Smaller 'stans fret at Russia's
dominance By Fozil Mashrab
TASHKENT - Tajikistan and Kyrgyzstan,
Central Asia's two smallest economies, are
discovering that breaking free of Russian
domination is a hard task, particularly when they
lack their own hydrocarbon resources and struggle
to forge good relations with other neighbors that
might make up for that shortage.
Russian
oil supplies meet more than 90% of Kyrgyzstan's
and Tajikistan's oil needs, but Uzbekistan,
Kazakhstan and Turkmenistan are rich in
hydrocarbon resources and could potentially
overtake Russia as the two smaller countries' main
source of petroleum and other fossil-fuel
supplies.
Russia, however, also offers an
important destination for millions of Central
Asian migrant workers, giving the Kremlin powerful
leverage over its
southern neighbors whenever these countries cross
"red-lines" by pursuing policies perceived to be
detrimental to Russia's interests in Central Asia.
"Red lines" include diversifying security
relations and establishing military ties with
Western countries by inviting them to open
military training and other facilities in their
respective countries; hostile actions by host
governments towards Russian investors and overall
Russian economic interests; and not least,
reasserting national identities by reducing the
role of the Russian language in their respective
societies.
In April 2010, Russia imposed
duties at an initial US$200-plus per ton on all
oil exports to countries that were not part of the
Customs Union (Russia, Kazakhstan and Belarus);
over two years, the duties gradually increased to
$406 per ton (as of December 2011).
Though
the measure was introduced largely as an internal
requirement to prevent Russian domestic oil
producers from exporting most of their produce and
starving Russian refineries while the domestic
market was also experiencing severe petroleum
shortages, the immediate collateral damage of this
measure was a sharp increase in petroleum prices
in Kyrgyzstan and Tajikistan.
Although
Tajikistan was able to survive this sudden
"petroleum shock", neighboring Kyrgyzstan was less
lucky; this latest punitive measure by Russia
helped to ignite a popular revolution against the
authoritarian regime of then president Kurmanbek
Bakiev, who was toppled on April 7, 2010, just a
week after Russia imposed the oil export duties.
Ever since, the duty-free Russian oil
supplies to Kyrgyzstan have played the role of a
barometer in the bilateral relations of the
countries. Later that year, new Kyrgyz authorities
were able to persuade Russian Prime Minister
Vladimir Putin to resume duty-free petroleum
supplies to Kyrgyzstan "in view of the hard
economic situation in the country" which was
caused by the violent regime change and bloody
ethnic clashes in the southern part of Kyrgyzstan.
In return for Kremlin's goodwill gesture,
the Kyrgyz parliament named one of the mountain
peaks in the country after Putin while the new
Kyrgyz government, led by the then prime minister
and now president, Almazbek Atambaev, promised to
honor the various pledges made by former president
Bakiev but apparently never fulfilled.
These included handing over to Russia a
majority stake in the Soviet era "Dastan" torpedo
manufacturing and testing plant located in
Issyk-Kul lake in return for writing off more than
US$100 million of Kyrgyz debt, and allowing
Russia's GazpromNeft to become a senior partner in
the lucrative new oil supplying joint venture
company GazpromNeft-Aero-Kyrgyzstan, which was
contracted by the Pentagon to provide 50% of the
aviation fuel supplies to the US military base at
Manas International Airport in Bishkek.
President Atambaev also pledged to lead
Kyrgyzstan into the Russia-led Customs Union, and
not to renew the lease of Manas air base to the
United States come 2014, when the current lease
agreement would expire.
At that time,
Kyrgyz authorities hailed the establishment of the
Kyrgyz-Russian fuel supply company
GazpromNeft-Aero-Kyrgyzstan as a major victory for
the new Kyrgyz government as this venture would
bring US$4.5 million in revenues to Kyrgyz
government every month, thus helping to shore up
badly depleted Kyrgyz finances. Meanwhile, the
Russian company would also earn handsome revenue
out of this business.
If Kyrgyz
authorities were able to resume duty-free
petroleum supplies from Russia soon after the
heavy duties were imposed, even if at the cost of
some of their sovereignty, matters did not revert
in the same manner for Tajikistan.
