Central Asia Report: June 23, 2004

THE WEEK AT A GLANCE. Cooperation and coordination were the watchwords of the week, as three of the most prominent regional organizations held high-level meetings. Leaders of the Shanghai Cooperation Organization's (SCO) member states -- China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan -- gathered in Tashkent, Uzbekistan on 17 June, to discuss the prospect of increased economic cooperation and threats to security. The SCO also held the official opening of its Regional Antiterrorism Structure in Tashkent. China made the biggest splash, offering to provide member states with $900 million in loans and trade credits. Afghan Transitional Administration Chairman Hamid Karzai attended as a guest. The Eurasian Economic Community's (EEC) Interstate Council met the next day in Astana, Kazakhstan, bringing together the leaders of Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan. Economic integration topped the agenda. The CIS Collective Security Treaty Organization's (CSTO) Collective Security Council met in Astana the same day, with the leaders of Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan in attendance. The session produced a document on cooperation between NATO and the CSTO, as well as a decision to consider regional peacekeeping missions under a UN mandate. CSTO rapid-reaction forces in Central Asia will conduct joint exercises in late July-early August.

Kazakhstan experienced a busy political week. President Nursultan Nazarbaev addressed a congress of the pro-presidential Otan party, where he vigorously disputed allegations of lagging political reforms. In an interview with a Russian newspaper, Darigha Nazarbaeva, the president's daughter and the leader of the pro-presidential Asar party, downplayed rumors that she is being groomed for succession. Opposition parties held a small unauthorized rally calling for the release of imprisoned opposition leader Ghalymzhan Zhaqiyanov; they consider him a political prisoner, although he is officially serving time for abuse of office. Electoral commissions at all levels took shape, with pro-presidential parties garnering a commanding presence. Against this backdrop, Kazakhstan's International Institute of Contemporary Politics had the temerity to present a report suggesting that society is tired of politicking. On a different front, Russia's "Kommersant-Daily" set off a minor tempest with a report that Kazakhstan signed a $1 billion contract with Britain's BAE Systems to upgrade the country's air-defense systems. Amid a flurry of denials and counterreports, it emerged that negotiations are apparently underway with BAE Systems, although no contract has been signed. Intriguingly, Kazakh officials may have leaked news of the BAE Systems "deal" to speed up sluggish Kazakh-Russian talks on the issue.

Kyrgyz President Askar Akaev told managers at the National Bank that they need to reduce staff redundancies and take steps to reform the banking sector with an eye to increasing foreign investment. Later in the week, Ombudsman Tursunbai Bakir-uulu said that he may consider running for parliament, or even the presidency, if a lawsuit by former employees of the Ombudsman's Office interferes with his ability to carry out his duties.

The Tajik parliament passed amendments to the country's election law that will reduce the deposits for candidates in parliamentary elections from $3,300 to $450. Opposition parties felt that the changes did not go far enough and called on President Imomali Rakhmonov to send the bill back for reworking. Elsewhere, the newspaper "Nerui Sukhan," which has a history of conflict with the authorities, received a warning for printing allegedly defamatory materials about the president and other officials. In Turkmenistan, President Saparmurat Niyazov met with former Finnish President Martti Ahtisaari, the OSCE chairman in office's special adviser on Central Asia, who praised Turkmenistan's "policy of constructive interaction" with the OSCE.

Uzbekistan inked a strategic partnership treaty with Russia, conjuring up the prospect of closer political relations, enhanced military cooperation, and stronger economic ties. The latter quickly moved to center stage, as Russia's LUKoil signed a 35-year, $1 billion production-sharing agreement with Uzbekistan's oil and gas company Uzbekneftegaz to develop the Kandym gas field. After talks with his Uzbek counterpart, Russian President Putin stated that his country's state-run gas monopoly, Gazprom, also plans to invest $1 billion in Uzbekistan. On the military front, large-scale joint exercises are apparently in the offing for 2005.

ASSESSING THE RUSSIAN-UZBEK RAPPROCHEMENT. The signing of a strategic partnership treaty between Russia and Uzbekistan on 16 June had all the earmarks of a significant event, the public confirmation of a rapprochement that could signal a foreign-policy reorientation for Central Asia's most populous nation.

But if the treaty's symbolic significance is clear, its actual importance will depend on the next round of decision-making in Moscow and Tashkent.

The first half of 2004 found Russian-Uzbek relations ripe for change, with Russian President Vladimir Putin undertaking something of a diplomatic offensive in Central Asia to restore past influence, and Uzbek President Islam Karimov looking for geopolitical breathing space as relations with the West sour over the issues of human rights and democratization. A chummy meeting between the two leaders took place in Moscow in mid-April as reports appeared that Russian companies were mulling billion-dollar deals in the Uzbek energy sector.

