An Offer they just Can’t Refuse?

   It’s not all about energy resources when it comes to Russian interests in its former Central Asian republics. As this RFE/RL article reports, the Russians are deploying further troops to their air base at Kant outside the Kyrgyz capital Bishkek. Reportedly housing some 400 personnel currently, the base has a U.S. “rival”, the 1000 staff U.S. air base at Manas also on the outskirts of Bishkek.

Though the Americans are paying a steep rent for the privilege of being allowed to maintain their only remaining military base in Central Asia, local governments are less warm to U.S. aid initiatives for a number of reasons, not least of which that the money allocated is meant to support human rights NGOs and the building of democratic institutions, which challenge the very foundation of the authoritarian Central Asian governments.

Russia, on the other hand, is seen as the most viable foreign partner despite obvious increase in its military presence in the region. In addition to proximity, cultural and historical ties, Russia is a profitable destination for impoverished migrant workers from Central Asia. Add to that Russian political support for regimes of the Islam Karimov type in Uzbekistan and talk of merging CSTO (Collective Security Treaty Organization) and Eurasec as a counterbalancing initiative to NATO and the EU, and the news of Russian further military deployment acquires the distinct taste of an offer Central Asian states just can’t refuse.

Joint LFAR: Energy Security in the Former Soviet Union

Read joint LFAR here: energy-security-fsu.pdf

Authors: Aimee Blanchard, Shelly Downes, Yana Feldman, Linda Popova

With an enormous sigh of relief and satisfaction, I’m happy to announce that I’ve just finished my second intel course. The course focused on written communication in intelligence and explored various reporting formats: INTSUMs (intelligence summaries), SFARs (short form analytical reports), writing under crisis, cable writing, and LFARs (long form analytical reports. The final project for the course was a joint LFAR, which focused on energy security in the Former Soviet Union.

There were four of us, who worked literally day and night for the past couple of weeks to produce this LFAR. I’m incredibly proud and happy with the final product, not least because our team of 4 showed a great work ethic, and collaboration simply seemed to flow. What makes the collaboration even more special is that it was an example of how working virtually has really begun to change our very concept of work and collaborative work in particular: one team member was located in the southwest of the U.S., one on the U.S. east coast, one in Austria, and one in Switzerland. While the U.S. part of the team was taking a rest, the European counterpart took over the shift, with an approx.7-10 hour difference in time, and vice versa.

This has been a great practical experience in virtual collaboration and communication and I would like to thank both my team and the Mercyhurst College Institute for Intelligence Analysis for the opportunity to work on producing something as conservative as an intelligence product in a most creative way.

LFAR: Energy Security and the “New Great Game” in Central Asia: the Case of Kyrgyzstan

pipelines1.jpg Executive Summary: The interest of the great powers and emerging competitors such as China and India in the resource rich Central Asian states are very likely to continue and increase over the next 12 months. Kyrgyzstan is likely to benefit from increased interest in its hydroelectric sector, attracting foreign direct investment from Russia, China, the Middle East, Japan, as well as indirect support from the U.S. Russia will all but certain remain Kyrgyzstan’s main trading partner. The U.S. is likely to seek India’s assistance to get back some of its lost influence in the region. China will intensify cooperation with Kyrgyzstan in financing new hydroelectric power stations along its Western border under the aegis of the SCO. Kyrgyzstan is likely better positioned than its energy producing neighbors to circumvent resource curse and Dutch disease. End Summary. 

Discussion: 

Background 

In the last decade, the Great Powers have once again turned their eyes on land-locked Central Asia, turning the region into one of the world’s most coveted areas for the extraction of natural resources, the securing of politico-economic alliances, and a fierce battleground for gaining strategic spheres of influence. Not undeservedly, Central Asia has been labeled with terms like “black whole” or “Asia’s Balkans”, placing enormous gravity on the region as one of the central nodes in the complex system of global energy security. 

