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Reference ID Created Released Classification Origin
07MOSCOW564 2007-02-08 12:42 2011-08-30 01:44 SECRET Embassy Moscow

DE RUEHMO #0564/01 0391242
P 081242Z FEB 07

S E C R E T SECTION 01 OF 03 MOSCOW 000564 
E.O. 12958: DECL: 02/08/2017 
Classified By: Ambassador William J. Burns.  Reason:  1.4 (b, d) 
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 
6. (C) Putin addressed the Council on National Projects on 
October 5, the day he ordered Fradkov to draw up the &#
x000A;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 
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 


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