The Caspian Energy Conundrum

Abstract:
Since 1991, Central Asia's vast oil and gas deposits have promised economic development for the impoverished region and have attracted the attention of major powers interested in accessing those resources for themselves. Kazakhstan's vast energy resources drew significant Western attention to Central Asia following the disintegration of the Soviet Union. Turkmenistan, the other energy export giant of Central Asia, has yet to live up to its real potential. Uzbekistan's large population accounts for the country's high domestic consumption and lower level of exports, despite its very high production levels. Uzbekistan will likely find its position as a local energy provider to Central Asia constrained in years to come. Turkmenistan remains dependent upon Russia's pipeline system. Despite a relative diversification of foreign trade in some sectors, Kazakhstan has been folded mostly into a sphere of Russian economic influence as well, except for the south of the country. Central Asia's energy trade could still bring prosperity to the region, but its domestic political volatility and complicated regional and global relationships may spoil such efforts. This journal article's introductory remarks are reproduced below, and its full text is available in printer-friendly format.

First publication:   Robert M. Cutler, "The Caspian Energy Conundrum," Journal of International Affairs 56, no. 2 (Spring 2003): 89–102.

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[ Introductory Remarks ]

[ page 89 ]

Since 1991, Central Asia's vast oil and gas deposits have promised economic development for the impoverished region and have attracted the attention of major powers interested in accessing those resources for themselves. Nonetheless, these promises have not been realized: the energy situation is extremely complicated, leaving the region's natural resources as inaccessible as ever. Each Central Asian republic has complex domestic political problems and difficult relationships with its neighbors. The region as a whole has a series of tense and complicated connections with bordering states and an unstable and shifting role in global politics and economics. All of these factors contribute to making the energy trade in Central Asia a dangerous game. The political vacuum left by the fall of the Soviet Union has led to greater instability throughout the region, further compounding the difficulty of access to Central Asia's natural resources.

Arguments abound about how this instability may develop. Many worry that the Central Asian republics will succumb to so-called "Dutch disease," whereby energy exports cause the domestic currency to appreciate, making domestic agriculture less competitive at home. As a result, farm unemployment increases, triggering mass internal migration to cities and the potential for political instability.[1] Others criticize the "enclave" style of Central Asian development, as the energy sector is developing within the national economy but without the linkages to other sectors that are necessary to drive development. Finally, some argue that political disorder will arise from the disparity between a country's new and wealthy super-elite and the vast majority of its poverty-stricken population.[2]

The dynamic of the "Dutch disease" is well studied and documented; warnings about imbalances in development arising from the emphasis on a single commodity and the absence of spillover effects to the rest of the national economy are not unfounded. Likewise, the

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human suffering caused by income inequalities and the sub-optimization of social and economic opportunity should not be minimized. The misery and lost opportunities experienced by individuals can result in economy-wide impoverishment, often encouraging criminal activities as a means of compensation. Such are the lessons from existing economic development studies that are transferred to Turkmenistan and Kazakhstan.[3] From them, it follows that the energy sector may be developing in such a manner as to unbalance national economies, putting the security of all of Central Asia in peril.[4]

To see this in proper perspective, it is useful to bear in mind the interaction of energy net works, economic development and political sustainability in Central Asia. For ease of presentation, this article reduces the inherent complexity of these themes to three levels: the national, the subnational and the international. I will first detail the national level, focusing on economic development in Kazakhstan, Turkmenistan and Uzbekistan. Second, at the subnational level, I examine how domestic political change alters energy economics in each of the three states. On the third level, I address the impact of the European Union (EU) and United States and then look at the Eurasian scale, where I examine the influence of Turkey, Russia, Iran, and other players.[5] In sum, I argue that Central Asia's energy trade could still bring prosperity to the region, but its domestic political volatility and complicated regional and global relationships may spoil such efforts.

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[Note 1]. Explained more technically, the "Dutch Disease hypothesis is that a positive shock (boom) to an important primary product causes an appreciation of the real exchange rate. This results in a movement of resources to the non-tradable sector and the boom sector, and away from tradable manufacturing and agricultural products. The exchange rate shifts can cause problems in promoting competitive diversification into non-commodity sectors." World Bank, Europe and Central Asia Region, Central Asia Country Unit, Kazakhstan: Development Priorities and Proposed World Bank Activities, 1, n. 1, at http://www.worldbank.org.kz/pdf.cas_note_eng.pdf for discussion, see 11–13 and 34–35.

[Note 2]. See, for example, International Crisis Group, Incubators of Conflict: Central Asia's Localised Poverty and Social Unrest, ICG Asia Report, no. 16 (8 June 2001).

[Note 3]. The pertinent literature is enormous. For a more detailed discussion of specifically macroeconomic dangers to Kazakhstan from the Dutch disease, see Asian Development Bank, Country Assistance Plan (2001–2003): Kazakhstan (Manila: Asian Development Bank, 2000), 3–4 and 7–8. For a general discussion, see Richard M. Auty, "Reforming Resource-Abundant Transition Economies: Kazakhstan and Uzbekistan," in Resource Abundance and Economic Development, ed. Richard M. Auty (London: Oxford University Press, 2001), 260–76; Karlygash Kuralbayeva, Ali M. Kutan, and Michael L. Wyzan, "Is Kazakhstan Vulnerable to the Dutch Disease?," ZEI Working Paper B01-29 (Bonn: Rheinische Friedrich-Wilhelms-Universität, Zentrum für Europäische Integrationsforschung, 2001).

[Note 4]. An excellent brief overview that puts the risk of the Dutch disease in the combined foreign-economic and political perspective of Central Asian affairs is Jonathan Walters, "Caspian Oil and Gas: Mitigating Political Risks for Private Participation," Center for Energy, Petroleumand and Mineral Law and Policy Internet Journal 7 (20 September 2000), at http://www.dundee.ac.uk/cepmlp/journal/html/article7-5.html. For a detailed argument about how resource rents have been wasted or appropriated by ruling elites in all three countries discussed in the present article, plus Azerbaijan, and what to do about it, see Akram Esenov, Martin Raiser, and Willem Buiter, "Nature's Blessing or Nature's Curse: The Political Economy of Transition in Resource-Based Economies," Working Paper, no. 65 (London: European Bank for Reconstruction and Development, November 2001).

[Note 5]. For a complementary analysis, see Robert M. Cutler, "Central Eurasia and the West after September 11," in NATO, the European Union—and the New Threats, ed. Hall Gardner (London: Ashgate, forthcoming 2003).

First publication:   Robert M. Cutler, "The Caspian Energy Conundrum," Journal of International Affairs 56, no. 2 (Spring 2003): 89–102.

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Dr. Robert M. Cutler [ website — email ] was educated at MIT and The University of Michigan, where he earned a Ph.D. in Political Science, and has specialized and consulted in the international affairs of Europe, Russia, and Eurasia since the late 1970s. He has held research and teaching positions at major universities in the United States, Canada, France, Switzerland, and Russia, and contributed to leading policy reviews and academic journals as well as the print and electronic mass media in three languages.