RUSSIAS FOREIGN POLICY FOR CENTRAL ASIA PASSES THROUGH ENERGY AGREEMENTS

Marika S. KARAYIANNI


Marika S. Karayianni, Ph.D. (Law), energy expert in the Black Sea Economic Cooperation (BSEC) (Athens, Greece)


Introduction

The months of April and May 2003 witnessed the signature of a series of strategic long-term energy agreements between Russia and the former Soviet Republics of Central Asia, namely Turkmenistan, Uzbekistan, Kyrgyzstan and Tajikistan, whereas discussions are underway for similar agreement to be signed with Kazakhstan. All four energy deals have a 25 year perspective and cover a broad range of partnership: gas exports, joint development of oil and gas fields, pipelines and rehabilitation of the obsolete installations of the Central Asian Republics. Since the war in Afghanistan and the settlement for the first time of American military bases in key strategic locations in Central Asia (Bishkek, Manas), Russia albeit not contradicting American presence pursued a policy of tying the poor and corrupt but energy rich Central Asian States to the Russian carriage through economicnot militarymeans.

It becomes evident that President Putin, who is likely to be re-elected for a new four-year term next year, aims at securing Russian dominance in Central Asia through economic and energy dependence of the new independent States on Russia. It is important to note that on behalf of Russia, the agreements were signed by Gazprom CEO Alexey Miller and not by the Russian Energy Minister Igor Yusufov. The political message of this fact is that President Putin intends for the Russian gas monopoly to set foot for many years in Central Asia and to undertake three key long- term tasks: (a) to handle gas exports in particular from Turkmenistan through Russian territory with the double aim of undermining the potential dynamics of the Trans- Afghan gas pipeline and of allowing Gazprom to export Siberian gas to the EU, (b) to pursue a long-term investment policy in the region by developing new fields, especially in Uzbekistan, Kyrgyzstan and Tajikistan, and (c) to upgrade the local pipeline system and ultimately connect it with the Russian network.

The Russian-Turkmen Pacts

Russia and Turkmenistan reached two pacts, an economic one on long-term energy exports and a bilateral security agreement. Both are considered to have a broad long-term impact on Central Asian geopolitics. The agreements were signed during the State visit of the Turkmen President to Moscow on 10-11 April, 2003. Saparmurad Niyazov signed a framework agreement on gas cooperation with his counterpart Vladimir Putin and a 25-year contract on gas supplies from Turkmenistan to Russia with Alexey Miller, the head of the Russian gas monopoly Gazprom. Moreover, the two countries signed a protocol confirming the Treaty of Friendship between Turkmenistan and Russia.1

Under the terms of the strategic energy deal, Turkmenistan, which owns the worlds third largest gas reserves after Russia and Iran, is to supply 2 trillion cubic meters of natural gas to Russia through 2028. Alexey Miller hailed the agreement as a revolutionary breakthrough in the cooperation between the two great gas powers.2 According to Niyazovs estimates, the deal could be potentially worth $500 billion over its 25-year lifespan, with Ashghabad earning around $200 billion and Moscow receiving $300 billion. At first, Gazprom will start buying relatively small amounts of Turkmen gas. In 2004, Gazprom will purchase 5-6 Bcm, increasing to 10 Bcm in 2006.

Two years of negotiations ended with Gazprom agreeing to buy Turkmen gas for $44 per 1,000 cm, although only a month ago, Alexander Ryazanov, one of Gazproms top executives, said that a fair price for the Turkmen gas is not $44 but $25-27 per 1,000 cm. During the initial period 2004-2006, Russia will be paying $44 per 1,000 cm. Half of this sum is to be paid in cash, the rest in goods and services. Starting from 2007 Russian purchases will jump to 60-70 Bcm and to 70-80 Bcm in 2009. Concerns are raised however by the fact that although the pact covers 25 years, the nature of the business relationship between Gazprom and its Turkmen partner Turkmenneftegaz is clearly defined only for a three-year period. This is a practical detail, which remains to be settled. That is why, it is not clear what will be the price of Turkmen gas after 2006. What appears certain is that within three years Russia will likely lose its right to a barter-type payment for half of the purchased gas. As a result, many political commentators in Moscow estimate that political considerations exerted considerable influence over Moscows negotiating strategy and final admission of the price proposed by the Turkmens for gas. They claim that the agreement has been signed on Turkmen terms, as Gazprom never wanted to pay more than $25-27 per 1,000 cm and characterized it as a political gas contract.3

