For months, the people of Kazakhstan have been watching with mounting expectation developments in the east Kashagan oilFIeld in the Kazakh section of the Caspian Sea. Oil Finds in the past year in parts of the Caspian controlled by Russia and Azerbaijan have raised hopes of a big Weld on the other side of the Caspian in Kazakhstan. The government says at least one billion tonnes of oil, a sizeable deposit, has been found. But another report, attributed to US government sources, suggests reserves of as much as 6.8 billion tonnes. If this turns out to be true, it would be the biggest oil Find for 20 years.
| Nazarbayev: wants to match Saudi production | ||||||
Now Kazakhstan’s president, Nursultan Nazarbayev, is talking of lifting as much oil as Saudi Arabia, the world’s biggest oil producer, by 2015. Before the Rolls-Royce dealerships start springing up, the big question on everyone’s mind is timing. The hoped-for oil from Kazakh Welds will not start Flowing in serious quantities until 2008. But a US-led multi-national consortium constructing the Baku-Ceyhan pipeline, one of the world’s largest private construction projects, says it will be ready to start pumping by 2004. A multi-billion-dollar pipeline with insuFFIcient oil to pump might leave a multi-billion-dollar hole in the pockets of foreign investors.
Nonetheless, the prospect of Kuwaiti-sized oil revenues has led to a strong rebound in investor sentiment about the Kazakh economy.
This was clearly shown in the reception for the seven-year $350 million Eurobond. Deutsche Bank and JP Morgan priced the issue at 98.347, with a coupon of 11.125% yielding a spread of 500 basis points over similar-dated US treasuries. Standard&Poor’s rated the bond B-plus. The issue was split into two parts, with local institutions beneFIting from a $220 million exchange deal for local treasury bills that will give Kazakh pension and investment funds a more liquid and long-term instrument.
The remaining $130 million was sold primarily to institutional investors in Europe and the US. Although Kazakhstan was not in desperate need of external Financing, it has set an encouraging benchmark with the spread on the new issue.
The last time it hit the international debt markets, in 1999 right after the Russia crisis, it had to pay 825bp over similar US treasuries. The pricing is also good news for Halyk Savings Bank and Turan Alem Bank, two of the largest Kazakh Financial institutions, which hope to launch their own international debt issues later this year.
Apart from courting private investors, the government has also been keen to play the role of model student with the multilaterals. In May, the National Bank of Kazakhstan repaid early nearly all outstanding balances owed to the IMF, amounting to $385 million. This was originally drawn between 1993 and 1998 under a variety of IMF arrangements and facilities in support of Kazakhstan’s economic transition eFForts. The repayment was made possible by recent favourable developments on the global markets, notably much higher prices for Kazakhstan’s main exports, especially petroleum, and by recovery of the economy from the shocks of the Asian and Russian crises in 1998 and 1999.
Kazakhstan’s existing programme with the IMF, supported by an extended credit line of $453 million, remains in place. Dealing eye to eye with the IMF and World Bank has become nothing short of personal priority number one for chairman of the National Bank Grigory Marchenko.
With the $350 million Eurobond proceeds safely pocketed and news of Kashagan spreading, a credit-rating announcement in late-July came as the icing on the cake. Standard&Poor’s upgraded Kazakhstan’s long-term foreign currency rating and senior unsecured rating from B+ to BB-. The agency also affirmed B as the foreign and local currency short-term rating while the outlook remained stable. This upgrade, S&P stated, reflected the improved liquidity of the Kazakh economy and the country’s increased hard-currency reserves.
Any further changes in the ratings should depend on progress in restructuring and privatization, the continued increase in reserves and the stabilization of the level of foreign debt. Kazakhstan collected $63.6 million from privatization in January-May 2000 and inflation for the month of July was 0.4%.
In recent weeks, the tenge has even strengthened slightly against the dollar.
The successful Eurobond offering was a key part of the government’s policy of developing its economic links as far afield from the CIS as possible. Most of the restrictions placed on the tenge following the Russian Financial crisis of 1998 have been lifted, thus eliminating many of the major obstacles to increased foreign trade. In fact, last year, roughly 73% of national GDP was in the form of foreign trade. Obtaining membership of the World Trade Organization was considered by the government as another major economic policy achievement.
On the political front, although Kazakh- stan may be trying to integrate itself rapidly into the global economy and, in theory at least, move beyond its old decrepit Soviet-era trading network, relations between the Kazakh capital Astana and Moscow have never been warmer. Kazakhstan, along with the rest of central Asia, has become increasingly disillusioned with political relations with the west and is turning to Russia for the type of military and economic assistance enjoyed in the past. Irritated by criticism of their human rights and methods of ruling, and, more important, facing Islamic threats on their southern borders, countries in the region have been quick to embrace new Russian leader Vladimir Putin in the hope of increased economic and political support.
| Yelemessov: “We have a mild form of Islam” | ||||||
The week after his inauguration last May, Putin Flew to Uzbekistan and Turkmenistan, and then met his Kazakh, Tajik and Kyrgyz counterparts in Minsk, Belarus. Over the summer, he had talks with Kazakh president Nazarbayev and then travelled to Tajikistan’s capital, Dushanbe, to meet leaders of what is known as the Shanghai-5, which include the presidents of Kazakhstan, Tajikistan and Kyrgyzstan, Russia and China. Although the region has been relatively stable in the past few years, Islamic militants have been active in nearby Tajikistan and Uzbekistan. Putin has started promoting the policy that security fears must force Russia to reconsider its role in central Asia. Last year, Afghan-based militants moved into neighbouring Kyrgyzstan, taking hostage several Japanese geologists.