As in the fairytale, Central Asia has been kissed awake from a century of slumber and emerged from sleep as a strategic focus in “the new great game”. Not since the 19th c., when Tsarist Russia and the British Empire flexed muscles to gain influence in the area, has Central Asia had so many eyes set on it. Yet the economic growth and the raised political profile come with an expensive price tag: authoritarian governments, stalled reforms, lack of transparency, high levels of corruption, media censorship, human rights violations, and not least of all, shivery winters for the majority of the local population. 

The emergence of Central Asia as a major actor on the geopolitical scene is largely due to a growing world energy demand. As stated in a report by the U.S. National Intelligence Council: “Growing demand for energy – especially by the rising powers – through 2020 will have substantial impacts on geopolitical relations.” Both the Clinton and the Bush administrations have actively sought means to gain influence in the area. According to analysts from the U.S. Energy Information Agency, the world’s unproven oil reserves are expected to double in the next two decades, with former Soviet states accounting for a projected fourfold increase. Based on this statement, there can be little doubt that Central Asia will continue to spiral up in geopolitical influence. The stakes are high and they affect not only the interests of super powers like the U.S. and Russia, but also neighboring Afghanistan, China, Iran, Pakistan, Turkey, and the Ukraine, as well as the more distant European Union, India and Japan. 

Energy is not the only reason that drives geopolitical relations in the region. The Taliban regime, which came into power in 1996, triggered a wave of fear of radical Islamic revival throughout Central Asia, prompting local governments to increase their security cooperation with Russia, the U.S. and China. In the aftermath of 11 September 2001, this cooperation has expanded, with the U.S. and Russia setting up military bases in the region, and China even conducting joint military exercises with Kyrgyzstan under the framework of the Shanghai Cooperation Organization (SCO), which, at least on paper, is not a military alliance. 

The Role of Kyrgyzstan 

Even if we ignore the Putin-Medvedev precedent in Russia, it is hardly surprising that Kyrgyz President Kurmanbek Bakiyev appointed former Energy Minister Igor Chudinov as new Prime Minister in early Jabuary 2008, following the hotly disputed December 2007 elections. Chudinov, and ethnic Russian with no knowledge of Kyrgyz, has already been criticized domestically for allegedly not having the experience to lead the government as well as for his inability to challenge Bakiyev, since constitutionally the president must speak Kyrgyz. Once a high-ranking Komsomol official, Chudinov has been the director –general of the Kyrgyz state gas company Kyrgyzgaz since 2005. Yet despite his background in the industry, he is not placing too much weight on boosting development in the energy sector; rather, he has stated that he will focus on improving core sectors such as agriculture, minerals and tourism, and only secondary, the exploitation of energy resources. 

It is true that Kyrgyzstan has neither the oil nor the natural gas resources of its neighbors Kazakhstan, Uzbekistan and Turkmenistan, however with an annual volume of 2,450 km3, it possesses considerable water resources. Kyrgyzstan is considered the third largest hydroelectric power in the CIS after Russia and Tajikistan. It has sufficient amounts of energy but is in dire need of developing its electric lines which are overloaded (they transfer around 5.5 GW but have the capacity of 4 GW) and have deteriorated due to neglect and lack of investment since the 1990s. Privatization of the electricity sector started as early as 1998 but has been slow until recently. Bakieyev’s government has been keen to push privatization of the sector as first priority and it is very likely that more concrete results will be seen by the summer of 2008. 

Out of an estimated potential of 26,000 MW, the Kyrgyz installations are currently only capable of producing around 3,000 MW, of which 80% is from hydro electricity and 20% from thermal stations. The country’s 17 hydroelectric and two thermal stations have enough electricity to fulfill local consumption needs and produce enough surplus for export. Yet regional energy trade relations are strained. 