The economic significance of the energy deal is undoubtedly high. On the one hand, Turkmenistan has solved a very important economic problem: relying on gas export revenues, it has sold the major proportion of its gas for the next quarter of the century. In addition to that, currently, the bulk of Turkmen gas is being exported to Ukraine and Russia via Russian pipelines, while some gas exports go to Iran. Now, under the new deal, most if not all Turkmen gas will go to Russia via Russian export routes. On the other hand, Russia badly needs Turkmen gas supply to cover domestic use in order to be able to increase its gas exports to the EU. It is to be noted that production from Gazproms own field of Nadym-Pur-Taz in the Yamal Peninsula is in decline and needs high capital investment.4 The deal is profitable for Gazprom for an additional reason: it removes a possible competitor for supplying gas to Europe. Under a proposed gas pipeline backed by Turkey and the U.S. years ago but now forgotten, Turkmenistan would be supplying gas to Europe through Azerbaijan and Turkey (the Trans Caspian Gas PipelineTCGP). Lack of political commitment and reluctance of the international financing institutions to put money on such a long and expensive pipeline crossing the Caspian Sea have put this project on hold indefinitely.

However, both the gas contract and the security agreement should be viewed also within the political context of recent developments in Iraq. Moscow is keen to monopolize the transit of the Turkmen gas because such a monopoly would enhance Moscows ability to project its influence across Central Asia. Confronted with growing U.S. assertiveness, the bulk of Russias analytic community now believes it is in the countrys best security interests to seek accommodation with Central Asias authoritarian rulers, rather than to confront them. In particular, Moscow should increase its strategic cooperation with Ashghabad, as Turkmenistan borders both Afghanistan and Iran, key Asian states that are not CIS member states. The Iraq crisis has only increased the significance of the so-called Caucasus-Central Asian arc that is again turning in the Russian leaderships strategic plans into a vital southern security belt, Rossiiskie Vesti said in an editorial.

For his part, the Turkmen leader, calling himself Turkmenbashi, father of all Turkmens, appears to feel endangered following the collapse of Saddam Husseins authoritarian regime in Iraq. Looking for allies and possible protectors, Niyazov appears to have turned to Russian President Vladimir Putin for support. The Turkmen leader was sharply criticized after he reportedly orchestrated show trials in the wake of the alleged assassination attempt against him last November.

Nevertheless, the major geopolitical significance of the Russian-Turkmen energy pact for energy security in Asia and the Middle East lies elsewhere: in the wake of the recent agreement of the Presidents of Turkmenistan, Afghanistan and Pakistan to move forward with the realization of the Trans-Afghan gas pipeline, Turkmenistans deal with Russia and its subsequent over-dependence on Russian pipelines are likely to alter future developments with respect to the implementation of the Trans-Afghan project. The $2.5bn pipeline, which could also be extended to India, would carry gas from the Dauletabad gas field of Turkmenistan near the Iranian border. Gazprom has been eyeing Dauletabad to carry 20 Bcm/y for Pakistani markets. But as Dauletabad is still hooked up to the old Soviet pipeline network, Gazprom still can take gas from there into Russia. That is why Russian officials rushed to ink a gas deal with the Turkmen President. With this deal, Russia basically convinced Turkmenistan to sell all its gas export to Russia. As a consequence, the economic viability of the Trans-Afghan gas pipeline suddenly becomes a matter of serious debate.5

Plans for future cooperation between Russia and Turkmenistan also involve the development of Turkmenistans Caspian offshore fields by a consortium of Russian companies. The consortium named AO Zarit (Zarubezhneft, Rosneft and Itera) is negotiating to acquire development rights to three oil and gas blocks in the Southern Caspian offshore Turkmenistan.6 The issue of the legal status of the Caspian Sea remains still unresolved, however this does not seem to obstruct development projects for offshore oil and gas fields.

