Nationalism in Kazakhstan and Russia

EUROPE-ASIA STUDIES Vol. 62, No.
1, January 2010, 3562
A Comparative Study of Resource Nationalism in Russia and Kazakhstan 20042008

PAUL DOMJAN & MATT STONE
Abstract
In neighbouring countries like Russia and Kazakhstan, resource nationalism that may look similar to outside observers has a dierent character and is driven by dierent circumstances in each state. To assess the underlying nature of state-centric models of resource-led development in the two post-Soviet states, we contrast recent state interventions into their respective resource sectors. In Russia, heightened state involvement in the resource sectors, including oil and gas pipeline networks, is characterised mainly by political goals, whereas Kazakhstans resource nationalism is primarily motivated by economic goals. More specically, Russia leverages its energy sector to achieve geopolitical objectives and domestic political stability. By contrast, Kazakhstan seeks widely dispersed economic development.
SINCE THE 2004 SEIZURE AND NATIONALISATION OF Yuganskneftegaz, the main production arm of the Russian oil company Yukos, many commentators have argued that Russia has been consumed by resource nationalism. Conventional wisdom holds that governments of resource-rich states attempt to capture a greater share of the resource rent when prices rise, only to beat a retreat when prices fall and they need to attract new foreign investment. However, while this paradigm has some analytical utility, it should be couched more clearly in a broader strategic context. One must be mindful that each resource-rich state nevertheless has unique cultural, ideological, historical, political, and economic reasons for the policies it enacts. This lesson is especially pertinent to the cases of Russia and Kazakhstan, where resource nationalism may look similar to outside observers but has a dierent character and is driven by dierent circumstances in each state. Russias form of resource nationalism diverges from the phenomenons historical incarnation, in which there was a shift in bargaining power from investor to host government after investment costs have been sunk (in other words, after substantial capital investments have been made that cannot be recovered by the investor if the terms of the investment have changed) (Vernon 1971). Rather, the Russian state is
ISSN 0966-8136 print; ISSN 1465-3427 online/10/010035-28 2010 University of Glasgow DOI: 10.1080/09668130903385374
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actively using its energy production and transportation systems to reassert its primacy in domestic and foreign aairs. By consolidating control of hydrocarbon production and altering the geography of its oil and gas transportation network, the Russian state has been able to provide political patronage to remote areas and co-opt alternative centres of political power. Looking abroad, Russia has made alterations to the geography of its energy transportation system in an attempt to increase its geopolitical leverage over both the energy-producing states of Central Asia and the energyconsuming states of Europe. This approach to its hydrocarbons is part and parcel of a broader project under Vladimir Putin to reinstate Russia as a great power in a multipolar world order (Gaddy & Kuchins 2008; Pipes 2009). The beginning of the increase in oil prices in 2003 presented the opportunity to develop Russia as an energy superpower, a concept propagated by the Russian state that reects the countrys psychological need to be seen as powerful once again.1 However, observing Russia in isolation risks confusing those traits that are unique to Russia and derive from its particular post-Soviet experience with those that are shared either by all countries pursuing a strategy of resource nationalism or even all natural resource producers in the post-Soviet space. In Kazakhstan, by contrast, President Nursultan Nazarbayev has explicitly modelled his political legitimacy on that of Singapores Peoples Action Party by focusing on strong economic growth and the diusion of the benets of growth to the population (Anacker 2004; Nazarbayev 2006). The Kazakh government has come to realise that the conuence of high oil and gas prices and increased international competition for oil and gas resources allow the Kazakh state to capture a larger portion of the nancial benet of hydrocarbon production as well as expanding the Kazakh role in oil production and setting a precedent for Kazakhstans uranium industry. While Kazakh energy policy is still motivated by a multi-vector foreign policy, changes in policy over the last ve years, particularly those that have been seen as disadvantaging international oil companies, are driven primarily by economic concerns to maximise the benet of natural resource production to Kazakhstan. In sum, while both countries have employed state-centric models of economic development in their natural resource sectors during the period 20042008, the Russian variant tends to focus on power and prestige by way of economic growth, whereas the Kazakh variant focuses on economic growth and development as a basis for strengthening the political legitimacy of the ruling elite. The rst section of this article oers a comparison of case studies, and, this is followed by a review of some of the main conceptual understandings of resource nationalism. Third, a case study of Russia is introduced to demonstrate the political impetus behind that countrys variant of resource nationalism, in particular the importance of oil and gas pipelines to the overall strategy. Fourth, the authors analyse the case of Kazakhstan where resource nationalism has been more about economic gains than the broader political project observed in Russia. The examples of
1 The term energy superpower was used infrequently in relation to Russia during the 1990s, but gained wide currency when US scholar Fiona Hill used it in 2002. It was taken up in Russian publications in 2003 and by Russian ocials since 2006. Rutland (2008) appropriately points out that the term is analytically useless, even contradictory.
A COMPARATIVE STUDY OF RESOURCE NATIONALISM
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MangistauMunaiGas and the Kazakh uranium sector are telling in this regard. The article concludes with thoughts on the future of resource nationalism in Russia and Kazakhstan and the contribution that understanding these cases can make to the wider literature on resource nationalism. Methodology Russia and Kazakhstan have been chosen for comparison because they have a common Soviet past and geographical similarities but a dierent recent political evolution.2 Although the two countries began with signicantly dierent initial conditions in the immediate post-Soviet period, there were still sucient similarities by 2004 to illuminate an analysis of the motivation behind diering approaches to resource nationalism. Both Russia and Kazakhstan are vast countries, the worlds rst and ninth largest, respectively. They are both sparsely populated and possess substantial and diverse natural resource wealth. In each state, natural resource wealth is distributed across the country, with signicant concentrations located far from their largest cities. Both countries have had signicant problems with maintaining political control and state integrity in their farthest regions. These problems are far worse and ongoing in Russia, where Moscow faced calls for independence in the North Caucasus and the Russian Far East. As a federal state, Russia must constantly manage the tension between eective implementation of the central governments policies and the devolution of some political powers to regional ocials. In Kazakhstan, problems of political integrity came in the immediate post-Soviet period through tension between ethnic Kazakhs in the south and ethnic Russians in the north, leading to the moving of the capital to Astana in 1997. While the relocation of the capital was seen by ethnic Kazakhs as comprehensive evidence of the unity of the countrys Russian north and Kazakh south, some Russians appear to have seen itespecially in combination with the Kazakhisation of many place names and the dismantling of statues of the Russian settlers of the steppeas evidence that the Kazakh majority would assert itself against any prospect of Russian separatism or cultural autonomy (Peyrouse 2008). In dierent ways, both countries were traumatised by the collapse of the Soviet Union. For Russia, this was a cataclysmic event that shattered its sense of itself as a superpower. For Kazakhstan, which was very much a creation of the Russian empire and an integral part of the Soviet Union, with little sense of national past, this left the country adrift, with serious questions about how and in what form it should constitute itself as an independent state. Kazakhstan was the last of the Soviet Socialist Republics to declare independence from the Soviet Unionafter it was already clear the USSR was dissolvingand quickly became an early leader in pursuing economic and security integration within the post-Soviet space (Cummings 2003).
We are by no means unique in comparing Russia and Kazakhstan. Fiona Hill (2005), for example, has argued that Kazakhstan is more comparable politically and economically with Russia than with its Central Asian neighbours.
