August 24, 2022
IntelBrief: Russia-Kazakhstan Strains Benefit Ukraine and Global Oil Market
The invasion of Ukraine has created a rift between Russia and its longtime ally Kazakhstan, a former Soviet republic that still has a substantial, if shrinking, percentage of ethnic Russian inhabitants. Perceiving that Russia’s President Vladimir Putin could use a similar rationale to justify a military intervention to protect “Russian speakers,” Kazakhstan’s leaders increasingly view their northern neighbor as a potential threat. Although it is a member of the Russian-led Eurasian Economic Union and the Collective Security Treaty Organization (CSTO), in June, while sharing a stage with President Putin, Kazakhstan’s President Kassym-Jomart Tokayev said that his country would not recognize the breakaway ‘Republics’ of Donetsk and Luhansk. Russian forces have captured large parts of the two Ukrainian provinces – which compose the Donbas region - and Putin has set transforming these provinces into pro-Russian republics as one of Russia’s primary war aims. Even though Tokayev immediately sought to deny any break with Moscow, Russian interference with Kazakhstan’s vital oil exports suggest that a significant rift has opened up between Moscow and Nur-sultan. The divide has emerged more than six months after Russian forces intervened to help secure Tokayev’s government from being toppled by widespread protests sparked by an increase in fuel prices. The rebellion - the most serious since the country’s 1991 independence - provided justification for Tokayev to end longtime leader Nursultan Nazarbayev’s residual influence over government policy. Nazarbayev is a longtime Kremlin ally and likely would have taken a more pro-Russian position on the Ukraine war had he still been Kazakhstan’s president.
The Russia-Kazakhstan chasm has expanded quickly, manifesting itself in a series of moves and countermoves between Tokayev and Putin on the global oil market. At the beginning of July, Tokayev offered Europe more of Kazakhstan’s oil, telling European Council President Charles Michel that “Kazakhstan could contribute by acting as a ‘buffer market’ between East and West, South and North” amid “deepening geo-economic fractures” - a clear reference to the European Union and U.S. sanctions on Russian oil exports. Tokayev expressed Kazakhstan’s readiness “to use its hydrocarbon potential to stabilize the situation in the world and European markets.” Shortly after Russia invaded Ukraine in February, international crude prices hit 14-year-highs of over $120 per barrel in June, but since have fallen back to about $90 per barrel on expectations of global recession. Experts forecast that oil prices might rise significantly again at the end of 2022 when a European Union ban on seaborne imports of Russian oil goes into effect.
Kazakhstan could help ease pressure on oil prices if it is able to export more oil to Europe. Its oil exports are roughly 1.4 million barrels per day (bpd) - approximately 1% of world supplies. About 70% of that oil already flows to Europe, meeting about 6% of European Union demand, and there is scope to increase that. However, Kazakhstan is landlocked, and its oil export routes are subject to cooperation with neighboring countries, including Russia, giving the Kremlin substantial leverage over Nur-Sultan. For 20 years, Kazakhstan’s oil exports have been shipped through the Caspian Pipeline Consortium’s (CPC) oil terminal at Russia’s Black Sea port of Novorossiysk, providing Kazakhstan access to the global oil market but also providing Moscow with a virtual stranglehold on Kazakhstan’s exportation. Two days after Tokayev offered to export more oil to Europe, Putin sought to retaliate for this perceived disloyalty. A Russian court ordered a 30-day closure of the CPC route, citing ‘environmental concerns.’ Although closures of the Novorossiysk terminal are frequent - it was closed in June over the discovery of World War II-era explosives in the port’s waters and in March due to storm damage - most energy experts assessed the closure as a clear message of Putin’s displeasure at Tokayev’s stance on the Ukraine invasion. Additionally, Russia does not want Kazakhstan to undermine its threats to reduce oil and gas exports if Europe and the United States continue to arm Ukraine.
Yet, the moves against Tokayev could backfire, causing Kazakhstan to reduce its dependence on Russia-controlled oil export routes. Immediately after the CPC court order, Kazakhstan’s state oil firm Kazmunaigaz (KMG) accelerated discussions with Azerbaijan’s state-owned energy firm SOCAR to allow the exportation of Kazakh oil through the Azeri pipeline that terminates at Turkey’s Mediterranean port of Ceyhan. That exportation route is expected to begin in September; however, the export volume of that route - just over 30,000 barrels per day - is insignificant compared to the 1.4 million barrels per day that flow through the CPC pipeline.
Although the arrangement with Azerbaijan would allow Kazakhstan to bypass Russian territory, the new Baku-Tbilisi-Ceyhan (BTC) route means Kazakhstan would introduce a bottleneck, requiring Kazakhstan to transport crude oil via tanker across the Caspian Sea to Baku. Kazakhstan is also planning to transport oil through another Azeri pipeline to Georgia’s Black Sea port of Supsa, beginning in 2023. Combined with BTC flows, the total export volume from these two routes would reach about 100,000 bpd, or about 8% of the volume that flows through the Russia-controlled CPC route. How the tensions between Putin and Tokayev play out might shape how effective Western sanctions are in damaging Russia’s war effort. Furthermore, these tensions may provide an opportunity for China, the E.U., and or the U.S. to develop valuable partnerships in Russia’s sphere of influence through greater cooperation with Kazakhstan.