Central Asia Report: August 10, 2004

THE WEEK AT A GLANCE. Election preparations and military cooperation dominated news from Kazakhstan. The opposition parties Democratic Choice of Kazakhstan and the Communist Party of Kazakhstan submitted a formal application to go into the 19 September parliamentary elections as a unified electoral bloc. The pro-presidential Otan party topped a public opinion poll, with the equally pro-presidential Asar party in second place, and the opposition Ak Zhol party in third. Meanwhile, an association of NGOs from Armenia, Kazakhstan, Kyrgyzstan, Russia, and Ukraine announced at a 3 August press conference that it will field 140 monitors to observer parliamentary elections. Military cooperation manifested itself on 2 August in joint exercises by the armed forces of the Collective Security Treaty Organization (CSTO) involving commanders from Kazakhstan, Kyrgyzstan, Russia, and Tajikistan. Also on 2 August, U.S. General John Abizaid, the head of Central Command, met with Kazakh President Nursultan Nazarbaev and Defense Minister Mukhtar Altynbaev to discuss plans to expand bilateral military and security relations, as well as broader cooperation between Kazakhstan and NATO.

CSTO joint military exercises moved to Kyrgyzstan on 3 August for counterinsurgency tactical training with 2,000 troops from Kazakhstan, Kyrgyzstan, Russia, and Tajikistan. Also in attendance in Bishkek on 4 August were Russian Defense Minister Sergei Ivanov and Tajik Defense Minister Sharali Khayrulloev. On the political front, a court rejected an appeal for conditional early release from imprisoned opposition leader Feliks Kulov, who is currently serving a 10-year sentence for embezzlement. Kulov heads the Ar-Namys opposition party, which asserts that its leader was jailed on politically motivated charges.

Tajik Prosecutor-General Bobojon Bobokhonov dropped a bombshell on 6 August, announcing the arrest of Lieutenant General Ghaffor Mirzoev, the head of the country's Drug Control Agency. Mirzoev faces numerous charges, including the 1998 murder of a police official. Mirzoev was a pro-government commander during the 1992-97 civil war; he also headed the National Guard until January 2004. Elsewhere, Muhiddin Kabiri, chairman of the opposition Islamic Renaissance Party, condemned the 29 July attack on Rajab Mirzo, editor of the independent "Ruzi Nav" weekly. Kabiri called the assault, in which Mirzo was injured, a "signal" in advance of parliamentary elections and pointed to lackluster official efforts to solve the case. A Tajik official dismissed Kabiri's allegations and accused "third forces" of being behind the attack.

Uzbekistan's Interior Ministry announced on 2 August that security forces have made "several arrests" in the wake of three suicide bombings in Tashkent on 30 July. Uzbek authorities have suggested that the attacks, which targeted the U.S. and Israeli embassies and the Uzbek Prosecutor-General's Office, were the work of extremists linked to the outlawed extremist organization Hizb ut-Tahrir. Elsewhere, Russia's Federal Atomic Energy Agency is negotiating with Uzbek authorities to import spent nuclear fuel from a scientific reactor in Uzbekistan. Contracts are expected in 2005.

CARVING UP TURKMENISTAN'S GAS PIE. Blessed with vast gas reserves, Turkmenistan has been exploring for the last 13 years ways to diversify its gas-export options and to lessen its dependency on the northern export route through Russia. Scores of alternative gas-export-pipeline projects have failed before they even started. Meanwhile, Russian President Vladimir Putin's cavalry continues to exert maximum efforts to regain total control over the Turkmen gas market.

The long-standing issue of sales of Turkmen gas to Ukraine was resolved last week. In essence, Russia succeeded in establishing that Turkmen gas will be exported through the northern route. In fact, the turning point took place in April of last year when Russia achieved a breakthrough by signing a 25-year agreement with Turkmenistan on gas cooperation that stipulates a "gradual increase formula" for the purchase of Turkmen gas. At that time, both the Russian president and the chairman of Gazprom described the deal as a revolutionary breakthrough for the two gas powers. Starting in 2004, Russia will buy 6 billion cubic meters of gas per year at a price of $44 per thousand cubic meters, 50 percent of which is paid in currency and the remainder paid in kind.