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This comparison does not mean to overstate the similarities between the two countries. Russia is an ethnically diverse federation, with a strong need for political tools to enable the centre to maintain control of the periphery. Kazakhstan, by contrast, is a unitary state dominated by two main ethnic groups whose ocial rhetoric is of a single, non-ethnic Kazakhstani nationalism (Anacker 2004). Historically speaking, Russia inherited the Soviet Unions century-long experience of oil production. By contrast, Kazakhstan experienced relatively limited oil production during the Soviet period: Chevron signed its agreement to develop the Tengiz eld during the late Soviet period because the Soviet Union lacked the domestic capability and resources to develop the eld on its own (Gustafson 1989). As such, from 1991 to 2004, Kazakh oil production more than doubled from 569,000 to 1,297,000 barrels per day largely on the basis of new production, whereas Russian production fell from 9,326,000 in 1991 to a low of 6,114,000 barrels per day in 1996 before recovering to 9,287,000 barrels per day in 2004 through the application of Western technology to existing, Soviet-era elds (BP 2009). Resource nationalism Despite the dierences described above, a comprehensive comparison of resource nationalisms evolution in each country yields some useful insights. Resource nationalism came into its own in the second half of the twentieth century. In the early post-World War II period, Keynesian economic thought, the conceptualisation of market failure, and the apparent economic growth of the Soviet Union constituted an intellectual justication for state intervention in the economy (Stevens 2008). In the so-called Third World, this intellectual rationale was combined with concerns over sovereignty: resource nationalism, especially in the oil sector during the 1970s, was pursued as an assertion of state sovereignty in the aftermath of decolonisation. Around this time, Ray Vernon identied and described the obsolescing bargainthe shift in relative bargaining power from investor to host government after investment costs have been sunk (Vernon 1971)which approximates the logic underpinning the phenomenon of resource nationalism. Mommer (2000) suggests that the resource nationalism of the 1970s was about shaping the relationship between the host government and the international oil company into a landlordtenant relationship. A broader contextual understanding of the phenomenon comes from Paul Stevens, who characterises resource nationalism as the battle between national interests and foreign inuences as played out in the oil and natural gas sectors (Stevens 2008, p. 8). Resource nationalism is understood today as referring to a wide range of strategies that domestic elites employ in order to increase their control of natural resources. In practice, resource nationalism encompasses both the reassertion of state control prior to the end of the construction phase of a development (before all or even most investment costs have been sunk) and the outright exclusion of foreign participation, depriving the nation of the benets of foreign investment. Bremmer and Johnston have recently proposed a framework for understanding resource nationalism that proves useful for understanding the cases of Russia and Kazakhstan (2009). They identify four varieties of resource nationalism and provide examples of each: a revolutionary type, tied to broader political upheaval (as for example in Russia and Venezuela); an
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economic type, driven by a more measured desire to improve economic terms (for example Kazakhstan and Algeria); a legacy type, inherited as a consequence of a reassertion of a historical legacy of national control (for example Kuwait and Mexico); and a soft type, conducted through legal channels without threats to tear up contracts (as in Canada and the United Kingdom). Bremmer and Johnstons framework makes the same distinction between types of resource nationalism as our more in-depth analysis of Russia and Kazakhstan. It also raises important questions for our study of Russia and Kazakhstan. Will Russias revolutionary resource nationalism subside in favour of a more innocuous economic one, or lead to an economically debilitating legacy type of resource nationalism that structurally constrains Russian resource production? Will Kazakhstans economic resource nationalism evolve into a more predictable, rules-based soft resource nationalism, or a more revolutionary variety? Humphreys et al. focus more on the scal elements of resource nationalism (2007, pp. 32324). They argue that resource nationalism is a result of the failure of governments to insist on contract terms that guarantee an acceptable return for the government in the event that prices rise. This scenario is clearly analogous to the situation in Kazakhstan, where contracts were signed under very favourable terms during a period of low prices in order to attract investment and were later seen as unacceptably harsh in the light of higher prices. However, this approach fails to explain the rise of resource nationalism in Russia, where ideological and political factors seem more signicant than scal ones in determining the states approach to asserting control over private rms. Throughout the detailed case studies that follow, we will use the framework of economic as opposed to political (revolutionary) resource nationalism to help characterise the two countries approaches and motivations. The Russian Federation Resource nationalism in the Russian Federation is driven rst and foremost by political concerns. The economic rationale for an increased state role in the oil and gas sector is subordinate to political goals that are designed to reassert the primacy of the state in domestic and foreign aairs. The mechanism for doing so is what Gaddy and Ickes (2005) have identied as the centralisation of informal resource rent sharing. By capturing a greater share of the resource rent associated with hydrocarbon development and administering its distribution, Moscow secures itself domestic stability and geopolitical inuence, both of which are self-reinforcing. Domestic stability is served by ensuring that the commanding heights of the economyin this case, the energy sectordo not generate centres of political power outside the purview of the central government. Geopolitical inuence is served by controlling the majority of Eurasian gas and oil export pipelines, enabling the Russian government simultaneously to exert inuence over Central Asian energy producers and European energy consumers. Whereas governments of other countries exhibiting a surge in resource nationalism tend to focus primarily on the production aspects of petroleum, the linchpin of the Russian Federations strategy is its energy transportation network, and more
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importantly, its export pipelines. The governments control of export pipelines provides leverage over both private companies producing petroleum inside Russia and Central Asian governments wishing to export through Russia. This is a matter of geopolitics and history: not only has geography blessed European Russia with a prime location between an energy-producing region (Central Asia and West Siberia) and an energy-consuming region (Europe), but political complications, some deliberately initiated by the Russian government, have prevented the full realisation of a southern energy corridor that would bypass Russia by way of the Caspian Sea, the Caucasus and Turkey. Moreover, the enormous network of oil and gas pipelines transiting Russian territory is a legacy of Russian political dominance in Central Asia, especially during the Soviet period. In addition to geopolitical inuence, Russias recent rise of resource nationalism is also a matter of the governments political survival. During the rally in oil prices since 2003, Russias development has taken on aspects of a rentier state, wherein the economy is dominated by rents from the production of oil and gas that are largely distributed in an opaque sequence of political machinations and business deals.3 Indeed, Moscow has acted as if the true threat to the leadership cadres hold on power is not the countrys populace, but rather its political and business elite.4 Under Putin, the state pursued many so-called oligarchs with holdings in the media and petroleum sectors (Homan 2003). Now, heightened state involvement in Russias energy sector allows the government, through resource rent distribution, to co-opt the constellation of elites that might potentially pose a threat to domestic political stability. Transportation networks Russias energy transportation infrastructure is critical to this strategy. The countrys oil and gas pipeline networks are dominated by two state-owned companies: the oil pipeline monopoly OAO Transneft and the open joint stock gas company OAO Gazprom, which, in addition to production assets, monopolises Russias natural gas pipeline network. The government eectively retains full ownership of Transneft and a 50%-plus-one-share holding in Gazprom. High-level government ocials sit on the boards of both companies, including a former prime minister, now First Deputy Prime Minister, Viktor Zubkov (Gazprom), Minister of Economic Development Elvira Nabyullina (Gazprom), and Minister of Energy Sergei Shmatko (Gazprom and Transneft). Many high-level government ocials, including Arkady Dvorkovich and Dmitri Ryzhkov, formerly sat on the boards of the two companies. Current President Dmitri Medvedev served as the chairman of Gazproms board during the Putin presidency.5
3 Gaddy and Ickes (2005) identify three means of distributing the resource rent: prots to owners and shareholders, formal taxes to the government, and informal taxes, which entail a host of illegal transactions like bribes and kickbacks as well as legal, but coerced, transactions like companies voluntary contributions to causes favoured by the government. 4 This calculation might be changing during the current economic downturn as popular protests have taken place in, for example, Vladivostok and Pikalyovo. 5 President Medvedev, to his credit, has advocated a policy of no more than two government ocials on state-owned company boards to increase accountability (Vesti TV, 2 July 2008).
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Due to the high level of interconnectedness between the companies and the government, both rms enjoy a privileged position in the Russian domestic market in which political rather than commercial logic drives investment in and access to pipeline infrastructure. The strategic rationale of state control of pipeline networks, especially export pipelines, is predicated on the geography of the Eurasian landmass. Sources of energy supply, such as West Siberia and Central Asia, are usually distant from centres of energy demand like Europe and China. Because pipeline infrastructure is a state-sanctioned monopoly, energy producers on Russian territory usually have no other transport option to reach distant export markets. As a result, Transneft and Gazprom serve as state-sanctioned chokepoints for the multitude of producers some state-controlled and some privatethat operate on Russian territory. For Central Asian states, the Russian pipeline network for oil and gas has historically been the only export option. This is gradually changing as Central Asian energy exporters discuss and develop alternative export routes to China, across the Caspian Sea, and into Iran or Afghanistan. Since 20032004, the state has reinforced its hold on oil and gas pipelines and shown that private export pipelines will not be tolerated in Russias current political environment. The famous case of Mikhail Khodorkovsky, former head of the private Yukos oil company, was partially connected to the struggle for private pipelines in Russia.6 In 2002 and 2003, Yukos proposed to build a private oil pipeline from East Siberia directly into China while Transneft favoured a longer Pacic-bound route. In May 2003, Yukos signed a 20-year delivery contract with China, acting as if [it were] a sovereign power (Goldman 2008, p. 111). The 20032004 imprisonment of Khodorkovsky and dismemberment of Yukos eectively extinguished any promise of a privately nanced and privately operated eastern oil pipeline. Around the same time, Yukos, Lukoil, Sibneft and TNK were lobbying the Russian government to construct a private oil pipeline from West Siberia to the ice-free port of Murmansk on the Barents Sea. The companies proposed constructing the pipeline and then handing over its management to Transneft. Nevertheless, the Kremlin declined the proposal. Additionally, ExxonMobil sought to construct a private gas export pipeline to China from its Sakhalin-1 oil and gas project in the Russian Far East. In late 2007, the Russian government decided not to approve funding for such a project. Instead, Gazprom has oered to purchase ExxonMobils gas output for domestic sale, though export to China is more likely once Moscow and Beijing resolve their dierences over pricing. The only example of a private export pipeline on Russian territory, the Caspian Pipeline Consortium (CPC), has been subject to governmental interference. Originating at the Tengiz oil eld in northern Kazakhstan and terminating at the Russian Black Sea port of Novorossiisk, CPC was commissioned during the Yeltsin administration and commenced operations in 2001. Russian-imposed constraints on the pipelines construction were only eased when Russian equity participation in the pipeline was agreed (Ahrend & Tompson 2007). Since then, former Transneft head Semyon Vainshtok periodically criticised the pipeline and tried, but failed, to take over
6 There are many theories as to why the state targeted Khodorkovsky and Yukos. Private export pipelines provide only one of many reasons.