Tajik
leaders refused to give in to Russian pressure,
instead playing hardball by proudly announcing
that in a year's time they would fundamentally
diversify their oil supplies away from Russia. At
the same time, it had been reported that Tajik
Prime Minister Akil Akilov had written several
letters to his Russian counterpart requesting that
Russia grant Tajikistan the same exemptions that
were offered to Kyrgyzstan.
Throughout the
past year, Russia has not only continued to ignore
the Tajik government's repeated requests but has
also thought it necessary to apply strong pressure
on the Kyrgyz government to ensure that none of
the 1 million tons of "subsidized" Russian fuel
per year meant only for domestic consumption in
Kyrgyzstan makes its way to Tajikistan -
particularly through their ill-guarded border in
the Kyrgyz province of Batkent in the Fergana
Valley.
Regional observers claim that
thousands of tons of subsidized Russian fuel still
found their way to Tajikistan since Kyrgyz
authorities could not resist making quick cash
from the process while publicly pledging to put an
end to such practices if they indeed existed.
During 2011, an election year in Kyrgyzstan, some
of the prominent presidential candidates traded
accusations claiming that the rival candidate was
providing a "political roof" for fuel smugglers.
For almost two years, Tajikistan has been
receiving petroleum supplies at much higher rates
than Kyrgyzstan, burdening the Tajik economy and
driving up prices across the board for many
consumer products. Some visiting European
observers commented that some consumer goods in
Tajikistan were more expensive than in European
Union countries.
High petroleum prices
have also helped to widen Tajikistan's trade
deficit and weaken the national currency, the
somoni, which had to be saved from free fall by
central bank intervention, at the cost of millions
of US dollars, throughout 2011.
Now with
the benefit of hindsight it seems that all these
hardships experienced by Tajikistan for the past
two years only increased the country's misery
while the government has not been able to
"fundamentally diversify" Tajikistan's oil
supplies away from Russia.
As of December
2011, Tajikistan was still receiving 84% of its
fuel supplies from Russia, which means that
Tajikistan has reduced its dependence on Russia by
only some 10%.
On January 25, Energy
Minister Sherali Gul made a working visit to
Russia carrying yet another letter from the prime
minister requesting that the Russian government
provide 1 million tons of duty-free fuel supplies
to Tajikistan this year. Russia agreed to provide
only 179,000 tons - a quarter of Tajikistan's
annual fuel needs.
Russian observers
believe the Kremlin will extend the same
exemptions to Tajikistan only if the Tajik
government agrees to a number of political demands
from Russia. These include the return of the
Russian border guards to the Tajik-Afghan border,
the lease of Ayni military air base to the Russian
Air Force free of charge, and the extension of the
stay of Russian military bases (in total around
6,000 personnel) in Tajikistan for another 49
years free of rent.
According to regional
observers, the Tajik government's desperate
efforts in the past two years to court other oil
producers in the region to provide fuel supplies
have not been successful as Kazakhstan and
Turkmenistan have offered only to supply fuel
based on international market prices - which were
higher than the cost of Russian fuel even with the
heavy export duty surcharge.
Iran,
Tajikistan's cultural and linguistic cousin,
seemed to offer some hope, as Iran was "willing to
flood" relatively the small Tajik market with
cheap Iranian crude - but Tajikistan lacks
refining capacity while Iran itself is a net
importer of refined oil products.
During
his visit to Tajikistan in September 2011, Iran's
President Mahmud Ahmadinejad promised to build an
oil refining facility in Tajikistan at some point
in the future. It is also believed that one of
Tajikistan's local tycoons close to President
Emomali Rahmon has been investing in an oil
refining facility near the capital, Dushanbe, with
an annual capacity of 100,000 tons of crude oil
and which is expected to start functioning in
autumn this year.
But even if Tajikistan
develops its indigenous refining capacity, it will
still face the problem of ensuring stable crude
oil supplies. Its own oil resources are extremely
limited and only recently started to be developed
by the likes of Russia's Gazprom and Canada-based
Thethys Petroleum.
Moreover, these oil
companies' continued interest in Tajik oil
reserves will be subject to sustained high (above
US$100 per barrel) international oil prices since
extracting Tajik oil is more costly than in other
Central Asian countries as the oil field works
involve deep drilling.
