Azerbaijan is counting on the development of the Caspian Basin's energy resources to secure its economic future. Yet a deadlock among Caspian littoral states on a Caspian Sea territorial agreement is viewed as a major obstacle to the development of regional energy exports. Recent political jockeying among Azerbaijan, Russia and Iran suggests that the Caspian dilemma may linger throughout this year into 2004.

On January 17, Moscow's special envoy for Caspian affairs, Viktor Kalyuzhny, tactfully implied on Azerbaijani television that the division of the Caspian Sea is likely to remain unresolved for an indeterminate period. Russia and Azerbaijan have signed a bilateral deal on apportionment, which the Russian envoy held up as a model for resolving approaches among all five states. But some pairs of states, notably Iran and Azerbaijan, seem unlikely to forge treaties. [For additional information see the EurasiaNet Business and Economics archives].

Amid broader efforts to sound encouraging, Kalyuzhny noted that Azeri and Iranian officials, who have already held nine fruitless meetings on the Caspian border issue, are perhaps farthest apart among the littoral states. [For additional information see the EurasiaNet Business and Economics Insight archives]. Russia may be indicating that it is not prepared to broker Baku-Tehran dialogue, weeks after Iran's foreign minister told his parliament that he would not seek such mediation. [For additional information see the EurasiaNet Business and Economics Insight archives].

The significance of the final division of the Caspian Sea is often measured in economic terms, and there will undoubtedly be substantial economic bearing on all the littoral states that can tap the basin's hydrocarbon riches. However, the ability to gain the largest possible share of the basin has increasingly evolved into a matter of national prestige. Iranian Foreign Minister Kamal Kharrazi and his staff in particular seem to face strong pressure to strengthen their hand against Iran's post-Soviet northern neighbors. On December 29, the Iranian parliament subjected Kharrazi to a major round of criticism over his Caspian negotiations for the second time in less than a year.

Kharrazi heard deputies describe his negotiating tactics as "weak," "submissive" and "short-sighted." When his turn came to speak, Kharrazi insisted that "Iran's lack of dependence on aliens and foreign powers must not be interpreted as Tehran's passive approach in international relations and its foreign policy."

Though he seeks to practice détente toward Russia, Azerbaijan, Kazakhstan and Turkmenistan on Caspian issues, Kharrazi continues to reject the schemes Russia has proposed for dividing the seabed. He insisted once again on December 29 that treaties signed between Iran and the Soviet Union in 1921 and 1940 should form the basis for new Caspian accords. A solid majority in Iran has yet to be convinced that the Islamic Republic must abandon the 1940 treaties, which could grant Iran a substantial portion of the sea's coastline. In May, President Mohammed Khatami described the 1940 agreement as a "suitable yardstick" for a new deal. In reality, though, Kharrazi has pursued a far more realistic path, which seeks a five-way split giving each country 20 percent of the coastline. Russia's proposal would divide the coastline by country boundaries; Azerbaijan has held to this line.

The Russian model would give Azerbaijan 21 percent of the sea, largely at the expense of Iran, which would receive 13 percent. Baku seems likely to insist on this approach, which forms the basis for its bilateral pact with Russia, for several reasons.

One reason is that the Azerbaijan government often accommodates Washington, which has provided critical support for the Baku-Tbilisi-Ceyhan pipeline and other major projects. Since US President George W. Bush branded Iran part of an "axis of evil" in 2002, Azerbaijan has little favor to gain by ceding hydrocarbon territory to Iran. In addition, Azerbaijani President Heidar Aliyev's administration has a tense relationship with the clerical regime in Tehran, and has expressed frustration over Iran's tacit backing of Armenia on the Nagorno-Karabakh issue. [For additional information see the Eurasia Insight archive]. Tehran, in turn, has maintained a high degree of suspicion toward Baku ever since the early 1990s, when former Azerbaijani President Abulfaz Elchibey overtly advocated for the unification of Azerbaijan with ethnic Azeri provinces of northern Iran.

In recent months, Azerbaijani media, with the government's implicit approval, have increasingly adopted an alarmist stance regarding the rights of Iran's 25 million ethnic Azeri residents. Ahad Qazaei, Tehran's envoy to Baku, accused the media of painting an erroneous picture of the ethnic Azeris' standing. He was taking issue with January 14 coverage of a new political party, the Southern Azerbaijan Independence Party, which purportedly seeks secession by Iran's ethnic Azeris.

This coverage has struck some observers as sensationalistic. Azeri Iranian political analyst Ibrahim Valizadeh says that "there is no real tangible momentum" for a unified Azerbaijan among Iranian Azeris. "Azeris in Iran accept that Azerbaijan is plagued with many problems, not least chronic corruption and generally lower living standards than can be found in Azeri provinces in Iran," he told EurasiaNet.

On the surface, Baku and Tehran remain officially committed to "brotherly relations." Aliyev visited Iran in May 2002. [For additional information see the Eurasia Insight archive].

President Khatami is due to visit Baku sometime in 2003, and Murtuz Alasgarov, the speaker of Azerbaijan's parliament, told Iranian news that a March 2003 visit from his Iranian counterpart "should open a new horizon in the bilateral ties between the two countries." Azerbaijan presumably hopes that horizon reveals a binding treaty on Caspian revenues, but such hopes can find little support in the current political climate.