The Kazakhstan energy politics: is oil diversification a geopolitical conundrum?
Geopolitical Report ISSN 2785-2598 Volume 21 Issue 5
Author: Luca Urciuolo
In a world of growing polarity, Kazakhstan has been attempting to portray itself as a bridge connecting the East and the West. However, the so-called Russian “special operation” in Ukraine has forced the Central Asian nation to distance itself gradually from Moscow.
If the problems between Moscow and Nur-Sultan are many and varied, the most pressing one certainly concerns the energy market. On July 5th, 2022, the Primorsky district court in the southern Russian city of Novorossiysk found that the Caspian Pipeline Consortium (CPC) had allegedly committed environmental violations. Environmental damage claims are among the preferred pressure methods on hydrocarbon companies and projects. Political and business influence helped reverse the court’s decision on July 11th, 2022, as the 30-day suspension was re-negotiated into an acceptable fine equivalent to just $3,250.
Although it handles just over 1% of global oil, CPC is critical for Kazakhstan; around 80% of Kazakhstan’s oil exports move through the Novorossiysk oil terminal. The timing of the decision has naturally raised some eyebrows, coming just two days after Kazakh President Kassym-Jomart Tokayev told European Council President Charles Michel via phone that Nur-Sultan was “ready to use its hydrocarbon potential for the sake of stabilisation of the global and European markets.”[1]
Europe aims to decrease its imports of Russian oil. Kazakhstan is an option, but Kazakh exports to Europe depend on Russian pipelines. The chain of events does not necessarily suggest Kazakhstan-Russian tensions, though some with surely draw that conclusion. Rather, the oil transporting and the constraints Kazakhstan faces due to a lack of diversification of export routes are at the heart of the issue. On the latter, Kazakhstan faces a geographic conundrum: with Russia or China’s main avenues for oil exports, diversification is not simple.
Kazakhstan and Russia: signals of friction
Directly bordering Russia and China and trying to maintain friendly relations with the West and the rest of the world, Kazakhstan has carefully pursued a “multi-vector foreign policy” since independence in 1991. With intensifying regionalism and global division, it has been especially challenging for Kazakhstan to protect its national interests and, at the same time, preserve good relations with all states. It is very well known and widely discussed that Kazakhstan was disadvantaged on February 24th, 2022, when Russia initiated military operations in Ukraine. It was not a surprise to the Kremlin for Kazakhstan’s leader to state at the annual Saint Petersburg International Economic Forum (SPIEF) that Nur-Sultan does not and will not recognise the Moscow-backed and self-proclaimed Donetsk People’s Republic and Lugansk People’s Republic.
“We do not recognise Taiwan, Kosovo, South Ossetia, or Abkhazia. Such a principle will also be applied to quasi-state territories, which, in our opinion, are Lugansk and Donetsk,” Tokayev stressed.[2]
Having a substantial ethnic Russian minority in the country’s northern regions bordering Russia, Kazakhstan will not take the chance that recognising any breakaway state will inspire or generate a prerequisite for something similar to happen in its territory. That, however, does not necessarily mean that Nur-Sultan will soon burn all bridges with Moscow.
The energy-rich Central Asian nation remains economically dependent on Russia, especially regarding oil exports. It is, therefore, not surprising that the Kremlin started using energy as a weapon against its ally. Kazakhstan produces some 1.6 MMbbl/d of oil and exports about 80% of that volume. Of the remainder, 15% leaves the country also via Russia, and around 5% goes to China and various destinations via rail and the Caspian Sea.[3]
The CPC pipeline is the route for nearly all Kazakh oil exports. Built in 2001, the CPC is a semi-private, international pipeline from Kazakhstan’s Caspian region to the Russian port of Novorossiysk on the Black Sea. Its corporate structure is split between two companies, one Kazakhstani and one Russian. The Russian court targeted the documentation regarding the Oil Spill Response Plan of the Russian company, saying the shortcomings represented an environmental threat.
