The Red Line
Prisoners of Gas Dependence: Kazakhstan, Uzbekistan, and Turkmenistan's Natural Gas Industry
In the space of a few months in 1991, the USSR fell from the world's second superpower to 15 fledgling republics. Whilst all these republics possessed unique cultures, leaders, and futures, three of these new countries were dealt similar geopolitical hands. Kazakhstan, Uzbekistan, and Turkmenistan all inherited the benefits of vast reserves of oil and natural gas, but all three of them also became landlocked states trapped between China and Russia seemingly overnight.
Natural gas is a crucial fossil fuel used for many functions and processes, including heating and electricity generation, and has seen widespread adoption across the globe. Central Asia has become a crucial contributor to global gas extraction and generation figures, particularly in the Chinese and Russian markets. In 2019 natural gas reserves in Central Asia comprise 21.7 trillion cubic metres, around 11 per cent of the world’s total proven gas reserves.
Central Asia’s ever-expanding role in the extraction of natural gas is feeding into the region's increasingly competitive energy geopolitics. Whilst these republics do have an abundance of the natural resource, they possess minimal capital and technology to enter gas production alone. Multinational corporations from countries including Russia and China have an ever-increasing influence on production, creating a struggle for regional influence between Beijing and Moscow.
Kazakhstan: A Prisoner of History
Whilst cursed with being a landlocked nation, Kazakhstan was also blessed with an abundance of natural resources beneath its soil; the former Soviet state sits upon natural gas reserves amongst the top 20 in the world. In addition to the oil and gas found predominantly in the west of the country, Kazakhstan also separates itself with beneficial reserves of other resources like uranium, copper, and ferroalloys.
Despite processing this plethora of resources, the Kazakh government has seemingly placed an overemphasis on the oil and gas industry, which by 2019 made up over 60 per cent of the country's net exports. What this overdependence on hydrocarbon exports has meant for Kazakhstan is that when the oil price drops sharply, the country's GDP and growth rate also decline expeditiously. We can observe this first hand during the oil crash of 2015 where the export-dependent nation would lose 42 per cent of its GDP over the space of just two years.
Much like the country's first president who ruled from 1990 - 2019, large parts of the Kazakh infrastructure are also holdovers from the Soviet era. Kazakhstan had relied heavily on Russian technology for the establishment of its gas industry during the USSR and remained reliant on Moscow directly after the Soviet collapse by doing very little domestically to improve the efficiency of its resource extraction technology. This trend continued through joint ventures between Russian and Kazakh state-aligned energy companies, with Russian firms often acting as the lead, buying up Kazakh gas and oil to refine, export, and then sell onto the Chinese and Western markets.
Through this resource wealth, Kazakhstan has managed to position itself as the economic leader among the five former Soviet Central Asian States (FSCAS). Kazakh citizens enjoy the highest PPP of any of the FSCASs, and the country also receives more FDI than any of the others. Despite this, Kazakhstan appears to be entering the middle-income trap, with annual GDP growth beginning to level out at around 4% per annum, and the technological catch-up effect diminishing. Whilst Kazakhstan has greatly improved its citizens’ standard of living when compared to the end of the USSR, its economic diversification still closely echoes that of its Soviet-era makeup.
"What this overdependence on hydrocarbon exports has meant for Kazakhstan is that when the oil price drops sharply, the country's GDP and growth rate also decline expeditiously."
Uzbekistan: A Prisoner of Geography
Uzbekistan is one of only two double-landlocked nations anywhere in the world, making access to the wider global markets incredibly difficult for Central Asia's most populous state. Whilst the Uzbeks do possess large gas reserves, they would be forced to transit that gas through Kazakhstan, or Turkmenistan to reach the open market. Both of those countries are net gas exporters themselves and impose tariffs on Uzbek gas to protect their own industries' competitiveness. This has forced the Uzbeks to greatly diversify their economy, with gold, copper, basic manufacturing, and cotton now making up the majority of the country's net exports.
Unlike Kazakhstan, Uzbekistan has gone through a period of liberalisation since the death of its first leader Islam Karimov in 2016. Uzbekistan is implementing overdue reforms to move its economy from a more agricultural-based one, to a higher value-added and specialised industrial one; manufacturing products like auto parts. Uzbekistan has made progress in this particular area with the price of labour rising in Kazakhstan, and regional supply chains developing enough to support production fracturing. This is important as with Uzbekistan’s geographic containment, and the decreasing returns on capital in commodities investments, the country must look elsewhere for growth.
