24.04.2017 Author: Dmitry Bokarev

The Political Dimension of Hydrocarbon Trade Between Russia and Central Asia

234231232132Central Asia is strategically important for Russia in terms of security. It plays the role of a sort of buffer between Russia and countries like Afghanistan, Pakistan etc., where the threat of terrorism is strong. Therefore, good relations with the countries of the region, their peace and prosperity are among Russia’s most important interests. Cooperation in the oil and gas industry is a powerful means to achieve this.

It’s well known that the countries of Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan) have significant hydrocarbon resources. For Turkmenistan and Uzbekistan, the extraction and sale of energy resources are the backbone of their entire economy. For Kazakhstan, this industry is also exceptionally important since oil is its primary export commodity. While Tajikistan also has substantial oil and gas reserves, hydrocarbon recovery there is poorly developed, providing only a small percentage of the country’s own demand. Tajikistan imports the remainder from Russia and Uzbekistan. Kyrgyzstan has completely handed over supervision of its oil and gas industry to Russia.

The oil and gas industry in Central Asia had begun to develop during the Soviet era, and it is not surprising that after the collapse of the Soviet Union, Russia remained the main consumer of local energy commodities, since the existing infrastructure (e.g., the well-known Bukhara-Ural and Central Asia Center pipelines) was tailored to the delivery of resources specifically in Russia’s direction, and creating a new infrastructure would need much time. To some extent this helped to preserve not only economic but also political ties among the post-Soviet states.

Due to the complex situation in the region during the 1990s, hydrocarbon trade had been in recession, but since the early 2000s, it’s been experiencing a sort of “rebooting”. Despite Russia’s own abundance of oil and gas resources, it continued to purchase them from Central Asia. Supplying Russia’s southern regions with Central Asian gas was convenient and profitable. Moreover, trade helped to maintain Russian presence in these states. At the same time, the countries of the region that didn’t supply hydrocarbons became importing partners with Russia. In 2003, agreements were reached regarding oil and gas cooperation between Tajikistan and Turkmenistan, in accordance with which Russia began buying Turkmen gas and helping to develop the Tajik oil and gas industry. As of 2004, approximately 25% of the gas consumed in Russia was from Central Asia. The main supplier of this gas was Turkmenistan. Also in 2004, after a long hiatus, Russia once again began purchasing gas from Uzbekistan. Part of Uzbek gas was exchanged with Kazakhstan, and a small amount went to Kyrgyzstan.

Over time, however, the old ties nonetheless have started to unravel. The old infrastructure fell into disrepair, and the new economic environment took its toll. For Russia, this trade gradually became less profitable, while China (which was much more interested in the local resources) came to Central Asia. Thus, from 2011 to 2012 Uzbekistan significantly increased its gas exports, but the primary gain came from deliveries to China. In the following years, demand for Uzbek gas continued to fall in Russia but grow in China. Wanting to maintain its partnership with Russia, Uzbekistan decided in 2015 to reduce the price of its gas. This decision has yielded results: in 2016 Russia remained the main importer of Uzbek gas, buying 6.2 billion cubic meters (China acquired 4.3 billion).

Russia stopped buying gas from Turkmenistan in January 2016, when its price outweighed the benefits for Russia in this cooperation. Now the main buyer of Turkmen gas is China, followed by Iran.

In August 2016 Gazprom stated that it intended to discontinue research on multiple deposits in Tajikistan due to their high cost and inefficiency. According to the Russian company’s representatives, the development of Tajik deposits has already cost Gazprom $170 million but hasn’t given a satisfactory result. Furthermore, the company has suffered additional losses due to the nature of Tajikistan’s taxation. For Tajikistan, this was unwelcomed news. Gas from mine deposits could reportedly suffice Tajikistan for several decades, and their successful exploitation could provide for its energy needs and significantly raise the country’s standard of living. Nonetheless, tax exemptions that Gazprom demanded from the Republic’s authorities have not been granted, so the Russian company decided to abandon the project. Some experts, however, remain hopeful that Tajikistan will still reconsider its position. Otherwise it’s going to have to work almost solely with China and left without competition, China will start dictating much less profitable terms to Tajikistan.

Nevertheless, despite all the difficulties and the fact that Russia is perfectly able to stretch its own resources, it doesn’t plan on stopping oil and gas cooperation with Central Asia. In fact, as has been mentioned, it’s not only a question of economic interests but also of political influence. Thus, in one form or another Russia will continue cooperation in the oil and gas industry even if prevailing economic interests do not require it.

On April 5, 2017, during a visit to Moscow by the new President of Uzbekistan Shavkat Mirziyoyev, an agreement between the Russian company Gazprom and the government of Uzbekistan was signed, under which Gazprom will buy 4 billion cubic meters of Uzbek gas per year for 5 years starting in 2018. The five year contract is mid-term. So far Russia has bought Uzbek oil mostly on short-term contracts for 1 year. Both sides also reached agreements under which Gazprom will help the Uzbek company Uzbekneftegaz in field studies, work organization, and training personnel. A lot of specialists consider the primary aim of these agreements to be the overall strengthening of Russian-Uzbek relations. As was before, Uzbek gas is most likely going to be supplied to Kazakhstan and Kyrgyzstan. As for Kyrgyzstan, remember that since 2014 Gazprom has owned all its gas infrastructure, having bought from the Kyrgyz government the controlling interest in the country’s main oil and gas company Kyrgyzneftegaz. Consequently, Kyrgyzstan’s entire oil and gas industry and its energy supplies are in the hands of Russia.

The issues with Tajikistan and Turkmenistan are most likely temporary. Despite the cease of cooperation in field development, Tajikistan continues to import Russian hydrocarbons. About 70% of all its oil and gas imports come from Russia. With regard to Turkmenistan, the trade terms with China and Iran are no longer suitable, and it would be better for the country’s interests to get back a buyer like Russia. According to media reports, this matter could be decided by 2019.

Therefore, we can say that despite all the events of the last few decades, Russia keeps contact in the oil and gas industry with all the countries of Central Asia, and this helps it to maintain influence in this important region.

Dmitry Bokarev, expert politologist, exclusively for the online magazine “New Eastern Outlook.

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