The potential one-month suspension of operations at the pipeline, which would have by default involved the Kazakhstani section, would have been a massive blow to the government’s budget and the companies’ bottom line. Given that, on July 4th, 2022, Tokayev pledged to assist the European Union in stabilising the global energy market. Therefore, it is possible to assume that the Russian court’s decision was Moscow’s response to Kazakh-European future cooperation in the energy market.
Under the current geopolitical circumstances, Kazakhstan has little choice but to balance its ties with the West and its alliance with Moscow. Although Europe is one of the main import-export destinations for Kazakh oil (the country’s main export commodity), the problem for Nur-Sultan is that its significant pipelines cross through Russia.
Nur-Sultan has not joined the anti-Russian sanctions imposed by the United States and its allies following Russia’s invasion of Ukraine but instead decided to adhere to all the rules established by the West regarding economic cooperation with the Russian Federation. As early as March 29th, 2022, Timur Suleimenov, the First Deputy Head of the Presidential Administration, stated that Kazakhstan “will not be a tool to circumvent the sanctions that the European Union has imposed on Russia.”[4]
Recent economic statistics show that the trade balance between the Central Asian nation and Russia had not changed drastically from January to May of this year relative to 2021. Imports from Russia increased by 7.3%, while Kazakhstan’s exports to Russia increased by only 2.8%.[5] Such data indicate that Nur-Sultan has not participated in re-exporting goods that cannot be imported into Russia due to Western sanctions.
Quite aware that Russia is perceived as a pariah state, Nur-Sultan is seeking to gradually reduce its economic dependence on Russia, with whom Kazakhstan shares a 4,253-mile border. More importantly, Nur-Sultan seeks to diversify export routes to bypass Russia. Tokayev called diversification of oil export routes a “priority” in a government meeting on July 7th, 2022.
Diversification would seem to be the obvious solution, but the difficulties of achieving it are equally prominent. As a landlocked country, Kazakhstan depends on other countries’ territories to see its oil reach global markets, no matter which direction it flows. In addition to CPC, which carries oil from Atyrau province in Kazakhstan across southern Russia, Kazakhstan can move oil via the Uzen-Atyraui-Samara pipeline into Russia and from there via the Russian pipeline network to the Baltic terminal of Ust-Luga, or Novorossiysk on the Black Sea. Then there is the Kazakhstan-China pipeline network.
Kazakhstan also ships oil via rail and tankers across the Caspian but at much smaller volumes. Trans-Caspian routes for both oil and gas have long been pondered, but none yet realised. Tokayev’s call for the rapid diversification of export routes is an unrealistic objective to be reached in the short term: pipelines are expensive energy infrastructures, which, to be constructed and entered into line, require long negotiation rounds with transit partners and, most importantly, buyers.
Tokayev’s “priority direction” for oil diversification is the Trans-Caspian route, which resurrects the efforts of his predecessor, Nursultan Nazarbayev, to transport more oil across the Caspian Sea to Azerbaijan and onward to Europe. The country reportedly plans to use the route to deliver goods via the Caspian Sea to Baku, Azerbaijan, Georgia, and Turkey.
Recently, the foreign ministers of Kazakhstan, Azerbaijan, and Turkey signed a declaration on transport cooperation. At the same time, Tokayev and his Turkish counterpart Recep Tayyip Erdogan discussed the importance of the corridor during a recent visit to Ankara. Additionally, on July 20th, 2022, the Kazakh leader visited Tehran, where he inaugurated a railway network from Kazakhstan via Turkmenistan and Iran into Turkey. This railway further facilitates Kazakh exports to Europe while bypassing Russian territory.
Nevertheless, there is still no pipeline across the Caspian. Whether Tokayev’s recent emphasis on diversifying oil export routes can move the process is unclear but arguably unlikely. More importantly, diversifying oil export routes only hitches Kazakhstan’s economy further onto an industry many see as inevitably doomed, as climate change motivates a hoped-for global shift away from fossil fuels.
The regime’s obduracy in keeping the whole economic structure dependent on the energy sector is likely to clash with the reality of the post-oil world. At that point, it is reasonable to expect that a dramatic economic crisis will erupt: the leaders of a New Kazakhstan ought to prepare to mitigate the risks associated with that scenario, as a post-rentier economy is not only more stable but also, and perhaps crucially, given the socio-economic grievances that continue to arise from the Kazakhstani society, a fairer economy.
