Russia and Central Asian Gas: Recent Trends
Stephen Blank

On March 11, 2008, Russia and Gazprom announced that beginning in 2009 Russia would buy gas from Kazakhstan, Uzbekistan, and Turkmenistan at world market prices, i.e. between $200-300/tcm.  Western commentary has centered on Russia`s efforts to retain its status as `gatekeeper` to Central Asian energy exports to the West, and that Ukraine and Europe will likely be the losers, and that this is the first episode of Central Asian cooperation vis-à-vis Russia. But there are deeper insights to be gleaned from this event, and important implication.

BACKGROUND: It is widely known that Russia has sought to monopolize Central Asian gas exports to the world, making itself the arbiter of the price differential between the very low prices it paid to import this gas and the price of gas it sells to Ukraine and Europe. Russia either sold Central Asian gas on at global prices (thus pocketing the differential) or used it to provide for its subsidized domestic energy market at below market prices. Given the centrality of energy to Russia`s politics and economics, it can thus be said that Russia`s economics and politics are inherently neo-colonialist in nature, depending on that price differential from Central Asia and its submission to those prices in order to satisfy all its customers, avoid domestic reforms, and leverage its energy power in the CIS and Europe. Hitherto it has been able to do so by virtue of its monopoly over export routes. However, that monopoly has been eroding, most prominently because of China`s success in signing deals with Central Asian states, specifically Turkmenistan and Kazakhstan, where it agreed to pay higher prices than did Moscow — although they were still below global prices. China`s heightened interest in Central Asian energy stems in part from its frustration with Moscow, which cannot provide it with sufficient oil or gas at the lower prices that China wants. Beijing`s success in Central Asia has undoubtedly alarmed Moscow, not least because it gives Central Asian regimes much greater leverage than has ever been the case.

Equally importantly, as analysts have noted, this episode marks a watershed in Central Asian regional cooperation. Whether it came at Kazakhstan`s initiative or from the unheralded work of U.S. diplomats, not only did Kazakhstan, Turkmenistan and Uzbekistan cooperate to leverage their market power‚  to force Moscow to pay ever higher prices since 2006; Turkmenistan also succeeded at this time in getting Moscow to release closely held Soviet geological data. It also has moved far to overcome its differences with Azerbaijan and recently awarded a British firm the contract to conduct an independent audit of its gas resources.

Ashgabat`s recent moves have been particularly noteworthy: It has worked to improve ties not only with Russia but also with its fellow producers; and it has shown confidence of having the assets to sell to Russia, China, and potentially South Asia and Europe as well. In this context, this example of regional cooperation could be the first of many future cases that could also include Azerbaijan and lead to a new bloc of powerful energy producers acting independently of both Moscow and Beijing. Clearly, these states can already compel Russia to pay more for gas than has hitherto been the case, and if they invest the proceeds wisely, they can also enhance their domestic stability — something that remains to be seen except possibly for Kazakhstan. Such cooperation could in the future contribute to reinvigorating the Nabucco pipeline and a Trans-Caspian pipeline, which would dramatically alter the geopolitical situation on both sides of the Caspian.

IMPLICATIONS: Moscow`s fear of such independence could lie behind its ongoing proposal for an energy club in the Shanghai Cooperation Organization (SCO). This proposal, dating back several years, evidently has as one of its motives regulation of the Russo-Chinese competition for influence and energy access in Central Asia. In other words, Russia wants to solidify its ties with China in Central Asia at America`s expense or to ensure its exclusion from the region`s energy market. It does not want to expand that rivalry but minimize or regulate it and consolidate its partnership, if not alliance, with China. In so doing, of course, it would consolidate as well its dominance over Central Asian energy. Unchecked competition with China leads not only to the greater independence of Central Asian producers in choosing their partners and pipeline routes, it also places Russia`s political economy under severe pressure and undermines the tie with China which is fundamental to Russian foreign policy in Asia and globally.

This leads to the third, unanalyzed outcome of this deal. There is no doubt that Russia will now seek to charge Ukraine and other European customers much higher prices, up to $400/tcm as Gazprom announced, on March 14. Moscow apparently believes it has the monopoly power to do so. But its actions are revealing that for all the talk of Medvedev`s so-called liberalism, we are unlikely to see any sign of it. This deal actually shows how weak the impulse for reforming Gazprom is. It should be recalled that Moscow still subsidizes its domestic energy economy and is putting enormous strain on it by its wasteful use of gas, subsidies and extensive plans for increased electricity and gasification of key industrial sectors — as is well described by Edward Lucas in his recent book, The New Cold War.

The government`s control of Gazprom and other major players in the energy sector has led to a situation where money is not invested in finding new fields, or improving existing ones, or for that matter infrastructure. Companies like Gazprom and Rosneft are not only not producing enough to meet demand, they also have serious debt-to-earning problems and could even need a bailout soon, incomprehensible as that may seem. Clearly, the answer is to reform these behemoths, put them under efficient management, and stop using them for rent-seeking and openly political purposes. In other words, to prevent the looming crisis , major reforms are called for.

Doing so means less reliance on Central Asian imports, which are designed to have Central Asia subsidize wasteful Russian and Ukrainian consumption — another sign of the inherently neo-colonial relationship that lies at the heart of the Putin regime. It would also entail driving through the price rises on energy in the domestic Russian market that have regularly been proclaimed but from which the regime has refrained from imposing to the full degree necessary.

The March 11 deal indicates that Putin, Medvedev and their cronies at Gazprom have opted for empire over domestic reform. They have continued to rely on Central Asian imports even though Russia is paying an ever higher price to keep Central Asian energy under its control. They evidently believe they can impose these higher costs on Ukraine and Europe and retain Central Asia in a subordinate position vis-à-vis global markets. This decision also shows that Gazprom, and probably other companies, will not be reformed and forced to perform under truly efficient and market driven conditions. In other words, faced with a choice between reform and empire, Medvedev, Putin, et. Al. fell back on the imperial and anti-reform option.

This failure to utilize or exploit the opportunity and need for reform all but ensures that Russia itself will fail to generate or produce enough energy to cover its three markets — Europe, Asia, and its domestic market — under conditions of continuing rising demand.

The failure to reform the domestic market in Russia and the energy sector there virtually ensures growing dependence upon Central Asian imports, which can only heighten that region`s importance, and the likelihood of successful cooperation in the long run among Central Asian producers. The futility of empire is increasingly visible from the fact that it is costing Russia ever more to maintain this neo-colonial posture vis-à-vis Central Asian producers, while they are becoming stronger market players and now have the experience of successful cooperation against Moscow which will surely not be the last such case of such cooperation.

CONCLUSIONS: It should not be mechanically assumed that Ukraine and Europe will merely and meekly accept Russia`s demands to have them subsidize its empire without finding alternatives over time. Nor should it be assumed that Russia can maintain its neo-colonial posture in Central Asia as that is costing it ever more money, even as its own domestic economy is failing to maximize the opportunities presented by the worldwide spike in energy prices. However, given the real economic trends in Russia and Central Asia, it is increasingly clear that thanks to this and other such decisions, Russia will have neither reform nor empire.

AUTHOR`S BIO: Professor Stephen Blank, Strategic Studies Institute, US Army War College, Carlisle Barracks, PA 17013. The views expressed here do not in any way represent those of the U.S. Army, Defense Department or the U.S. Government. First published in the CACI Analyst on March 19, 2008: