have different shareholders’

The corridor is a collection of pipelines connecting Central Asia to Europe via Azerbaijan, passing several disputed and unstable regions, such as Kurdistan in Turkey and the Russian-minded, self-proclaimed Republic of South Ossetia in Georgia by way of the connected Baku-Tblisi-Ceyhan pipeline (BTC). The unrest in the region has always been a reason for the EU to never fully commit to the corridor as a possible alternative to Russian gas.

However, now that the papers have been signed, the European Union has committed itself not only to Azerbaijan but also to several other parties involved in the corridor – players with major and sometimes conflicting interests.

The land of fire

The oil industry was pretty much invented in Azerbaijan. There is evidence that oil was traded there as early as the 3rd and 4th centuries. References to oil production on the Absheron Peninsula, near the Azerbaijani capital Baku, can be found in Persian and Arabic manuscripts of the time. The country probably owes its motto, the land of fire, to the gas flares used to burn methane gas during oil extraction.

The rich soil of the country invited Western industrialists to settle in the area at the beginning of the last century. For example, German and American developers kick-started the country’s oil industry, just before the First World War.After the collapse of the Soviet Union in 1991, the country’s industry kicked into high gear.

In 1992, British Petroleum (BP) entered the Azerbaijani market. Shortly afterwards, the oil giant signed several agreements with the government to develop the Shah Deniz gas field. BP also operates the Shah Deniz-II field.

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In addition, there is the possibility that Russia, too, will become involved in the Southern Gas Corridor. The reason the infrastructure has so many partners is that it is an open project. Gazprom, Russia’s largest gas company, could also potentially connect to the network, as the company already tried in 2017.

In the past, the geopolitical tensions in the region have often been a reason for the EU to refrain from fully committing to the SGC. But now, the European Commission seems to have come to the conclusion that relying on several unstable partners is better than relying on Russia alone.

'Geopolitical hornet's nest'

But it is not at all certain that, for the EU, the corridor will mean fewer problems with Russia. ‘Increasing dependence on Azerbaijan means increasing dependence on a route that could be blocked by Russia, as it is close to a region where Russia has a fairly strong strategic presence,’ says Lucia van Geuns, energy researcher at the Hague Centre for Strategic Studies (HCSS)

She calls the corridor project a ‘geopolitical hornet’s nest’, fraught with political infighting between the countries involved over who can use the pipelines to the EU – besides Azerbaijan itself, of course. ‘All those different pieces of pipeline have different shareholders. That is why there has been endless discussion about the use of the infrastructure [the history of the corridor goes back to the mid-1990s, eds.]. It wasn’t until 2020 that the gas substantially began to flow.’

‘The idea of ​​the corridor was and is that alternative energy sources – no matter how small – ensure that Gazprom is unable to exploit a monopoly position in a given market,’ says Alissa de Carbonnel, researcher at the International Crisis Group think tank. ‘Development of the Southern Gas Corridor was never aimed at completely eliminating and replacing Russian supplies.’

Some EU countries now think differently. For example, Bulgaria now buys about 300 million cubic metres of gas from Azerbaijan and 700 million from Russia. Bulgaria hopes to get the full one billion cubic metres from Azerbaijan before the end of this year, to completely detach itself from Russian gas.

Russian influence

How realistic are such expectations? Will the deal with Azerbaijan actually make the EU less dependent on Russian gas?

On the one hand, yes. Countries such as Bulgaria, as well as Greece and Italy, are now becoming less dependent on the whims of Russian President Putin. On the other hand, the deal concerns a relatively limited amount of gas: 20 billion cubic metres by 2027. To put that into perspective: Russia, until recently, supplied a whopping 155 billion cubic metres annually. Moreover, this ‘Azerbaijani gas’ has a slightly Russian smell.

The bulk of Azerbaijani gas comes from the Shah Deniz-II field in the Caspian Sea. The field is owned by a motley crew of shareholders, including the Azerbaijani, Iranian and Turkish governments, as well as BP. But another shareholder is Lukoil, Russia's second-largest oil and gas company. This company, which until recently was led by the now-sanctioned Azerbaijani-Russian oligarch Vagit Alekperov, owns one-fifth of the gas field.

