NEWSDESK

Bishkek/Brussels, 24 May 2007: Central Asia’s oil and gas cannot solve the European Union’s energy dependence on Russia, but these resources can destabilise the producing region unless governments use the revenues to promote good governance and rule of law.

Central Asia’s Energy Risks,* the latest report from the International Crisis Group, examines the resources of three countries – Kazakhstan, Turkmenistan and Uzbekistan – and the dangers of mishandling them. It argues that a trans-Caspian gas pipeline cannot largely write Russia out of the European energy equation, as Brussels hopes. But it also disputes the common view that the 12 May Russian-Central Asian gas agreement prevents that pipeline from being built.

“Central Asia can make a contribution – a modest one – to helping resolve Europe’s energy security concerns”, says Charles Esser, Crisis Group Energy Analyst, “but only if outside investment is tied to the good governance that is needed to improve regional and human security. If Western governments turn their eyes away from mismanagement and human rights abuses in expectation of short-term gains, they risk stimulating instability in Central Asia that will only add to their energy and other security problems”.

The three countries present different challenges, but all three are suffering from the “resource curse”. Kazakhstan has used its money best and is impressive compared to its neighbours but should aim for a higher standard now. It is at a point where enormous oil revenues need to be translated into commensurate outcomes that benefit its citizens. Corruption, an undiversified economy, improper management of state funds and a lack of the legal guarantees that are part of a true democracy hold it back.

All these problems are more extreme in Turkmenistan, a major gas exporter that was pillaged by the eccentric and brutal dictator Saparmurat Niyazov until his death in December 2006. Despite a relatively high per capita income on paper, most Turkmen live in poverty. Investment in energy production has faltered. It remains to be seen if anything fundamental will change under the new leader, a close protégé of Niyazov’s who came to power in a rigged election. He may not have much time before revenues fall, as gas production will decline without substantial new investment.

Uzbekistan has the least oil and gas of the three producers. It is a net importer of oil, and much of its declining gas output has been sold to Russia. Despite wishful thinking in some European capitals, it will never be a part of EU energy security arrangements. The gas also perpetuates a system that impoverishes and represses its people. Domestic supplies are often cut in winter, for example, so the gas can be sold abroad, leaving cities unheated in freezing weather, provoking protests and serious unrest.

“The hard fact is there is no substitute for arrangements with Russia that stress mutual dependence on commercial oil and gas delivery”, says Michael Hall, Crisis Group Central Asia Project Director. “The international community needs to pay more attention to Central Asia as a security risk, without expecting it to solve its outside energy needs”.

EXECUTIVE SUMMARY

Oil and gas are proving as much a burden as a benefit to Central Asia. The three oil and gas producers in the region – Kazakhstan, Turkmenistan and Uzbekistan – are showing signs of the “resource curse” under which energy-rich nations fail to thrive or develop distorted, unstable economies. Geography and their history in the Soviet Union have bound them to Russia, through which most of their energy exports must be transported. Moscow is proving to be an unreliable partner for foreign consumers as it has been willing to cut off pipelines to apply commercial or political pressure. Low investment, corruption and gross mismanagement in Uzbekistan and Turkmenistan may mean that their supplies run low before they can diversify their links to markets or their economies. Central Asia is likely to see energy create instability within the region; the chances are low that it will be a factor in improving European energy security any time soon.

Foremost among the energy problems is the resource curse. Kazakhstan has been the most skilful in the use of its money but it is showing all the signs of problems to come: more has been spent on Pharaoh-like projects such as the new capital Astana than on healthcare or education. Corruption infuses the government and oil-producing regions are already restive over what they see as unequal development. Growth has been impressive but the wealth gap has widened faster. The country now has about the same income per person as Bulgaria but life expectancy is a full decade lower. The economy remains undiversified, manufacturing has been stunted by an over-valued currency and the whole country will be subject to a shock if energy prices come down.

All these problems are even more extreme in Turkmenistan, a major gas exporter that was pillaged by the eccentric and brutal dictator Saparmurat Niyazov who ran the country as his personal fiefdom until his death in December 2006. Gas was mostly sold to the Russian firm Gazprom, which kept prices low while Niyazov amassed a fortune outside the country. Despite a relatively high per capita income, most Turkmen live in poverty. Investment in energy production has faltered and the country lacks key technical skills. It remains to be seen if this will change under the new leader, a close protégé of Niyazov, who came to power in a rigged election.

Uzbekistan has the least oil and gas of the three producers. It is a net oil importer and much of its declining gas output has been sold to Russia at low prices. The energy sector has a number of deleterious effects on the Uzbek people; most of the money goes to the elite and stays outside the country, while some is used to support a massive and brutal security system. On top of this, domestic gas supplies are often cut in winter so the gas can be sold abroad raising about half a billion dollars; entire cities sit unheated in freezing weather, often provoking protests.

Resource curse issues are likely to worsen tensions over presidential succession in Kazakhstan and Uzbekistan; neither country has developed institutions that could weather any price shock or manage the tensions that resource windfalls create. As money flows to powerful presidencies, competition is likely to be keen when the current leaders leave the scene. In Uzbekistan, the security services will want to keep a hand in the business that provides them with a major share of their income.

Despite these problems, Europe and China have been looking to the region to ease anxieties over energy security. European policy-makers plan to expand their relations with the Central Asian states and energy security is a key factor driving this. To some degree this is legitimate: Kazakhstan has the eleventh largest oil reserves in the world and probably has the greatest capacity for production growth of any non-OPEC member. The country is the only one apart from Russia that can supply China with oil by direct pipeline. But current oil flows to China are dependent on Russia, and more importantly, the amount of gas that could potentially flow from Central Asia to Europe is not enough to change the paradigm of Europe’s energy relationship with Russia. Fuller engagement with Russia, improvements to creaking infrastructure, an end to Russian domestic subsidies to cut domestic demand and conservation would do more to ease European concerns than attempts to expand purchases from Central Asia.

The concern should be less about the West’s energy security and more about these countries as a source of generalised insecurity for the region and the human security of their inhabitants. The enormous revenues being generated need to be translated into commensurate outcomes. In order to do this, good governance, effective spending, and the development of the rule of law are priorities. Oil and gas may be shortcuts to wealth, but there is no shortcut to the political and economic development that will take these countries on paths to peace and prosperity.

Brussels/Bishkek, 24 May 2007