The 16 June treaty tied these threads together. With provisions for increased cooperation in the political, economic, military, and commercial spheres, the treaty prompted both presidents to make enthusiastic pronouncements. Putin saw the agreement as marking "a new stage in conducting relations between our two governments," while Karimov said that it "lays the basis for a quantitatively new level of long-term relations between our countries."

The treaty's provisions for beefed-up military cooperation drew immediate notice. As quoted by "Vremya novostei" on 17 June, the treaty states that "the sides grant each other on the basis of separate agreements the right to use military facilities on their territory." More details followed. Speaking to journalists after the signing, Russian Defense Minister Sergei Ivanov said, "We are ready to respond to an invitation from the Uzbek side to conduct large-scale joint military exercises next year...We're ready to send our special forces, paratroopers, and to use our military aircraft," "Komsomolskaya pravda" reported on 16 June. On 18 June, RIA-Novosti quoted the minister as saying, "Large-scale military exercises with Uzbekistan are planned for next year using air power, helicopters, and special forces at an outstanding high-altitude training field not far from Samarkand."

Military cooperation will go beyond training exercises. The treaty stipulates that Uzbekistan will purchase military hardware from Russia and send Uzbek officers to Russia for training in maintenance and modernization, RFE/RL's Uzbek Service reported on 18 June. Moreover, as "Nezavisimaya gazeta" reported on 18 June, the treaty stipulates that "the sides will grant each other on a mutual basis maximally favorable conditions for participation in investment and privatization projects." This opens the door to deals that could allow Russia to trade military equipment for shares in Uzbek production facilities. The newspaper mentions specifically the Chkalov Tashkent Aircraft Production Company, as well as uranium mining and enrichment facilities. Finally, the report discusses the possibility of heightened cooperation between Russian and Uzbek air defense systems on the basis of a separate agreement the two countries recently ratified.

But as UzReport.com wrote on 17 June, "No matter how close the [two] countries grow politically, the level of commercial and economic relations will remain the chief measure of their cooperation." Measured against this standard, cooperation is indeed on the upswing, with one billion-dollar contract signed and another looming on the horizon.

Russia's LUKoil and Uzbekistan's state-owned oil and gas company Uzbekneftegaz signed a 35-year production sharing agreement (PSA) on 16 June to develop the Kandym gas field, "Vedomosti" reported the next day. LUKoil and Uzbekneftegaz will create a joint venture in which the Russian company will own 90 percent and the Uzbek company 10 percent. Likewise, the bulk of the $1 billion investment the project requires will come from LUKoil. When the project first begins producing gas in 2007, LUKoil will receive 49.8 percent of the production and Uzbekneftegaz 50.2 percent. A source in the Uzbek company told "Vedomosti" that "the Uzbek share of production will vary from 50 percent to 80 percent depending on profitability." The Kandym gas fields contain 283 billion cubic meters of gas reserves, and annual production should eventually reach 8.8 billion cubic meters a year.

The other big player in the two countries' burgeoning energy-sector cooperation is Russia's state-run gas monopoly Gazprom, which will purchase the gas produced by the LUKoil-Uzbekneftegaz PSA for subsequent export. But this is only a small part of Gazprom's planned involvement. Putin told a 16 June news conference that "Gazprom wants to invest $1 billion in Uzbekistan," UzReport.com reported. Gazprom has already signed a PSA to develop one gas field in Uzbekistan to the tune of $15 million between 2004-2007. The $1 billion is expected to go toward a PSA to develop gas-condensate fields in the Ustyurt region, "Kommersant-Daily" reported.

Putin was careful to state that "this is not Russia investing in Uzbekistan, but rather Russian business." LUKoil head Vagit Alekperov also stressed that his company's deal with Uzbekneftegaz came about only after Uzbekistan had put in place the necessary legislation to ensure the economic viability of hefty, long-term joint ventures. Nevertheless, LUKoil's willingness to commit $1 billion to a foreign project comes at a time when Russian big business is making exceptional efforts to stay in the good graces of officialdom. LUKoil also has, to its credit, a solid track record of good relations with the Kremlin. And Gazprom, as more than one observer has noted, has often acted more as an instrument of Russian foreign policy than as an independent company.

On the public relations front, the treaty and deals offered advantages to both sides. But if Putin was content to stand back and let observers note the restoration of Russian influence, Karimov chose to send a more direct message. For one, he let it be known that not only was the strategic partnership treaty an Uzbek initiative, but that Karimov himself had helped to hammer out its central provisions. Moreover, the Uzbek president's comments indicated a certain frustration at the limited dividends his country has reaped from its efforts to draw closer to the West. "There were hopes," "Izvestiya" quoted Karimov as saying on 17 June, "that international capital would come to these countries [of Central Asia], and that we would quickly join the ranks of developing, or, as some of my neighbors say, fully developed countries." Those hopes, Karimov implied, have not borne fruit.

Karimov may also have reason to believe that closer relations with Russia will play well at home, where reactions to violent unrest in late March-early April suggested an increasingly disgruntled populace. An 18 June informal poll of Tashkent residents by Fergana.ru indicated substantial support for better ties with Russia. Virtually all respondents expressed their approval, with most voicing regret over the rancor of the post-Soviet period and hope that Russian investments will aid Uzbekistan's ailing economy.

Some observers were quick to view the warming of Uzbek-Russian relations in the context of a perceived battle for influence in Central Asia, especially with the United States currently mulling the wisdom of continued military aid to Uzbekistan, a staunch ally in the war on terror, amid growing criticism of the country's human-rights record. In this vein, Germany's "Tagesspiegel" wrote on 18 June that "Uzbekistan...is clearly disappointed in Washington and is once again seeking protection from Moscow." Noting that both Russia and the U.S. are seeking "levers of influence" in Uzbekistan, "Izvestiya" wrote on 17 June that "the [LUKoil-Uzbekneftegaz] gas contract, whatever the economic viability of its subsequent implementation, can be considered a serious victory for Moscow."

Others stressed the mutual benefits of the emerging strategic partnership. Independent observer Qudrat Alimov told RFE/RL's Uzbek Service on 18 June that Russia needs a strategic partner like Uzbekistan in order to strengthen its regional influence and prevent the spread of Islamist ideologies in Central Asia. But sociologist Bahodir Musaev struck a pessimistic note, telling RFE/RL's Uzbek Service on 16 June that efforts to build a strategic partnership, ensure regional security, and develop economic cooperation face daunting obstacles. As Musaev put it, "In order to resolve these issues, each country must first be able to solve its own far-reaching internal problems. If things stay as they are, no matter what organizations Uzbekistan joins, and no matter what important strategic treaties it signs, none of it will bear fruit."

Strategic partnership treaties have the great virtue of signaling a trend toward closer relations while allowing the parties to assume as few, or as many, obligations as they consider necessary at a specific moment. The Russian-Uzbek treaty is no exception. For Russia, it signals a commitment to regain lost influence in Central Asia and an ability to use soft power for foreign-policy leverage. For Uzbekistan, it signals a willingness to rethink current alignments and a desire to balance great-power partnerships. For both, the terms remain flexible, with actual forms of military cooperation left to be determined and investments spread out over many years. But there is only so much time to weigh options. Eventually, Russia will have to decide how deeply it wants to become involved with a partner that has proved unpredictable in the past, and Uzbekistan will have to decide whether its new dalliance is a bargaining chip or the basis for a new relationship.

RUSSIAN BUSINESS HOLDINGS IN CENTRAL ASIA. The recent thaw in Russian-Uzbek relations has taken place against a backdrop of approximately $2 billion in potential Russian investments. The phenomenon bears watching; increasingly, Russian influence in Central Asia comes in the form of business interests. We provide here a brief survey of Russian business holdings in Central Asia, with an emphasis on recent acquisitions. The list is anything but exhaustive. Moreover, many Russian business interests in Central Asia do not come in the form of a joint venture or outright ownership. For example, Gazprom's "contract of the century" with Turkmenistan represents billions of dollars in future revenues; LUKoil has already invested $1.5 billion in Kazakhstan and plans to invest another $13 billion by 2020 and Russia's Unified Energy Systems may help Tajikistan to fund the construction of the Sangtuda hydropower plant. State and private interests often intertwine, further complicating matters. The following is merely the tip of an iceberg that future issues of RFE/RL's "Central Asia Report" will explore in greater detail.

KAZAKHSTAN. Isker-GAZ Gorky Automobile Plant (GAZ) owns a controlling stake in Isker-GAZ in Almaty. The plant assembles minivans and small trucks. "Izvestiya" reported in March 2003 that GAZ planned to sell 350 vehicles assembled at Isker-GAZ in 2003, a 42 percent increase from the previous year. According to some reports, GAZ plans to boost production of its Gazel model, a popular minivan, to 2,000 units a year. GAZ itself is part of the RusPromAvto holding company. Russian aluminum tycoon Oleg Deripaska owns 75 percent of RusPromAvto.

