WEEKEND READ: From Russia with love

In a rare instance of the Kremlin denying the wishes of one of its own oil majors, Russia has suddenly decided to help Kazakhstan expand its oil export pipeline.

Stratfor.com
Russian President Dmitri Medvedev will ink an agreement with Kazakhstan over a much-belabored expansion to the Caspian Pipeline Consortium (CPC) on May 22-23 when he visits Kazakh President Nursultan Nazarbayev during his first trip to Kazakhstan. The agreement follows oil negotiations which Russian Energy Minister Viktor Khristenko held with Kazakh Prime Minister Karim Massimov and Energy Minister Sauat Mynbayev in Moscow on May 7.

Russia has attempted several times to bankrupt the CPC and appropriate the pipeline, so the decision to cooperate marks a significant change of strategy.

The CPC pipeline crosses Russian territory north of the Caspian, running across the Caucasus to the city of Novorossiysk on the Black Sea coast. In 2007 Kazakhstan shipped about 620,000 barrels of oil per day (bpd) through the line. The planned $1.5 billion expansion project would increase capacity to 1.34 million barrels per day. The pipeline is therefore a crucial instrument for Russia in maintaining a monopoly over Kazakhstan’s export routes, and hence in upholding its power over Kazakhstan and its energy customers.

The expansion project has been delayed for years because Russian oil company Transneft, one of the big players in CPC, with assistance from Russia’s Federal Tax Service, sought to drive the consortium into bankruptcy and gain full possession of it by charging millions of dollars in back taxes and transit fees. In January, Russia stopped sending its crude through the pipeline. Yet the Kremlin’s heavy-handed attempts to assimilate Russia’s last remaining privately owned pipeline into its centralised energy structure backfired, and Kazakhstan found other ways to export its oil.

Chevron – the major Western player in the consortium – highlighted tensions over CPC when its representative in Moscow, Ian MacDonald, criticised Russia’s role in the expansion project during the 11th Eurasia Economic Forum in Istanbul on May 1-3. MacDonald suggested that if delays with the CPC expansion continued, Chevron would continue shipping oil by tanker across the Caspian to Baku, where it enters the Baku-Tbilisi-Ceyhan (BTC) pipeline. This suggestion piqued the Russians, who know well that BTC is an energy transport link to Europe that purposefully avoids Russian territory. It might not be a coincidence that less than a week after Chevron heightened its criticisms, the Kremlin decided to cut the deal with Kazakhstan.

The deal, however, required that Russian leaders ignore Transneft’s intentions – a rare instance of the Kremlin denying the wishes of one of its own oil majors. The Kremlin obviously sees Transneft as inferior to Gazprom and Rosneft and could be annoyed with the company’s failure to put the CPC entirely under Russian control. But Moscow’s choice to undermine Transneft follows from geopolitical necessity after realising that the Kremlin’s preferential treatment of the company has weakened its influence over Kazakhstan and hence Central Asia.

Kazakhstan has entered a new era of independence from Russia and is diversifying its range of energy export customers. Wooed simultaneously by the West and China, Astana no longer needs to rely solely on Soviet-era pipelines or railroads to ship its products or slow down for Russia’s deliberate obstructions.

Instead, Kazakhstan is seeking to capitalise on its abundance of natural resources by exporting to the highest bidder, meanwhile attracting investors to assist in developing its technology for resource extraction and production, as well as its infrastructure. For Kazakhs, increased openness to global markets and internationalism may seem rational and inevitable. For Russia, it is evidence of Kazakh disloyalty and presumption.

Kazakhstan’s dealings with other countries have directly counteracted Russian machinations, as when, for instance, Russia tried to prevent Kazakhstan from expanding the north-flowing pipe network that ships Kazakh oil to Russia via Samara until it realised that China had completed the first phase of its import pipeline to Atasu, Kazakhstan. Similarly, Russia’s early delays with CPC led Kazakhstan to build the tanker platforms in the Caspian that enabled it to ship oil supplies to the BTC line in Baku.

But Russia would be foolish to remain in a state of denial over Kazakhstan’s new freedom and importance forever. Instead, it must act to maintain a role in Kazakhstan’s development – partly because there is much money to be made from Kazakh energy resources. But fundamental geopolitical reasons lie beneath this financial incentive. Russia and Kazakhstan share a long border, so a drifting Kazakhstan ultimately means a less secure periphery for Russia. Russia has a powerful lever to prevent Kazakhstan from drifting from its orbit; the largest population of ethnic Russians outside of Russia lives in Kazakhstan. But if Kazakhstan does slip away, the rest of Central Asia will go with it.

Therefore, Russia must keep a hand in Kazakhstan’s sources of wealth. The explicit purpose of the BTC pipeline is to provide Europe with energy that is not susceptible to Russian interference. Although Russia’s sudden jump-start of the CPC expansion would be an embarrassingly belated response to BTC, it is not too late to give Russia a role in transporting the oil that will eventually come from Kazakhstan’s mammoth Kashagan oil field on the Caspian coast.

Moreover, Russia must keep Kazakhstan close as a buffer zone against China. Medvedev’s upcoming visit to Astana is a stop on his way to Beijing, so clearly both countries are on his mind. China has made rapid progress in its rapport with Astana. It has funded new roads, railroads, oil extraction and production, and is in the process of completing a 200,000 bpd pipeline that runs across the entire width of Kazakhstan. It also plans to construct a natural gas pipeline from Kazakhstan to Turkmenistan. Russia’s sudden cooperation on CPC, then, is not quite a preemption of Chinese moves, but comes in the nick of time before the Chinese have won the whole game.

Medvedev’s meeting with Nazarbayev – which is in line with Russian Prime Minister Vladimir Putin’s frequent visits during his term as Russia’s president – will set the tone for Russia’s relationship with its energy-rich neighbour for the next four years. Kazakhstan, for its part, will appreciate Russia’s sudden agreeableness, as it still needs Russia’s friendship – and fears the wrath of Russia’s Federal Security Bureau, which maintains a strong presence in the country. Therefore it must preserve its relationship with Moscow while doing business with the Europeans and Chinese. Russia’s cooperation on the CPC expansion shows that Kazakhstan is successfully balancing these elements in its bid to become a major international energy provider.