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its chairmanship in April 2006. Instead, the former deputy general director of the state-owned oil pipeline company Zarubezhneft, Vladimir Razdukhov, was elected to the post by CPC shareholders as a condition for eventual expansion of the CPCs throughput capacity. In 2007, the Russian government transferred its 24.5% shareholding in the CPC to Transneft. The CPC remains a private pipeline, but its future private status and throughput capacity expansion are clearly contingent on Moscows political needs, not the commercial rationale of its shareholders. In the natural gas sector, Gazprom owns and operates the Unied Gas Supply System (UGSS), a 155,000-kilometre integrated network of main and branch gas pipelines that extends westwards from West Siberia. Independent and private gas producers are expected to connect to the UGSS in order to sell their output to either Gazprom or other domestic customers. The company is usually content to share the domestic market with independent gas producers. This is a function of the belowmarket prices Gazprom is required by law to charge domestic consumers. Independent gas producers are not subject to the same price regulation, and therefore Gazprom is willing to cede some domestic market share in favour of export markets where revenues and prots are more lucrative (Stern 2005). In 2008, the European export market accounted for just 32% of Gazproms total gas volumes sold but 68% of its total sales revenue.7 Exporting gas to Europe is far more protable than domestic sales, and, as such, Gazprom logically favours the European market. Gazproms privileged position is enshrined in the 2006 Law on the Export of Gas, which designates Gazprom as the unied export channel for Russian natural gas. This is better known as an export monopoly and provides the state with substantial heft in its dealings with major Central Asian gas-producing countries, major European gas-consuming countries and independent gas producers operating inside Russia.8 During the summer of 2008, the Russian government indicated that non-discriminatory access to Gazproms gas export infrastructure was under consideration. This was an initiative of the Federal Antimonopoly Service (FAS) at the urging of Deputy Prime Minister Igor Sechin, who also chairs state-owned oil major Rosneft, which produces, but cannot export, substantial quantities of associated gas.9 The opaque deliberations over the issue probably point to some access for the politically wellconnected Rosneft but hardly ordain a broader liberalisation of the Russian gas sector due to its strategic importance to the state.10 Indeed, the strategic importance of both
7 Authors calculations based on Gazprom IFRS consolidated nancial statements 2008, available at: http://gazprom.com/f/posts/71/879403/2ifrs.pdf, accessed 2 October 2009. 8 The notable exception to this unied export channel is the presence of intermediaries in the TurkmenUkrainian gas trade. Three companiesItera, Eural Trans Gas and RosUkrEnergohave proted handsomely from this business since the 1990s, and each has been tied in some way to senior Gazprom management, leading many scholars to believe that these middleman trading companies are designed to enrich a privileged few and avoid the Russian governments taxation of Gazprom (Global Witness 2006). 9 Rosneft is the second largest non-Gazprom producer of natural gas in Russia after the nominally independent Novatek (Stern 2009). 10 In May 2009, the FAS announced that it would open inquiries into the violation of anti-monopoly legislation if it receives information to that eect from independent companies regarding restricted access to Gazproms gas pipeline infrastructure. However, the promise to open inquiries if information is provided by independent companies does not yet entail non-discriminatory access to Gazproms gas
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Gazprom and Transnefts pipeline networks was highlighted by the passage of a law by the State Duma on 4 July 2007 that allows both companies to create their own security forces to protect pipeline infrastructure.11 These corporate security forces would operate with fewer legal restrictions than conventional private security contractors. Additionally, the State Duma is considering draft legislation on trunk pipelines, which stipulates that private investors may build pipelines as long as the state owns a 50%-plus-one-share stake in gas pipelines and at least 75% of the shares in oil and oil product pipelines (Andriash 2008). While this may help attract investment capital to the aging Russian pipeline infrastructure, it avoids sacricing the governments strategic control over their use. Once the investment is sunk, private pipelines still face the risk of expropriation. Policy imperatives The Russian states preference for the control of oil and gas pipeline networks is a matter of economics and geopolitics. The economic imperative. Pipelines are a form of redistributive largesse. While the Russian state captures a share of the resource rent by virtue of participation in some of the upstream activities and its full control of the transport of petroleum, the development of pipelines is a way of redistributing resource rents to a host of companies with Kremlin connections as well as local politicians and bureaucrats. Gaddy and Ickes (2005, p. 566) point out that the construction of oil tanker rail cars in Russia during the upward trend in oil prices since 2003 has been expanded through informal rent sharing, redistributing resource rent to the ailing, inecient railways. The construction of pipelines is a similar example. In particular, the development and construction of the East SiberianPacic Ocean (ESPO) oil pipeline, the worlds longest at approximately 4,700 kilometres, originating at Taishet and terminating on the Sea of Japan coast at Kozmino Bay, oers numerous opportunities for the involvement of subcontractors, local bureaucrats and politicians. In an economy as corrupt as Russias, all construction activities are facilitated by a series of payments from the federal government to inecient rms and regional bureaucracies. Tellingly, Transneft lobbied for the longest ESPO route possible because it stands to gain from the inated costs associated with a long pipeline route. Costs can inate over time and with distance because each subcontractor and local bureaucrat seeks to exploit Transneft for as much as it can. In turn, Transneft claims cost overruns to receive a larger dispensation from the federal government, often arranged via loans from state-owned banks like VTB Bank that share many of the
export pipelines. Most independent companies will be loath to provide such information at the risk of angering the gas giant. A politically well-connected rm like state-owned Rosneft might be less bashful however (AFP, 26 May 2009). 11 The law has not passed the Federation Council or been signed by the president.
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same board members as the state-owned energy rms. Since the commencement of ESPO construction, cost estimates have risen from $11.5 billion to over $20 billion.12 Moreover, the evolving decision over a nal terminus for ESPOfrom Nakhodka to Perezovnaya Bay or to Kozmino Bayis predicated partly on the real estate interests of dierent local elites vying for the opportunity to sell their land at a substantial premium to the Russian government (Stone 2007). In this sense, it is revealing that the Russian government rejected the private oil pipeline to Murmansk discussed above. Even though Transneft would have operated the pipeline, the Russian government preferred an alternative Transneft-constructed route to Indiga, presumably because the construction and laying of the pipeline is an important way of redistributing resource rents to ensure the loyalty of regional politicians to the centre. The geopolitical imperative. In addition to acting as agents of the Kremlin in a rentier economy, Gazprom and Transneft act as proxies for the Russian government in export markets, allowing the government to exercise inuence on the politics of some energy-importing states. The most visible examples of this are in the Russian Ukrainian gas disputes that led Gazprom to cut o gas exports to Ukraine in January 2006 for three days and most recently in January 2009 for 20 days (Pirani et al. 2009).13 While the post-Soviet period has been marked by many, mostly unnoticed, gas disputes between Russia and other countries of the Commonwealth of Independent States (CIS), especially Ukraine and Belarus, the 2006 and 2009 Ukrainian aairs concentrated the minds of Western leaders and the international press on the reliability of Russia as a gas supplier. For its part, Gazprom maintains that it is still a reliable supplier of gas to European markets, but the result of ongoing disputes with Ukraine was to provoke a debate in European capitals about how to become less dependent on Russian energy ows. In the past few years, several countries have experienced the suspension or reduction of oil and gas ows from Russia coincident with political or economic disputes: these include Latvia in 2005, Lithuania and Georgia in 2006, Estonia and Belarus in 2007, and the Czech Republic in 2008. In order to bypass transit states like Ukraine, the Russian government is pushing costly gas pipeline alternatives like Nord Stream and South Stream (under the Baltic and Black Seas, respectively). The danger for Europe is that the realisation of these alternative export pipelines, particularly Nord Stream, would enable Gazprom to manipulate gas ows to Central and Eastern European members of the European Union (EU) while the more inuential Western European members remain unaected. The geography of Russias gas export pipelines suggests that the Kremlin would like to undermine European unity vis-a`-vis Gazprom, instead giving incentives for each nation to ignore the EU and pursue its own short-term national interest. This, of course, results in incoherence, even incompatibility, among EU member states
12 Part of this increase is attributed to global cost ination in the energy industry but the eect of rent-seeking is not negligible. 13 Gazprom Stopped the Supply of Natural Gas to Ukraine on January 1, 2009, CEE Focus, 1 January 2009.
