Wednesday, February 1, 2012

Smaller 'stans fret at Russia's dominance...

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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