The Regional Actors 

The theoretical compatibility (3 gas and oil producing states and two hydroelectricity producing ones) has proved unsustainable in practice. There have been ongoing negotiations to exchange water for oil, but Kyrgyzstan has usually been on the losing side of those, with strong over-reliance on energy from Kazakhstan and Uzbekistan. Uzbek pricing demands have had significant repercussions in Kyrgyzstan. While in 2006 Bishkek was paying Tashkent US 55 per thousand cubic meter, at the end of December 2007, Uzbekistan hiked up prices between US 100-115 and US 145/tcm. Kyrgyzstan is not the only one being bullied by Tashkent. Tajikistan is suffering a similar fate, and even Russia has agreed to a sizable price for the Uzbek gas. “The Kyrgyz economy is bearing the price rise of Uzbek gas with difficulty,” reported the Gazeta.kz website on 3 January 2008. “The people of Tajikistan will bear the most substantial losses. The poverty rate, which is already high, may increase.” 

From this and other similar instances we can deduce that it is very likely that Karimov’s administration is puppeting Russia in strengthening its political influence over Kyrgyzstan and Tajikistan by controlling the gas taps. 

The five Central Asian states continue to be divided over issues of how to use the water resources: for irrigation in the summer or for heating in the winter. There is currently no reason to believe that the negotiations will move forward in the next 12 months. Since the June 2001 agreement between Kazakhstan, Kyrgyzstan and Uzbekistan to pay off their mutual energy debts through energy barter rather than by cash payment, Kyrgyzstan has been grudgingly delivering more than a billion kwh of hydroelectricity to both countries annually. While it would be Kyrgyzstan’s preference to receive cash for such transactions, it has had to contend with 700 million cubic meters of gas and 20,000 tons of petrol from Tashkent and 800,000 tons of coal and 20,000 tons of oil from Astana.

In June 2007, the Bishkek Institute for Public Policy hosted a roundtable for local experts and government officials on the challenges and opportunities for energy security in Kyrgyzstan. Participants in the discussion concluded that energy security in the country depends on the uninterrupted increase of generating power and the decrease of dependence from imports from neighboring countries. In this light, it is very likely that the current administration will attempt to speed up the privatization process and attract foreign capital for construction and exploitation of the hydroelectric stations. But even if construction of these stations, most notably the Kambarata stations, goes according to plan, and they are fully operational in 5-7 years, it is difficult to predict if that will have a desired impact on energy security. With a lack of institutional oversight and high levels of corruption, it is likely that a tariffs policy on electricity will be extremely difficult to implement and regulate. One major consequence of such a scenario is likely to be that the bulk of electricity would be exported at the expense of the local population and the Kyrgyz economy. This is currently the case in Uzbekistan and Turkmenistan, where the benefits reaped from energy exports have largely been appropriated by the political elites and shady businessmen, leaving residents to “burn whatever they can get their hands on in order to stay warm”, according to local media sources. 

Russia 

Russia’s interests in Central Asia have naively been attributed (mostly by Western analysts) to a hegemonic lust to reclaim its “lost” empire. Russia’s decades-long control of the region has indeed far more complex long-term geopolitical implications. It is highly unlikely that Russian foreign policy toward Central Asian countries is driven by hopes of recapturing great oil wealth. A far more likely scenario is Russia’s desire for geopolitical dominance of the region. Russia’s likeliest ambition in the area is not the possession of oil and gas resources, but control over the pipelines. As one expert has put it: “Whoever controls the lifeline of oil transportation controls the oil resources of Central Asia, and by extension will dominate the politics of Central Eurasian states as well. 

With energy as a means rather than an end in Russian foreign policy, it is not difficult to perceive Russia’s motivation in participating actively in the privatization of the Kyrgyz electricity sector. Currently Russia imports cheap Kyrgyz hydroelectricity to supply parts of Siberia. To reinforce its position, Moscow wants to develop transmission lines connecting north and south Kazakhstan and some inter-connecting lines between Tajik and Kyrgyz networks. The Russian state-run Unified Energy System (RAO-UES) is likely to use this network as a “North-South energy bridge” to export via the Central Asian grid to dynamic markets in the Far East. 