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regarding relations with Russiaa tactic that might allow Moscow to reconsolidate inuence in Central and Eastern Europe in the coming decades. The short-term political and economic gain for Russia from energy disputes with its neighbours is dubious, and the long-term ecacy is uncertain. On the one hand, many commentators and policy makers in Europe have come to support Nord Stream and South Stream as practical alternatives to Russian gas transited through Ukraine, despite the potential costs for Central Europe. On the other hand, the threat of future disputes gives added impetus to develop alternatives to Russian gas. A major nonRussian alternative, Nabucco, suered a major setback with the 2008 Russian incursion into Georgia, but found reinvigorated political backing following the 2009 RussianUkrainian gas dispute. Indeed, during the summer of 2009, the Nabucco intergovernmental agreement was signed and gas-rich Turkmenistan expressed interest in supplying the project. Moscows reaction to alternative export pipeline arrangements out of Central Asia is illustrative of the strategic importance Russia places in maintaining its near monopoly on the export of Central Asian gas and oil. The development of a southern energy corridor that bypasses Russian energy transport infrastructure, an active goal of US foreign policy in the region, has been ercely contested by the Russian government, both in rhetoric and action. The advent of the Blue Stream gas pipeline that ships Russian gas along the bottom of the Black Sea to Turkey was in many ways strategically designed to kill the prospects of the Trans-Caspian Gas Pipeline from Turkmenistan to Azerbaijan. In lieu of a legal framework governing the Caspian Sea, the Kremlin has argued that the Trans-Caspian Gas Pipeline would be illegal as well as environmentally harmful. In the meantime, Gazprom went ahead with the Blue Stream pipeline, in the face of great technical risk, to saturate the growing Turkish gas market with Russian gas and to dampen the economic viability of the Trans-Caspian Gas Pipeline. Similarly, the proposed KazakhCaspian Transportation System (KCTS), a trans-Caspian oil pipeline connecting to the operational BakuTbilisiCeyhan (BTC) oil pipeline, has been contested by Russia for want of a multilateral Caspian legal regime and by oering better incentives for export through the CPC (Baran 2005). Moscows August 2008 military incursion into Georgian territory, under the pretence of protecting Russian passport-holders in the separatist regions of Abkhazia and South Ossetia, has damaged the prospects of additional oil and gas pipelines transiting the Caucasus. The military manoeuvres signicantly exacerbated political instability in the region, thereby raising nancing costs and undermining Central Asian condence in the export route. Barring Turkish and Azeri rapprochement with Armenia or the sudden advent of USIranian friendship, the expansion of the southern energy corridor out of Central Asia will require an even greater outlay of political and nancial capital on the part of the West. Even to the east, where the Russian government has yet to deliver on promises of oil and gas pipelines, the development of competitiveand thus strategicthreats has spurred action. For many years, the Russian government dithered on the planning and implementation of ESPO. When the AtasuAlashankou oil pipeline from Kazakhstan to China opened in December 2005, the Russian government nally pushed the ESPO feasibility study through. Particularly important from the Russian standpoint was the fact that Kazakh crude alone could not ll AtasuAlashankou to capacity; instead,
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some West Siberian crude oil could also be exported through the pipeline to China. It was duly noted in Moscow that one of Russias largest oil companies, Lukoil, suggested that it might export some of its West Siberian crude oil by way of the new, non-Russian-controlled pipeline. After nearly 10 years of tful planning for ESPO, construction commenced in April 2006, a mere four months after oil began to pump through AtasuAlashankou. The proposed Altai gas pipeline, originating in the gasrich Nadym-Pur-Taz region of West Siberia and terminating in the Xinjiang region of China, was only agreed in March 2006, two weeks before China signed an agreement to build a gas pipeline from Turkmenistan. While the TurkmenistanChina pipeline has raced ahead, progress on the Altai pipeline has been hampered by SinoRussian disagreements over pricing, environmental concerns and Gazproms delayed upstream investment schedule. These responses to alternative energy export channels for Central Asian producers are illustrative of Russias view that alternative export pipelines that do not involve the Russian state-owned energy companies are not merely a commercial threat, but a strategic one as well. From pipelines to the upstream The consolidation of the Russian governments control over its pipeline infrastructure has coincided with the states increased involvement in upstream activities (Hanson 2009, pp. 1516). In particular instances the state-owned energy companies have leveraged control of pipeline networks to force concessions from private energy companies that seek access to transportation networks. The Russian government has also interfered in the upstream by claiming environmental violations by private companies, revoking licenses or putting pressure on these companies to sell a majority stake of the project to either Rosneft or Gazprom. In most cases, the actions of the Russian government or the state-owned energy rms are forms of rent-seeking. While the short-term increase in revenues brought about by this strategy may be large, the additional state involvement in the upstream undermines investor condence and thus investment. Tellingly, domestic oil production since 2005 has stagnated at just above 9 million barrels per day (Considine 2008) with insucient projects in the development phase to compensate for the decline of more mature oil elds.14 For potential investors
14 Gaddy and Ickes (2009, p. 2) argue that the Russian government has deliberately sought to undermine investor condence to curb output growth as world oil prices rose since Russia is a highcost oil producer. In this view, resource nationalism is designed for the sake of macroeconomic stability, especially in an environment of oil price volatility. This argument, while novel, presupposes unity within the ruling class on the question of resource rents. It is not clear who originated the strategy of resource nationalism, though received wisdom suggests that Igor Sechin and a group of like-minded policy makers drawn from the Russian security agencies, known as the siloviki, devised the takedown of Yukos. Nevertheless, during the most recent economic turmoil, this group has generally argued for greater spending from Russias foreign currency reserves, scrupulously amassed during the high oil price environment at the behest of Finance Minister Alexei Kudrin. Indeed, the economic liberals surrounding Kudrin seem to be more concerned about macroeconomic stability than the siloviki. If the siloviki are the primary originators of the strategy of resource nationalism, the argument of Gaddy and Ickes would be dicult to accept because it would assume that the siloviki are forward-thinking macroeconomic stabilisers, not rent-seeking kleptocrats. However, an alternative view is possible: that
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the Russian governments involvement in the hydrocarbon-upstream has pushed above-ground factors like political risk and the tax regime to the fore over belowground factors of geology and crude quality. Russias domestic oil production may actually fall before growth resumes. The 2003 arrest, imprisonment, trial and conviction of Khodorkovsky was a strong indicator of the Kremlins intentions for the energy sector. Private ownership of upstream energy assets would be tolerated only insofar as it was in line with broader political goals. In 2005, fellow oligarch Roman Abramovich sold his oil company Sibneft to Gazprom, forming the oil-producing subsidiary Gazpromneft. In 2006 and 2007, the government pursued Russneft, the seventh largest oil company in Russia, for alleged fraud and tax evasion, prompting a sale to the Kremlin-friendly oligarch Oleg Deripaska. The sale has not yet been approved by the FAS and rumours abound of a resale to Gazpromneft.15 In April 2009, Gazpromneft also began buying up shares of oil producer Sibir Energy with an apparent view to a full takeover. Since 2000, the Russian states share of crude oil production has grown from 16% to approximately 50% (Goldman 2008, p. 99), a gure that is likely to rise during the current economic contraction. Foreign participation in the upstream oil and gas sectors has also been discouraged. In the Sakhalin-2 integrated oil and gas project, majority shareholder and operator Royal Dutch Shell sold a controlling stake to Gazprom in December 2006 following announced cost overruns of over 100% and investigations into environmental violations of the consortium. These investigations were dropped following Gazproms entry into the project. The ExxonMobil-led Sakhalin-1 oil and gas project has also faced complaints of a similar nature, though it has not been burdened with cost overruns of Sakhlin-2s magnitude. As noted above, the government denied ExxonMobil the right to build a gas export pipeline to China in hopes of purchasing Sakhalin-1s gas output for sale in the domestic market. The Kharyaga production sharing agreement (PSA), operated by Total, has also been targeted by the Russian authorities for contract and environmental violations.16 The primary complaint has been Totals unwillingness to produce the minimum amount of oil stipulated in the PSA. However, Total will not produce at full capacity until Transneft builds an export pipeline with sucient export capacity to Indiga on the Barents Sea. A similar charge faced TNKBPs Kovykta gas condensate project in East Siberia. TNKBP was threatened with license revocation because it was not producing the amount of gas stipulated in its contract. However, Gazprom would not provide TNKBP with the necessary pipeline infrastructure to export to East Asian markets,
the economic liberals devised the strategy of resource nationalism, probably for the reasons Gaddy and Ickes provide. Balzer (2005), analysing Putins 1997 PhD thesis on mineral resources and the Russian economy, which argues for a variant of resource nationalism, speculates on whether Kudrin and his team wrote the thesis on Putins behalf (pp. 21415). If so, the Gaddy and Ickes argument would fall within the realm of possibility. 15 Nefte Compass, 25 June 2009. 16 As Krysiek (2007, p. 7) points out, the Russian government is still unsure whether to pursue greater state control or encourage more private investment in its environmentally complicated Arctic regions. This helps explain the Kremlins more ambivalent approach to Kharyaga in comparison to Kovykta or Sakhalin-2.
