international analysis and commentary

The former Soviet “stans”: from the energy rent to regional cooperation

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With the collapse of the Soviet Union, the five central Asian republics Kazakhstan, Uzbekistan, Turkmenistan, Tajikistan and Kirgizstan have (re-) emerged as independent states. The task of building new state institutions and a functioning domestic economy, while preserving the newly acquired sovereignty and independence vis-a-vis external major powers, seemed like an impossible mission at the time.

Today, almost 30 years later, Central Asian countries – which successfully mastered that difficult transition – are confronted with an even greater challenge: faced by geo-economic and geopolitical changes across Eurasia, they can seemingly preserve their sovereignty only by strengthening long neglected intra-regional cooperation, rethinking their economic model of development and their foreign policy priorities.

 

From states to region

The evolution of Central Asian countries from state building to more recent attempts of regional cooperation is indeed deeply linked with the rise and (partial) fall of their major geopolitical and geoeconomic assets: energy resources.

In the early years after the collapse of the Soviet empire, the young republics were considered prone to chaos, poverty and civil war and dammed to become a source of instability. This was even more so if considering that in the early ‘90s the region was perceived as a land-locked backwater of international politics and largely forgotten by the West, Russia, and China. Russia considered relations with the five “stans” a burden on its trajectory towards integration with the West. The West – and Europe in particular – long ignored this space, focusing instead on the integration of Eastern Europe in Western institutions. China for its part was merely interested in rapidly settling border issues with the newly created republics to avoid destabilization of its Western-most, largely Muslim populated provinces.

This situation changed dramatically by the end of the ‘90s thanks to two major global events: the constant rise of oil prices, determined by a mix of rising global consumption and market speculation, and the new geopolitical relevance of extraction, transport and delivery of fossil resources (particularly gas) in defining relations between the West, Russia and later, China.

Kashagan oil field, in the Kazakh Caspian Sea. Production reached 12 million tons in 2018.

 

For the West, particularly Kazakhstan, Turkmenistan and to a lesser extent Uzbekistan, seemed to emerge as an alternative source of oil and gas to both the Middle East and Russia. They could also offer alternative energy routes to the European and global markets in a period in which a resurgent Russia seemed willing to use energy, particularly gas, as a geopolitical tool. For Russia, gas from Central Asia was resold at a higher price to European consumers or stored for its domestic consumption. For Moscow, any attempt by Central Asians and by the West to build pipelines by-passing its territory was hence fiercely opposed. China, for its part, where oil (and gas) demand dramatically increased along with the economic growth of the country, silently, carefully but rapidly oriented its attention to its Western continental neighbors in search of alternative supplies for its central and western provinces.

Against this backdrop, particularly Kazakhstan and to a lesser extent Turkmenistan and Uzbekistan have proven able to develop a careful but effective multi-sectoral energy diplomacy and successfully integrate in the global energy markets. They have partially diversified their energy transport routes away from the Russian network (Kazakhstan) to the West or reoriented to the east, to the rapidly growing Chinese market (Kazakhstan, Turkmenistan and Uzbekistan).

The Central Asia-China pipeline (2007) and the Kazakhstan-China pipeline (2005-9) allow China oil and gas imports from the rich Central Asian fields

 

The energy factor

For a decade, high oil prices and the new geopolitics of energy have hence changed the functional role of the region from geopolitical irrelevance and geographically land-locked to a new geopolitical centrality and partial reconnection with the global markets. This has allowed the elites of these countries to relatively successfully master a complicated geopolitical environment navigating between powerful and irreplaceable neighbors (China and Russia) and distant but needed Western partners.

Thanks to the export of their resources, Central Asia states did not only master a complicated geopolitical environment and preserve their sovereignty. They also created their own national state institutions, built up their national economies and expanded their social security systems, a main source of legitimation for otherwise authoritarian and kleptocratic regimes.

The flipside of this model of resource-based economic development and of outward-looking energy diplomacy has been the neglecting of the non-energy sector of the economy. This has resulted in high vulnerability to external oil price shocks, the absence of significant investments in cross-border and trans-regional transport infrastructure and in other value added industries needed to participate in global value and supply chains and a scarce interest for regional political and economic cooperation.

 

Ignore-thy-neighbour

In fact, the major countries of the region, Kazakhstan Uzbekistan and Turkmenistan, have all pursed at different levels a multi-sectoral foreign policy more directed at establishing stable economic and political relations with the major powers outside the region (Kazakhstan) or aimed at isolating themselves from the rest of the continent (Uzbekistan under Karimov, Turkmenistan) than at cultivating relations within the region.

