Kazakhstan is seeking to increase its oil export capacity, with production increases at Kashagan and Tengiz in the works. But as the country seeks to deepen infrastructural ties with Azerbaijan, such moves have become more important in light of Nazarbayev’s ongoing struggle to manage succession after his death and relations with Russia.
Bust to Boom?
Before the Crimean Crisis and collapse in oil prices, Kazakhstani President Nursultan Nazarbayev began touting systemic reforms and development targets to transform the Central Asian rentier state’s economy by 2050. Economic development has been the mainstay of Kazakhstan’s regional clout. The economic crisis that emerged in 2014 hastened the need for reform, yet the realization of much of Nazarbayev’s platform hangs on the oil and gas sector and the state’s use of oil and gas rents for its development. Oil production is finally set to grow rapidly with the most recent developments in the Kashagan and Tengiz fields in northwestern Kazakhstan. KazMunaiGas, the state oil and gas company, and Samruk Kazyna, the state’s primary sovereign wealth fund, are looking to profit. Nazarbayev is watching closely as the country looks to expand its oil export capacity.
The Minister of Energy announced a production target of roughly 1.835 million barrels per day (bpd) by 2020 back in September. In line with these projected increases, the Ministry also announced plans to increase export capacity to about 2 million bpd by 2020. Most of the planned increase comes from the Caspian Pipeline Consortium (CPC), which built and operates a pipeline network connecting the Tengiz field to the Kazakhstani port of Atyrau and Black Sea port of Novorossiysk in Russia. The consortium invested $5.4 billion to expand daily capacity to 1.4 million bpd in 2016 and Kashagan — the principle driver of production growth — is situated to use it. The Kazakhstan-China pipeline supplies the Chinese market 400,000 bpd, roughly the difference between projected total production and the CPC’s capacity.
Late last year, renewed talk of a potential Trans-Caspian oil pipeline connecting Kazakhstan and Azerbaijan resurrected the dream of piping Kazakh oil exports to the Baku-Tbilisi-Ceyhan (BTC) pipeline running through the Caucasus to the Mediterranean. The new pipeline would reportedly have a capacity of 150,000 bpd and provide Kashagan another route for export.
Any large expansion of tanker capacity is prohibitively expensive because the Caspian Sea is landlocked, necessitating ships be built in modules elsewhere or massive investments be made into shipyards. A pipeline offers a better return at lower volumes and would provide Kazakhstan flexibility in case of political or technical challenges. Talk over the proposed route petered out in 2008. But Azerbaijan and Kazakhstan signaled their willingness to ignore the legally gray status of the Caspian and forge ahead with the project last October. Then the project was put on pause after initial agreements were reached.
Pipelines Meet Politics
Talks concerning the pipeline restarted on February 2 with the help of surging Kazakhstani confidence in production at Kashagan and Tengiz. The political motivations behind the project should not be overshadowed by its clear economic rationale. The CPC route limits the competitiveness of Kazakh crude outside of Europe and the Mediterranean. But the pipeline chatter comes at a sensitive moment for Nazarbayev as he maneuvers at home and seeks to manage growing uncertainties about Russia. Given that reportage has been optimistic and positive since Kashagan entered production in November, there were clearly political drivers behind the decision to reopen talks at the beginning of February.
Any large-scale project brings foreign investment and lucrative contracts, useful bargaining chips as Nazarbayev tries to insulate himself from political threats at home and secure better foreign partnerships to remind Russia that it cannot act against Kazakhstan’s interests unilaterally. Whoever controls the key state assets at play and works with international firms to provide the groundwork for the project either already has friends in high places or will soon prove to be valuable to competing factions in Astana. Money filters through networks of political support and would, ideally, help Kazakhstan’s western regions, which would play host to relevant infrastructure. Currently, social needs in Kazakhstan’s west have been neglected and strained by low oil prices. As such, it’s impossible to disentangle the larger economic “national interest” of the project from Nazarbayev’s interest in finding a new vehicle to dispense favors and money.
Adversaries Foreign and Domestic
Russia’s annexation of Crimea and low-grade conflict in Ukraine’s Donbass continue to create a sense of uncertainty among post-Soviet autocrats. A recent diplomatic slip-up with Russia has particularly spooked Kazakhstani elites. Pavel Shperov — a member of the ultra-right Liberal Democratic National Party of Russia (LDNP) in the Russian Duma — reportedly implied that ethnically Russian lands in Kazakhstan would soon be returned to Russia. Though the sources were weak, Kazakhstan’s Foreign Ministry asked for clarification. The response from the Russian Foreign Ministry amounted to a non-statement about the need to respect the opinions of the electorate in a democracy, a scary implication given that Shperov is the LDNP’s envoy to the State Council of Crimea.