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and the East Siberian domestic market could not absorb the quantity of gas TNKBP was required to produce. Further, the Russian government, at Gazproms behest, would not allow TNKBP to build a private export pipeline. Thus TNKBP was caught between government complaints of underproduction and a state unwilling to provide the transport infrastructure that would allow the company to produce at full capacity. In the face of growing pressure from the Russian authorities, TNKBP nally agreed to sell its stake in Kovykta to Gazprom in 2007, a sale that has yet to be nalised. This would prove to be only the beginning of TNKBPs troubles with the Kremlin.17 At the Zapadno-Malobalykskoe (ZMB) oil and gas project, a joint venture between Hungarian energy rm MOL and Russneft, the Russian authorities have accused the license holders of failing to meet their contractual requirements for associated gas utilisation. In response, MOL and Russneft allege that they cannot fully utilise the associated gas because Rosneft will not allow access to its Yuganskneftegaz gas transportation system. The recent regulatory activity surrounding ZMB coincides with Russnefts troubles as well as MOLs resistance to a surprise purchase of a 21.2% stake in the company by Surgutneftegaz, a Russian rm with close ties to the political elite.18 The conuence of restricted access to state-controlled pipeline infrastructure and regulators complaints of contractual violations is a common tactic in the struggle for the Russian upstream. These attacks on foreign interests in the Russian upstream have recently been combined with changes in legislation to centralise government control of future foreign investment in the sector. In May 2008, in the week before Vladimir Putin stepped down as president and began his term as prime minister, the law on foreign investment in strategic enterprises took eect. This law states that proposed foreign investments in strategic companies must be vetted by a special commission chaired by the prime minister. In particular, an investment that leads to a foreign investors stake of 10% or more in an oil eld with reserves of at least 70 million tons, or gas elds with reserves of at least 50 billion cubic meters, or any additional voting shares beyond 10%, is subject to approval by the special commission (Panov 2008). This new law further centralises control of the hydrocarbon sector and the relationships that domestic oil and gas producers build with potential foreign investors. By controlling the transportation networks for oil and gas, it is clear that the Russian state is able to undermine the economics of particular projects in the interest of rent-seeking and increasing direct state control of resources, seeking either a
17 In 2008, the TNKBP joint venture (half-owned by BP and half-owned by Russian shareholders) faced more diculties when the state became involved in a shareholder dispute, making BPs position in the joint venture increasingly untenable. For instance, in June 2008 the Kremlin denied visas to most of TNKBPs British sta. TNKBP CEO Robert Dudley, on loan from BP, later ed the country in an attempt to run the company from a secret location. The dispute between BP and the Russian shareholders has since been resolved, but the coercive methods employed by the authorities on behalf of the Russian shareholders in the joint venture illustrate Moscows broader approach to the oil and gas industry. 18 Russian commentator Stanislav Belkovsky claims that Prime Minister Putin owns a 37% stake in Surgutneftegaz (Aslund 2007).
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renegotiation of the contract terms or the sale of the assets at a discount. It is not outright expropriation per se, but rather an underhand form of it that generates many of the same short-term benets for the state with less negative press. In this way, the Russian government has leveraged control of its energy transportation networks to achieve domestic centralisation of resource rent distribution and external manipulation of energy owsa revolutionary form of resource nationalism that goes beyond the coercive renegotiation of contracts for scal gain.
Kazakhstan The regional context In the Caucasus and Central Asia, politicisation of resource production took a dierent direction. In Azerbaijan and Kazakhstan, resource production was politicised (or perhaps geopoliticised) in the early years after the collapse of communism as the leaders of these newly independent states used natural resources as a means to attract foreign investment to balance Russian inuence. In the early 1990s oil prices remained below $20 per barrel and some commentators expected that prices would fall into the single digit range. In order to attract international investment to a newly opening, landlocked region during this period of low oil prices, Azerbaijan and Kazakhstan initially implemented PSA arrangements that promised favourable investment terms and long-term contractual stability in order to encourage international involvement in the energy sector. These PSAs19 would certainly match the criteria of Humphreys et al. for PSAs that are likely to give rise to resource nationalism, as they oered generous terms to the investor and relatively limited opportunity for the national government to receive a larger share of oil revenue if prices rose substantially from their level when the PSAs were signed.20 Meanwhile, Turkmenistan and Uzbekistan took political decisions not to follow this course (Jones Luong & Weinthal 2001). Uzbekistan has remained closed to foreign investment due to political factors combined with limited oil and gas resources, and Turkmenistan only slowly began to open up to substantial foreign investment in late 2006 following the death of President Saparmurat Niyazov. In Azerbaijan, disappointing geological surveys and ongoing Caspian delimitation disputes have prevented major expansion into a second generation of projects, and the industry remains dominated by its rst investor, BP, which operates all of the major postcommunist projects in Azerbaijan. In Kazakhstan, by contrast, a range of attractive projects is currently under development, and there is signicant scope geologically for further expansion. Kazakhstan, with its much less mature oil and gas industry and practically empty state coers, was not comparable to Russia in the 1990s. By 2004, however, Kazakhstan
19
For example, Agreement on the Joint Development and Production Sharing for the Azeri and Chirag Fields and the Deep Water Portion of the Gunashli Field in the Azerbaijan Sector of the Caspian Sea (AIOC PSA): Baku (1994). 20 Azerbaijans main PSAs have been published while Kazakhstans remain secret as is normal practice in much of the world.
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invited a number of companies, both domestic and foreign (including US, European, Russian and Chinese), to develop a range of projects of diering geological complexity and scale. Kazakhstan had also succeeded in building a national oil company, KazMunaiGaz (KMG), which, while far less experienced than Gazprom, could still be presented as a Kazakh partner or alternative to foreign investment. Finally, Kazakhstan had begun to amass substantial nancial resources to enable it to develop projects without foreign nance, including establishing a sovereign wealth fund (the National Fund), assets of which rose from $5.1 billion in February 2004 to $27.8 billion in July 2008, and a range of national development funds.21 This wealth of opportunities, the developed ecology of oil and gas rms, including a national oil company, and growth in the states nancial resources make Kazakhstan the most appropriate of the post-Soviet states to contrast with Russia. The post-Soviet energy industry in Kazakhstan Since the end of communism, Kazakhstan has consistently pursued a so-called multivector foreign policy that emphasises maintaining good relations with Russia while also courting the interest of other great powers. In the 1990s, this policy focused on developing relations with the US and Western Europe. Today it extends to include growing Asian interest in Kazakhstan. At independence, Kazakh ocials had practically no foreign policy experience to speak of. The country had few diplomats, and its diplomatic representation was initially handled almost entirely by Russian embassies. In 1992, 1993 and 1994, President Nazarbayev signed major agreements with Russia, China and the US, respectively. While Russia came rst, Kazakhstan made a concerted eort to reach out to China and the US in order to achieve balance in its foreign policy. This early expression of multilateralism developed into the multivector approach, which was enshrined as the core doctrine of Kazakh foreign policy and incorporated into Nazarbayevs Kazakhstan 2030 strategy (Cummings 2003). The multi-vector policy was then, and remains to this day, a key driver of the international component of Kazakhstans energy policy (Ipek 2007). International oil companies face a paradox in Kazakhstan. On the one hand, the Kazakh governments capacity for policy implementation has increased steadily since independence and is arguably at its greatest under the current government of Prime Minister Karim Massimov. On the other hand, as government professionalism has increased, international oil companies have faced escalating pressure on their terms in increasingly sophisticated ways. On the surface, this might seem to be a similar sort of resource nationalism to that in Russia. Unlike in Russia, however, this pressure on international oil companies is driven by primarily economic concerns. While Kazakhstan continues to adhere to the principles of the multi-vector foreign policywhich, in the energy area involves balancing oil and gas concessions among foreign powers in order to achieve international autonomythe Kazakh government has also put increased pressure on international oil companies, most notably during the Kashagan dispute, in order to capture a bigger share of the prots from rising
21 Ministry of Finance of the Republic of Kazakhstan, Ministry of Finance of the Republic of Kazakhstan, available at: http://www.nationalfund.kz/, accessed 5 July 2009.
