We Three Kings – Russia Snags Major Central Asian Pipeline Deal

Christmas has come early for the resource nationalists, as the Kazakbashi, the Turkmenbashi, and the Rusbashi have announced the signing of a critical agreement to build a natural gas pipeline along the Caspian coast, ending months of flirtation with a competing proposal backed by Western nations to build an undersea pipeline bypassing Russia. Following a conference call between Vladimir Putin, the Kazakh President Nursultan Nazarbayev, and the unpronounceable Turkmen President Gurbanguli Berdymukhamedov, the trilateral agreement was signed begin the massive project, first proposed last May to export 20 billion cubic meters of gas annually to Central and Western Europe – an amount that could cover the demands of a country as large as France. Like many recent energy deals masterminded by the Kremlin, this pipeline victory carries enormous geopolitical significance and was years in the making.

Russian and Western competition for energy supply and influence in Central Asia goes back many many years, but the “Great Game-esque” struggles have only recently intensified as the Kremlin’s political influence over Gazprom deepens during the Putin era.The Pipeline CurtainIt’s a well established fact that Moscow’s strategy in Central Asia is to block all southern pipeline export routes and integrate supplies into the Russian network to the north.Russia first approached Kazakhstan and Turkmenistan to build the Caspian coast line as a strategy to block the Trans-Caspian alternative promoted by the European Union and the United States, which would connect Kazakh and Turkmen resources to the pipeline at Baku, Azerbaijan, eventually flowing through Erzurum, with the potential to fill the West’s ultimate fantasy project, the Nabucco pipeline. The idea behind the project was that both Europe’s energy security and competition could be greatly enhanced by have an alternative supplier from the East, ending the monopoly control by the Kremlin, which will now retain the power to cut off the taps at a moment’s notice and “renegotiate” long term contracts at will.

