EurasiaNet Business & Economics - Russian Energy Partnership with Kazakhstan Faces Reality Check

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RUSSIAN ENERGY PARTNERSHIP WITH KAZAKHSTAN FACES REALITY CHECK
Sergei Blagov 1/18/06

Although Russia has long viewed Kazakhstan as its top energy partner in Central Asia, Kazakhstan now appears to be seeking ways to diversify its energy partnerships, and to avoid over-reliance on Russia.
Earlier this month, Russian President Vladimir Putin attended Nursultan Nazarbayev’s January 11 presidential inauguration in Astana. The visit, Putin’s first to a foreign leader’s inauguration, was seen as an unprecedented gesture toward Kazakhstan.

In recent years, Nazarbayev, annoyed by Western criticism of human rights abuses and graft in Kazakhstan, has appeared intent on fostering better ties with Moscow, which has avoided criticizing his domestic policies. Little heed was paid by Russia to warnings last year by visiting Kazakhstani opposition leaders that Kazakhstan’s political system is corrupt. Instead, attention has focused on promotion of bilateral economic and political cooperation with the Central Asian state.

In talks between the two leaders during the inauguration ceremonies in Astana, that pattern held. On January 12, Russia and Kazakhstan signed an agreement to establish the Eurasian Development Bank, a jointly run bank to be based in Kazakhstan’s commercial capital, Almaty, and to encourage regional economic growth. Under the agreement, Russia will contribute two-thirds of the bank’s charter capital of $1.5 billion, and Kazakhstan one-third.

Putin also pledged to prioritize Russia’s energy ties with Kazakhstan, and to cooperate on joint energy projects in third countries. However, Nazarbayev made no secret that Kazakhstan’s energy ties with Russia were not without problems. Notably, the Kazakhstani president urged Putin to facilitate the transit of Kazakhstani oil and gas -- as well as grain -- through Russian territory. Kazakhstan now funnels around 16 million tons of crude each year through Russian pipelines.

The proposal came on the heels of a series of breakthroughs for Russian-Kazakhstani ties in the energy field. Last December, Gazprom Chief Executive Officer Alexei Miller and Kazakhstani Energy and Natural Resources Minister Vladimir Shkolnik agreed to establish a joint venture to process Kazakhstani natural gas at the Orenburg plant Siberia. Negotiations on the joint venture will be completed in the near future, according to Miller and Shkolnik; no specific timeframe for the project has been released.

Expectations are also riding high for the joint exploration of another major natural gas field in the Caspian Sea � a project finalized in conjunction with a January 2005 border treaty on delimitation of the two countries’ 7,500-kilometer-long frontier. In a statement following his summit with Putin, Nazarbayev predicted that the exploration would eventually double bilateral trade between Russia and Kazakhstan.

Yet despite Moscow’s long-standing support for Nazarbayev, Kazakhstan has begun to look further afield to diversify its energy and foreign investment options.

Notably, in December 2005, Nazarbayev formally inaugurated the 1,000-kilometer long Atasu-Alashankou pipeline to funnel crude oil to China, an energy-ravenous neighbor intent on tapping into Central Asia’s oil and gas stores. In a message to his Chinese counterpart, President Hu Jintao, Nazarbayev described the pipeline as a sign of a bilateral "strategic partnership" between China, a traditional Russian sparring partner, and Kazakhstan.

However, as the Russian daily Nezavisimaya Gazeta observed, neither Russia nor China intend for the pipeline to cut Russia off entirely. The $800 million Atasu-Alashankou pipeline is expected to pump 10 million tons per year, but it would need Russian crude from Western Siberia via the Omsk-Pavlodar-Shymkent pipeline to reach its full capacity of 20 million tons by 2010.

Yet despite promises to funnel Siberian oil to China, the Atasu-Alashankou pipeline appears to be a development detrimental to Russian economic interests. In the short term, the Atasu-Alashankou pipeline will render Russian oil shipments by rail to China economically non-viable. As a result, the Russia railway giant OAO RZD is set to lose up to 4 billion rubles ($140 million) a year in revenue.