Conclusion
Kazakhstan is trying to position itself as an open, entrepreneurial nation and a good neighbour and valuable partner for President Vladimir Putin’s Russia, but also a country which is not closed off from the rest of the world. Nevertheless, as the geopolitical division between Moscow and the West continues to widen, this will undoubtedly be a challenging feat to pull off.
The narrative in the Western media interpreted it as a pivotal moment for Kazakh-Russian relations. Tokayev refusing to support the Kremlin’s visions for Luhansk and Donetsk, in person, is seen as an example of how low Russia has fallen even among its closest allies. However, watching the whole panel, the Russian and Kazakh presidents agreed on many points, even those that fell beyond economic discussions.
Tokayev was courteous and friendly in his expressions, and he stressed numerous times how important it is for Russia and Kazakhstan to work together in the Eurasian Economic Union (EAEU) framework to overcome the challenging economic state the region finds itself in. Moreover, Tokayev’s presence at SPIEF in the first place is suggestive of Kazakhstan’s clear intentions to try to find ways for mutually beneficial economic cooperation.
Indeed, Kazakhstan wants to keep relations with Russia on good terms for its reasons. Simultaneously, in its current position, Russia needs Kazakhstan and accepts its foreign policy course. On June 23rd, 2022, Russian Ministry of Foreign Affairs spokesperson Mariya Zaharova said, “Russia respects Kazakhstan’s point of view on the conflict in Ukraine.”[6] Overall, the war in Ukraine has seemed to make Kazakhstan more vocal in expressing its position and national interests concerning Russia on the global stage.
Despite Russia’s complex geopolitical and economic conditions, it is in both countries’ interests to keep their good relations afloat. However, tensions seem inevitable. The risks for the country are considerably high. In the immediate future, strict compliance with sanctions and pursuing more robust relations with the West could prompt Moscow’s irritation.
Attempts to accommodate Russian interests could also create the ground for secondary sanctions. In the medium and longer term, a political and isolated Russia resulting from a geopolitical trap is not good news for the region either. The negative impact is likely to be multifaceted and ultimately hard to predict.
Sources
[1] Interfax Staff (2022) Kazakhstan ready to help stabilize energy prices on European, global markets – Tokayev. Interfax. Link: https://interfax.com/newsroom/top-stories/80918/.
[2] Aleksandra Klitina (2022) Putin publicly humiliated by Kazakh leader. Kyiv Post. Link: https://www.kyivpost.com/eastern-europe/putin-publicly-humiliated-by-kazkah-leader.html.
[3] Reuters Staff (2022) Analysis: Oil Majors Face Output Slump, Deep Losses If Russia Stops Kazakh Pipeline. Pipeline & Gas Journal. Link: https://pgjonline.com/news/2022/july/analysis-oil-majors-face-output-slump-deep-losses-if-russia-stops-kazakh-pipeline.
[4] Georgi Gotev (2022) Kazakh official: We will not risk being placed in the same basket as Russia. EURACTIV.com. Link: https://www.euractiv.com/section/central-asia/interview/kazakh-official-we-will-not-risk-being-placed-in-the-same-basket-as-russia/.
[5] Алиби Саруар (2022) Казахстан ощутит всю серьезность антироссийских санкций уже осенью – аналитик (Kazakhstan to feel full severity of anti-Russian sanctions in autumn – analyst). LSM. Link: https://lsm.kz/vliyanie-sankcij-i-vygoda-dlya-kazahstana.
[6] Informburo (2022) Мария Захарова: Россия уважает точку зрения Казахстана на конфликт в Украине. Informburo. Link: https://informburo.kz/novosti/mariya-zaharova-rossiya-uvazhaet-tochku-zreniya-kazahstana-na-konflikt-v-ukraine.
Disclaimer. The views and opinions expressed in this report are those of the author and do not necessarily reflect the official policy or position of SpecialEurasia.