On March 27, officials from Gazprom and the State Oil Co. of Azerbaijan Republic signed a memorandum of understanding providing that discussions between the two energy giants would begin at an unspecified date on the shipment of an unspecified quantity of Azeri gas to Russia starting in January 2010. While the specifics of the agreement have yet to be elaborated, the memorandum represents a potential seismic shift in the strategic tussle between the Kremlin and the West over the future energy assets, as events of the past year have demonstrated both Russia's reviving influence over the region and the West's relative inability to forestall it.

Two events have caused Azerbaijan to reconsider its relations with its giant northern neighbor -- the brief Russian-Georgian military confrontation last August and the subsequent collapse of oil prices amid a deepening global recession. Azerbaijan's economy has been dominated by hydrocarbons for more than a century, which saw foreigners flood into the country until they were displaced by the 1917 Bolshevik seizure of power. However much it wishes, Azerbaijan cannot escape its history or geography, and the recently signed memorandum seems to be an acknowledgement that the halcyon days of Western cash and influence over its energy reserves are on the wane.

Azerbaijan has been producing oil since the 1870s, and by 1900 it was producing more than 50 percent of the world's oil. War and revolution severely crippled its output, but by World War II, the industry had recovered enough to become a major objective of Hitler's armies. During the 1960s, Azerbaijan's output fell as the Soviet leadership opened up new oil fields in western Siberia, but the collapse of communism saw Azerbaijan poised to enter its second golden age.

In a moment of historical irony, Azerbaijan's rise as a petro-state would be kicked off by a man who was part of General Secretary Mikhail Gorbachev's Politburo, Heydar Aliyev, who opened the door to Western investment after assuming the presidency in 1993, transforming the economy so thoroughly that he is remembered with some affection by many Azeris as "Baba," or "Grandpa."

Amidst the economic chaos following the collapse of the Soviet Union, Aliyev understood that to revive the country's oil industry, a massive influx of foreign capital was necessary. Accordingly, in his first year in office he negotiated the "contract of the century" -- a $7.4 billion production-sharing agreement with Western oil companies. Thirteen years later, Azerbaijan had a $21 billion economy, expanding at more than triple the rate of China's, making it the fastest-growing economy in the world, with the International Monetary Fund pegging its growth at 29 percent. Since 2004, Azerbaijan's state budget has quadrupled and its economic planners have won praise from the international financial community for establishing a State Oil Fund to invest a large portion of oil revenues for the benefit of future generations.

When Aliyev died in December 2003, he was succeeded by his son Ilham, who is still president after retaining power in a series of elections decried by both the opposition and many foreign observers as unfair. Whatever the political implications of the country's presidential politics, Ilham has continued his father's policies; Azerbaijan is the sole post-Soviet state to have diversified its export routes beyond Russian control.

Last year's military confrontation between Russia and Georgia, while not directly involving Azerbaijan, nevertheless heavily impacted the country. Its two pipelines transiting Georgia were shuttered by the conflict, and Azerbaijan was forced to renew its use of Russia's Baku-Novorossiisk pipeline. Most importantly to Azerbaijan and fellow energy-rich Caspian neighbors Kazakhstan and Turkmenistan, the conflict indicated that a newly assertive Moscow and its concerns had to be factored into any new transit arrangements.

If any further indication were needed in Baku, Ashgabat and Astana of Kremlin intentions, all doubts were laid to rest by January's natural gas dispute between Russia and Ukraine. In its aftermath, all three countries began to cast a more skeptical eye on various Western proposals for new pipelines, particularly the Trans-Caspian and Nabucco natural gas pipelines. The 2,050-mile Nabucco pipeline, if built, will cost an estimated $12 billion to $13 billion and be twice the length and more than triple the cost of the West's one shining Caspian success to date, the $3.4 billion Baku-Tbilisi-Ceyhan oil pipeline.

While the West has made a grand gesture to Caspian nations promoting Nabucco, the capacity of which is to be 34 billion cubic meters of gas annually, Azerbaijan has so far made the only promise of 8 bcm from its Caspian Shah Deniz field, leaving the project bereft of both throughput and substantive financing. Small wonder, then, that Baku is undertaking discussions with Gazprom about purchasing its natural gas.

While SOCAR executives are insisting that the memorandum signed with Gazprom in no way means that Baku will abandon Nabucco or other Western-backed natural gas ventures, Baku seems quite sensibly to have chosen in the interim to cooperate with Russia rather than wait for Western promises to be fulfilled. Baku's attitude toward Western energy concerns now seems to be, "Show me the money." For a West mired in recession, it seems likely that the currency the Azeris will see in the foreseeable future will be rubles, not dollars, and in such a climate one can hardly blame them, even as European and American pundits will doubtless soon be debating "who lost Azerbaijan."

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