January 31, 2023
IntelBrief: Central Asian Leaders Face Key Energy Sector Choices
Bottom Line Up Front
- Several Central Asian states are attempting to realign their energy routes and usage in response to Russia’s invasion of Ukraine and rising domestic demand.
- Moscow and Tehran both possess the willingness and ability to disrupt or threaten Central Asian energy export routes.
- China is a major market for Central Asian energy exports because of the size and rapid growth of its economy in recent decades and its geographic accessibility.
- As some Central Asian states reduce energy exports to satisfy domestic public demands to increase supplies at home, the region may become less attractive to Western energy investors.
Russia’s invasion of Ukraine has forced the United States, its allies, and many countries around the globe to rethink their security requirements, not just purely in terms of defense capabilities and needs, but in socioeconomic terms as well, particularly as violence has erupted in Kyrgyzstan, Tajikistan, and Uzbekistan over the past few months. Central Asian countries that, like Ukraine, were once part of the Soviet Union, are readjusting their relationships with Moscow. Several countries—particularly Kazakhstan, Turkmenistan, and Uzbekistan—are significant producers of oil, natural gas, and minerals. All three seek to diversify their energy export routes that were initially made dependent by design on Russian cooperation. Over the past two decades, there have been increasing efforts to strengthen regional cooperation among the states and with international partners. Highlighting regional challenges and opportunities, and the work of the UN and international partners in that space, the head of the UN Regional Center for Preventative Diplomacy for Central Asia (UNRCCA), Natalia Gherman, briefed the UN Security Council yesterday for a regularly scheduled update to members on regional issues. Ms. Gherman, a Moldovan diplomat, has been appointed by the Secretary-General to head the UN Security Council Counter-Terrorism Executive Directorate (CTED), a post she is due to take up shortly.
Owing to its location, including the port access offered by its Caspian Sea coastline, Iran now appears to be a factor as Central Asian states calculate how to best allocate their respective resources. Exporting oil and gas to large European markets requires Central Asian leaders to thread the needle between Tehran and Moscow and reduce the potential for either to choke off vital export supply lines. Moreover, the war in Ukraine has resulted in sanctions that regional states must navigate, and for a region reliant on Russia to employ vast numbers of laborers, limitations on migration to Russia likely to generate more domestic hardship and grievances in the region.
As an example of Central Asian energy exports’ vulnerability to Russian pressure, Kazakhstan earns 40% of its revenue from oil. However, 80% of its energy exports pass through Russia via the Caspian Pipeline Consortium. Recognizing that Central Asian states were looking to reduce energy ties to Russia, Moscow proposed a tripartite gas union in late 2022 with Kazakhstan and Uzbekistan that would jointly supply gas to China. Initially non-committal, both Central Asian governments compromised early this year by signing a more limited cooperation agreement with Russian gas giant Gazprom. The two countries already export the bulk of their natural gas exports to China, but Kazakhstan also exports gas to Russia, while Uzbekistan does not.
Beyond energy, the Chinese market’s size, geographic accessibility, and rapid growth in recent decades make Beijing a significant factor for Central Asian leaders (though the country’s economy has faced challenges recently). China’s Vice Premier Hu Chunhua visited Uzbekistan in December to discuss broadening general trade between the two countries. A recent report by the Washington-based International Tax and Investment Center indicated that Beijing is focused on developing the China-Kyrgyzstan-Uzbekistan (CKU) railway and other connectivity projects to the two countries and the region. The long-stalled railway project gained momentum after Kyrgyzstan announced on January 23 that representatives of Uzbekistan’s national railway company had agreed to open a joint office coordinating the CKU’s construction. China has long shown interest in expanding ties to the region’s main energy powerhouse, Kazakhstan: Chinese President Xi Jinping announced the Belt and Road Initiative (BRI) from Kazakhstan in 2013, and it was also the first country Xi visited since COVID-19 became a public health emergency.
Securing reliable energy supplies remains China’s paramount interest. China’s imports from Central Asia consist mostly of energy; Kazakhstan, Uzbekistan, and Turkmenistan are its leading suppliers. In the first quarter of 2022, Turkmenistan, China's largest gas supplier, delivered $2.87 billion worth of gas to China, according to official Chinese data, making it the country’s largest gas supplier. Those figures rose by more than 50% throughout 2022. As part of an apparent effort to restructure the global economy to its advantage, China’s leaders also “want[s] to engage and invest in Central Asian resources as a bridge towards markets in Europe, towards hydrocarbon resources and politically friendly parts of the Middle East, such as Iran, and increasingly Saudi Arabia and Iraq,” according to Wesley Hill, one of the authors of the ITC report. Central Asian leaders are attracted to China because energy supplies that can be shipped via routes such as the China-Central Asia pipeline, which carries gas across Uzbekistan and Kazakhstan, are relatively immune to Moscow’s pressure or disruption.
Wary of China’s growing influence as well as Russia’s legacy presence in Central Asia, U.S. and allied officials and experts have recommended enhancing efforts to build energy ties with Central Asian states. Experts note that Western investment is needed, particularly for pipelines and specialized port terminals, if Central Asian states are to develop export routes that bypass Russia or Iran. According to the recent ITC report, by supporting the region's energy industry, "the democratic world will create steady partners and balance Chinese and Russian ambitions." The United States and Europe have the financial and technological capacity to invest in the energy infrastructure of Kazakhstan, Uzbekistan, and Turkmenistan, but Western countries have been slow to compete there. The halting pace of economic and political reform in the Central Asian countries is among the factors that have slowed Western investment. Experts agree that, to attract more Western energy investment, Central Asian states need to institutionalize the rule of law, liberalize their markets, implement anti-corruption measures, and otherwise ensure that energy projects will not be plagued by corruption, excessive bureaucracy, or confiscatory and punitive taxation. Judging from their statements, Central Asian leaders are eager to attract more Western energy investors. During a December visit to Washington D.C. for the annual U.S.-Kazakhstan Strategic Dialogue, Kazakhstan’s First Deputy Foreign Minister Kairat Umarov told experts: "Kazakhstan is a responsible actor…Over 70% of our oil exports go to the European Union."
Central Asian states also need to demonstrate to Western investors that they can provide substantial financial returns from energy exports at the same time their publics are demanding that their energy be used to supply domestic markets rather than be exported abroad. Facing bitterly cold winters and energy supply cuts, the region’s inhabitants blame their governments’ interest in exportation—as well as corruption and lack of accountability—for high domestic energy prices and/or supply shortages, while Central Asian authorities blame production decreases and supply bottlenecks. Perhaps trying to head off the unrest that typically results from escalating domestic energy prices, Kazakhstan halted gas exports to China this year, instead marking it for domestic use. Uzbekistan’s leadership has said it intends to end gas exports in coming years due to rising domestic demand. The country will already export 75% less natural gas in 2023 than it exported in 2019. On December 7, Uzbekistan’s energy minister confirmed that the country had halted gas exports to China, which stood at approximately 6 million cubic meters a day, to satisfy a domestic demand exceeding 25 million cubic meters a day. It is possible that domestic demands, coupled with the slow pace of reform, might deter the Western energy investors that are crucial to helping Central Asian leaders emerge as consistent and reliable Western partners immunized from the influence and pressure of Russia, China, and other powers.