EurasiaNet Business & Economics - Energy Row Looms in Central Asia

BUSINESS & ECONOMICS

ENERGY ROW LOOMS IN CENTRAL ASIA
Sergei Blagov and Igor Torbakov 7/12/06

Turkmenistan is once again proving to be the wild card of Central Asia’s energy game. In early 2006, Turkmen leader Saparmurat Niyazov expressed readiness to significantly strengthen his country’s energy ties to Russia. But after Niyazov recently demanded a hefty price increase for Turkmen gas, a crisis looms in bilateral relations -- the consequences of which could possibly be felt as far away as Europe.

Niyazov lived up to his mercurial reputation during a late June meeting with Alexei Miller, the head of the Russian conglomerate Gazprom. According to a Turkmen Foreign Ministry statement, Niyazov demanded that Gazprom pay $100 per 1,000 cubic meters (tcm) of Turkmen gas for the second half of 2006, up from $65 per tcm that the Russians have been paying during the first six months of the year. Also in late June, Turkmen officials demanded that Ukraine pay the same $100/tcm price for gas exports.

Miller refused to meet Niyazov’s terms and energy talks between the two countries were suspended. Ukraine has similarly been unable to strike a deal with Ashgabat.

Although Gazprom issued a carefully worded statement on the turn of events, Ashgabat’s reaction was unexpectedly strong. On July 3, the Turkmenistani government lashed out at what it described as the "double-faced scheming" of Russia. It also characterized Russia’s energy policies as "dirty deals" by "dogs and monkeys"

Earlier, the Turkmen Foreign Ministry announced that if Moscow declined to meet Ashgabat’s new price, Turkmenistan would suspend natural gas supplies to Russia in September and would redirect exports to China. Such action could cause disruptions in Russian energy supplies to Western Europe. [For background see the Eurasia Insight archive].

Ashgabat was particularly upset by a critical report aired on July 2 by Russia’s RTR television channel, described as "the official mouthpiece of the Kremlin" in the Turkmenistani statement. Commentary broadcast during the weekly Vesti Nedeli program implied that Turkmenistan posed a threat to energy security. In response, the Turkmenistani government alleged that "the Kremlin has given at least tacit approval to its official media outlets to pursue foreign policy goals through the practice of media terrorism."

Ashgabat’s statement also stated that Turkmenistan would not keep "subsidizing the economies of Ukraine and Russia" with below-market-rate energy exports. "Turkmenistan continued to pump gas to its clients even when Russia brought almost the whole of Europe to grinding halt in January this year by shutting down the gas flow to Ukraine, the Turkmenistani government said. [For background see the Eurasia insight archive].

Referring a deal between Gazprom and RosUkrEnergo that ended the Russian-Ukrainian energy dispute back in January, Ashgabat accused Russian and Ukrainian energy executives of "teaming up to form a phony company to transport Turkmen gas to Ukraine and Europe, siphoning off all the profits" with neither the governments nor the people of Russia and Ukraine able "to expose the dirty deal."

The statement also said that "the real face of Russia under [President Vladimir] Putin" was clarified by the fact that Russia charged $250/tcm of gas, but described Turkmenistan’s request for $11/tcm as a threat to energy security. Gazprom agreed to import Kazakhstani gas in the second half of 2006 at $140/tcm, but started "chattering like agitated monkeys" when Turkmenistan sought only about 70 percent of that price, the statement said.

Indeed, Niyazov appears to be following the lead of Kazakhstani President Nursultan Nazarbayev, who, during a May meeting with Putin, secured the significant gas price increase for Astana’s exports. Gazprom, meanwhile, is getting a dose of its own medicine: the conglomerate sparked outrage in many CIS countries in late 2005 and early 2006 by imposing massive price hikes for its exports. [For background see the Eurasia insight archive].

Ashgabat’s action is doubly frustrating for the Kremlin because Russian-Turkmen relations appeared set for a prolonged period of harmony following Niyazov’s visit to Moscow in early 2006. [For background see the Eurasia Insight archive]. Gazprom’s room for maneuver would seem limited, thus the Turkmen move is likely to deal a significant blow to the company’s bottom line. Since it intends to retain its monopoly position in Central Asia, it will have to continue its aggressive purchasing of fuel produced in the region. But that means that Ashgabat (and possibly other Central Asian gas producers) may try to keep raising export prices, testing Gazprom’s "cost-efficiency limits." Preliminary estimates show that a price of $100/tcm for Turkmen gas would cost Gazprom roughly $600 million this year and up to $1.5 billion in 2007. Some Russian energy experts see a silver lining in the Turkmen price demand, arguing that paying higher prices could force Russian energy companies, in particular Gazprom, to make their operations more efficient.

The Central Asian energy issue is certain to be high on the agenda of the G8 summit in St. Petersburg, Russia. The meeting of the heads of state of the eight leading industrialized nations will run from July 15-17. Europe, which faces the prospect of relying on Russian gas exports to the tune of 60 percent by 2030, may be in no mood to see Niyazov calling the shots from Ashgabat. Given the West’s lack of leverage with Turkmenistan, European leaders may vent their concerns and cautions to the summit’s host, President Putin.

Editor�s Note: Sergei Blagov is a Moscow-based specialist in CIS political affairs. Igor Torbakov is a freelance journalist and researcher who specializes in CIS political affairs. He holds an MA in History from Moscow State University and a PhD from the Ukrainian Academy of Sciences. He was Research Scholar at the Institute of Russian History, Russian Academy of Sciences, Moscow; a Visiting Scholar at the Kennan Institute, Woodrow Wilson International Center for Scholars, Washington DC; a Fulbright Scholar at Columbia University, New York; and a Visiting Fellow at Harvard University. He is now based in Istanbul, Turkey.

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