Tensions in Dagestan have receded somewhat since last week, when overwhelming Russian force compelled a group of rebels led by Chechen field commander Shamil Basayev to withdraw from villages they had occupied in southwestern Dagestan. The new government of Vladimir Putin has portrayed the episode as a decisive victory for Moscow over Islamic separatism, and this is true to a certain extent. Dagestan will not be joining Chechnya in de-facto independence for the time being. But the cross-border incursion—and the enormous military effort that was as required to counter it—have served again to emphasize Moscow's weakness in the southern reaches of the Russian Federation.

The events in Dagestan also represent the failure of the constructive side of Russian policy toward the states of the South Caucasus—an approach that had been built on the transportation of oil. From late 1997 through early 1999, exports of Azerbaijani oil through Russia had introduced some shared interests and a basis for cooperation into what had been a hostile relationship. However, a year of mounting instability in Chechnya and Dagestan, and the prospect of more to come, have cut off these exports indefinitely, and made it very unlikely that Russia will reemerge as a transit country for significant volumes of Azerbaijani oil. An important source of stability and cooperation in the Caucasus has disappeared. The aftershocks of Russia's most dubious venture in the region—the 1994 invasion of Chechnya—are thus continuing to haunt the entire Caucasus, north and south, and complicate its chances for political stability.

Much attention has been focused on the destructive side of Russian policy in the South Caucasus as Moscow has sought haphazardly to rebuild its declining position in the region. Evidence suggests that, since 1991, Russian elements have directly or indirectly sought to undermine domestic stability in both Azerbaijan and Georgia on a number of occasions. A series of incidents—the fall of the Azerbaijani government in 1993, support for separatism in Abkhazia and Nagorno-Karabakh, two serious attempts on the life of Georgian president Eduard Shevardnadze—put a clearly destructive face on Russian policy toward the South Caucasus.

Between 1995 and 1998, however, the character of Russian policy in the region was altered by the increasing importance of oil and pipeline politics. In pipeline politics, as in traditional politics, Moscow's basic goal was to strengthen Russian influence, and pipelines were seen as a means toward this end. Russian policymakers quickly grasped that they went into the pipeline derby with a fundamental advantage—the existing pipeline linking Baku to the Russian port of Novorossiysk. For the AIOC consortium of international companies that operates Azerbaijan's flagship oil project, the prospect of using this Russian pipeline for exports of "early oil" was commercially attractive. The pipeline gave Russia a source of positive leverage over Azerbaijan—a carrot rather than a stick—which was potentially far more effective than the destructive tactics on which it had previously relied.

For the government of Azerbaijan, as well as the oil companies, the commercial attractiveness of the Russian pipeline route was balanced by a desire to avoid excessive dependence on Russia. Therefore Baku and AIOC decided in 1995 to seek to use the Russian pipeline for initial exports while also beginning construction on a new Georgian pipeline. From Moscow's point of view, this outcome represented only a partial success. Nevertheless, it did set the stage for the first 18 months of AIOC oil exports to transit Russian territory exclusively. More significantly, the pipeline decision created the basis for a thaw in Russian-Azerbaijani relations.

The negotiations held in 1995 and early 1996 regarding the commercial terms for Azerbaijan's use of the Baku-Novorossiysk pipeline showed Russian policy at its most constructive. The Russian pipeline authority Transneft—already infamous as a major source of headaches for foreign investors in the Russian oil sector—seemed to be have been instructed to sign a transportation deal without delay. Commercial and legal terms were agreed upon rather rapidly (by Russian standards), and Azerbaijan and AIOC found themselves with a solid long-term contract to ship volumes of early oil through the Russian pipeline.

Until early this year, the presence of Chechnya astride the pipeline route seemed like an insurmountable problem that had nonetheless been surmounted. After a period of stalemate in 1997, the Russian authorities reached an agreement with the Chechen government of Aslan Maskhadov that allowed oil to flow, with Chechnya receiving a significant share of the tariff revenue. The operation of the pipeline was far from smooth, but by and large it was a success. For the second half of 1998 Azerbaijani pipeline exports to Novorossiysk averaged 80,000 barrels per day, generating revenues and the beginnings of trust.

This year has seen matters take a severe turn for the worse. Beginning in February, the pipeline began to be interrupted for extended periods of time; by July no oil was flowing whatsover. There appear to have been two causes: first, the steady deterioration of relations between Moscow and Groznyi, and second, the complete inability of President Maskhadov to exert control over Chechnya's so-called "field commanders," of which Shamil Basayev is the most prominent example. It is also precisely these two factors that gave rise to the incursion into Dagestan. Maskhadov's government cannot prevent independent Chechen groups from disrupting the pipeline, nor from taking aggressive steps to destabilize Dagestan. At the same time, Russian actions have helped create a new consensus in Chechnya that Maskhadov's cooperative approach on the pipeline issue has yielded little or nothing in way of reciprocation from Moscow. Thus cooperation has been replaced by a more militant approach, which comes more naturally to Chechen leaders in the wake of a bloody war and the poverty and social dysfunction of its aftermath.

For Azerbaijan and its oil ambitions, the shutoff of the Baku-Novorossiysk pipeline—which would have been devastating in 1997 or 1998—is of less consequence today. The pipeline to the Georgian port of Supsa which was inaugurated at the beginning of 1999 can accommodate current AIOC production, and its lower tarrifs (a function of the fact that the project shareholders financed and built the pipeline) make it more profitable than the Russian route. As the next phase of offshore development moves forward, Azerbaijan will need new export capacity. The closure of the Russian pipeline reduces flexibility and increases the urgency of moving forward with a large, new pipeline, but building a so-called main export pipeline to Turkey (the proposed Baku-Ceyhan line) would likely have been a top Azerbaijani priority in any case.

Now that instability in Chechnya and Dagestan has denied Russia a piece of the pipeline action, the geopolitical context of Azerbaijani oil development will be much more contentious. The effects are already being felt in Russia's relations with Azerbaijan, as well as Georgia and Armenia. Unconstrained by pipeline dependence, Azerbaijan has taken a much more aggressive anti-Russian policy line and signaled its desire to strengthen its relations with the United States and NATO. Russia has reacted predictably by moving back toward a more hostile stance toward Azerbaijan. The Georgian pipeline now appears to Moscow less as a commercial competitor than as a political affront, and perhaps as a result Russian pressure on Georgia—particularly through meddling in Georgia's internal politics—has been increasing. In this broader context, the strong military and political partnership between Russia and Armenia appears especially important for Russian policy, and difficult for Armenia's leadership to resist. A constructive Russian attitude toward the Karabakh peace negotiations seems less likely than it did before.

Cross-border pipelines do not necessarily breed peace. But the Baku-Novorossiysk pipeline had the potential to help mitigate the deep tensions that have characterized the politics of the post-Soviet Transcaucasus region. Its continuing operation would have taken some of the politics out of the pipeline issue, and encouraged all players to be more cooperative in Azerbaijani oil development. A Russian stake in the pipeline game would have softened the edges as Azerbaijan moved toward its ultimate goal of exporting the bulk of its future oil production through Georgia and Turkey. By cutting off the Russian pipeline, the situation in Chechnya and Dagestan has made it all but certain that Russia, and indeed all of the relevant states, will view pipelines as weapons in a zero-sum game that pits Russian interests against those arrayed in support of Baku-Ceyhan and the geopolitical alignment that it represents.