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energy prices by enabling Kazakhstans state companies to take a larger share in the industry. These changes do not represent a rejection of the multi-vector foreign policy that originally led Kazakhstan to welcome Western investment, but rather a rebalancing of the scal terms in view of rising oil prices and, as discussed below, rising project costs. The Kazakh leadership remains disappointed with the limited benets that international oil company investment has brought Kazakhstan, especially when compared to the visible, tangible direct benets of the booming construction and banking sectors. As oil prices rose from the end of the 1990s, the government became gradually more assertive, most notably in 2002 when it alleged environmental damages at Chevrons Tengiz eld.22 This resource nationalism came to its peak in 2007 when the Kazakh government accused the consortium developing the massive Kashagan eld of failing to meet their obligations under the PSA and threatened to nationalise the project. When it was initially drilled in 2000, Kashagan, the biggest oil eld discovered worldwide in more than 20 years, was hailed as an unprecedented nd that would revitalise interest in the Caspian and produce oil as early as 2005.23 However, due to extensive project delays, in the best case this oil will only ow in 2011 (McMahon & Clint 2008). As in the case of Sakhalin-2, discussed above, cost overruns have caused the overall expected project costs of an already notoriously expensive project to at least double.24 While project delays and cost overruns have been endemic in the oil industry during the period 20042008, Kashagan is, in the view of the International Energy Agency (IEA), a truly exceptional case, delaying roughly ve times the aggregate oil volume of the next largest delay surveyed by the IEA (International Energy Agency 2008a).25 More importantly, the general global trend of cost overruns and project delays does not reduce the immediate pain the Kashagan delay has caused Kazakhstan. This is particularly troubling for Kazakhstan because, under the terms of the original PSA, the consortium of investors is entitled to recover its costs before the Kazakh government begins to receive revenue from the project (Gorst & Crooks 2007). In short, the project will start producing much later and cost much more than expected, which means that under the original terms Kazakhstan would receive a smaller total amount of revenue at a later date. This failure has led the government to question the claims that international oil companies bring superior technical and project management expertise to projects relative to other operators, whether Russian, Chinese or Kazakh. Kazakh resource nationalism between 2004 and 2008 is best understood as essentially economic in character. The aim has been to improve economic terms and long-term economic benet for the country. Kazakhstan has done this in three ways:
22 USKazakh Oil Giant Faces Fine for Environmental Damage, Interfax-Kazakhstan, 21 February 2002. 23 Oil Find Re-opens Debate about Export Routes, Petroleum Economist, June 2000; Kazakhstan: KashaganMad, Bad and Dangerous to Know, Petroleum Economist, August 2002. 24 Kazakhstan: KashaganMad, Bad and Dangerous to Know, Petroleum Economist, August 2002; Eastern Promises, Petroleum Economist, April 2007. 25 While Kashagan is likely to be delayed by half a decade, the IEA has measured delays in the Middle East in months rather than years (International Energy Agency 2008b).
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rst, by increasing the state share of ownership in major projects; second, by placing more of the burden of cost overruns and delays on the international oil companies; and third, by increasing the states control of the project through KMG. Notably, Kazakhstan has implemented a legal framework for nationalisation whereas Russia has not. However, since the economic downturn began, there is initial evidence of the possible beginning of the sort of national economic upheaval that Bremmer and Johnston argue characterises revolutionary resource nationalism, as in Russia. In particular, the state has taken over or purged the management of the rms connected to Mukhtar Ablyazov, a former opposition leader and former Chairman of BTA Bank, accusing a range of people connected to Ablyazov of corruption and embezzlement. While the episode has not impacted on the oil sector or seen outright nationalisation,26 it has impacted on the uranium sector, as the head of Kazatomprom, Mukhtar Dzhakishev, and a number of his associates have been arrested.27 Were this reassertion of state control to continue beyond assets connected to Ablyazov, particularly to encompass all rms involved in natural resource production, it would only then be appropriate to say that Kazakhstan had shifted toward revolutionary resource nationalism. The politics of resource wealth in Kazakhstan In developing its oil and gas resources, Kazakhstan has had two key goals: avoiding reliance on Russia and ensuring that economic growth delivers tangible benets to the growing middle class. In order for Kazakhstan to pursue an independent foreign policy that allowed it to balance Russian inuence with the interest of other powers and to maximise its return on its oil and gas resources, Kazakhstan needed to ensure that it was not exclusively dependent on Russia for the key strategic oil and gas sector of its economy.28 In addition to its obvious concern to avoid extending Soviet-era reliance on Moscow by encouraging international investment and developing international political alliances, Kazakhstan is landlocked, leaving it reliant on international pipelines to reach international markets. In 2004, while Azerbaijan was completing the BakuTbilisiCeyhan pipeline, which gave it access to international markets without transiting Russia, Kazakhstan relied on Soviet-era pipelines and the new CPC pipeline that connected the Tengiz eld with the Russian port of Novorossiisk. President Nazarbayevs strategy for Kazakhstan has been based on using natural resource wealth to fund improvements in standards of living, economic competitiveness, infrastructure and the functioning of government institutions. This focus was institutionalised at least as early as 1997 in the Kazakhstan 2030 economic plan (Nazarbayev 2006). While polling data from Kazakhstan are very limited, evidence of focus groups and opinion polls conducted in 2007 by the International Republican
26 BTA Bank was taken over by the state along with a number of other banks following a bailout similar to those in the US and Europe. 27 The Knock on the Door, Economist, 18 June 2009. 28 Tellingly, Nazarbayev stated in 1994, I do not think that in todays world weapons can do anything to protect a country. Our main security guarantee . . . will be a powerful Western business presence in Kazakhstan (Mommer 2000).
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Institute suggest that Kazakhstans voters are primarily focused on economic growth and that improving personal and national economic circumstances explain the fact that more than 70% of the respondents polled say that the country is on the right track (International Republican Institute 2007). These twin goals of economic independence and development have driven Kazakhstan to encourage international competition both to produce and to export its oil and gas. In the rst place, competition to produce oil and gas enables the Kazakh government to maximise its share of revenue and to force rms into adopting strict local content policies, which are seen to benet economic development. In the second place, competition for exports ensures that, although Kazakhstan is landlocked, it is not forced by lack of substantial alternative export options to take a below-market price for its oil.29 The focus on the energy sector as a springboard for Kazakhstans economic development is particularly clear in value-added activities like equipment manufacture, nancing and rening. Although these activities usually occur outside the borders of Kazakhstan, the government and its state companies are attempting to expand domestic activity and acquire equity participation in value-added activities abroad. In the rst case, this can be seen through local content requirement, the policy of establishing a Regional Financial Centre in Almaty, and the emphasis of KMG taking a leading role in future projects (Domjan 2005; Regional Financial Centre of Almaty City 2008). In the second case, examples include the purchase of the Rompetrol renery in Romania by KMG, Kazatomproms joint venture with Rosatom on uranium enrichment, and Kazatomproms purchase of a stake in reactor manufacturer Westinghouse (Yermukanov 2006).30 In addition to expanding its activities throughout the value chain, the Kazakh government appears to want domestic rms, most notably KMG, to take an active technical role in most energy projects to develop local expertise, similar to Saudi Arabias prescription for participation, not nationalisation in the late 1960s and 1970s (Parra 2004). This is shown in the policy of reserving new operatorships for Kazakh companies, while leaving open the option of foreign companies jointly participating with the Kazakh operator. This approach may be designed to help KMG gain the necessary technical and project-management capability to work in the shallow water Kazakh zone of the Caspian to develop future projects similar to Kashagan. As such, this approach is consistent with Kazakhstans policy of economic resource nationalism, as the goal is to capture a larger share of the value of its energy production. Such an approach is further suggested by the fact that Kazakhstan has not agreed any PSAs with international oil companies on major oil elds (those with more than
Turkmenistan, by contrast, accepted a below-market price for its gas exports through Russia before construction began on a second export route to China in 2008, prompting Russia to oer to pay European market prices for Turkmen gas in order to encourage Turkmenistan not to develop additional alternative export capacity: Russia Ready to Buy Turkmen Gas at Market Prices, 3 June 2008, available at: http://en.rian.ru/russia/20080703/112914252.html, accessed 10 July 2008. 30 KazMunaiGaz Snaps Up Rompetrol, Petroleum Economist, October 2007; Kazakhstan to Buy 10 percent of Westinghouse from Toshiba, AFP, 13 August 2007.