Developing domestic
oil refineries might be a long-term solution and
could even alleviate Tajikistan's crippling
dependence on Russia in the short and medium term,
but for years to come they will provide only a
fraction of Tajikistan's domestic needs while much
of the required fuel will still be delivered by
Russia.
Developing domestic refining
capacity also seems to be on the agenda for the
new Kyrgyz government led by its business-friendly
prime minister, Omurbek Babanov, a former oil man.
He has invited Azerbaijan's state oil company,
SOCAR, to build an oil refinery in Kyrgyzstan.
According to the latest agreement signed
between the Kyrgyz government and SOCAR in
Bishkek, Azeri Oil Co will build a refinery with a
capacity of 2 million tons of crude oil per year.
It is scheduled for completion in 2013.
Importing Iranian oil to Tajikistan and
Azeri oil to Kyrgyzstan might appear to carry the
promise of lessening the dependence of both
Kyrgyzstan and Tajikistan on Russian oil
domination, but these projects also face hurdles.
Iranian oil is already under US-led
sanctions and if Tajikistan starts importing
Iranian crude in a big way to feed its
soon-to-be-built refineries it might also be
targeted by US sanctions. Tajik officials are
already apprehensive that Iranian investments in
the Tajik economy might dry up in 2012 as a result
of US sanctions.
So far, the US has
largely ignored and spared Tajikistan's economic
dealings with Tehran, considering them
insignificant and in an attempt to secure
Dushanbe's continued assistance to deliver
logistical supplies to US and North Atlantic
Treaty Organization troops in Afghanistan.
SOCAR's investment in the Kyrgyz refinery
project will boil down to whether the venture will
be profitable for the Azeri company, as most of
the crude oil will have to be imported from other
countries (adding extra transportation costs)
including from Azerbaijan, which is not
Kyrgyzstan's immediate neighbor.
Regional
observers believe there is a third way for both
Kyrgyzstan and Tajikistan to lessen their
dependence on Russian fuel supplies - this would
require an improvement in the relations of these
two countries with their downstream,
hydrocarbon-rich neighbors. In particular,
Tajikistan has to improve its ties with Uzbekistan
and Kyrgyzstan with Kazakhstan over long-standing
disputes over regional water resources.
Turkmenistan can also play a positive role
by partly meeting Tajikistan's fuel needs at
"brotherly discount rates". In the past,
Turkmenistan has offered such a deal to Tajikistan
if the latter agrees to abandon its plans to build
the controversial Rogun dam, which if completed
will affect water supply to the agricultural
sectors of both Uzbekistan and Turkmenistan.
However, the Tajik government politely
rejected the Turkmen offer while some hot-heads in
Tajikistan demanded that the government sell the
water of rivers that originate in its territory to
downstream counties as these are not willing to
provide natural gas and petroleum free.
Relations between Kyrgyzstan and
Kazakhstan also seem to be undergoing some sort of
crisis, especially after the overthrow of Bakiev
in April 2010; before he was toppled, Kazakhstan
invested heavily both politically and economically
in Bakiev.
Kazakhstan, one of the world's
largest oil producers and with huge refining
potential, could easily meet Kyrgyzstan's need -
or for that matter other Central Asian countries'
combined demand - for fuel. However, it has faced
periodic fuel shortages as most of the foreign oil
companies involved in the country prefer to sell
their output to overseas markets rather than at
below market rates to domestic Kazakh refineries.
Unlike Russia, the Kazakh government is
not in a position to impose exorbitant export
duties on foreign oil companies operating in its
territory. More fundamentally, Kazakhstan seems to
have given up on its ambition to be a dominant
player in Kyrgyzstan after the overthrow of
Bakiev, thus allowing itself only to play second
fiddle there to Russia.
One way or
another, both Kyrgyzstan and Tajikistan have to
look for solutions that will help them lessen
their present crippling dependence on Russian oil.
Otherwise, their political and economic
independence will be increasingly at stake for
years to come.
Fozil Mashrab is
a pseudonym used by an independent analyst based
in Tashkent, Uzbekistan.
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