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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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Kazakhstan's vast energy resources, and the Tengiz oil field in particular, drew significant Western attention to Central Asia following the disintegration of the Soviet Union. The Tengiz field, in the northwest of the country, is estimated to contain between six and nine billion barrels of reserves and is now under development by the TengizChevrOil joint venture (half-owned by ChevronTexaco with a quarter share to ExxonMobil, both American companies).
Although the international petroleum industry has shifted its attention over the past year from Central Asia to West Africa and Southwest Asia, Kazakhstan is guaranteed continued investment because of the large quantities of oil already discovered. The biggest find was the offshore Kashagan field, the largest discovery anywhere in the world since Prudhoe Bay three decades ago. At present, Kashagan is estimated to contain between six and eight billion barrels of proven reserves and up to 40 billion of probable reserves. In addition, Russia and Kazakhstan recently resolved their differences concerning the division of Caspian resources, and additional offshore fields, notably Kurmangazy, are now slated for development in joint ventures with Russian companies. The country has several other oil and gas fields that produce for domestic and regional markets, while further exploration of numerous smaller fields continues.[7]
The Karachaganak natural gas field, also in the northwest, contains over two billion barrels of oil-and-gas condensate and 16 trillion cubic feet of natural gas. The fate of the Karachaganak gas field illustrates some of the subtleties of post-Soviet energy economics in the region. Originally developed during the Soviet era, Karachaganak gas was slated for processing across the Russian border in Orenburg. After 1991, however, the deposit began competing with Russian natural gas for the Russian market. As a result, Orenburg significantly limited the quantities it would accept from Karachaganak. Kazakhstan is therefore planning to build a new plant at the site itself to process the associated oil-and-gas condensate.[8]
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The three principal fields—Tengiz, Kashagan, and Karachaganak—continue to be the most important for foreign investors and for those concerned with managing Kazakhstan's economy. After a couple of false starts early in the 1990s, prompting a change in leadership and organizational and financial restructuring, the Caspian Pipeline Consortium (CPC) was finally able to construct a pipeline for Tengiz oil crossing southern Russia to Novorossiisk, a Russian port on the Black Sea. The CPC pipeline began operations in 2001. At present, the oil reaches world markets through the Turkish Straits, and there are currently plans for additional quantities to reach European markets both via Ukraine after being shipped across the Black Sea and via a Bulgaria-Greece pipeline yet to be constructed that would end on the Mediterranean. Other than the CPC route, Kazakhstan's export options currently include the Atyrau-Samara pipeline (also through Russia) and a combined rail-and-barge route across the Caspian Sea into the South Caucasus.
Although it has yet to live up to its real potential, Turkmenistan is the other energy export giant of Central Asia. National planning in the country is based on a "Strategy for Social and Economic Transformation" that covers the first decade of the twenty-first century. Much of its implementation, including projected state-led investment, is predicated upon unrealistic assumptions of foreign loan inflows and hard-currency revenues from energy exports. Nevertheless, official performance is in line with government intent, and the correlation of outcomes with policy projections is astoundingly close.[9]
Moscow competes with Turkmenistan in energy production. In 1993, Gazprom barred Ashgabat's gas from gaining export access to the West. Ukraine picked up much of the slack, becoming the main consumer, with Armenia and Azerbaijan accounting for most of the rest. Although it is historically the largest consumer of Turkmenistan's gas, Ukraine has endemic cash-flow problems. Turkmenistan cut off exports to Ukraine several times in the 1990s for nonpayment. Thus, in contrast to a 1991 production level of nearly 85 billion cubic meters (bcm) of gas, in 1998 Turkmenistan produced only 13.2 bcm. Its production has since rebounded, with yet another settlement of the payments question.
The former Soviet republics generally pay about half in cash and half in barter. The recent agreement for Ukraine, for example, provides for 40 percent of the cost of the gas to be worked off through Ukrainian participation in industrial construction projects in
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Turkmenistan.[10] Also, Turkmenistan's gas has become more important to Russia. Plans are creased Russian export commitments to Europe. With a relative lack of domestic investment, Russia will need Turkmenistan's gas to make up the difference for its domestic consumption.