As part of these reforms, the majority of Uzbek gas was diverted away from outside markets and instead devoted to domestic power production, where its central regional position provides a comparative advantage. The country attempted to open up its energy market even further by allowing international investment into the state monopolies like UzbekEnergy, and then forcibly breaking up its state gas company UzbekNefteGaz to promote domestic competition. To avoid the transit costs and tariffs, Uzbekistan has pivoted to producing and exporting more valuable electricity to its neighbours, rather than just the raw gas itself.
Turkmanistan: A Prisoner of Dictatorship
Of the three nations examined here, Turkmenistan is by far the most economically reliant on its gas industry. The Turkmen leadership has continuously disregarded economic diversification to a point where oil and gas makes up 89.79% of the country's net exports. Whilst possessing few other natural resources, Turkmenistan does hold the sixth largest global reserves of natural gas. This is an amount rivalling that of major gas players like Qatar and the UAE, but unlike those two Turkmenistan isn't a world player in the gas markets due to its geography as demonstrated in the diagram below. The only major customer remaining to buy Turkmen gas is the Chinese.
As of 2018 China now purchases 93.2% of Turkmenistan's gas exports, in a policy more analogous to colonisation than a trading partnership. The Chinese-National-Petroleum-Company (CNPC) has been working with the regime in Turkmenistan for decades now to improve the efficiency output of gas, but the CNPC has invested very little into any other sector of the Turkmen economy. The Turkmen state gas company Turkmengas would now find it difficult to operate their plants without Chinese technology and expertise. China has become the scaffold for Turkmenistan’s economy, and many worry that the overreliance on China will be disastrous for Turkmenistan in the long term. China is already beginning to diversify its gas partners, and at this current level of reliance, Turkmenistan has minimal leverage in price negotiations with Beijing.
China and Russia Competition: A Prisoner of Great Powers
When travelling around the region you will find that most citizens in the FSCASs culturally may feel closer to Russia. Economically though, Central Asia is being increasingly pulled toward Beijing, with China now making up just under 80 per cent of Central Asia's total exports. China shares direct borders with three of the FSCACs and values the fact that this pool of natural gas in its backyard avoids the instability of the Middle-East or the contentious shipping lanes of the South China Sea. Whilst Russia built and invested into much of Central Asia's gas infrastructure originally it looked to buy the gas from these states, refine it, and sell it onto wealthier markets for a profit. China on the other hand has the capital to be able to co-opt these industries and directly consume the gas produced from these republics.
Russia had attempted to reassert itself in these industries through proposals to create Central Asian gas cartels but this has proved unappetising to even Russia's closest ally in Kazakhstan. Instead, year after year, China builds new roads and pipelines, and provides FDI to Central Asian state companies to assist these regimes to stay in power. China does still import gas from countries like Australia and the Middle-East to maintain economic diversity, but Central Asia in particular are beginning to receive the lion's-share of China's medium term gas exploration funding. With Kazakhstan and Turkmenistan incorporating China so heavily into their economies, it does open the door to a future “race-to-the-bottom”, as Russia is pushed from the European markets and begins to compete with Kazakhstan and Turkmenistan for space in the pipelines bound for China.
Central Asian gas exports are set to climb, with demand rising in countries looking to use gas as a transitional fuel for producing energy. The difference is that whilst other international gas exporters like Australia have an open market to sell into, due to the cruelty of geography, the Central Asians only have two options, with one of those being a natural gas export competitor themselves.
"... due to the cruelty of geography, the Central Asians only have two options, with one of those being a natural gas export competitor themselves.
Fundamentally, all three of these republics have been hampered just by being a landlocked nation, and statistics show this is often a severe handicap. Uzbekistan has embraced this position in the very centre of Central Asia, choosing to mould itself into an exporter of basic manufactured goods and electricity, based on its comparative advantage in gas and labour costs. The geophysical fundamentals have also allowed Kazakhstan to become the transit hub between the gas fields of Central Asia, and the energy hungry markets in China and Europe.
Unlike the other two, Kazakhstan shares a direct border with Western China, and is doing what it can to position itself as a safe and reliable trade partner for Beijing. Turkmenistan has some of the most atrocious current fundamentals, and at the time of writing, it has created an incredibly fragile single industry economy. Despite that, if Turkmenistan can connect its pipes to Azerbaijan and onto Europe, or Afghanistan stabilises, or Iran rejoins the Western bloc, the economic potential for Turkmenistan is enormous.
For now, these three republics are doing what they can to change their proximate factors; through investment to build up things like oil and gas refining in Kazakhstan, or automotive parts manufacturing in Uzbekistan, these republics are striving to produce more valuable parts of the region’s value chain. In the short term they will continue to trade underneath the radar of most observers, but as demand for natural gas grows, and the global geopolitical fulcrum continues to drift toward East-Asia, these three Central Asian gas giants may become the fuel in Asia's economic engine.
Written by Michael Hilliard.
Edited by Wade McCagh.