29
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one billion barrels of oil in place) since 2000. In fact, the Kazakh government has delayed repeatedly the conclusion of a PSA with Statoil for the Abai eld, which KMG and Statoil began exploring cooperatively in 2005.31 It did, however, sign a PSA in 2005 with KMG and Rosneft for the oshore Kurmangazy eld, and another in 2008 with KMG alone for the oshore Nursultan block N (Energy Information Administration 2008a). This behaviour suggests that the Kazakh government is testing whether KMG is capable of undertaking major oshore projects on its own before awarding further contracts to international oil companies. Changes in the governments interest in foreign participation in oil and gas production have been mirrored in transportation. Westward export capacity has not increased markedly since the CPC pipeline opened in 2001. Expansion of westward exports is stalled by CPC expansion diculties and delays in concluding an agreement on funding and constructing the KCTS to carry Kazakh crude into the BTC pipeline (Cutler 2009). Meanwhile, the AtasuAlashankou pipeline delivered its rst crude to China in 2006. Having extended this pipeline to connect to oil elds in western Kazakhstan operated by the China National Petroleum Corporation (CNPC), Kazakhstan is now planning to double capacity to 400,000 barrels per day and construct a gas pipeline to China as well (Auyezov 2009). However, the Kazakh government appears to recognise that this does not provide direct exposure to international markets but rather leaves Kazakhstan potentially reliant on Chinese purchase price oers. As such, alternative export routes are required that give Kazakhstan direct exposure to world market prices, thus ensuring that Kazakhstan maintains favourable pricing terms on exports to China. Kazakhstans continued discussions of KCTS and CPC expansion are evidence that Kazakhstan understands the importance of exposure to world market prices. While international oil companies perceive Kazakhstan as making strong moves towards China, continued Kazakh interest in possible expansion of westward export routes suggests that the government perceives China as one of a number of foreign actors that must be kept in balance through active government-led natural resources management. The emerging role of China The dual goals of international balancing and economic development are encapsulated in Kazakhstans relations with China. While Western international oil companies perceive Kazakhstan as currently favouring China, Kazakhstan is in fact torn in its approach to its eastern neighbour. On the one hand, during a period of very high oil prices, revenue maximisation goals were not being served by IOC cost overruns, production delays and the PSA regime. China oered both another source of international support and, potentially, more favourable scal terms than Western international oil companies. Thus, a role for Chinese rms helps Kazakhstan to maximise both inuence with its neighbours and short-term oil revenue. On the other hand, Chinese rms are less technologically advanced than Western international oil companies and have a worse track record of investing in local content and human
31
KMG and Statoil Explore Caspian Field, FSU Energy, 23 September 2005.
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capital development. This is shown both by anecdotal evidence received by the authors in Kazakhstan, anecdotal evidence from other countries (Taylor 2007), and the low ranking of Chinese companies in The Goldman Sachs Energy Environmental and Social Index (Ling et al. 2004). Thus, giving a large share of the energy sector exclusively to Chinese rms would not serve the goal of long-term economic diversication and development. This tension can be seen through actual Chinese participation in major upstream projects in Kazakhstan. All but one of the major projects that are currently in production with the participation of Chinese rms were acquired through the acquisition by CNPC of PetroKazakhstan rather than granted directly by the Kazakh government (Energy Information Administration 2008a, 2008b). While Kazakhstan has granted roles to Chinese rms in several attractive projects that are currently in the exploration stage, this has not been to the exclusion of Western international oil companies. Furthermore, China has established a joint investment fund with Kazakhstans Kazyna development fund to bankroll domestic infrastructure in Kazakhstan outside the oil and gas sector, similar to Chinas infrastructure construction in other oil and gas producing states.32 China and Kazakhstan may be growing closer, but the multi-vector foreign policy is still alive and well. MangistauMunaiGas: the Kazakh Yukos? In addition to the extension and expansion of the pipeline connections between the two countries, China has provided Kazakhstan with a $10 billion loan in return for a stake for CNPC in MangistauMunaiGas (MMG). CNPC has extended a further $5 billion loan to KMG, perhaps $1.5 billion of which will be used to fund KMGs stake in MMG (Silk Road Intelligencer 2009a). The story of MMG, although it only came to an apparent conclusion in 200933 and thus falls somewhat outside of our period of analysis, provides a useful contrast to the nationalisation of Yukos and shows how economic motivations and the continued strength of the multi-vector foreign policy shape Kazakhstans particular variety of resource nationalism. MMG was founded in 1995 as an independent, vertically integrated Kazakh oil and gas company. In 2006, the company produced approximately 115,000 barrels of oil per day (7.7% of Kazakhstans total) on a recoverable reserves base of more than 1.3 billion barrels of oil (3% of Kazakhstans total). By contrast, in 2004, the year that Yukos was nationalised, Yukoss planned production of 1.72 million barrels per day would have accounted for 18.5% of Russias total production (Arvedlund 2004). MMG was an integral part of the business empire of Dariga Nazarbayeva, the daughter of President Nazarbayev, and her former husband, Rakhat Aliyev.34 Since 1997, the company has been formally controlled by Central Asia Petroleum Ltd of
32 For example, China to Fund Tehran Metro Line, International Railway Journal, August 2000; Kazakhstans Kazyna, Chinas CITIC to Set Up Investment Fund, 5 June 2008, available at: http:// www.interfax.cn/news/news/2995/, accessed 10 July 2008. 33 At the time of this writing, the MMG deal has been delayed, but it appears likely that the acquisition by CNPC will eventually be completed (Silk Road Intelligencer 2009b). 34 Oil Find Re-opens Debate about Export Routes, Petroleum Economist, June 2000.
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Indonesia, which initially purchased a 60% stake.35 The stake is rumoured to have risen to 99% by 2007 (Silk Road Intelligencer 2007). In 2007, Rakhat Aliyev was accused of racketeering, dismissed from his dual posts as Ambassador to Austria and to the OSCE, and divorced by Dariga Nazarbayeva (Lillis 2007). He is currently in Austria, which has thus far refused to extradite him to Kazakhstan, where he has been sentenced in absentia to two 20-year sentences (Sidorov 2009). Although MMG is not as closely tied to the person of Aliyev as Yukos was to Khodorkovsky, it is still notable that Central Asia Petroleum Ltd announced in December of 2007 that it would sell a controlling stake in MMG to KMG. However, the conduct of KMGs acquisition of MMG over the following 18 months was dramatically dierent from the Russian Federations approach to Yukos and reects the multi-vector foreign policy and economic resource nationalism. From the beginning, KMG made it clear that it wanted to acquire a controlling stake in MMG and then bring in a foreign joint venture partner. Throughout 2008, talks appear to have been held with potential Russian, American and Chinese partners. In July 2008, Gazpromneft announced that it was prepared to purchase a minority stake in MMG following its acquisition by KMG (Silk Road Intelligencer 2008). Ultimately, however, MMGs upstream arm was sold to KMG and CNPC for a combined $3.3 billion (Mortished 2009). The multi-vector foreign policy is evident in Kazakhstans approach to a range of potential investors in order to secure the best deal for both the specic project and the Kazakh state more broadly. Using the framework of Bremmer and Johnston, the form of resource nationalism evident here is economic, verging on soft. Not only was MMG not nationalised outright, but Central Asia Petroleum Ltd, and thus its ultimate benecial owners, including perhaps Rakhat Aliyev, received a respectable, though by no means generous, $2.50 per barrel of reserves. While the simplest explanation is that these favourable terms reect a preference for using economic and legal vehicles to assert national control, there are a number of possible alternative explanations for these favourable terms: perhaps Rakhat Aliyev was able to leverage some remaining inuence within the Kazakh elite; perhaps Dariga Nazarbayeva holds a substantial stake in MMG. Regardless of the reasons for the terms of the acquisition, both the process and the outcome set a far more positive precedent for other foreign and domestic investors than the takeover of Yukos. The dynamics of uranium: another perspective on resource nationalism in Kazakhstan As in oil and gas, Kazakhstan faces two challenges in developing its uranium industry: reliance on Russia and developing value-added industry. Mukhtar Dzhakishev, President of Kazatomprom until he was arrested in May 2009, argued that Kazatomprom needs to ensure that it has capability throughout an integrated value chain (linking every stage of the process from mining of uranium, through processing into reactor fuel, to construction and operation of nuclear power plants) rather than simply producing fuel that it exports for processing abroad for use in power plants built by foreign companies (Smith 2008). This is particularly important in the nuclear industry because low fuel requirements and extensive rening of nuclear fuel mean
35
Central Asia Petroleum Buys Kazakh Oil Stake, The New York Times, 13 May 1997.