Until a small pipeline was built for exports to Iran in the late 1990s, Russia monopolized Turkmenistan's pipeline outlets on the world market. Having wasted a chance to agree on the construction of the Trans-Caspian Gas Pipeline (TGCP), which would have sent its production under the Caspian Sea and then to Turkey via Azerbaijan and Georgia, Turkmenistan is condemned for the foreseeable future to use the Russian pipeline system even with small exports to Iran. If the plan had materialized, Turkey would have subsequently consumed or re-exported the TCGP gas. Another failed attempt at pipeline construction was a well-known project in the mid-1990s, which would have built a conduit through Afghanistan to Pakistan and through India. Despite recent diplomatic activity seeking to revive this project, the financial obstacles are formidable, as are the ills of pipeline security in northwest Afghanistan. Turkmenistan is now producing more gas than it did in the 1990s. In the future, however, even Turkmenistan's gas exports through Russia will come under threat as Kazakhstan ramps up production in the north, particularly from its huge Karachaganak deposit.
Discussions of energy development in Central Asia often lose sight of Uzbekistan. This is understandable, given that its resources are dwarfed in size by those found in Kazakhstan and Turkmenistan. Nonetheless, Uzbekistan (which, unlike the other two countries, does not border the Caspian Sea) is an important energy supplier within Central Asia itself. In fact, it is just behind Russia on the list of Commonwealth of Independent States (CIS) gas producers. Uzbekistan's large population, five to six times that of Turkmenistan, accounts for the country's high domestic consumption and lower level of exports.
Uzbekistan has two main export pipelines for its natural gas that go to other countries in Central Asia. The principal one runs from Tashkent through Bishkek to Almaty via northern Kyrgyzstan and southern Kazakhstan, depositing supplies along the way. Because Uzbekistan is perpetually unpaid for these energy supplies, they are often halted, especially in the winter months. Kyrgyzstan periodically responds by withholding water and hydroelectric power from Uzbekistan, notably during the growing season. Bishkek is in discussions with Moscow on the possibility of completing yet another pipeline from Russia for gas imports. Almaty, meanwhile, has been unhappy over its energy relationship with Tashkent—a principal motive
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for the exploration of the Amangeldy field in southern Kazakhstan. Kyrgyzstan, seeking every means to reduce its dependence upon Uzbekistan, is another customer in line for gas from the Amangeldy field.[11]
Uzbekistan sends gas to Russia through the same pipeline system that Turkmenistan and Kazakhstan use. Due to the inherited structure of Soviet-built pipelines, Uzbekistan also supplies Kazakhstan, Tajikistan and Kyrgyzstan. The presence of ethnic Uzbeks in those countries, coupled with a regional foreign policy profile that is anything but conflict-averse, has exacerbated disagreements, to the extent that transmission of Uzbekistani gas frequently is suspended. At times, the suspensions are justified in terms of the neglected payments, but politics always playa role as well. As Kazakhstan continues to work on its national pipeline system and gas discoveries in southern Kazakhstan multiply, Uzbekistan will likely find its position in Central Asia as a local energy provider constricted in years to come.
The other major pipeline from Uzbekistan runs through Tajikistan. A transit pipeline crosses the northern part of the country, connecting eastern Uzbekistan with the country's gas-producing provinces. Tajikistan receives some of this gas in payment for use of that pipeline and thereby purchases additional amounts. Turkmenistan's natural gas must pass through Uzbekistan and Kazakhstan to reach markets in Russia and beyond. Consequently, transmissions along the Bukhara-Urals pipeline have restarted, although Uzbekistan is merely a transit nation in this instance.
In 1992, Kazakhs and Russians each composed roughly two-fifths of the Kazakhstani population. One decade later, Kazakhs comprise over one-half, while ethnic Russians have declined to under one-third of the total. Ethnic Kazakhs control the principal financial and state institutions, and the whole of the country's economic, political, and social life has been marked by a policy of "Kazakhification."[12]
Many of Kazakhstan's difficulties derive from the fact that foreign economic policy has been largely a byproduct of domestic economic policy. A small circle around the president that lacks the necessary training in the field has monopolized this policy. The privatization program illustrates this point. The program's original concept paper, created in the early
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1990s, reviewed different methods of privatization and advocated a coupon method, based more or less on the Russian model. However, in the second stage of the three-stage privatization program, shares in the companies that were being privatized were given both to the State Privatization Fund and to newly created mutual funds; but only mutual funds, and not citizens, were permitted to buy enterprise shares. Citizens had to buy the shares of the mutual funds.
