Russia is conducting an assertive energy policy: interview of Ariel Cohen to REGNUM

Read it in Russian

Senior Research Fellow in Russian and Eurasian Studies and International Energy Security Ariel Cohen tells REGNUM about his report on Russia’s control over the economic development of Kazakhstan’s natural resources and answers some other questions.

REGNUM: Mr. Cohen, could you please tell about your report and its key ideas?

The report was published in GMB Publishing (London), which has issued a whole series of reports on Russia’s foreign energy policy: Russia-China, Russia-Belarus, Russia-Ukraine, etc. I wrote about Russia and Kazakhstan, because I have studied those two countries for many years already. Naturally, I was mostly interested in oil and gas cooperation. My father is an oil geologist and prospected the very first oilfields in the Caspian Depression in late 60s-early 70s, when we lived in Saratov. So, oil and gas study is kind of the family business for us. At the end of the report, I give statistics on electricity, coal – and atomic energy, which has rather good prospects in uranium-rich Kazakhstan.

The Kazakh oil and gas fields were partly prospected but undeveloped, especially in Soviet times. Then, the focus was on Western Siberia. During the decline of the Soviet Union Chevron made contracts, first with the USSR under Gorbachev, and after its collapse, with Nazarbayev in Kazakhstan, where they started developing Tengiz by laying the only non-governmental oil pipeline CPC (Caspian Pipeline Consortium) from the north-eastern Caspian shore to Novorossiysk. Kazakhstan also has a big oil field in Kashagan and a mostly gas condensate field in Karachaganak. The country is just beginning to get oil and gas from there, but is already faced with a dilemma: where to export this oil and gas? Today Kazakhstan has four options. First – to Russia, where it already has an oil pipe to Orenburg and gas pipe links with the Russian system. There is also part of the oil Central Asia-Center system, which is now being restored and enlarged. Everything is quite clear here.

Second – Baku-Tbilisi-Ceyhan pipeline. Now they are considering a project to export by barge as much as 500,000 barrels a day. Given Kazakhstan’s plans to double and triple its oil export, there is a project – which the US supports – to build and link to BTC — a diagonal Trans-Caspian pipeline to export 1 mln barrels a day –which may be be enough to accommodate the growing Kazakhstani production.

The third option is China. The relevant work is underway. First, in January they launched a pipeline to export 250,000 barrels a day from Western Kazakhstan to China. They built it quickly, they spent a lot on it — which showsChina’s strategy on Kazakh oil. Second, Kazakhstan and China have agreed to lay a gas pipeline to be coupled with Uzbekistan and later, probably, with Turkmenistan. This will make China an even bigger strategic player in Central Asian gas developments.

The fourth way is Iran. The Iranians are restoring and enlarging their Caspian port of Neka. They are already taking oil by barge from Kazakhstan — and are planning to expand this – for their oil refineries are in Northern Iran, while conducting oil swaps in the Persian Gulf. So they are making a swap – they are taking oil from the Kazakhs, selling it in the Persian Gulf and giving back the money. The US is doing its best to prevent the project with Iran. It might be an option were it not for the politics.

In the 90’s, because of perturbations here, Russia was not very aggressive in the Kazakh market. Today, things have changed. First, Kazakhstan, together with Belarus and Armenia, is one of Russia’s strategic post-Soviet partners. In the past, Nazarbayev even offered such an integration scheme in Eurasia. Once back on feet again, with high oil prices and money, Russia and, especially, LukOil, have gotten actively involved in Kazakh oil mining. Even more, Russia was quite right when it rejected Iran’s offer for the general use of the Caspian Sea. This is almost impossible. Instead, Russia agreed with Azerbaijan and Kazakhstan to share the sea. This is good for Russia as this gives it access to the fields on the Kazakh-Azeri sea border and allows it to clearly demarcate its own and other sectors for foreign investors.

In this sense, Russia is very pragmatic. But in the military sense, it is certainly a domineering and, therefore, stabilizing force in the Caspian region, and Kazakhstan, Azerbaijan and, hopefully, Iran know that. In the 90’s western companies drew up a number of contracts to share Caspian oil – to have a share in both Kazakhstan and Azerbaijan. This is a very important energy reserve for western companies as this region is much more stable than the Middle East, the Persian Gulf region, which is shaky and will continue to be because of its social-religious problems.

REGNUM: While in Kazakhstan on March 14 US Energy Secretary Samuel Bodman said that Kazakhstan should take up leadership in the region to be able to develop its energy infrastructures and to create additional transit routes. What prospects does the US have in the region?

In gas the Americans have very limited prospects. Their key task now is to remain a player in the region, to keep what they have. I think it was interesting for the US to watch the rivalry between the Russian LukOil and the Chinese CNPC for the assets of the Canadian PetroKazakhstan.

I guess in the future the Chinese will begin to pay more for assets than Russia or even the US. They are overpaying for assets already today as their oil demand is growing by double-digit % every year. In comparing January 2006 to Jan 2005 their oil imports grew by 70%, the sale of new cars by as much — this is a very quick process.

The US will continue to be a player in oil, the US authorities are lobbying for involvement in BTC. This is hardly against Russia – for, today, Kazakhstan produces over 1 mln barrels a day, will produce 1.5 mln shortly and 3 mln by 2015. If CPC can’t transport 1 mln barrels a day, if they export 500,000 barrels via BTC and even if they redouble capacity for China – at 1 mln barrels a day, they will get only 3 bln a day. But as far as I know Russia is working at full capacity now — in Orenburg and Samara. So, I would advise US companies and authorities to cooperate in that market so that everybody can play and get profit there. This is not a zero-sum game.