The Japanese were later released but the threat of destabilization in the region has remained.
Russian news agency Tass has reported that the 5,000-strong army of militants who escaped back into Afghanistan still nurture long-term plans for a new Islamic state in the region.
Rumours routinely circulate in the local media that Iran is bankrolling this entire movement.
The Kremlin’s special spokesman on central Asia, Sergei Yastrzhembsky, confirmed that Russia is now providing military and technical aid to central Asian nations and was ready to boost military cooperation in the region. “The threat of terrorism stretching from Chechnya to Afghanistan is seen quite clearly,” he says. “Russia is providing military and technical aid, supplying arms, ammunition and spare parts and if there is a need to increase such aid, Moscow will consider it.”
Security issues and protection of the status quo in central Asia have created solid common ground between the Kremlin and Kazakhstan.
Both countries, in addition, take a long-term view about how the region will develop. “Today, there are really no significant concerns about civil unrest or Islamic fundamentalism within Kazakhstan alone. Kazakhs eat pork and like to drink vodka. We have adopted only a mild form of Islam very late in our history,” says Askar Yelemessov, president of Deutsche Bank Securities in Almaty, who has developed an impressive knowledge of the culture, history and politics of the region. “But, if you look at the map you will see we are really not that far from Afghanistan and China. The Chinese have a saying that in a thousand years, everyone will be Chinese. You can decide for yourself what that means.”
Indeed, the government’s decision to move the capital from Almaty to Astana two years ago at an estimated cost of over $1 billion has been widely attributed to long-term security concerns. Peter the Great wanted to move the Russian capital from St. Petersburg to Moscow so it would be farther away from foreign borders. In a similar manner, Astana is safely inland, hundreds of miles from the nearest border in the south and only a stone’s throw from Russia.
Russia’s role in the Kazakh economy will increase not only because it has emerged as the main guarantor of its internal stability but also because Kazakh international trade still is mostly Russia-oriented. “Certainly, the Kazakh economy is trying to move towards greater and greater integration with the west,” explains Nicolay Varenco, director of corporate Finance at Almaty-based Kazkommerts Bank, one of the largest Financial institutions in central Asia. “But, even with all the talk about distinguishing ourselves from Moscow in the eyes of international investors, you must not forget that historically and right up to the present, Russia is Kazakhstan’s major economic partner and political ally.”
With the Russian economy recovering and such Russian energy giants as Gazprom and LukOil more than capable of making substantial direct investments in Kazakhstan, Astana has slowly realized that there are more multinational oil investors in the world than Exxon-Mobil, Chevron, Shell, and BP Amoco. Kazakhstan is clearly an easy target for Russian companies, which face few barriers entering the regional markets. Unlike western multinationals, Russian gas and oil giants speak the same language and Russian executives understand local customs well.
Western executives will Fly in from London for a few days, speak English through unqualified interpreters and prefer to avoid getting drunk in bathhouses. The Russians are culturally well adapted to swallowing bottle after bottle of vodka and are happy to negotiate while wrapped in towels in a sweaty sauna.
Several western corporates have bailed out of the country over the last several months. Last June, Belgium’s Tractebel, which for some time controlled gas pipeline systems in Kazakhstan, left the country for good, announcing that it repeatedly had failed to resolve disagreements with the government. In response, the following month, Russia’s Gazprom said it would create a joint venture with Kazakhstan’s gas-transportation Firm, KazTransGaz, to operate Kazakh gas Welds, exports and gas sales, thus replacing Tractebel. “Russia understands that it can make Kazakhstan more dependent by creating a joint oil and gas infrastructure,” a Moscow-based oil analyst observes. “That is why it is now actively moving into the region through its gas and oil Firms.”
Moscow’s future relations in its own backyard of central Asia will depend largely on Putin’s ability to develop personal relationships with the central Asian presidents, most of whom have installed themselves in power for life.
Meanwhile, the US government has not sat idly on the sidelines when there is a prospect that such an immensely resource-rich region might move out of Washington’s sphere of influence.
Shortly after the Russian presidential elections, as a counter to Putin’s initiative in courting the region, the director of the CIA, George Tennet and the FBI director, Louis Freeh, both visited central Asia immediately.