This "indirect mass privatization" was at best a poor imitation of the Russian model. In fact, it contained elements totally foreign to the original concept paper.[13] It effectively created some 20 state-corporatist mutual funds, dominated by a small handful of managers. It thus heralded the beginning of the crowding out of broad social forces from the country's economic life. Such crowding out is akin to the "enclosure laws" in England that turned public lands into private property. In Kazakhstan, however, it was the national economy and the country's financial and industrial activity that were closed off, creating, sector by sector, a private reserve for the political class.
Even within this political class, there are fissures. In late 2001, for example, President Nursultan Nazarbayev removed from office Galymzhan Zhakiyanov, the outspoken prefect of the Pavlodar region.[14] As a result, several important cabinet ministers resigned to form Democratic Choice, a technocratic reform group that adopted the name of an earlier movement. This group existed entirely within the rarefied atmosphere of the country's political elite and opposed the dominance of the president's family over the levers of power. Its main leaders, including Zhakiyanov, are now in jail.[15]
It was Nazabayev's frustration with the corruption and conservatism of the inherited bureaucracy and ministries, perhaps, that led him to increasingly rely on member of his own family. Such reliance has had deleterious results, however, particularly for the development of the economy. For instance, the Canadian oil exploration and production firm Hurricane Hydrocarbons came under strong pressure in 2001 to cede control of its operations in Kazakhstan to a group that, by all appearances, was intimately linked to a close relative of the president. This attempt was defeated, but it was widely publicized in the press and
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throughout the industry, hurting foreign investors' confidence in Kazakhstan. That confidence took another blow when the government attempted, in late 2002, to force a revision of bookkeeping procedures of the flagship venture TengizChevrOil. Because this administrative change would have cut into overall profitability, the company's board took the unusual step of holding its annual meeting in Almaty, where it voted to suspend the next stage in the project's $3 billion development plan. Only following high-level negotiations did the Kazakh government rescind the rules that it sought to impose on the company, and TengizChevrOil proceeded to reinstate its original investment plans. New legislation on foreign direct investment (FDI), however, only enhances the uncertainty of the business environment for foreign companies by explicitly allowing the revision at any time of any future FDI agreements.
Turkmenistan's President Saparmurat Niyazov is known for his self-aggrandizing cult of personality. Highlights of his cult include his self-designation as Turkmenbashi (Leader of all Turkmen), publication of his book Rukhnama, intended "for the Turkmen nation to be a light and a guide on its journey towards its goal" the renaming of months of the year after himself and his mother and an immense glittering golden statue in the capital, Ashgabat, equipped with a rotating motor so that his outstretched hand points always towards the sun, which falls eternally upon his face.[16] Meanwhile, omnipresent security police make political opposition inside the country next to impossible. There is nevertheless political discontent within the security police as a result of the massive purge of its apparatus that was conducted by Niyazov in 2002. The Presidential Guard is now "the main instrument of presidential control," while the army is politically disorganized and the population powerless.[17] All of these factors only serve to hamper Turkmenistan's economic potential.
Internationally, the country has accumulated significant debt. Lacking any International Monetary Fund (IMF) or publicly traded debts, however, Turkmenistan is not formally considered to have any sovereign debt. Although it provides no transparency or predictability in debt service, and despite suppliers' frequent difficulty being paid by the government. Turkmenistan technically is not in default on any loans-although both the European Bank for Reconstruction and Development (EBRD) and the IMF have curtailed operations. Like most sectors of reform, trade reform lags as well. FDI, necessary for regular development of the country's vast resources, encounters obstacles at nearly every turn.
