In the best of times, on July 11 oil reached its historic record high of $147.27 per barrel. In the worst of times a severe global recession has ensued since those heady summer days, and oil prices have slumped 73 percent. Following Israel's attack in the Gaza Strip on Dec. 29, fears over crude oil supplies pushed up the price of oil by nearly 8 percent from the previous day, with New York light crude jumping by almost $4 to $42.20 a barrel.

The precipitous fall in prices has essentially flattened the growth expectations of former Soviet republics Russia, Azerbaijan and Kazakhstan. The economic volatility has underscored the precarious nature of economies dominated largely by a single "cash crop" export, and the repercussions will be felt for some time to come, particularly in Russia, the world's second-largest oil exporter. For better or worse, oil and oil-related products presently account for more than 70 percent of Russian exports, tying Moscow's prosperity or pauperization to the commodity for the foreseeable future.

A second factor having a major impact on Caspian energy was the brief but violent five-day military confrontation last August between Russia and Georgia. Since 1991 the West, led by Washington, had relentlessly pushed into developing the Caspian nascent oil reserves, which had remained largely fallow during the last two decades of Soviet power as Moscow turned its attention to its vast energy reserves in western Siberia. While Azerbaijan in fact had an oil industry that predated Russia's 1917 revolution, its further development had been largely sidelined while Moscow, which knew of Kazakhstan's potential, lacked both the interest and exotic offshore drilling technology to bring its Caspian reserves online. As Washington's Caspian energy policies developed, their key tenet became the construction of westward export oil and gas pipelines that bypass both Russia and charter "Axis of Evil" member Iran.

The August Georgian-Russian military confrontation highlighted the naive fallacy behind inveigling Kazakhstan and Azerbaijan to entrust the bulk of their exports to westward pipelines dominated by American and European consortia in the naive belief that the Kremlin would somehow quietly acquiesce in such an arrangement. The Russian military operation against Georgia underlined the fact that ignoring the Kremlin's concerns about Caspian energy export routes was a reckless policy at best, foolhardy at worst.

For Azerbaijan, the conflict was an unmitigated disaster, as the bulk of Azeri oil exports were shipped through Georgia via the West's crown jewel investment, the 1,092-mile, $3.6 billion Baku-Tbilisi-Ceyhan pipeline, capable of shipping up to 1 million barrels per day. On Aug. 5, two days before hostilities started, the segment of BTC transiting eastern Turkey was interrupted when an explosion of indeterminate origin caused BTC operator BP to halt oil exports. When the fighting started BP also closed its Georgian Baku-Supsa as a precaution, while Russian military operations off Georgia's Black Sea ports Poti and Kulevi were also halted, effectively shutting in Azeri exports except for those sent northwards through Russia's Baku-Novorossiisk line and, in a first for Baku, oil swaps eastwards to Iran. When BTC resumed operations 20 days after the explosion, Azerbaijan had been stymied in shipping approximately 17 million barrels of crude at a final cost along with pipeline repairs of more than $1 billion. The conflict served notice on both Azerbaijan and Kazakhstan that Moscow's wishes were to be taken under advisement in any future dealings with Western energy firms.

Ironically, Russia's moment of triumph coincided with the beginning of the downward spiral of energy prices, with the ruble depreciating 20 percent since August. The Bank of Russia has responded by gradually broadening the ruble's reference trading band against the dollar and the euro in an attempt to engineer a "soft landing" decline in the currency's value, but the policy has been overtaken by the deepening implosion of the world economy, which in turn is hastening the pace of devaluation, pushing the ruble into 12 mini-devaluations since Nov. 11. As foreign currency reserves were used to defend the ruble, Russia's reserves have degraded by about 25 percent to $450 billion.

Besides the war providing a sharp reminder of Russia's proximity, the subsequent downward spiral of energy prices has impacted the Kazakh and Azeri economies in a manner similar to Moscow. Like Russia, Kazakhstan's economy is dependent on energy revenues for more than two-thirds of its income, as by 2005 Kazakhstan's oil and gas sector accounted for 70 percent of the country's exports, giving Kazakhstan a larger economy than the other four former Soviet Central Asian republics combined. Now, according to the CIA's Factbook, Kazakhstan's external debt is more than $96 billion, and the debt share per resident is more than $6,000.

In Azerbaijan, according to the Asian Development Bank, rising oil revenues meant that Azerbaijan had one of the world's fastest-growing economies, with its GDP growing by 26 percent in 2005, 31 percent in 2006 and 29 percent last year. Like Russia and Kazakhstan, Azerbaijan's prosperity was dependent on its energy industry, which in 2005 accounted for 42 percent of the country's GDP. Both countries have accordingly downsized their budgetary predictions, with Azerbaijan projecting income based on about $70 per barrel, while Kazakhstan is projecting even lower income based on $61 per barrel. The decline in global prices has made even these cautious projections obsolete.

In a small but telling attempt to diversify its economy away from its dependence on oil, last month the Russian government discussed charging 10 percent higher import duties on new foreign cars in an attempt to force international automotive giants to build automotive assembly plants in Russia. But the Kremlin obviously feels the energy oligarchs' pain, and the restrictive import duties will not be applied to Bentleys and Jaguars. Luxury car sales have also tumbled in Azerbaijan and Kazakhstan as well.

As the dwindling numbers of Azeri, Kazakh and Russian energy tycoons wait for the global economy to rebound, at least the oligarchs can console themselves with extra heapings of the Caspian's other "black gold" if they have the right connections. Despite Russia banning commercial harvesting of sturgeon in 2002, last year illegal caviar sales were worth more than $1 billion. Every oil slick has a silver lining.

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