The Russian Agreements with Kyrgyzstan and Tajikistan

In May, Gazproms CEO Alexey Miller was in Central Asia, where he signed two more energy agreements with officials in Kyrgyzstan and Tajikistan. Under the terms of the agreements, Kyrgyzstan and Tajikistan will receive a reliable supply of gas throughout the year, something they have never enjoyed since becoming independent in late 1991. The agreements break the two countries dependence on neighboring Uzbekistan and also give Gazprom a strong basis for developing new energy resources in these two countries. Kyrgyzstan and Tajikistan have been dependent on Uzbekistan for supplies of natural gas since the days of the Soviet Union. Then, all republics were part of the unified power-grid system built by the Soviet Union, which brought gas from Turkmenia and Uzbekistan to Kirghizia and Tajikistan. Since they were all associated Soviet Republics, there was no question of payment. But the collapse of the Soviet Union and the emergence of the new independent states meant the end of the days of free natural gas.

Kyrgyzstan and Tajikistan are among the poorest of the CIS member states. Since independence, they have been dependent on neighboring Uzbekistan for the bulk of the natural gas they receive. The Uzbek government has used this dependence on several occasions to put pressure on Bishkek and Dushanbe to bring their policies into line with those of Tashkent. Both these countries quickly accumulated large debts for the gas they consumed. Uzbekistan has often cut supplies to both countries, citing these debts. Kyrgyzstans problems were compounded later when, under agreements from the late 1990s, Uzbekistan insisted on charging world prices for its gas instead of the favorable rates it had initially granted its neighbors. Similar events have involved Tajikistan and the Uzbek government. The cutoffs have led to the temporary closures of schools in winter and the rationing of energy to households and industries. Repeated visits of Kyrgyz and Tajik energy officials to Tashkent to plead for extensions on payment have become almost annual events.7 Now, it is not Uzbekistan selling gas to Kyrgyzstan and Tajikistan, but Russia, although it is still local gas both countries will receive. Gazprom also has made deals to buy natural gas from Uzbekistan and Turkmenistan, and it is this gas that Kyrgyzstan and Tajikistan will be receiving. Payments for the gas will be made to Gazprom, however, not the Uzbek government. As a consequence, Moscow has achieved a partial dependence of Tashkent on Russia regarding its policy of gas exports.

With regard to the Russian-Tajik energy agreement, Gazprom and Tajikistan will jointly conduct prospecting, extraction and exploitation of gas resource deposits on the territory of Tajikistan (including allotment of products), build, reconstruct and exploit gas pipelines and other infrastructure objects, and also cooperate in the sphere of refinement, transport and realization of gas. It is estimated that there is more than 1 Tcm of gas resources on the territory of Tajikistan. Currently, the volume of prospected gas reserves is small, and extraction does not provide for the domestic demand. The difference is made up by imports. Gas extracted on private oil fields (24 mm cm in 2002) is consumed in the south of Tajikistan. In the north, gas is delivered via a gas pipeline from neighboring Uzbekistan (485 mm cm in 2002).8

Gazprom intends to help repair Tajikistans damaged energy infrastructure, participate in the exploitation and use of the resources inside Tajikistan and repair of gas and oil wells, as well as pipelines. Alexey Miller and Tajik Energy Minister Abdullo Yerov signed a 25-year agreement on strategic cooperation in the gas industry on 15 May. The next day, Miller signed another agreement with Kyrgyzstan, which he said, will ensure reliable gas supplies to meet the demand of Kyrgyzstan in 2003 and 2004.