Turkmenistan remains essentially a cash-only economy. Even the two-tier banking system, comprising a state-owned Central Bank and a network of commercial banks (in addition to several dozen cooperative agricultural banks), is next to useless, primarily because only
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some of its commercial banks have a license to convert foreign currency into national currency and vice versa. Only about one-tenth of all firms slated for privatization have in fact been privatized, thus further complicating foreign investment. Still more important, the government has stated that energy-related concerns—the most important in the country for generating foreign exchange—will remain in state hands.
Turkmenistan's gas exports continue to suffer from dependence on Russian pipelines. The construction of oil and gas pipelines through Afghanistan into Pakistan is once again a possibility of Turkmenistan has agreed with its neighbor Kazakhstan on the bilateral division of offshore oil fields. Nonetheless, it remains at loggerheads with Azerbaijan over the Kyapaz/Serdar offshore field, which consequently lies fallow. Indeed, much of Niyazov's policy in Caspian matters seems driven by his personal belief that his merits should garner as much international celebration as those of Azerbaijan's president, Heydar Aliyev.[18]
There is little doubt that Turkmenistan's influence in the region is beginning to increase. It is Central Asia's main geopolitical bridge to Southwest Asia. Modestly successful oil swaps with Iran will continue, and electricity exports to that country are likely. Electricity exports to southwest Kazakhstan and especially Afghanistan, already under way, also will continue to increase. If a pipeline is eventually built from Kazakhstan's Kashagan field to the Iranian shore of the Caspian Sea, then it is not out of the question that the pipeline will pick up offshore Turkmenistani oil on the way.
The impoverishment of Uzbekistan's growing population is one indication of the country's social ills. While its population approaches twice that of Kazakhstan, its gross domestic product is but half. To add to the problem, early Western interest in FDI has been stymied due to both the prohibition against hard-currency transactions outside the banking system and the continued maintenance of multiple exchange rates. A general absence of economic reform in Uzbekistan greatly restricts FDI in the general economy, which in turn hits the energy sector particularly hard. A wave of "privatization" efforts in the mid-1990s remained limited to buy-outs of large state firms in the metallurgical and machine-building sectors. A major privatization plan implemented in the late 1990s was extended into the new century, but it remains a failure.[19]
The natural gas sector of the country's economy has prospects, with Russian companies such as Itera and Lukoil playing significant roles in the development of new gas fields. Western participation in modernization and expansion of the country's electrical grid is significant. Yet Tashkent's search to auction its large minority stakes in the country's major oil
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and gas exploration, oil and gas transport, oil refining and drilling companies continues. It also has placed 49 percent of Uzbekneftegaz, the state oil and gas holding company, on the auction block and has sought bids for development of more than 80 of its oil fields. Nonetheless, the greater profitability of other opportunities elsewhere in the world, as well as still existing currency and administrative controls, continues to make such prospects unattractive to Western energy companies and consortia, even given incentives such as tax preferences. Western investors have a tendency, therefore, to prefer to participate in the upgrading of existing fields that already have been shown to have definite prospects.[20]
The Uzbek public is exhausted by the violations of civil and human rights that have become a normal part of President Islam Karimov's search for Islamic militants. Among Uzbekistan's middle class, there is hardly a family in which a member has not been detained, questioned, arbitrarily imprisoned or beaten by internal security forces.[21] Moreover, a moral vacuum in social life leads discontented intellectual, Internet-savvy, English-speaking youth to join Islamic movements, even if they regard the Islamic language as only a voice for their discontent with everyday hardship. This is precisely the social stratum that would likely take advantage of opportunities, if they existed, to establish small and medium enterprises and support moves toward democracy, but the regime has hardly encouraged such developments. The exiled leaders of both secular opposition parties, Birlik and Erk, have issued programmatic statements emphasizing reliance upon the nascent middle class to build public sentiment for democratic changes. Inside the country, however, activists have appealed to the poorest and unhappiest strata of the population.[22] Uzbekistan's population, currently between 20 and 25 million, could increase to 35 million by decade's end. Out of the eight most densely populated regions in the former Soviet Union, five of them are found within Uzbekistan's borders. These are regions of the country where job creation is unlikely to occur, even if its national economy acquires real momentum for growth.[23]
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Throughout most of the 1990s, the EU objected to two pipeline projects supported by the States. The first was the Baku-Tbilisi-Ceyhan pipeline (BTC), designed to take Azerbaijani offshore crude through Georgia to the east Mediterranean Turkish coast for shipment to world markets. This pipeline would be important for Central Asia. If constructed, Kazakhstani oil would be taken from its newly discovered offshore Kashagan deposit across the Caspian Sea for eventual entry into the BTC pipeline. This variant is referred to as turning the BTC pipeline into the ABC pipeline (for Aqtau-Baku-Ceyhan). Europe continues to object to the ABC prospect, on supposed environmental grounds. Meanwhile, the French-Italian company TotalFinaElf lobbies for Kashagan's oil to be taken across the Caspian to Iran and swapped for Iranian exports from the Gulf.