The United States 

According to a U.S. senior research fellow, Ariel Cohen, U.S. interests in Central Asia are threefold: security, energy and democracy. While a key U.S. national security concern is the diversification of energy resources, and Central Asia, despite its geographic distance and difficult accessibility, provides just such a lukewarm alternative to more turbulent markets in the Middle East, the U.S. has nonetheless achieved only marginal success in the region. 

So far U.S. involvement in Kyrgyzstan as well as the greater region, can be characterized by a “win some lose some” track record. Despite supporting local projects to increase and diversify non-Russian energy transit routes for Central Asia and setting up two military bases: one in Uzbekistan (now defunct since the 2005 riff with Karimov over criticism of human rights violations in the Andijan case) and one in Kyrgyzstan, reception of the U.S. alleged benign intentions on Cenral Asian soil has failed to produce the “winning of hearts and minds” it did perhaps intended. Nominal cooperation between local authorities and the U.S. in the war on terror, has helped the U.S. keep its airbase at Manas for the annual price tag in rent of about US 150 million, but has been an annoyance to the authoritarian governments of the region in its encouragement of reforms, modernization and democratization. 

It is highly unlikely that the U.S. will become a dominant power in Central Asia in the foreseeable future. What is likely, however, is that it will try to leverage its good relations with India to gain benefits indirectly. As both a stable democracy and a partner in the fight against terrorism, India will likely be used as a foreign policy tool to maintain and possibly expand U.S. influence. By providing an alternative corridor for energy exports to the Central Asian countries, India could be instrumental in breaking up the Russian monopoly, which in turn would contribute to economic growth, stability, and improved relations among the pipeline transit countries of India, Pakistan, and Afghanistan, which is all in U.S. interest. 

China 

China has been an importer of petroleum products from Central Asia since the April 1994 visit of Chineses Premier Li Peng to Kazakhstan, Uzbekistan, Kyrgyzstan and Turkmenistan. However, Beijing’s interests at that time were border security concerns (the 3,300 km western border with Kazakhstan, Kyrgyzstan and Tajikistan) as well as insurgency fears from Uighur separatists in Xingjiang rather than energy politics. Just little more than a decade later, China’s energy strategy is keeping eyes fixed on its western neighbors. Not only is close energy relationship with Central Asia very likely to further boost Chinese economic growth, but it can play a positive role on China’s self-confidence as an emerging great power, able to compete and possibly outperform geopolitical rivals such as Russia, the U.S. and Japan. By far the largest impact that China is likely to make on the energy market in Central Asia is its ability and willingness to provide new oil pipelines and diversify options and opportunities for the land-locked states, thus acting as a balancing force between Washington and Moscow. 

Specifically to Kyrgyzstan, Chinese-Kyrgyz energy cooperation has taken off significantly since 2005 and shows no likelihood of slowing down in the near future. A proposed investment of US 900 million to Bishkek in 2005 is now in the implementation stage of constructing a hydroelectric station, two blast furnaces, and the construction of a railway track and two roads in exchange for Kyrgyz electricity, iron and precious metals. It is all but certain that China will participate in the construction of the Kambarata I and II stations, although the Kyrgyz authorities will likely tread lightly on the deal so as not to undermine the authority of Gazprom and other Russian companies with big stakes in the construction. Further cooperation can be expected in Oriental Tian-Shan, in the region of Lake Issyk-Koul on the border with China, where privately-owned company Sarydjaz-Energo plans to begin construction of a cascade of five stations with the help of Chinese financing. 

“Resource Curse” or Blessing and the “Dutch Disease” 

A common problem that has emerged in Central Asia (as well as Russia) as a result of the oil and natural gas boom, the increase in energy prices and heightened international interest in the region is the so-called “resource curse”, whereby energy rich countries waste their income in corruption and spending on security forces, while failing to diversify their economies, build effective institutions or stable democracies. 

