Will Sanctions Stymie Russia’s Resurgence in Central Asia?

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Will Sanctions Stymie Russia’s Resurgence in Central Asia?

Moscow’s projects in the region are coming unglued just as the West steps up sanctions over the Ukraine crisis.

Will Sanctions Stymie Russia’s Resurgence in Central Asia?
Credit: Presidential Press and Information Office, Kremlin

The latest round of Western sanctions against Russia may be hampering Moscow’s ability to maintain its presence in Central Asia. Vladimir Putin’s interventions Ukraine may end up slowing the pace of Russia’s initiatives in other areas of interest.

The pinch is already being felt in Kremlin stronghold Kyrgyzstan, after delays over Russian investments, including the controversial construction of a massive water dam on the Syr Darya river. Russian energy giant Inter RAO was already having difficulties financing the Kambarata-1 hydro project prior to the standoff with the West, while Russian state oil company Rosneft appears to have lost the chance to take over Manas International Airport and its subsidiaries, according to reports emerging from Kyrgyzstan.

It is the most vulnerable Central Asian states, Kyrgyzstan and Tajikistan, which are likely to experience the biggest economic impact, with a decline in migrant remittances from Russia, which remains a preferred destination for laborers from these countries. Traditionally hostile to Moscow’s meddling in regional affairs, the impact of the sanctions on Turkmenistan and Uzbekistan are unlikely to be as severe as they are in the rest in the region, although Uzbek migrants do represent a sizable labor force in Russia. As for Kazakhstan, it forged closer ties with the Kremlin this year by advancing the Eurasian Union, which experts see as a political rather than free market arrangement. Yet Moscow’s Cold War-style confrontation with the West could well have repercussions for Kazakhstan’s developing economy as well.

But it is in Kyrgyzstan where Moscow’s ambitions for Central Asia have been most evident. Three Russian energy giants – Gazprom, Rosneft and InterRAO – are actively pursuing investments that many analysts view as politically driven. Coinciding with the escalation of the conflict in Ukraine, these projects have either lost momentum or come into question altogether.

Rosneft’s anticipated grab of the Manas International Airport network is a case in point. Until a few months ago, it was widely understood that the state-owned oil firm would acquire 51 percent ownership of the Manas international airport. In February, it signed a memorandum with Kyrgyzstan under which Rosneft would pay $350 million for an ownership stake and bankroll another $650 million to transform the airport into regional logistics hub.

But signs that the deal was unraveling emerged in April. Then, last month, a Chinese company appeared on the scene. Beijing Urban Construction Group has stepped up to provide the $1 billion originally pledged by Rosneft. Another Chinese firm is apparently ready to invest in Kyrgyzstan’s second airport. Did Western sanctions play a part in Rosneft’s unability to finalize the acquisition? That is unclear, but analysts speculate that the sanctions may be having repercussions for the company’s international plans.

The Kremlin’s other massive project in Kyrgyzstan – Kambarata-1 Dam, a hydroelectric power plant – is also facing delays. Russian energy holding company Inter RAO is overseeing this $3 billion investment, which according to the Russian press remains in the feasibility stage. Kyrgyz media has a somewhat different perspective, consistently claiming that the delays with the study of the hydro project’s technical and economic viability reflect financial difficulties at Inter RAO. It is certainly true that Kambarata-1 funding was in the headlines in 2013 when the Russian government was trying to assist Inter RAO with a restructuring of its domestic assets. The energy giant’s latest financial disclosure reveals that its net profit for the first six months of 2014 was down 47 percent. Still, Moscow’s envoy to Kyrgyzstan, Andrei Krutko sounded optimistic about Kambarata-1 in April. The Russian diplomat insisted that construction on the dam would get underway “in the summer or autumn” of 2014.

Aside from Kambarata-1, Russia has plans to deliver four smaller hydropower stations, with two due to be operational in 2016 and the remaining two in 2019. The partly Kremlin-owned energy company RusHydro is managing the construction of these hydro projects, worth $425 million. Analysts were somewhat pessimistic when RusHydro announced its Kyrgyzstan venture in 2012, worrying that “regulation and tariffs will not be able to provide a return on investments, while cash collection could also be a problem.” At least compared to Inter RAO, RusHydro appears to be in better financial shape. It was announced that RusHydro would begin the main construction stages of two of the stations in the next three to six months, although conflicting news reports from Russian and Kyrgyz media outlets somewhat appear less enthusiastic about the status of the projects.

So-called Level 3 sanctions against Russia announced at the end of July did not target gas giant Gazprom, in a move observers believe reflects EU dependence on natural gas from Russia. Gazprom enjoyed unchallenged dominance in Central Asia for decades, although that has come under increasing threat with China’s rising regional and global economic clout. Over the past 10-15 years, Chinese energy companies have been nudging Gazprom out of Turkmenistan, a country with proven natural gas reserves. The Turkmenistan factor was apparently a useful bargaining chip for Beijing during the final stages of the decade-long negotiations with Moscow over the $400 billion gas deal finally signed in May.

China’s consistent multi-billion dollar spending spree on regional gas pipeline projects has transformed the geopolitical status of Central Asia, once seen as Russia’s exclusive zone. Moscow is keen to reassert its presence in the weaker states, but it has found itself caught up in the complex regional politics. Take Kyrgyzstan, where Moscow was linked to a violent coup in April 2010 that led to bloody inter-ethnic conflict. Four years later, Gazprom finds its interests in Kyrgyzstan threatened by a spat with Uzbekistan.

In 2014, Gazprom completed the takeover of the Kyrgyzstan’s state-owned gas provider Kyrgyzgaz for $1, promising a steady supply of natural gas from Uzbekistan and investment in rundown domestic pipeline infrastructure. Kyrgyzstan struggled for years to stabilize gas imports from its neighbor. But downstream Uzbekistan has been explicitly critical of the Russian-Kyrgyz plans for hydro projects on the Syr Darya river, which is crucially important for Uzbek agricultural industry in the Ferghana Valley.

Unsurprisingly, Gazprom’s new ownership of its neighbor’s pipeline network did not go unnoticed by the Uzbek government, which cut off the gas supply to South Kyrgyzstan in April. Uzbek authorities claim that a contract renewal is at the center of the dispute – Gazprom has been negotiating with the Uzbek government for months already. It remains unclear whether the Russian gas giant will be able to live up to its pledge of stable gas supply, but Kyrgyz officials have expressed skepticism at the chances of Uzbekistan resuming gas deliveries in the upcoming cold season. Gazprom’s inability to sway Uzbekistan in turn raises questions about Russia’s overall leadership and capabilities in Central Asia. The turbulent nature of inter-state politics in Central Asia cannot be ignored.

Of course, the extent to which Western sanctions have played a role in the troubles Russia has had with these projects to date is very debatable. What is clear, though, is that the sanctions are threatening to tip Russia into recession, even as it already struggles to keep its projects – and its Central Asian presence – on track.

Ryskeldi Satke is a contributing writer with research institutions and news organizations In Central Asia, Turkey and the U.S. Contact e-mail: rsatke at gmail.com