The second project that Europe did not support was the Trans-Caspian Gas Pipeline (TCGP), a U.S.-sponsored project that would have taken gas from Turkmenistan across the Caspian Sea to Azerbaijan. From there it would have followed a route parallel to the BTC into Turkey, where, if not consumed by the domestic market, it could have easily been re-exported to southern Europe. Fearing that America's "Russophobia" would inflame the region, Europe objected to the project on environmental grounds yet again. Such environmental objections, however, did not prevent Europe from supporting the construction of the "Blue Stream" pipeline from Russia to Turkey-technically speaking, a more difficult project along the bottom of the Black Sea, deeper than any other natural gas pipeline built up until that point. It even assisted in arranging the bank credits to build it. It is little coincidence that the companies involved in realizing the Blue Stream project are European rather than American. In the end, Blue Stream gas looks as thought it will ultimately be of Turkmenistani origin, due to the failure of the TCGP project.
Despite its opposition to U.S.-backed projects in the region, the EU has had an immense and constructive influence on the energy provinces of Central Asia. This is evident in two cases. First, with its Transport Corridor Europe-Caucasus-Asia Program (TRACECA) the EU has worked since 1993 to provide technical assistance to develop a transport corridor from Europe across the Black Sea, through the Caucasus and the Caspian Sea and on to Central Asia. Second, the Interstate Oil and Gas Transport to Europe Program (INOGATE), created in 1994, has promoted regional integration of oil and gas pipeline systems. This facilitated the transport of energy resources to Europe and the West in general by attracting private investors and international financial institutions to pipeline projects. The INOGATE Umbrella Agreement, with 21 signatories, entered into force as an international treaty in early 2001.
The EU has done a great deal through INOGATE and TRACECA to evaluate the transportation infrastructure around the Caspian Sea littoral and to undertake measures to
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enhance it. Special attention has been paid to enhancing multimodal facilities and to bringing terminals up to international standards. The concepts for TRACECA and INOGATE both began inside the EU's Technical Assistance to the Commonwealth of Independent States program (TACIS). Finally, the Energy Charter Treaty and the Energy Charter Conference, though not ED institutions, originated in the EU's 1991 European Energy Charter. The Treaty, which entered into force in April 1998, now has 51 signatories. It aims to strengthen the rule of law on energy issues by assuring most-favored-nation status for foreign energy investments, free trade on energy materials and related equipment, freedom of transit through pipelines and grids, mechanisms for dispute resolution and energy efficiency and related environmental aspects.[24]
Analyses of international politics in the Central Eurasian meta-region, centered on the combined Black Sea–Caspian Sea littorals, are often couched in terms of the Turkey–Russia–Iran triangle. Of these three countries, Russia was the agenda-maker in Central Eurasia and Iran the agenda-taker, at least until the terrorist attacks of 11 September 2001. This made Turkey the potential agenda-breaker. Historically, these three countries were the most important powers in influencing Central Asia. Since 1991, however, their influence and the intimacy of their mutual interactions have played more of a role in the South Caucasus than in Central Asia. This is due to their roles as potential or actual "transit holders" for energy flows from the region, while Russia and Iran are important producers in their own right.