Hot on their heels came Madeleine Albright, the secretary of state, who travelled to the capitals of Kazakhstan, Kyrgyzstan and Uzbekistan. Her mission was to discuss regional security and democracy with the three countries’ leaders and she offered each $3 million to assist in dealing with an increasing cross-border Flow of weapons, drugs and terrorists. But along with the carrot came the stick. Albright, as expected, admonished the presidents for blatant shortcomings in recent elections in all three countries and for persecuting political opponents. Although the central Asian leaders were Flattered by such a high-level American charm offensive, the constant criticism about how they run their own personal fiefdoms was far less welcome.
“Russia is our God-given neighbour,” Kazakh president Nazarbayev is fond of saying.
For the time being at least, the Kazakh economy remains carefully positioned on the line between East and West – and working both sides for all it can get.
Pipeline politics
Estimates of reserves in the east Kashagan oil Weld are still tentative after drilling of the First appraisal well, 75 kilometres offshore Kazakhstan in the Caspian and more than 5,000 metres under the seabed. But even conservative estimates suggest that east Kashagan contains six times more oil than Tengiz, Kazakhstan’s biggest known oilFIeld and one of the world’s top 10. The onshore Tengiz Weld has recoverable reserves of 6 billion to 9 billion barrels and is being successfully developed by US companies Chevron and Exxon-Mobil.
In the long run, estimates of reserves seem likely to go up rather than down, once the exploratory drilling advances toward the centre of the Weld from its periphery. Apart from east Kashagan, the US-led consortium also plans to start exploration at three other promising Kazakh offshore Welds. The significance of this discovery and its international implications are enormously complex from both a political and economic perspective.
East Kashagan should disprove recent pessimism about the size of Caspian oil resources. As recently as last December, shortly after US president Bill Clinton met the leaders of Georgia, Kazakhstan and Turkey at a summit in Istanbul to sign a treaty laying the legal groundwork for a Baku-Ceyhan pipeline, Transneft, the Russian state-owned pipeline monopoly, was sanguine. Transneft publicly stated that limited oil reserves in the Caspian would mean that the Baku-Ceyhan route could never be economically justified and thus would never be completed. As a result, Transneft confidently predicted, Russia could be safely assured of its continued dominant role in the region as well as its share of the hard-currency cash Flow from oil.
The new pipeline is projected to begin in Baku, Azerbaijan, on the western coast of the Caspian, pass through Tbilisi, Georgia, and then terminate in Ceyhan on the Mediterranean coast of Turkey. This short route conveniently bypasses Russia, thus depriving the Kremlin of potentially billions of dollars in oil transit fees. Although the Baku-Ceyhan route is aggressively supported by the west, it is still being resisted by a vocal minority that supports an export route through Iran. Russian hard-liners – from military chiefs down – have seen the Baku-Ceyhan project as nothing short of a return to an economic cold war waged by the west.
Moscow’s hard currency-hungry central government is clearly striving to pocket as much of the export revenues from Kazakh oil as possible. The east Kashagan discovery dramatically alters the pipeline politics of central Asia since it substantially boosts the case for the rapid completion of the Baku-Ceyhan project. To become commercially profitable in the absence of huge US government subsidies, that pipeline will need to pump an estimated one million barrels of oil a day. The international projects operated by the Azerbaijan International Oil Company (AIOC) will not produce that amount in the near future, which means that, at present, there is simply not enough oil to guarantee that the Baku-Ceyhan pipeline will actually be completed. However, oil from east Kashagan could change everything, causing Russian corporate interests to become marginalized.
Up to now, the Clinton administration’s “multiple pipelines” concept has been little more than talk. Apart from the tiny Baku-Supsa oil pipeline out of Azerbaijan, passing through Georgia with an annual throughput capacity of less than Five million tonnes, Russia continues its present domination of the oil transport business through the existing Transneft system and is even set to absorb an increasing share of it.
Kazakhstan currently exports 14 million tonnes of oil a year via Russia. In 2001/02 when the Transneft-managed pipeline from Tengiz to Novorossiisk in Russia, with a 28-million-tonne annual capacity, is due to be commissioned, this will increase significantly. With this increased capacity, Moscow’s potential leverage on Kazakhstan will also increase, as will the proportion of Caspian oil resources diverted directly for use within Russia. The Tengiz-Novorossiisk pipeline will further strengthen Moscow’s dual role of commercial competitor and overbearing regional power.
From the Kazakhs’ point of view, walking the rope between eastern and western interests continues. According to president Nursultan Nazarbayev’s aide, Yermuhammet Yertysbayev: “East Kashagan will enable Kazakhstan to start regional cooperation with Azerbaijan, Georgia, and of course with Turkey, give us access to the Euro-Atlantic and other global systems and open at long last a direct route for Kazakh oil to western Europe.”
Development of the east Kashagan Weld will still take up to Five years to reach the stage of commercial production. The consortium comprises Agip, British Gas, BP Amoco, Exxon-Mobil, Inpex, Phillips Petroleum, Shell, Statoil and Totalfina, most of whom hold equal stakes in the project.
This purely western consortium may well soon decide to invite Russian interests for at least some piece of the action from east Kashagan. Few investors in the project want to risk the uncertainties of a Russian reaction to missing out completely on the world’s biggest oil discovery in decades.