The “resource curse” is one of the main ingredients in the correlation between natural resources and violent conflict, and Central Asia is certainly not immune in this respect. Studies show that oil producing areas often suffer poverty, repression, environmental degradation and labor tensions, with the populations not being privy to benefits from the wealth that is created. Uzbekistan and Turkmenistan are one of the more extreme examples of this tendency. They, along with other resource giant Kazakhstan, also run a much higher risk of “Dutch disease”, in which increased natural resource revenue causes a currency to appreciate rapidly, making other exports less competitive. “Dutch disease” and “resource curse” contribute to a higher risk of internal conflict, to which many Central Asian governments and Russia have responded by strengthening their domestic security structures to a point that a basis for the development of democracy has eroded or been killed in infancy. The abundance of valuable resources creates opportunities for government corruption and rentier states, whose political and economic goal is getting a share of the spoils and self-perpetuation, with little or no regard for economic and social development. 

In this regard, Kyrgyzstan’s lack of substantial oil and natural gas resources may actually turn out to be a blessing in disguise. Alan Rousso, Lead Counsellor at the European Bank for Reconstruction and Development (EBRD), provides some valuable insights on the connection between market reform and political governance in the resource rich countries of Eurasia, which unlike other former Soviet states in transition such as the Central European and the Baltic states, have so far lagged behind with respect to adoption and effective implementation of structural and economic reforms that support markets. He claims that within the CIS, some of the most reluctant economic reformers have been the oil and gas producing countries such as Russia, Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan (RAKTU), showing that since 1992, the non-energy producing countries in CIS (Kyrgyzstan falls under this category) have outperformed the energy producers in early phase liberalizing reforms (price and trade liberalization, small scale privatization) and in later phase institutional reforms (financial sector, governance and enterprise restructuring, infrastructure and large scale privatization). An EBRD study from 2005 shows that the non-energy producers had an average transition score in early phase reforms of around 3.8 out of a total 4.3 (4+), compared to an average score of around 3.2 for energy producers. In the second phase reforms, this ratio is 2.4 to 2.1. 

While Kyrgyzstan is far from being a developed democracy, it has certainly been more open and tolerant to reform processes and democratization, such as greater tolerance to political opposition, greater freedom of the press, better development of civil society and NGOs, greater respect for human rights, greater cooperability with the international community, and greater efforts toward the diversification of its economy. 

If Kyrgyzstan is able to take advantage of its resource disadvantage by focusing on institutional and market reforms, it is very likely that it will emerge healthier and better positioned in the global geopolitical game, opening doors for itself, where other energy producing countries have shut the blinds and bolted the gates. Given the country’s currently weak political and economic institutions, its chances of avoiding the resource trap will be entirely dependent on the partnerships it decides to pursue and the extent to which the present administration will be able to reduce energy dependency on Uzbekistan and Kazakhstan, as well as over-reliance on Russian investment. It is unlikely that any major shifts will occur on the chess board of energy security politics in the next 12 months with respect to Kyrgyzstan. But whatever changes do affect the current spheres of influence configuration, they are more likely to be blown by the south and east winds, not the north and the west. 

Comment: This report makes no mention of the role of the European Union and its relations and possible impact on energy security cooperation between the EU and Central Asia, So far the EU has had little or no impact in the energy politics of the region even though it is painfully aware that its failure to do so is detrimental to its energy interests. It can be acknowledged that in the Euro-Atlantic framework, the U.S. has been faster and smarter at seeking a stronger foothold in the region in order to minimize Russian monopolization of sources and routes. While the EU realizes that Russia is using its stakes in Central Asia as a political tool in EU-Russia relations, the EU is yet to develop a common energy strategy. 