The dust-up comes amidst Nazarbayev’s developing strategy for managing his own exit from power. Most worrisome is Nazarbayev’s now public conviction that a “fifth column” threatens the stability of the state as he places and replaces those in his administration. He recently unveiled a plan for the devolution of powers, which is a largely cosmetic set of proposals that seemingly allow for greater political competition at a moment when inter-elite fighting is on the rise. State news agency Kazinform — not known to typically comment on inter-elite struggles — publicly alluded to a fight through the prism of Nazarbayev’s recent appointment of Imangali Tasmagambetov to the post of ambassador to Russia.
Tasmagambetov served as chief of the presidential staff years ago and did a stint as defense minister after the Crimean annexation took place in 2014. Until February, he served as vice prime minister. Many considered him a top candidate for succession, but the move to Moscow will freeze him out of decision-making in Astana and give him the onerous task of managing ties with Russia at a time when the United States seems to be backing off of confrontation. Previous Ambassador to Russia Marat Tahzin has been named a deputy chief in Astana, placing him closer to power.
Nazarbayev’s shuffling is most certainly aimed at preserving his grip on power in the short-term. But the fact that he established a task force to propose systemic reforms does hint that he is concerned about the institutional and structural integrity of any succession of power, even under the political cover a so-called fifth column provides in cracking down on dissent and front-runners for his job. Russia’s aggression in Georgia, Crimea, and the Donbass calls into question how Moscow might exploit Nazarbayev’s passing or exit. Nazarbayev knows that Kazakhstan’s international position will weigh heavily on the safety of any transition of leadership.
Foreign Policy as Domestic Policy
Like Putin in Russia, Nazarbayev has used foreign policy as a means of creating domestic legitimacy. Kazakhstan’s seat on the UN Security Council and move to host talks regarding the ceasefire in Syria highlight Nazarbayev’s attempts to portray himself as an influential and able international player both to global elites and the public at home. The proposed Trans-Caspian pipeline is part of the Euro-Asian Oil Transportation Corridor (EAOTC) first agreed to with the EU and other players in 2008 and stalled until last October. The pipeline would be a source of legitimacy for him as an international dealmaker while attempting to control a process of cosmetic, peripheral reforms. The port infrastructure to sustain the project at Kuryk is already under construction, which suggests a high level of confidence and an eager Kazmortransflot, KazMunaiGas’ tanker subsidiary, looking to take state money to expand its fleet.
A faster decision regarding the pipeline also fits into a broader climate of uncertainty about the future of the EU and deepening cooperation between Ukraine and Azerbaijan, key transit states for the EAOTC. The greater Kazakhstan’s reach into international oil markets, the more it can attract security attention from Russia’s key partners and adversaries. The faster it builds the pipeline, the less it has to worry about potentially calamitous developments for the EU’s decision-making structures with the results of the French elections. Iran’s recent acquisition of the Makhachkala port and Transneft’s on-again, off-again stance on oil transit through Dagestan have also pressured Kazakhstan to secure another route for the 5-7 million tons that normally pass through Makhachkala every year.
These factors aside, the greatest part of the foreign-domestic policy overlap, given the structure of Kazakhstan’s political system, is personal.
Ambassador Tasmagambetov’s son-in-law, Kenges Rakishev, is the majority shareholder of Kazkommertsbank, one of Kazakhstan’s largest banks. Having rebranded itself as Qazkom, the bank’s portfolio has been dominated by non-oil and gas projects and small to medium-sized businesses. But Qazkom has been in merger talks with competitor Halyk Bank since November. Halyk Bank, Kazakhstan’s third-largest bank, manages Kazakhstan’s oil pipeline firm Kaztransoil’s assets through subsidiary Halyk Finance and has provided loans to businesses connected to the sector. As his father-in-law has seemingly been put out in the cold, Rakishev is likely banking on the upcoming pipeline project to make himself useful to the aging president.
Nazarbayev’s ongoing play for domestic legitimacy calls for another round of rent-seeking by handing out contracts and using Qazkom, which recently acquired half of Belarusian BTA Bank, as a vector for ensuring better ties with other Russian neighbors. Kazakhstan’s National Bank extended $1.2 billion in financing to Qazkom at the end of December to cover losses from non-performing loans, offering a “too big to fail” justification. The bank needed the loans given that Kazakhstan’s banking sector is in serious need of consolidation to cover spreadsheets loaded with bad debt. But the link between Nazarbayev’s political needs and Rakishev’s aspirations cannot be ignored as to the timing of the Central Bank’s decision and lack of clear regulatory response. Nazarbayev is using a push for an integral part of Kazakhstan’s energy security as a means of shoring up support at home, both in public and in the halls of power at the same time Rakishev is likely trying to exploit bank consolidation to raise his profile as a power broker. It’s unclear how politically feasible the pipeline is given potential Russian and Iranian responses, but the wily president needs a new national project to cover over elite discontent after several hard years for the country’s economy. Rakishev may be stepping forward to help him achieve just that.
Nicholas Trickett currently works at a think tank in Washington D.C. He is finishing an M.A. in Eurasian studies through the European University at St. Petersburg with a focus on energy security and Russian foreign policy.