Russia Just Signed Another Huge Energy Deal Amid The Ukraine Crisis

(AP Photo/RIA-Novosti, Mikhail Klimentyev, Presidential Press Service)Russian President Vladimir Putin claps as Chairman of the Board of Directors and Managing Director of ONGC Group of Companies Dinesh Kumar Sarraf, left, and CEO of state-controlled Russian oil company Rosneft Igor Sechin exchange documents.The State Oil Company of the Azerbaijan Republic (SOCAR) announced on May 24th that it had entered a joint venture (JV) agreement with a Russian state-owned energy firm, Rosneft.

The agreement enables SOCAR and Rosneft to co-operate on the exploration and production of oil and gas projects within Azerbaijan, Russia and in third countries.

Commenting on the JV, Rovnag Abdullayev, the chief executive officer of SOCAR, and Igor Sechin, the executive chairman of Rosneft, said that the deal would facilitate co-operation in the development of the energy sector in Siberia and Russian areas of the Caspian Sea, along with energy infrastructure.

The establishment of the JV follows an agreement signed between both parties in mid-August 2013 to increase their co-operation.

The JV will form an important component of SOCAR's long-term development plan to expand its foreign operations and become a more central player in regional and global energy markets. In recent years the company has increased its investment in countries that will form part of the Southern Gas Corridor that will transport gas from the second phase of the Shah Deniz gasfield project, which is planned to come on stream in late 2018. SOCAR has also increased its involvement in downstream operations in Europe, including in Romania, Ukraine, Switzerland and Georgia.

It is also likely that political considerations influenced the decision to sign the deal with Rosneft. The Southern Gas Corridor will provide the first export route for Caspian gas outside of Russian control. By concluding a major deal with Rosneft, the Azerbaijani authorities have ensured that Russia will also be a stakeholder in the future expansion of Azerbaijan's energy sector.

This is not the first concession Azerbaijan has made to Russia this year-in February SOCAR and the Russian oil pipeline monopoly, Transneft, announced that they had reached a new agreement on the transportation of oil from Azerbaijan through the Baku-Novorossiysk pipeline. The deal made little sense from an economic perspective, as Azerbaijani light crude is sold at a discount when blended with Russian Urals crude.

However, in the light of the Ukraine crisis, the Azerbaijani government may have taken the view that strengthening energy ties with major Russian companies could provide useful insurance against future political pressure.

Click here to subscribe to The Economist.