The agreements specify that the Russian company will help Kyrgyzstan and Tajikistan develop their own natural-gas resources. More immediately, Gazprom will help provide supplies of gas to both countries. The Kyrgyz and Tajik governments are no doubt hopeful that this agreement with Gazprom marks the end of sudden gas-supply interruptions and the rationing of electricity and gas, especially during wintertime.

The main areas of cooperation will be repair, construction and exploitation of the gas pipeline system, compressor plants and other gas facilities in Kyrgyzstan as well as the creation and implementation of joint projects in gas and energy production, gas prospecting and the development and exploitation of gas fields in the republic. Known gas reserves in Kyrgyzstan total 5.7 billion cubic meters. However, the gas fields in the republic have not been fully developed for geological reasons and the infrastructure of the gas industry is also underdeveloped. Annual gas consumption in the republic comes to 0.6 Bcm and this gas is imported from Uzbekistan.9

Moreover, Gazprom links the agreements to the upgrading of the Central Asian pipeline system, which connects the Central Asian Republics infrastructure with the Russian gas infrastructure in an effort to unify the Central Asian and Russian gas export systems and to control if possible all gas exports from Central Asia. This prospect is likely to reduce the appeal to Tajikistan and Kyrgyzstan of the Trans- Afghan gas pipeline, as was stated above.

However, what is most interesting is that both Kyrgyzstan and Tajikistan have an energy resource, which is waiting to be used: hydroelectricity. The deals give the Russian companies and ultimately the Russian government new footholds and new access to hydroelectricity, one of the potentially greatest energy resources in the region. Gazproms deals leave open the possibility to tap these resources. Both States have the significant potential for hydroelectric production, and it could come about and be on-stream soon, if substantial investment takes place. Two of the hydroelectric projects, the Rogun hydroelectric plant and Kyrgyzstans Cascade project, could provide enormous amounts of energy, enough to allow Kyrgyzstan and Tajikistan to become regional energy exporters. Afghanistan has already been named as one country that could benefit from the completion of the two projects. Pakistan is another. For those looking far into Central Asias future, it is worth noting that Russias participation in the two hydroelectric projects would also give Russian companies a strategic foothold in the exploitation and use of Central Asias two largest rivers, the Syr Darya and the Amu Darya, which bring water to the fields of Uzbekistan, Kazakhstan, and Turkmenistan.10

The Russian-Uzbek Energy Future Cooperation

A recent key reform by the Uzbek President Islam Karimov looks set to allow the first major investment in Uzbekistans oil and gas industry. The law would allow foreign investors to spread returns on capital expenditures over several years, rather than the present obsolete system, which prevents investments from being carried over from one year to the next. Russian companies LUKoil and Itera are interested to take advantage of the change, as they seek to sign a Production Sharing Agreement (PSA) with the Uzbek national oil company Uzbekneftegaz on the Kandym gas and oil field in northwest Uzbekistan. Both companies have previously signed preliminary agreements to develop the contract area.

The field is estimated to hold reserves of over 100 Bcm of gas. The PSA would also include the already productive neighboring fields of Ustyurt, Khauzak and Shady. In all, the reserves are estimated at 1.7 trillion cm of gas and 1.7 billion tons of oil and gas condensate. To gain access to international markets and expand productivity, Uzbekistan urgently needs foreign partners. In an earlier attempt to attract capital investments, Karimovs government put minority stakes in various subsidiaries of Uzbekneftegaz on sale. But no deals were ever reached. Among other hurdles to be overcome before foreign investors are likely to invest large sums in the countrys oil and gas sector are ambiguous regulations of currency exchange. These laws oblige foreign companies to cash in on their investments in local currency at state-determined exchange ratesat hardly two-thirds of those offered on parallel markets. An alternative used by some investors in the country, taking payment in goods barter deals, has limited attraction for companies working in the capital-intensive oil and gas industry.11 Should a PSA be signed for the development of the Uzbek fields, Russian companies will enjoy a significant precedent in Uzbekistan: they will be the first foreign companies to undertake investment of such magnitude in the oil and gas sector of the country.