As for Turkmenistan, the regime change in Afghanistan recreates the possibility of building a pipeline from Turkmenistan into Pakistan and putatively through to India-a pipeline shelved not long after the Taliban took Kabul. In the face of financial, logistic and security concerns, however, such a project remains daunting at best. It competes with an Iranian project that seeks to build a trans-Pakistan pipeline from Iran to India. Discussion of an undersea link proved too expensive in a feasibility study. Although Turkmenistan is locked into the Russian pipeline system for the foreseeable future, the international consortia that are developing Kazakhstan's fields are working hard to give the country export options that do not rely on Russia.
The offshore Kashagan deposit will enter production sometime between 2005 and 2010. Its product may be taken by barge across the Caspian Sea to Azerbaijan to enter the BTC pipeline. Kazakhstan's national leadership appears divided on the question of export direction. TotalFinaElf, a French-Italian company with a one-sixth share in the consortium developing the field, has been a strong proponent of a pipeline under the Caspian Sea to its Iranian
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shore. Once in Iran, the oil would be imported and refined for domestic use by Tehran, which would swap it for exports of its own production from ports on the Persian Gulf. Nonetheless, the uncertain ability of Iran's refineries to handle the high sulfur content, as well as the two countries' history of bilateral disagreements over details of small-scale swaps in the 1990s, remain complicating factors.
The gas deposit at Karachaganak, also in the northwest, is being slowly developed. Its market has yet to be defined, but the deposit is so huge that it will find a market eventually, unless investment conditions in the country continue to deteriorate. The widely publicized though ultimately unsuccessful attempt in 2001 by a close relative of Kazakhstan's President Nazarbayev to win control of the Canadian firm Hurricane Hydrocarbons' Kazakhstani operations has damaged confidence among foreign investors. Finally, a pipeline across the northern part of Kazakhstan into China remains possible. For nearly five years, however, efforts to commence construction have been impaired by a lack of international financial backing. Moreover, disagreements have arisen over the nationality of the workers who may build the pipeline; the Kazakhstani leadership is concerned that if they bow to China's insistence on employing Chinese workers, then these workers will choose not to return to China after construction culminates. In a situation where there is a small population of unmarried Kazakh males in the labor pool—less than one million—and significant illegal ethnic Han immigration, Kazakhstan's leaders are rightly concerned about the implications of further population transfers for domestic social stability.
The only hope Central Asia has of establishing a cohesive or coherent economic region within global geo-economics rests in its energy resources. They include the vast offshore fields of Turkmenistan and Kazakhstan, as well as eastern Turkmenistan and parts of Uzbekistan. However, lines of local geopolitical influence have been drawn according to the pattern set by energy cooperation and the geography of pipelines. Turkmenistan remains dependent upon Russia's pipeline system and hence remains within Russia's sphere of influence in spite of its formally declared "neutral" policy. 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, which remains open to economic and political influence from Uzbekistan and beyond.
The events of 11 September 2001 did little to alter the fundamental geographic, economic or demographic problems facing the region. Turkmenistan remains a troublesome wild card, but it lacks influence in the Eurasian or global strategic balance, and Russia is the only great power truly interested in the fate of the country. Kazakhstan, by contrast, remains a crucial shatterbelt. It is a gateway to the north and east and potentially vulnerable from the south, a critical factor enhanced only by the significance of its energy resources. However, the
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country is more susceptible to infringement from external influences, including an ever increasing pressure from China, than from internal mass upheaval. Finally, Uzbekistan's population and age structure, coupled with its economic maldevelopment still threatens future social stability For now, the energy deposits in Central Asia remain largely untapped, but the governments of the region and the global powers almost certainly will find ways to exploit them. Unfortunately, all of the above arguments about the dangers of economic development and political instability still hold for the region. As popular unrest grows, the danger becomes more acute, exacerbated by the attention paid to the region by global actors. For Central Asia, the energy trade still retains its promise of economic prosperity, but the threat of political instability cannot be ignored.
The author would like to thank Karen Shepard for suggesting improvements to early drafts. All URLs cited in the notes are verified to be correct as of 4 February 2003.
[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, Petroleum 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).
[Note 6]. This article defines geo-economics as the "combination of international economic and political factors relating to or influencing a nation or region;" it has been called "geo-economics" from a construction analogous to "geopolitics." American Heritage Dictionary of the English Language, 4th ed. (2000), s.v. "geoeconomics," at http://www.bartleby.com/61/22/G0092200.html.