The country, like Russia, uses oil and gas ‘to silence the EU on issues related to its rule of law’

‘The question is what role Lukoil will play in the future,’ says Van Geuns. ‘It is a private company, in terms of its company structure it differs little from Shell or BP, and it has shareholders. Administratively, Alekperov is no longer CEO, but in the current political climate, to what extent can such an oil company, which happens to fly a Russian flag, be said to be independent?’

Unlike Gazprom, Lukoil itself has not been sanctioned. Therefore, the company can continue its business more or less unhindered, albeit that the company's lobbyists are no longer welcome in Brussels, following the decision of the Council of the European Union to strip Russian oil and gas lobbyists of their credentials. Lukoil’s lobbyists are no longer able to access the buildings of the European institutions.

It is unclear what Lukoil’s involvement in the project means for the future. In Azerbaijan, the Russian energy giant expanded its position in the project by buying up the shares owned by Malaysian oil company Petronas. The transaction involved about 1.5 billion euros. Lukoil wanted to acquire an even larger share in the gas field. The Azerbaijani authorities and the British oil group BP put a stop to that, however, because they did not want to lose their 51 per cent majority stake in the gas field. It seems that Azerbaijan and BP aren’t comfortable with an increase in Russian influence either.

De Carbonnel of the International Crisis Group suspects that the multitude of stakeholders is enough to ease the EC’s state of mind: ‘In this case, a reliable supplier simply means that Russia is not in the driver's seat.’

Dilemma

‘The long-term agreement indicates that the shareholders are confident that gas will continue to flow through that pipeline to Europe for years or even decades to come,’ says De Carbonnel. This presents the European Union with a dilemma. For years, they have been proclaiming that tackling climate change, and with it reducing the use of fossil fuels, is a top priority. How can that be reconciled with a long-term gas deal?

The Commission itself recognises the conundrum, and has vowed to ‘make the chain as efficient, environmentally and climate-friendly as possible’. To cover the fossil burden, the Commission is urging Azerbaijan to also tap into its renewable energy potentials – such as offshore wind energy and green hydrogen – and gradually make the current infrastructure more sustainable. Earlier this year, in collaboration with the World Bank and the International Finance Corporation (IFC), the country published a roadmap to achieve the production of between 1.5 and 7 Gigawatts of wind energy per year by 2040.

But even if this scenario were to become a reality, the energy would be entirely destined for domestic usage. There is as of yet no infrastructure that would enable the country to export hydrogen or other forms of energy, such as wind, to the EU. Developing the necessary infrastructure is costly and time-consuming. It is therefore questionable whether these measures are sufficiently in line with the climate targets that the EU has set itself.

Corruption, money laundering, intimidation

The EU is being accused of compromising on its own ideals in areas other than ​​climate too. Human Rights Watch and Transparency International are critical of the deal because of the reputation of the Azerbaijani government. For example, corruption and money laundering scandals rocked the government and intimidation of journalists and political opponents are no one-off events, according to Reporters Without Borders, who rank the country as one of the lowest globally in terms of press freedom. The country, like Russia, uses oil and gas ‘to silence the EU on issues related to its rule of law,’ Philippe Dam, acting EU director at Human Rights Watch told the British newspaper The Guardian.

The Azerbaijani authorities are known for their crackdown on civil society activists investigating corruption

The Commission acknowledges these problems. After the deal was sealed, European Commission foreign affairs chief Josep Borrell said ‘decisive progress is needed on human rights’, and that ‘the international standards and commitments made by Azerbaijan must be safeguarded’.

In particular, Borrell pointed to the new media law in Azerbaijan, which came into effect earlier this year. This law obliges journalists to register. Those who fail to do so can be prosecuted for illegally carrying out their work. ‘The reality is that the Azerbaijani authorities are known for their crackdown on civil society activists investigating corruption, especially in oil and gas cases,’ Dam said.

NGO Transparency International criticised the agreement over a bribery scandal known as ‘the Azerbaijani Laundromat’, which saw dozens of European politicians and officials taking money from the Azerbaijani authorities to turn a blind eye to corruption in the country. The Azerbaijani government itself has always vehemently denied its involvement in this matter, but on Twitter, Transparency International nevertheless claims that the ‘trustworthy’ image the country has acquired is the result of ‘buying influence from European politicians’.