Apparently aware of Russia’s vulnerability, Nazarbayev’s suggestion that Putin facilitate Kazakhstani grain transit through Russian territory was not coincidental. Kazakhstan’s grain deliveries to Georgia in 2005 indicated that relations between Astana and Georgian President Mikheil Saakashvili’s pro-Western government are growing warmer � even as ties between Moscow and Tbilisi are increasingly strained.

Kazakhstani reluctance to take sides in the political standoff between Russia and Georgia has already earned Georgian praise. Kazakhstan is a reliable economic partner, who depends less on "political caprices," said Saakashvili after talks with Nazarbayev in Astana on January 10. The remark was an apparent reference to Russian GazProm’s recent decision to increase the price for natural gas exported to Georgia, a move Georgians widely interpret as intended to pressure Tbilisi’s pro-Western government into closer ties with the Kremlin. The leaders of two other countries that have also been affected by higher Russian gas prices � Azerbaijan and Ukraine � joined Saakashvili at Nazarbayev’s inauguration.

After talks with Nazarbayev, Saakashvili said that he wanted to see Kazakhstan become his country’s top investor. "Kazakhstan is an investor which has economic goals and is less dependent on political caprices: that is very important," Saakashvili told reporters. Georgian Foreign Minister Gela Bezhuashvili announced after January 11 talks with his Kazakhstani counterpart, Foreign Minister Kasymzhomart Tokayev, that Kazakhstan could invest up to $1 billion in Georgia.

Already, reportedly, the investments have begun to flow. Following Bezhuashvili’s announcement, Georgian media carried reports that the Kazakhstani BankTuranAlem plans to invest around $200 million in various hotel projects in the Black Sea region of Adjara. The bank has also begun to consider financing a $350 million oil refinery in Georgia, the Russian news agency RIA-Novosti quoted BankTuranAlem Board of Directors Chairman Mukhtar Ablyazov as saying.

Energy issues, however, appear likely to provide the sharpest sting for Moscow. Despite repeated Russian offers to rely on oil transit through its territory, Kazakhstan has decided to join the Baku-Tbilisi-Ceyhan (BTC) pipeline, a US-backed venture meant to offer Caspian Sea energy producers an alternative to traditional Russian energy transit routes. In a January 10 meeting with Azerbaijani Prime Minister Artur Rasizade, Kazakhstani Prime Minister Daniyal Akhmetov confirmed Kazakhstan’s plans to join the BTC project, the Kazakhstani prime minister’s press service said in a statement.

An intergovernmental agreement between Kazakhstan and Azerbaijan to transport Kazakhstani oil through the pipeline involves setting up the Aktau-Baku system to ship Kazakhstani crude in tankers across the Caspian Sea. The plans involve shipment of 7.5 million tons of Kazakhstani crude through the Baku-Tbilisi-Ceyhan pipeline. That amount is expected to eventually increase up to 20 million tons per annum.

Given its independent energy policy and enormous oil and gas reserves, Kazakhstan could eventually emerge as a serious competitor to Russia in global markets. And the Kazakhstani authorities have taken notice. The guest list for President Nursultan Nazarbayev’s inauguration ceremony "came as a confirmation of our country’s firm international position, its status as a leader in Central Asia," announced Kazakhstani Foreign Ministry Spokesperson Yerzhan Ashykbayev in a January 16 statement.

Editor�s Note: Sergei Blagov is a Moscow-based specialist in CIS political affairs.

The Central Eurasia Project aims, through its website, meetings, papers, and grants, to foster a more informed debate about the social, political and economic developments of the Caucasus and Central Asia. It is a program of the Open Society Institute-New York. The Open Society Institute-New York is a private operating and grantmaking foundation that promotes the development of open societies around the world by supporting educational, social, and legal reform, and by encouraging alternative approaches to complex and controversial issues.

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