EurasiaNet Business & Economics - Russia Registers Significant Victory in Caspian Basin Energy Contest

BUSINESS & ECONOMICS

RUSSIA REGISTERS SIGNIFICANT VICTORY IN CASPIAN BASIN ENERGY CONTEST
Sergei Blagov 4/05/06

President Nursultan Nazarbayev’s three-day visit to Russia yielded a pledge to vastly expand Kazakhstan’s oil exports via Russia, along with Astana’s endorsement of a Moscow-led Eurasian economic union. Nazarbayev’s twin announcements are being celebrated by Russian leaders as a major geopolitical victory. At the same time, the news raises questions about Kazakhstan’s participation in the US-backed Baku-Tbilisi-Ceyhan pipeline.

Following a meeting with Russian President Vladimir Putin on April 4, Nazarbayev revealed that the volume of Kazakhstani oil transported via the Caspian Pipeline Consortium (CPC) route would rise to 67 million metric tons from its present level of 28 million tons. The almost-1,000-mile-long CPC route connects the oil fields of Western Kazakhstan to the Russian port of Novorossiysk. [For background see the Eurasia Insight archive]. Russian analysts say the route, which began operations in 2003, has been underutilized, reportedly causing significant losses. Provided that Kazakhstan follows through on its commitment, the CPC pipeline could begin to operate at near capacity.

The agreement on the CPC "means that in the next seven or eight years the increase in oil production in Kazakhstan will be backed by transportation possibilities," Nazarbayev said in televised remarks. He also announced that Kazakhstan and Russia would work jointly to develop three off-shore oil fields, which the Kazakhstani leader identified as Kurmangazy, Khvalynsky and Tsentralnoye.

On April 5, the last day of his Moscow visit, Nazarbayev sent additional signals that Kazakhstan now views Russia as its chief political and economic partner. In a speech to the Russian State Duma, Nazarbayev advocated the acceleration of efforts to forge a regional economic group linking Central Asian states to Russia, adding that the region now stood at the "threshold of the establishment of a Eurasian Union," the Kazinform news agency reported.

"We can jointly determine the rules of the game in the Eurasian space," the Itar-Tass news agency quoted Nazarbayev as saying. "Of course, Russia will play a leading role" in the budding Eurasian Union. In the coming years, the Kazakhstani leader said, regional states should actively explore the formation of a customs union. He added that the recent establishment of a Eurasian Development Bank would serve as a "powerful source" for regional growth and integration.

Russian state-controlled media, including the RTR television channel and Radio Mayak, cast Nazarbayev’s Moscow trip as a potential turning point in the struggle for control of the Caspian Basin’s oil and gas reserves. During the last decade, the United States and Russia -- and to a lesser extent China -- have engaged in vigorous competition over energy export routes. [For background see the Eurasia Insight archive].

The opening of the US-backed Baku-Tbilisi-Ceyhan (BTC) pipeline in 2005 broke an effective Russian pipeline monopoly linking the Caspian Basin and Western markets. [For background see the Eurasia Insight archive]. The CPC route can be seen as the chief Russian competitor to BTC. Some analysts say heavy Kazakhstani participation in BTC is needed to make that export route profitable. Astana has repeatedly said it will ship oil via BTC, but a firm deal has so far not been negotiated. [For background see the Eurasia Insight archive]. The Kazakhstani pledge to boost its CPC export volume is causing concern among some Western analysts that Astana’s commitment to BTC will end up being relatively minor, threatening the pipeline’s economic viability.

At the very least, Russian leaders seems to have taken a major step toward bringing Kazakhstan firmly into Moscow’s economic orbit. On April 4, Putin said that Russia, Belarus and Kazakhstan would soon sign framework agreements to forge a common economic space. Meanwhile, Vagit Alekperov, the CEO of the Russian energy conglomerate LUKoil, which has invested roughly $3 billion in Kazakhstan in recent years, came out in favor of new joint projects, including an expansion of the CPC pipeline.

Russian-Kazakhstani trade in 2005 reached nearly $10 billion, a 35 percent increase over 2004. During Putin’s talks with Nazarbayev, already the third meeting between the heads of state this year, they pledged to double the current trade level in the next few years. During the first two months of this year, bilateral trade hit a rough patch, totaling about $1.13 billion, down 4.5 percent from the same period in 2005. Putin made no secret that bilateral trade was somewhat imbalanced. Russian exports to Kazakhstan were up by 40 percent year-on-year in 2005, while Kazakhstani exports to Russia were in fact slightly down, Putin said.

Nazarbayev’s visit also produced notable defense and security agreements. Russia and Kazakhstan agreed to reduce the lease payments for test sites and firing ranges by $3 million per year, Russia’s Defense Minister Sergei Ivanov said on April 4. Both sides additionally agreed that the size of the firing ranges in Kazakhstan would encompass roughly 10 million hectares, he said. In addition, the two countries signed an agreement granting an orbital position to the Central Asian republic’s communications and broadcasting satellite Kazsat.

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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