Discussions with Kazakhstan

Gazprom is currently holding talks also with Kazakhstan for the signature of a similar 25-year agreement. The Russian gas monopoly has signed contracts with Kazakhstan and Uzbekistan last year for the purchase of 5bn cm/y from each State. The deal with Kazakhstan covers one year, while the Uzbek agreement extends to 2012.12 Kazakhstan holds the majority of oil reserves of all Caspian States. Three giant fields are located in Kazakh territory and offshore area: Tengiz, Karachaganak and Kashagan. These fields are poised to place Kazakhstan in the top ten oil-producing countries in the next years, provided that field development goes on according to schedule. The geopolitical significance of this country for Russia lies in its direct neighborhood, they have common border, as well as in the fact that oil from Kazakhstan, namely from Tengiz, is already being transferred through Russian territory to the Western markets. Also, the Central Asia-Center Gas Pipeline passes through Kazakh land, which makes cooperation with this country immensely important not only for Gazprom but for the major Russian oil companies too.

Concluding Remarks

The American military bases still remain in Central Asia and there is no sign of an imminent departure. Russia and President Putin personally right after the 11 September attacks were aligned with the U.S. and pledged support for the U.S. campaign against terrorism in Afghanistan. Successful or not, this was against the Taliban, and al-Qaeda was the first real test for Russian-American relations. Russia did not actively participate in the battlefield but gave its consent to the installation of U.S. military bases in Central Asia and provided the Americans with intelligence. On his part, President Bush acknowledged Russian cooperation and admitted for the first time that there is a link of cooperation between al-Qaeda and the Chechen warlords. The war in Afghanistan is over, however stability is not yet consolidated. The country badly needs Foreign Direct Investment for reconstruction.

The Trans-Afghan pipeline is a project with multiple economic and political significance for Afghanistan and the wider region: it will bring cash to the wrecking economies of the three participating countries, as Turkmenistan will find an outlet for its gas from the Dauletabad field, Afghanistan will profit from transit fees from the passage of the line through its territory and in addition will receive gas for domestic use, and Pakistan will benefit from the utilization of its Karachi port. The pipeline will make even more economic sense if India gets involved too. However, now with the signature of the new deals between Russia and Turkmenistan, the future of the pipeline becomes uncertain, as the Dauletabad source becomes committed to Gazprom. This gives a huge advantage to the Russians, as they will have a saying in the talks for the progress of the line. Not having any more the military might of the past, Russia now pursues a constant policy of economic penetration into the Central Asian Republics knowing very well the state and needs of the local economies. Foreign-policy making through economic diplomacy is likely to produce slower but sure and long-term results for the relations and the involvement of Russia in Central Asia.


1 See: I. Torbakov, Russian-Turkmen Pacts Mark Strategic Shift for Moscow in Central Asia, Eurasia Insight [Eurasianet.org], 15 April, 2003.
2 M. Clothier, Turkmenistan Wins Gas Deal, Caspian Business News, 14 April, 2003.
3 M. Klasson, Commentary at Vremya MN daily, 14 April, 2003.
4 See: FSU Oil & Gas Monitor, Week 20, 21 May, 2003, NewsBase.
5 See: Russia Achieves Breakthrough in Central Asia Gas Plan, Asia Times, 2 May, 2003.
6 See: M. Clothier, op. cit.
7 See: B. Pannier, Kyrgyzstan, Tajikistan Hope Gazprom Will Make Their Winters Warmer, Times of Central Asia, 23 May, 2003.
8 See: Gazprom and Tajikistan To Sign Gas Agreement, The Russia Journal Daily, 19 May, 2003.
9 See: Gazprom and Kyrgyzia Sign 25-year Cooperation Agreement, RosBalt News Agency, 19 May, 2003.
10 See: B. Pannier, op. cit.
11 See: Marsh Reinsures Caspian Pipelines Risk, Caspian Business News, 26 May, 2003.
12 See: FSU Energy Report, Petroleum Argus, Volume VIII, 20, 23 May, 2003.

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