Source Reliability: 9

Analytic Confidence: 8  

INTSUM: Privatization of the Kyrgyz Electricity Industry Likely to Hit Hardest the Poor

kyrg_water.jpg IWPR (Bishkek) 25 January 2008

Plans to privatize Kyrgyzstan’s electricity industry are under way, after President Bakiyev’s statement that the only way to bring more money into the sector is through privatization. He and his officials believe that Kyrgyzstan can become self-sufficient in energy as privatization would help with renovating derelict Soviet equipment and with the building of new plants. However, while those who support privatization as the only way of salvaging a loss-making industry, opponents say the privatization process has been anything but fair and transparent, expressing a low degree of trust in the way the government handles potential bids.

Analysis:

It is very likely that privatization of the electricity industry will continue rapidly, with several major investment deals likely to close by summer 2008. While Russia, and Gazprom in particular, are highly likely to be favored as investment partners, it is also likely that Kyrgyz authorities will be open to other bidders, including Kazakhstan, Uzbekistan, China, some Middle East countries, and possibly even the US.

As private investors move in, the prices for electricity and heating are very likely to increase by about 30%, which will have the most severe effects on the Kyrgyz poor, and especially on the retired segment of the population.

Source reliability: 8

Analytic Confidence: 8

Speculations about Nuclear Cargo Detained in Kyrgyzstan Continue

Speculations about the origin and destination of the nuclear cargo discovered on a Tajik train at the Kyrgyz-Uzbek border are continuing as IAEA has launched a formal request to the Kyrgyz government to cooperate with the investigation. RFL just published another article, in which a US expert on nuclear proliferation and terrorism talks about the properties of the radioactive substance cesium-137, and postulates that a malicious intent of smuggling is unlikely, purporting instead, that the incident is more likely to be a cause of negligence.

Code word: Tom & Jerry

Further to my posts on the growing of the Hizb ut-Tahrir’s following in Southern Kyrgyzstan, here’s an article the Institute for War and Peace Reporting (IWPR) just published on the spread of Islamist propaganda in the form of CDs and videotapes (alias Tom  & Jerry) by one Muhammad Amin – a passionate supporter of the Uzbek exiled Islamic radical Tahir Yoldash.

While the Hizb ut-Tahrir movement has always taken pains to disassociate itself from the Islamic Movement of Uzbekistan (IMU), of which Yoldash is supposed to be the leader, on the grounds that the former does not support violence, it is nonetheless worth noting that in face of the “common enemy” the two Islamist groups face, i.e. the secular authoritarian regimes of Kyrgyzstan and Uzbekistan, such disassociation may not remain a permanent fixture.

For what’s worth, the Kyrgyz government has historically been a lot more tolerant to its opposition (both secular and Muslim) than its Uzbek counterpart. One thing, however, is clear, and that is support for more radical Islamist groups in the south of Kyrgyzstan is on the rise. This is sure to have increased pressure on Bakiyev’s domestic policies as well as bilateral relations with neighbouring Uzbekistan.

INTSUM: Afghanistan – a New Migration Destination for Kyrgyz Workers

While the majority of Kyrgyz economic migrants still seek better opportunities in the booming economies of northern neighbors Russia and Kazakhstan, some are turning instead to conflict-ridden Afghanistan, where higher security risks are compensated with higher wages. A major source of employment for south-bound Kyrgyz migrants are US private contractors in Afghanistan. The US State Department has stated that it employs some 29, 000 private contractors there, many of whom are neither US nor Afghan citizens, but third country nationals (TCNs), who despite harsh and often dangerous conditions, are lured by the much higher wages.

Analysis:

Given the small number of Afghanistan-bound Kyrgyz migrants, it is unlikely that this trend will have any severe short-term impacts on Kyrgyz economy. In fact, those returning to their homeland with accumulated capital, are likely to have a positive impact in the area of SME development in Kyrgyzstan. However, given the general trend in migration causality from politico-ideological to economic, such a trend is likely to have more long-term consequences, which would be difficult to predict, and may even fall under a Black Swan category. One likely psychological outcome may well be a diminished sense of risk aversion in the segment of population that is facing exceedingly gloomy employment prospects at home.

Source Reliability: 8

Analytic Confidence: 8