Although the project seemed dormant for months, Nabucco, and the salvation of European energy supply (of Europe itself?), was briefly given a boost at the end of last summer, as the European Commission found renewed interested in its political promotion, and Hungarian PM Ferenc Gyurcsany changed his tune and started pretending he was interested in it. For a brief period, it seemed that transit states were turned off by Russian bullying and warming up to American approaches. Europe seemed to be waking up.In an important November 2007 paper, researcher Niklas Norling remarked upon the life or death importance of an alternative supply route, and predicted that both the Trans-Caspian and the Nabucco would stand together or die together: “Nabucco could potentially be the glue that keeps both Europe’s common energy policy and Europe’s engagement with the states around the Caspian Sea together. If supplied with Azeri and Turkmen gas Nabucco would significantly improve Europe’s energy diversification. It would also promote additional outlets for Turkmen gas while guaranteeing Azerbaijan a long-term income. More importantly, it would indicate a long-term commitment from the European side which would compel the Central Asian and Caucasian states to pursue a more balanced and independent policy. In effect, no longer would they be little more than appendages to Russia, but rather independent and sovereign states.“The death of the Nabucco has been proclaimed repeatedly, as funding as dried up while the Europeans have failed to respond to Gazprom’s impressive outflanking and diplomatic wrangling in the region. The Caspian was not the only theatre of this energy war, as the Russians were dramatically successful in bludgeoning the project from several other points, by kicking off a divide-and-conquer approach to Austria’s OMV and Hungary’s MOL, tightening relations with the Greeks and Bulgarians, and prompting the Italian firm Eni (which is believed to be following Russia’s instructions very carefully since acquiring expropriated Yukos assets) to sign on for the South Stream pipeline project across the Black Sea. Gazprom has allegedly even gone so far as to leak false stories to the media about non-existent agreements to put pressure on partners and scare the money away from Nabucco. Now that the pipe, which was set to begin in Turkey, will only have Azeri gas, its failure is practically assured.Today’s news is overwhelming evidence of the success of Russia’s strategy to build a “pipeline curtain” to firmly separate Europe from direct access to Central Asian and South Caspian energy supplies. Whenever an alternative project is proposed, the Russians counter with a parallel pipeline with more attractive incentives for the decision makers in critical transit and exporting countries (I imagine that only a fraction of these incentives are made public).Shrewd Bargaining and Powerful IncentivesAlthough today’s news makes it look like the United States and the European Union have lost both Kazakhstan and Turkmenistan to Russian and Chinese spheres of influence for the foreseeable future, there are indications that the writing was on the wall. With regard to the Trans-Caspian proposal, we noted on this blog many months ago that any undersea route could be vetoed by either Russia or Iran, making the project essentially frivolous from inception. Then there was the discouraging circling of the wagons during the Caspian Summit in Tehran in October, when Vladimir Putin and Mahmoud Ahmadinejad signed bilateral energy agreements and all members gave a strong warning that any attempt invade Iran would be vigorously resisted (As we’ve noted in the past, Russia benefits enormously from increased geopolitical tension over Iran, as one of the critical faults of the Nabucco is the investors unwillingness to help pay for Iran’s natural gas development).But just because Russia had this game locked away for many months, don’t think they didn’t have to pay heavily for it. Moscow got a pretty raw deal, and discovered exactly how clever the new Turkmenbashi is, who skillfully played up the possibility of going with the alternative export routes in order to give Gazprom a taste of its own medicine: a 30% increase in price, breaking a contract which had fixed Turkmen gas at $100 per thousand cubic metres until 2009. (Read the research at Global Witness for more information on the lack of transparency in the Turkmen gas trade).Some analysts are not surprised that Gazprom won again, but rather that it took them so long. Peter Kaderjak, director of the Regional Center for Energy policy and Research in Budapest, told the IHT: “Russia has always been trying to block Nabucco. But what is interesting about this deal is that it took so long, and it needed Putin to push it through. It just shows how much Russia needs extra gas supplies, and it is willing to pay for it.” Due to a critical lack of investment under state management, Gazprom’s Siberian fields have been plummeting in production, and Russia is in danger of being unable to fulfill its supply commitments domestically or export commitments to Europe.Although paying top dollar certainly helps, Russia was also able to win in Central Asia by offering superior incentives of international legitimacy that Europe and the United States should have been better prepared for. It is practically amusing the timing with which Vladimir Putin publicly celebrated Nursultan Nazarbayev’s approval to chair the OSCE: “The results of the recent OSCE session in Madrid vividly demonstrated how efficient coordinated actions of two states can be. … Kazakhstan with support of its allies managed to get the approval for OSCE chairmanship without any conditions.” Organizations like Human Rights Watch and Freedom House clamored in outrage against this OSCE chairmanship selection, which probably did the American pipeline alternative no favors.Turkmenistan likely also prefers Russia’s blind eye to human rights abuses, which certainly did not happen in the State Department’s 2006 review of the country, which states “Human rights problems included: citizens’ inability to change their government; torture and mistreatment of detainees; incommunicado and prolonged detention; abuse of religious minority group members; arbitrary arrest and detention, including family members of accused criminals; house arrest; denial of due process and a fair trial; arbitrary interference with privacy, home, and correspondence; restrictions on freedom of speech, press, assembly, and association; restrictions on religious freedom; a government-maintained blacklist of individuals not permitted to travel abroad; violence against women; and restrictions on free association of workers. “Be this as it may, it looks like Berdymukhamedov eventually swayed toward the Kremlin simply over money – the strongest personal efforts U.S. Energy Secretary Samuel Bodman were not sufficient to charm him.There was never a lack of foresight with the Central Asian energy crisis, and the potential threat of Russia’s ambitions there were always very clear. What is particularly surprising is the lack of focus, energy, and resources put forward by the EU and the United States to achieve a better balance of influence. There has also been a distinct lack of innovation in policy approaches to help solve this problem, while the Russians have appeared enormously resourceful. It is indeed a tragically advantageous symmetry among three gas exporting nations tightly controlled by three autocratic despots. As one journalist remarked, “Moscow is also offering guarantees of support to the Central Asian potentates if a Ukrainian-style domestic uprising should take place, leading to a change in government, something the United States and Europe cannot do.“There is no greater reminder that the energy sector should not and must not be owned and managed by the very same individuals holding direct political power.