Kostonai Diesel Plant -- AgroMashHolding acquired the Kostonai Diesel Plant (KDZ) in March 2003. AgroMashHolding is a major producer of agricultural equipment with annual revenues of over $200 million. KDZ was a large Soviet enterprise, with an annual production capacity of 40,000 diesel engines, but it had been idle for about a decade. AgroMashHolding Vice President Aleksandr Koropachinskii told Kazakh President Nursultan Nazarbaev in September 2003 that AgroMashHolding planned to invest $12.7 million in 2003-2004 to restore KDZ's production facilities, Ekspress-K reported. In 2004, the State Development Bank of Kazakhstan gave AgroMashHolding a 15-year, $20 million loan for the next phase of reconstruction. KDZ is slated to begin production of diesel engines in late 2005.

KazRosGaz -- KazRosGaz is a parity joint venture between Kazakh state oil and gas company KazMunaiGaz, and Russia's state-controlled gas monopoly Gazprom. Created in June 2002, KazRosGaz "purchases gas from the Karachaganak gas condensate field, processes it at the Orenburg processing plant, and supplies the processed gas to Gazprom enterprises for subsequent sale in various countries of the CIS and Western Europe (Ukraine, Moldova, Great Britain, and Belgium)," according to the Gazprom website. At its current stage of development, Karachaganak produces 19 million cubic meters (700 million cubic feet) of gas per day, "International Oil Daily" reported on 23 February 2004. Kazakhstan would like to build its own gas processing plant, but has had difficulty coordinating plans with Karachaganak consortium investors.

RusAl/EFPK -- RusAl announced in May that it has signed a memorandum with Kazakhstan's Eurasian Financial-Industrial Company (EFPK) to build two facilities in Kazakhstan -- an aluminum smelter capable of producing 500,000 tons a year, and an alumina plant with a production capacity of 1.5 million tons a year. The two companies will create the Eurasian Aluminum Company on a parity basis to finance and implement the project. Construction will require a total of six years and some $3 billion in investment. RusAl is the world's third-largest producer of primary aluminum, with annual revenues in excess of $4 billion. It accounts for more than 70 percent of Russia's primary aluminum production. Metals tycoon Oleg Deripaska owns 75 percent of RusAl. EFPK is one of Kazakhstan's largest holding companies, with interests in metals, energy, and the financial sector. Its public face is Aleksandr Mashkevich, who enjoys close ties with Kazakh President Nursultan Nazarbaev.

KYRGYZSTAN. Kyrgyzkhlopok Alliance Group is the main shareholder in Kyrgyzkhlopok, the largest cotton producer in Kyrgyzstan. Created in 1998, Alliance Group is a conglomerate with oil holdings in Russia's Far East. Kyrgyzkhlopok can produce 70,000 tons of cotton a year and accounts for 35 percent of the country's cotton production.

Bishkeksut -- Wimm-Bill-Dann (WBD), a fast-growing dairy and juice producer, bought a controlling stake in the Bishkeksut dairy factory in 2000. According to the company's website, Bishkeksut produces more than 35 tons of dairy products a day under some 50 product names. A WBD executive told "Kompaniya" in June 2004 that 30 percent of Bishkeksut's production is exported to Kazakhstan.

UZBEKISTAN. Kalina A cosmetics and perfume manufacturer, Kalina at one point owned two production facilities in Uzbekistan -- Pallada Vostok and Lola atir Upa. Kalina paid $1.5 million for Pallada Vostok in 2000, and added Lola atir Upa in 2001. The production assets allowed Kalina to avoid problems with customs duties and currency convertibility, but a poor business climate created profitability problems, "Kompaniya" reported in May 2004. Kalina announced on 21 June that it has sold Pallada Vostok.

Wimm-Bill-Dann bought Toshkent Sut, one of Uzbekistan's largest dairy plants, in March 2004. WBD plans to invest $7.3 million in Toshkent Sut by 2008, RBC reported.

Cherkizovskii is in the process of acquiring Tashkentgusht, Uzbekistan's largest meat processing plant. Cherkizovskii will pay $1 million for the plant and undertake investment obligations of $11 million, "Vedomosti" reported in May. The deal is set to be completed by the end of 2004. Cherkizovskii is Russia's largest meat holding company, with sales in excess of $400 million.

Golden Telecom announced on 3 June that it has bought 54 percent of Buzton, Uzbekistan's only alternative fixed-line communications operator, for $2.8 million. Buzton has approximately 10,000 subscribers and posted sales of $3.9 million in 2003. Golden Telecom already has an affiliate in Kazakhstan, SA-Telcom.