Unfortunately, in the other Central Asian regions, for example in Uzbekistan, Moscow and Beijing, the whole Shanghai Cooperation Organization seem to regard their game with the US as a zero-sum game. But this is not about oil. This is more about geo-politics. What we are talking about is geo-economy, where rivalry makes assets more expensive. The PetroKazakhstan example has shown that when there is rivalry the cost of assets grows. Kazakhstan itself wants to maintain a balance between the big 3, and Nazarbayev has been working to this end. But the recent internal developments in Kazakhstan may well push that country off balance.

REGNUM: Well. Let’s return to the Caspian Sea. Russian Foreign Minister Sergey Lavrov said that Russia is against “the efforts of extra-regional powers to establish their military-political presence in the Caspian region for not very clear purposes.” Who did Lavrov mean?

You know, ideally, Russia would like to stay dominant in the region even by weakening Iran by not letting them to move their Persian Gulf ships to the Caspian Sea. I think Iran, especially if it gets nuclear weapon — and it is really working to get it and the Russians realize that – will get more assertive in both the Caspian region and Central Asia. They have experts who are planning to increase Iranian influence in the area – something they had hundreds of years ago. This is what Russia is keeping or, at least, should keep in mind. As regards the US, I think they will review their policies because of the failures they have had in Iraq, the problems they may have in Iran and the concerns they will have for an increasingly strong China. Russia’s present policy is to form a kind of anti-American bloc with China. Let’s wait and see how this will develop. I don’t say this will happen tomorrow, but revision is possible – revision of the attitude towards America as a potential enemy – because Iran is near and China has a very long border with Russia.

REGNUM: What do you think about the idea of the energy consumers’ alliance proposed by Russia’s allies, particularly, by Uzbekistan?

Yes, Russia has various ideas: an idea to from a concern of gas producers, a kind of Russian gas OPEC; a controversial attitude to the EU-sponsored idea of an Energy Charter; or the idea you have just mentioned — an association of electricity consumers. But Russia is not only a consumer; it is also a supplier. Kyrgyzstan and Tajikistan with their vast water power resources can also be suppliers and will want to supply China and, possibly, Pakistan. Their resources are really vast but the geography is mostly mountainous and hard for electricity line laying. Of course, here the state wants to play its role, while private companies play theirs. And they should always try to find common ground.

REGNUM: Let’s return to Central Asia as a whole. Now that a year has passed since the revolution in Kyrgyzstan what changes do you see in that country? And what does the US think of them?

I think the US was a bit overoptimistic about the democracy of the Kyrgyz revolution, while it was just a change of post-Soviet elites. I have seen no democratic tradition in Central Asia, in general, and Kyrgyzstan, in particular. The Akayev regime was decrepit and no longer legitimate, Akayev himself was no longer popular. Like in many other places, his relatives got unbearably rich for the people. They went beyond any limits, and that was the key reason why Akayev was replaced by Bakiyev. But to say that Akayev was a tyrant and Bakiyev is Mahatma Gandhi… I think even in the US the key democracy promoters realize that it is hard to promote democracy in Central Asia and leaders are not always democracy bearers there.

As regards the US’s other interests in that region, I guess it gave the US much pain to be pushed out of Karshi-Khanabad. That’s why our base in Manas is crucial for us as a transit and resupply air base, what is called a “lily pad” for Afghanistan – as it was termed by President Putin. But the US is so strong today that it can well go without the CA bases at all. Of course, we would like to use them freely and we hope to do so for as long as possible. But the operation in Afghanistan will not suffer much from whether we have a base in Uzbekistan or not. I think that actually crucial for the US now is the Persian Gulf. The Iranian crisis is looming large, and Kyrgyzstan is not strategically crucial here.

REGNUM: Strategically crucial is Ukraine with its arterial networks – Ukraine who is trying in vain to curb Russia’s energy hegemony. What are the consequences of the fuel tariff rise for Ukraine? What will the parliamentary elections in that country show?

They will show the level of support of Yushchenko, Yanukovich and Timoshenko – more importantly – who will run in the next presidential election and if people trust Yushchenko any more — and more specifically — how many people support Yushchenko’s less pro-Moscow policy. For example, many have noticed that only 30% of people in Ukraine support NATO membership against 70% contra. But they say that Ukraine will at least try to join NATO, and the US has signaled its support for Yushchenko wherever they could: they signed a protocol on Ukraine’s admission to the WTO, gave it market economy status and abolished the Jackson-Vanik Amendment. But all these signals were for the Kyiv elite only. An old woman in Zhitomir doesn’t care at all if Ukraine joins the WTO or not: what she wants is inexpensive bread and cheap lard.

The rise in Russian fuel prices will make Ukrainian exports more expensive and Russian subsidies no longer possible. This will hardly make Ukraine economically healthier in the near-term, but can well make it more competitive in the longer run. The US notes Ukraine’s progress in democracy and freedom of speech. There is real progress, and one should not laugh at it as they often do in Russia. But on the other hand, we also see problems in economic policy, fights in the parliament and the political elite as a whole. As a matter of fact, this happens in any country in transition. This happened in Russia in the ‘90’s. And this is not happening there today just because they have very high discipline. Otherwise, they would face the same: fights for financial flows and property.

We see this happening in Ukraine. This doesn’t make Ukraine more attractive for foreign investors, this doesn’t make its economy healthier, but Ukraine is exactly the case when they say: not everything is as bad as it looks, and not everything is as good as it looks. They have structural problems, but they speak of them with us and amongst themselves quite openly. It is good that they are frank. And I think it is good that those in Ukraine’s elite can agree with one another. And what Russia is beginning to understand is that Mr. Yanukovich does not automatically serve Russian business. And even if he gets wider powers – though I see no way for him to get Premiership – he will still not automatically serve the businessmen of Russia but rather the businessmen of Eastern Ukraine, whose representative he has always been.