The Azerbaijani Laundromat

The European Union cannot have missed the fact that the Azerbaijani authorities use unsavoury practices to influence their international image. Human rights organisations and politicians have been sounding the alarm about this for years. The pinnacle of these practices so far is an unprecedented corruption scandal known as the Azerbaijani laundromat.

In 2017, international research collective OCCRP revealed that billions in government funds were funnelled out of the country through complex tax structures. Senior Azerbaijani officials used the money to buy luxurious apartments and yachts throughout Europe.

Money also ended up in the pockets of European politicians responsible for election and human rights monitoring in Azerbaijan. They were employed by the Council of Europe, an independent body that monitors human rights and democracy in its 47 member countries.

The motivation behind the effort: Azerbaijan has been dangling at the bottom of corruption and press freedom lists and suffers from its reputation. The country currently ranks 128th on Transparency International’s register, several spots lower than five years ago. On the World Press Freedom list, the country is doing even worse, coming in at 154.

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No deal on human rights

Turning a blind eye to the curtailing of democracy or rule of law in dire times seems to be a common thread in the EU’s partner policy with eastern gas suppliers, says Marco Siddi, a scientist in the field of international relations and expert on the southern gas corridor during an interview with Follow the Money. ‘Because Europe does not have many options when it comes to gas, the norms and values ​​of the partner matter less and less – this is especially the case with Azerbaijan.’

Turning a blind eye to the curtailing of democracy or rule of law in dire times seems to be a common thread in the EU’s partner policy

The country is part of the Eastern Partnership. Established in 2008, the program is a partnership of six former Soviet countries and the European Union. Through the partnership, the EU hopes to promote ‘democratic values, cooperation and international solidarity’ by issuing grants to value-aligned projects. The program also offer diplomatic support. For example, the EU acts as a mediator between Armenia and Azerbaijan, which were recently embroiled in a brutal war.

According to Siddi, however, the inclusion of Azerbaijan has always had a strong strategic-economic angle: ‘The country is somehow included in the EU’s neighbourhood policy. But the EU is well aware that, unlike Georgia or Armenia, for example, Azerbaijan is not interested in closer normative ties with the European Union. Azerbaijan is the only Eastern Partnership country that has not signed an agreement with the EU on human rights and democratic standards. Energy is the main focus here, everything else – talk of promoting democracy – is just frills.’

For that reason, the European Commission itself has never taken a clear position on specific incidents of corruption and human rights violations in Azerbaijan. Instead, it prefers ‘silent diplomacy’, for example mediating between EU partners in the region who are in conflict with each other: ‘The stronger the ties, the harder it becomes for the EU to criticise a partner’s actions: you run the risk of being accused of hypocrisy,’ says Siddi. ‘Diplomatically speaking, all you can do is sit it out and hope no one notices.’

Interests versus values

​​In a report published just before Von der Leyen spoke of ‘blackmail’ by Russia, the International Energy Agency (IEA) warns that it is ‘code red’ for Europe. European countries must reduce their gas consumption and replenish gas supplies as soon as possible. Without Russian gas supplies, according to the IEA, it will be very difficult to stay warm throughout the winter.

According to De Carbonnel of the International Crisis Group, the fact that the European Commission is now signing a controversial agreement to alleviate the need for gas is entirely in line with Von der Leyen’s position. Norms and values ​​are subordinate to geopolitics, De Carbonnel says. ‘It is the classic tension between interests and values. Usually, such a treaty is signed by the chief representative of the EU’s foreign policy [in this case that would have been Josep Borrell, eds.]. But now it was Von Der Leyen who took the lead and appeared on social media, shaking hands with an autocrat. If the EU claims to be a normative power, this sends the wrong message. But given the weight of the steps being taken, I am sure Brussels is fully aware of the geopolitical implications and the sensitivity of the issue. More than anything else, it shows that the Commission is desperately looking for other sources of energy.’

The European Commission could not be reached for comment.

Translation: Chris Kok.