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that fuel processing adds much more value to uranium than oil rening does to crude oil. Kazatomprom began implementing this strategy in 2006 with the establishment of three joint ventures with Rosatom for the extraction and enrichment of uranium (Yermukanov 2006). At the same time, Kazatomprom established an extraction joint venture with Japans Sumitomo Corporation and Kansai Electric Power Co., which the Japan Bank for International Cooperation characterised as a means of Securing Japans Energy Resources (Japan Bank for International Cooperation 2006). Cooperation with Japan was strengthened the following year, in August 2007, when Kazatomprom purchased a 10% stake in US nuclear power plant manufacturer Westinghouse from Japans Toshiba, which retains a 67% stake in Westinghouse.36 In the most recent example, in June 2008 in conjunction with President Nazarbayevs visit to Paris, Kazatomprom and Areva signed an agreement to cooperate on the front end of the nuclear fuel cycle, particularly the production of high value fuel assemblies (Kazatomprom 2008). Kazakhstan now has strong connections with all major nuclear reactor manufacturing nations apart from South Africa. Moving to participate in the entire value chain helps Kazakhstan in two ways. Just as the multi-vector foreign policy has ensured that Kazakhstan can achieve world market prices for its oil and gas, Kazakhstan wants to ensure that it has direct exposure to uranium consumers and does not become a captive supplier to Rosatom. Furthermore, simply preserving exposure to the uranium price is not sucient. Not only is the commodity cost of uranium a small fraction of the total generation cost, but demand for raw uranium may fall as the processing of used nuclear fuel becomes more prevalent and eective (World Nuclear Association 2008). Because Kazakhstan started developing its nuclear industry much later than its oil and gas industry, the experience in the oil and gas industry has informed strategy in the nuclear industry. In particular, there has not been the same perceived need to redress unfavourable past contracts. Consequently, strategy in the nuclear industry shows how Kazakhstans thinking about the role of natural resources in economic development has evolved since it signed its rst international PSA (for the Tengiz eld) in 1993. Accordingly, Kazakhstans expectations from foreign investors in the nuclear industry, particularly access to diverse markets, access to new technology and a greater share in the entire value chain, provide a useful illustration of what it may look for from future oil and gas investors and joint venture partners. Moreover, the consistent similarity between the approaches in the oil and gas and nuclear sectors suggests a coherent state strategy of economic resource nationalism from 2004 to 2008. In 2009, however, the nuclear industry took a very dierent course from the oil industry. In contrast to the MMG case, where the economic resource nationalism of the 20042008 period seems to have taken a softer turn, the arrest of Dzhakishev and other key managers at Kazatomprom suggests a more revolutionary approach. There are several possible ways to interpret this divergence. At the most basic level, it could be attributed to uncertainty arising from the nancial crisis, which has had a strong impact on Kazakhstan. More likely, it could also be attributed to the dierent
36 Kazakhstan to Buy 10 percent of Westinghouse from Toshiba, Agence France Press, 13 August 2007.
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approaches being taken towards the key oligarchs involved: Aliyev in the MMG case and Ablyazov in the Kazatomprom case. In either case, Dzhakishevs arrest does not strictly constitute an act of resource nationalism, as Kazatomprom has always been a state-owned agency. Furthermore, the professional approach that appears to have been taken to restructuring the BTA Bank, of which Ablyazov was chairman, suggests that even if the means of taking control of the bank reect some of the elements of revolutionary resource nationalism, Kazakhstans subsequent approach to managing the bank is essentially economic, focusing on maximising the value of the rms remaining assets and restructuring its debt (Silk Road Intelligencer 2009c). Conclusion Both Kazakhstan and Russia have chosen to pursue a state-centric model of resourceled development in an environment of rising oil and gas prices. Yet, despite their shared history and similar geography, the two countries have practised very dierent versions of resource nationalism, driven by diering domestic and external political circumstances. Kazakhstan has pursued economic resource nationalism by focusing on economic growth, the diusion of resource wealth to the wider population, and avoiding reliance on any one outside power, while Russias approach has been driven by the desire for geopolitical leverage and domestic political stability. Neither is the textbook model of resource nationalism, in which bargaining power shifts from the foreign investor to the host government after investment costs have been made. In Kazakhstan, the push for greater government control has come far in advance of oil production at Kashagan, and the government made an explicit decision to slow foreign investment in order to develop domestic capability. In Russia, the government has pushed for greater control of both foreign and domestic assets and has focused on altering the geography of its energy transportation system to achieve both foreign and domestic political goals. In both cases, the strategic motives go beyond simply capturing a greater share of the resource rent. Rather, the dierent domestic circumstances and politics in each country have produced unique forms of resource nationalism that reect dierent ways of responding to the challenges of the collapse of the Soviet Union. From the perspective of understanding the post-Soviet experience, the primary lesson of this comparison is that the shape of the resource industries in these countries and the policy approaches to them seem to ow as much from de novo post-Soviet political and economic dierences as from their common Soviet past. Kazakhstan could easily have treated MMG as Russia treated Yukos, but chose not to because of dierent domestic circumstances. Similarly, Russia could have taken Kazakhstans approach of attracting foreign interest in building new export routes, but chose instead to focus on developing an export system that met domestic political goals vis-a`-vis outlying regions as much as foreign policy goals. In both cases, the divergence in approach cannot be explained by the Soviet legacy. While the Soviet experience may have led to some path dependence in the 1990s, by 2004 domestic decision making played at least an equally important role. While Kazakhstans attitude to foreign oil investors can be explained by the failure to take into account the possibility of much higher future prices in early contracts,
59
which Humphreys et al. postulate as a major driver of resource nationalism, this driver does not appear to be present in most Russian assertions of state power nor with regards to Kazakh domestic companies and the Kazakh nuclear sector. This economic motivation helps explain some instances of resource nationalism, but it is not a comprehensive, or even predominant, cause of the resource nationalism in these cases. Rather, resource nationalism here often seems to ow from a comprehensive state economic or political strategy, not in response to specic cases. However, in some instances, particularly for international oil companies, more favourable terms for the state would clearly have helped avoid resource nationalism, as in the Kashagan case. Perhaps more important, however, would have been a more exible approach on the part of international oil companies in recognising the goals of the state and trying to assure that the IOC helps the state to achieve those goals. In the cases of both Kazakhstan and Russia, rms that helped the state achieve its goals, like MMG, which made no attempt to keep KMG from acquiring it, were often able to also achieve their goals or at least receive favourable terms in the event of nationalisation.37 Finally, the experience of Russia in the current decade and Kazakhstan in 2009 suggests that our understanding of resource nationalism might be enhanced by considering the target of resource nationalism, a concept that has mostly entailed national governments targeting foreign investors. Internal resource nationalism is also at play in the Russia and Kazakhstan cases, wherein governments have targeted not only foreign participants in the sector but domestic elites as well.38 To the extent that resource nationalism is essentially a rebalancing of control between the state and the current contractual owner of a natural resource, all four of Bremmer and Johnstons resource nationalism categories can target domestic and foreign investors. Bremmer and Johnston explicitly acknowledge this in the case of Canada, where soft resource nationalism has been directed primarily against domestic companies; but in the cases of Russia and Kazakhstan, it appears that a key signpost of revolutionary resource nationalism is the targeting of domestic investors who appear to pose a political threat to the incumbent leadership cadre. Indeed, as we have seen, the jury is still out on the future direction of Kazakhstans resource nationalism: do recent actions against domestic elites presage a more revolutionary form of resource nationalism? This seems unlikely, but the current economic contraction could change much of the thinking in Astana. The fact remains that internal resource nationalism is not necessarily revolutionary, but depending on the states motivations in targeting a domestic investor, the process of nationalisation and its treatment of the nationalised rm, one can better ascertain whether the internal resource nationalism is primarily driven by revolutionary politics or economic concerns. What might drive internal resource nationalism in the rst place? As Jones Luong and Weinthal (2001) note, Russia privatised its oil sector in the 1990s to mostly domestic investors while Kazakhstan privatised to mostly foreign investors. In Russia,
37
Russian oligarch Oleg Deripaskas approach is summed up in his July 2007 statement: If the state says we must give up our companies, we will give them up. I do not separate myself from the state (Aron 2008). 38 Internal resource nationalism is not so much an additional category to the BremmerJohnston framework as a cross-cutting variable.
60
these domestic investors leveraged their oil and gas assets to generate inuence in domestic politics, leading to a subsequent crackdown by the Putin administration to reassert political control. The Kazakh government did not face the same level of political contestation from domestic oligarchs with independent power bases in domestic natural resources rms, which may explain Russias turn toward revolutionary resource nationalism, targeting both foreign and domestic investors, and Kazakhstans economic resource nationalism targeting foreign investors almost exclusively. In contrast to Russia, Kazakh domestic political elites established themselves largely through their inuence over state and quasi-state companies, like Kazatomprom. Indeed, in these two cases, the application of resource nationalism to domestic investors seems to be motivated by domestic political considerations rst and foremost. In that case, the key variable in ascertaining the future of Kazakh resource nationalismits economic or revolutionary characteris how safe from domestic elite political challenges President Nazarbayev feels. Clearly an economic downturn can be a very unsettling thing for an autocrat. As the economic pie grows smaller, the intraelite competition for a proportionately larger slice of the pie intensies. This may help explain actions in 2009 that do not fully conform to the economic resource nationalism observed in the period 20042008. University of Oxford
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EUROPE-ASIA STUDIES Vol. 62, No.

1, January 2010, 3562

A Comparative Study of Resource Nationalism in Russia and Kazakhstan 20042008

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

A COMPARATIVE STUDY OF RESOURCE NATIONALISM

PAUL DOMJAN & MATT STONE

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