Russia Striking Back in Energy Game, Makes Play for Kyrgyz National Gas Company

The Kremlin, via its strategic surrogate Gazprom, is not standing by idly as the United States strives to revive its geopolitical fortunes in the Central Asian energy contest. Gazprom in recent weeks has gone on an acquisition and joint-venture binge in its effort to secure Russia's dominating position as the controller of Central Asian energy exports and of European Union supplies. Kyrgyzstan's national energy company, Kyrgyzgaz, appears to be Gazprom's newest take-over target.

From mid-2005 through mid-2007, the United States experienced considerable erosion of its geopolitical status in Central Asia, enabling Russia to gain the upper hand in the struggle for access to the region's energy exports. Over the past few months, US officials have sought to repair relations with Uzbekistan and woo the new leader of Turkmenistan, aiming to restore the regional balance that existed before the start of the Iraq imbroglio. [For background see the Eurasia Insight archive].

In response, Vladimir Putin's Kremlin evidently believes that the best way to defend Russia's interests is to go on offense. With skyrocketing energy prices acting to fill the Kremlin's coffers, Gazprom since the start of 2008 has struck deals to solidify its hold on the European market. Gazprom's most important acquisition was the purchase of a majority stake for Slavic-sister Serbia's oil-and-gas monopoly. Gazprom also negotiated a deal with the Austrian energy company OMV to jointly operate Europe's third-largest gas trading hub. The announcements of those deals came on the heels of a strategic coup, in which Russia induced another state with which it has a close cultural connection, Bulgaria, to join the so-called South Stream pipeline project. South Stream is widely seen as a Russian bid to block construction of the EU-supported Nabucco route. [For background see the Eurasia Insight archive].

On top of all those deals, Gazprom has announced an intention to become a leading gas retailer, not just a wholesaler. Company officials are making Great Britain the focal point of their retailing strategy, setting a target of capturing 14 percent of the country's market share by the end of 2011, according to a report published by The Wall Street Journal.

Having gone a long way toward securing its European flank, Gazprom is now on the move in the Central Asian direction. Kyrgyzstan -- one of the trio of former Soviet states that underwent so-called color revolutions during the first half of this decade -- is considering selling its national gas company Kyrgyzgaz to Gazprom. The Kyrgyz government holds an 86 percent stake in Kyrgyzgaz.

Even in the unlikely event that the sale falls through, Gazprom has already raised its profile in Kyrgyzstan with a January 22 announcement that it will invest $300 million in a joint venture with Bishkek to explore for new reserves and to build pipeline infrastructure. The Kyrgyz government will supposedly commit $200 million to the venture, most of it to be devoted to exploration.

"We offered Gazprom to participate in the upcoming privatization of the natural gas transit company Kyrgyzgaz," Igor Chudinov, Kyrgyzstan's prime minister, told the official Russian news agency RIA Novosti. "When the privatization takes places depends on Jokorgu Kenesh, our parliament, but I hope that it will happen this year."

Chudinov's first trip abroad as prime minister was to Moscow, where he held talks with Gazprom CEO Alexei Miller on January 24. "We cooperate with many Russian oil companies, but Gazprom is ready to invest the most in the nation's economy, figuratively speaking, as soon as tomorrow," Chudinov said in the RIA-Novosti interview.

Being that Kyrgyzstan's annual budget is roughly $1.2 billion, Gazprom's intention to invest $300 billion is significant. Kyrgyzstan is desperate to find alternate sources of natural gas after it failed to convince China to route the planned Turkmenistan-China pipeline though Kyrgyzstan, and after Uzbekistan in late 2007 raised its natural gas export price to $145 per thousand cubic meters.

Beijing declined to route the pipeline through Kyrgyzstan – although it offers the most direction connection between Turkmenistan and China – reportedly because of Bishkek's reluctance for force the close of the US air base at Manas, outside the Kyrgyz capital. [For background see the Eurasia Insight archive]. The Turkmenistan-China pipeline would have ensured Kyrgyzstan a stable supply of natural gas at discounted rates, as well as provide income from transit fees.

Kyrgyzstan's own natural gas reserves are estimated at 6 billion cubic meters, but much of it is located in harsh terrain that lacks infrastructure. With Gazprom's support, Bishkek hopes to raise production levels from the current, paltry 30 million cubic meters (mcm) per year. The country's minimum annual gas need is about 745 million mcm.

Miller, Gazprom's boss, is expected to visit Kyrgyzstan in February to discuss various projects and receive exploration licenses for two major gas fields. The Kyrgyz government also proposed to Gazprom several other exploration and transit infrastructure projects, including, for instance, the construction of a pipeline to Kyrgyzstan's Chui Province.

More than any other deal, Gazprom's bargaining with Kyrgyzstan appears rooted in geopolitical scheming, rather than economic sense. Not only is Russia feeling pressure again from the United States in Central Asia, but China also over the past few years has become an aggressive player in the region.

According to an anonymous source in Kyrgyzgaz, Gazprom, if it acquires the Kyrgyz company, would be ignoring the type of risk that normally deters a typical investor. "Due to serious economic difficulties, local industrial and individual natural gas consumers have huge, multi-million debts and are not going to, or are able to, pay them," the source said. "It's been a chronic problem. [Prime minister] Chudinov used to be Kyrgyzgaz's general director; he knows. I can't see how the new owner is going to solve this problem."