Political indifference toward intra-regional cooperation and reciprocal mistrust, along with similar production structures and monocultural economies have hence resulted in a very poor regional record: Central Asia is still one of the least connected and integrated regions in the world, with intra-regional trade still very low at merely 6%-10% of the region´s total and no functioning regional cooperation organization without participation of external powers.

The combined effect of global and regional factors has dramatically changed Central Asia’s geopolitical and geo-economic landscape, impacting its major geopolitical asset – energy – and hence the prospects for regional integration and cooperation.

Globally, the continued fall in oil prices since 2008 has exposed the vulnerability of the region’s economic model and affected national budgets and local employment. Meanwhile, the transformation on the energy markets (increasing role LNG, energy efficiency and increase in alternative energy sources) has reduced the relevance of oil and gas as “geopolitical assets”: while fossil fuels retain a crucial role on global markets and politics, piped oil and gas from central Asian has more a complementary today than a “swing” function. The more so if considering that major pipelines to the east and the west have already been built while much needed new pipelines to the south (India, Iran) remain on paper.

 

Proximity and value chains

However, changes in the political economy of Eurasia are also offering new opportunities for reinforced regional cooperation, which might turn the traditional geographic “isolation” of the region into a future, potential “proximity” asset. Supply and value chains are territorially expanding from maritime to continental Asia while old overland trade links across the continent are reopening, catalyzed by China´s Belt and Road Initiative, Russia’s Eurasian Economic Union and the EU’s Connectivity strategy. Under these circumstances, the incentives for intra-regional, cross-border market and trade integration are greater than ever. The more so, if considering that the east-ward shift in Europe´s manufacturing center from Western to Central-Eastern Europe and China’s symmetrical westward shift from coastal to central provinces has brought the production networks of both Europe and Asia closer to the Central Eurasian space.

Nur Sultan (formerly Astana), is the capital city of Kazakhstan since 1997

 

Regional cooperation is increasingly becoming a geopolitical necessity to resist or at least balance external pressure by both China’s Belt and Road Initiative and Russia’s Eurasian Economic Union while profiting from external trade, financial and economic ties reopening across the continent. In this sense, for example, a strong Uzbek-Kazakh relation is essential to coordinate diplomatic efforts and policies both vis-à-vis China’ initiative and Russia’s economic union. Uzbekistan’s possible participation in the union, for example, could prove instrumental to increase the weight of Central Asians inside the union.

At the regional level, particularly Uzbekistan’s opening-up and reform process, since 2016 has unleashed a major interest for regional state-to-state cooperation. This has largely focused on improving cross-border trade, decreasing barriers to trade and supporting small and medium enterprises, the backbone of the main Central Asian countries´ private economies. The smooth, even though partial, transition of power in Kazakhstan could animate new President Tokaev to cautiously follow a similar path.

 

Looking for the geopolitical dividend

Improvements at the state-to-state level have also impacted cross-border transportation inside the region, with the reopening of cross-border rail and road links long sealed off. The reopening of north-south and east-west connections is proving crucial not only for facilitating transcontinental traffic but also for creating intra-regional supply and value chains, particularly in the food industry, agribusiness and industrial manufacturing.

As a result, at least among some of the key Central Asian countries, in the past few years intra-regional-trade has increased by as much as 50% and significant improvements are visible in bilateral and regional cross-border trade, even though this increase starts from a very low level. Agro-industry, food-production, logistics and to a less extent manufacturing (industrial machineries, automotive, telecommunications) are emerging as the most promising sectors for intra-regional cooperation.

However, all these positive developments notwithstanding, Central Asia’s emerging regionalism remains plagued by serious economic and political shortcomings which hamper further integration both within the region and with the rest of the continent. Economically, the dependence on the extractive industry, the lack of a skilled low- and middle-level working force, the overall low income, the lack of industrial capacities and the distance from open seas and ports, not yet compensated by better and efficient logistic services, hamper the participation in global and trans-regional value and supply chains. Politically, regional cooperation remains at a very early stage, with no institutionalization, largely occurring on an ad-hoc basis and still dominated by a certain level of reciprocal mistrust, a jealous protection of sovereignty which serves to legitimatize more or less authoritarian and still dysfunctional regimes.

Samarkand, Uzbekistan

 

Energy resources proved to be the key geopolitical (but dysfunctional) asset on which Central Asia’s early post-Soviet statehood was built. Today, regional cooperation and integration in value and supply chains might prove to be the new (and only) geopolitical and geo-economic asset that Central Asians have in order to sustainably profit from greater continental interconnectedness, reform their economic and political systems, while preserving their autonomy in a geopolitically more fluid and complicated continental environment. It will be left to the present and future elites to turn the potential of regional cooperation into geopolitical, economic and social dividends for their populations.