The Caucasus region sits between the Black Sea on the West and the Caspian Sea on the East, and comprises the newly independent states of Armenia, Azerbaijan, and Georgia. Since 2004, these three countries have been included in the EU’s Neighborhood Policy . This report considers only Armenia and Georgia; for a full report on Azerbaijan, see EIA’s Azerbaijan Country Analysis Brief .

As herein defined, the Caucasus Region consists of two highly dependent net energy importers surrounded by some of the world’s energy giants (i.e. Russia, Iran, and to a smaller but growing extent, Azerbaijan). Energy priorities of the Caucasus countries, therefore, are two-fold: to diversify their energy supplies; and to cash in on transit revenues as their neighbors develop export facilities which traverse their territory. Three of the new export pipelines will pass through Georgia, while none are scheduled to cross Armenia due to its unstable bilateral relationship with Azerbaijan

The Soviet Union bequeathed a number of problems to the Caucasus countries, including artificially drawn national borders and centrally-planned economies that were heavily dependent on Russia. Even before Azerbaijan and Armenia declared independence, fighting broke out in 1988 between the then-Soviet republics over the disputed area of Nagorno-Karabakh , and separatist conflicts sparked in Georgia soon after independence. Some of the regional conflicts that flared in different parts of the Caucasus throughout the 1990's are now dormant, but few have been officially resolved.

Robert Kocharian has been President of Armenia since March 1998 and was re-elected to another term in February 2003, with a run-off in March 2003. Georgian President Mikhail Saakashvili was elected in January 2004 after the resignation of Eduard Shevardnadze in November 2003. Saakashvili also won a victory in Ajaria, one of three separatist regions in the country, when the leader resigned in May 2004. The central government still holds little power over the other pro-Russian regions of Abkhazia and South Ossetia, and Georgia has amassed 10,000 troops on the border of South Ossetia.

Armenia and Georgia are relatively small producers and consumers of energy, however important oil and gas transit routes cross these countries.