[Note 7]. For details, see V[ladimir] Shkolnik, "Development of the Oil and Gas Industry in the Republic of Kazakhstan," Clingendael Energy Lecture (Astana: Republic of Kazakhstan, Ministry of Energy and Mineral Resources, 27 November 2002), 6–7. Shkolnik is Minister of Energy and Mineral Resources of the Republic of Kazakhstan.
[Note 8]. Richard McManus, "BG in Kazakhstan," (London: Investis, 2002), at http://ir.bg-group.com/bggroupplc/presentations/2002-09-06/powerpoint.pps, slides 14–16. McManus is Executive Vice-President of BG (formerly British Gas), which operates the Karachaganak concession jointly with Agip.
[Note 9]. The veracity of Turkmenistan's reporting on energy exports is also notoriously suspect. Robert M. Cutler, "How Shah-Deniz Is Changing the Equation: Part 9," FSU Oil & Gas Monitor, no. 49 (12 December 2000): 2–4; inference validated by Boris Shikhmuradov, "Security and Conflict in Central Asia and the Caspian Region," talk given at Caspian Studies Program, Belfer Center for Science and International Affairs, John F. Kennedy School of Government, Harvard University, 3 May 2002. Shikhmuradov is former Foreign Minister of Turkmenistan, once President Niyazov's chief negotiator on Caspian affairs and is now in prison in the country after his public confession to an attempt to assassinate Niyazov at the end of 2002. See Michael Lelyveld, "Turkmenistan: Ashgabat Overstating Gas Exports [to Iran]," Radio Free Europe/Radio Liberty Weekday Magazine (4 September 2002), at http://www.rferl.org/nca/features/2002/09/04092002163917.asp.
[Note 10]. For background on the Ukrainian part of this equation, with extensive information on the Russian side of the triangle, see Margarita Mercedes Balmaceda, "Gas, Oil and the Linkages between Domestic and Foreign Policies: The Case of Ukraine," Europe–Asia Studies 50, no. 2 (March 1998): 257–86; more generally, on Europe, see Christian von Hirschhausen and Hella Engerer, "Post-Soviet Gas Sector Restructuring in the CIS: A Political Economy Approach—Consequences for European Gas Markets," Energy Policy 26, no. 15 (1998): 1113–23.
[Note 11]. Energy Information Administration, "Central Asia: Uzbekistan Energy Sector," U.S. Department of Energy Country Analysis Briefs, May 2002, at http://www.eia.doe.gov/emeu/cabs/uzbek.html.
[Note 12]. For background, see William Fierman, "Language and Identity in Kazakhstan: Formulations in Policy Documents, 1987–1997," Communist and Post-Communist Studies 31, no. 2 (June 1998): 171–186; Erlan Karin and Andrei Chebotarev, "The Policy of Kazakhization in State and Government Institutions in Kazakhstan," in Nurbulat Masanov et al., The Nationalities Question in Post-Soviet Kazakhstan, Middle East Series 51 (Chiba: Japan External Trade Organization, Institute of Developing Economies, May 2002), chap. 2; Pål Kolstø, "Anticipating Demographic Superiority: Kazakh Thinking on Integration and Nation Building," Europe–Asia Studies 50, no. 1 (January 1998): 51–68.
[Note 13]. A copy is in the author's files. This paper was drafted by Dr. Chan Young Bang, a Korean economist whom Nazarbayev invited to Almaty to act as a principal advisor in the early 1990s and upon whom he relied heavily at the time. Bang created the Kazakhstan Institute of Management, Economics, and Strategic Research (KIMEP), officially established in January 1992 and administratively subordinated to the Office of the President. An organizational struggle within the Office of the President, however, led to Bang's departure in mid-1993, and also to the creation of the Kazakhstan Institute of Strategic Studies (KISS), likewise placed under the administration of the Office of the President. KISS emerged to deal with foreign policy issues not having direct economic significance, while KIMEP concerned itself exclusively with training new specialists in the various technical economic expertises. General oversight of economic policy making was meanwhile confirmed in a so-called "Analytic Sector" of the Office of the President, the membership of which significantly overlapped with that of the country's National Security Council. Author's interviews with participants in the process and first-hand observers of it, Almaty, June–July 1994.
[Note 14]. This orthography is transliterated from the Russian. From the Kazakh, it would be properly rendered as "Galymjan Jaqiyanov," but "Jakiyanov" is more often seen for the surname transliterated from the Kazakh.
[Note 15]. For details on this episode, see Robert M. Cutler, "Government Crisis in Kazakhstan: Warm-up for the Succession to Nazarbayev?," Central Asia – Caucasus Analyst 2, no. 25 (5 December 2001): 3–4.
[Note 16]. Saparmurat Turkmenbashi [Niyazov], Rukhnama (Ashgabat: Saparmurat Turkmenbashi, 2002), 148, as at http://www.rukhnama.com/book/section3a.htm.
[Note 17]. International Crisis Group, Cracks in the Marble: Turkmenistan's Failing Dictatorship, ICG Asia Report 44 (17 January 2003), at http://www.intl-crisis-group.org/projects/asia/centralasia/reports/A400871_17012003.pdf.
[Note 18]. Author's interviews with individuals having first-hand experience negotiating oil and gas concessions with Niyazov, various cities, 1998–2000.
[Note 19]. Compare Jeni Klugman, "Uzbekistan: Institutional Continuity Helps Performance," MOCT-MOST: Economic Policy in Transitional Economies 8, no. 1 (1998): 63–82; Richard Pomfret, "The Uzbek Model of Economic Development, 1991–99," Economics of Transition 8, no. 3 (November 2000): 733–748; Richard Pomfret and Kathryn Anderson, "Economic Development Strategies in Central Asia Since 1991," Asian Studies Review 25, no. 2 (June 2001): 185–200.
[Note 20]. For details on privatization in Uzbekistan, with special attention to the energy sector, see Jakhongir Mavlany, "The Energy Sector of Uzbekistan," Department of Commerce, Business Information Service for the Newly Independent States, 18 June 2001, at http://www.bisnis.doc.gov/bisnis/country/010618uzen.htm.
[Note 21]. U.S. Department of State, Country Reports on Human Rights Practices: Uzbekistan (Washington, D.C.: Government Printing Office, 2002), at http://www.state.gov/g/drl/rls/hrrpt/2001/eur/8366.htm; International Helsinki Federation for Human Rights, Human Rights in the OSCE Region: The Balkans, the Caucasus, Europe, Central Asia and North America (Vienna: International Helsinki Federation for Human Rights, 28 May 2002), 359–70, see 362–64; International Crisis Group, Uzbekistan's Reform Program: Illusion or Reality?, ICG Asia Report 46 (18 February 2003): 3–10.
[Note 22]. Author's interviews, various cities, 2000–2001. See also the materials on Birlik's and Erk's own websites: Birlik, "Birlik Popular Movement of Uzbekistan," at http://www.birlik.net; and Erk Democratic Party of Uzbekistan, "Uzbekistan ERK Partiyasi," at http://www.uzbekistanerk.org.
[Note 23]. Reuel R. Hanks, "Emerging Spatial Patterns of the Demographics, Labour Force and FDI in Uzbekistan," Central Asian Survey 19, no. 3–4 (September 2000): 348-363. For an interesting comparison, see Neil J. Melvin, "Patterns of Centre–Regional Relations in Central Asia: The Cases of Kazakhstan, the Kyrgyz Republic and Uzbekistan," Regional and Federal Studies 11, no. 3 (Autumn 2001): 165–93.
[Note 24]. For more information, including extensive primary-source documentation, see Energy Charter Secretariat, "E[nergy] C[harter] S[ecretariat]," at http://www.encharter.org; INOGATE Programme, European Commission (EC), "INOGATE – Interstate Oil and Gas Transport to Europe," at http://www.inogate.org; EC, Directorate General for External Relations, "The EU's Relations with Eastern Europe & [sic] Central Asia – Tacis, Overview," at http://europa.eu.int/comm/external_relations/ceeca/tacis/index.htm; EC, Directorate General for External Relations, "Welcome [to TRACECA]," at http://www.traceca.org.
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.
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