The low price and the barter element of the agreement are highly advantageous for Russia. Allowing for problems with the quality and pricing of bartered goods, the final aggregate value of Turkmen gas is around $33 per thousand cubic meters -- a measly sum compared to the $100-plus that Russia gets from its West European gas customers. By 2009 Russia will effectively be buying virtually all of Turkmenistan's gas, amounting to 80 billion cubic meters by 2028, and Russia will retain the exclusive right to reexport the gas beyond Russia.

At the same time, Ukraine buys 36 billion cubic meters of gas per year, or half of its demand, from Turkmenistan. The contract comes up for renewal in 2006. Against the backdrop of the deal between Russia and Turkmenistan, the renewal of this contract appears highly unlikely, a fact underscored by several postponements of Ukrainian President Leonid Kuchma's 2003-04 visit to Turkmenistan to sign a new gas contract. Kyiv was eventually forced to abandon the idea of an independent gas policy in Central Asia and struck a deal with Moscow that changed the transportation scheme to Ukraine.

Several steps have been taken to emphasize that virtually everything in this gas deal was done with the permission of Turkmen President Saparmurat Niyazov.

On 1 August, Ukrainian Ambassador Vadim Chupron met with President Niyazov and informed him that Yuriy Boyko, the head of state-run Ukrainian gas monopoly Naftohaz Ukrayiny, would soon visit Turkmenistan and would "bring draft agreement for supply of Turkmen gas to Ukraine up to 2028" for the Turkmen president's consideration and approval. Chupron also briefed Niyazov on the delivery and payment status of gas supplies to Ukraine under the present arrangement, which remains valid up through 2006.

The Turkmen president's press service reported on 6 August that President Niyazov met with Naftohaz Ukrayiny Chairman Boyko and with Vladimir Petruk, the director of the Interbudmontazh company. They personally informed Niyazov about the signing of a number of documents laying out arrangements between Russia and Ukraine for the transport and delivery of Turkmen gas through the year 2028. As "International Oil Daily" reported on 30 July, the newly formed company RosUkrEnergo will now handle the transport of natural gas to Ukraine together with Naftohaz Ukrayiny. In the course of the meeting, the Turkmen president expressed his satisfaction with and approval for the new scheme of gas transport to Ukraine. Niyazov always likes to emphasize that his decisions are required to seal such deals, although in this case, the sale of Turkmen gas takes place on the Turkmen-Uzbek border and the mechanism of further transportation is unrelated to Turkmenistan from even a technical standpoint.

In fact, everything was decided much earlier, on another level, and with other players.

The strategic agreement between Russia's Gazprom and Naftohaz Ukrayiny was reached on 26 July in Yalta during a meeting between Russian President Putin and Ukrainian President Kuchma. It was finalized on 29 July when the heads of the two state monopolies signed documents laying out rules for cooperation between Russia and Ukraine in the sphere of transport and delivery of natural gas up to 2028.

The agreement was marked by the establishment of the Swiss-registered RosUkrEnergo, which will buy Turkmen gas for the Ukrainian market, acting as a transit operator as well as an investor in the gas-transportation infrastructure needed for subsequent deliveries. Its shareholders are, on an equal basis, a subsidiary of Gazprombank and Austria's Raiffeisenbank. Under the new deal, Naftohaz Ukrayiny serves as the only ultimate gas consumer, Prime-TASS Energy Service reported on 29 July. As a result of this move, dwarf companies such as the Hungarian offshore Eural TransGas, which Ukraine had authorized to be Ukraine's beneficiary a year and half ago, have been squeezed out of the Turkmen gas market by newly arrived giant RosUkrEnergo, which is itself controlled by Gazprom and Raiffeisenbank.

"Vremya novostei" reported on 30 July that, according to representatives of Gazprom, the participation of the Austrian bank is required by the need to attract financing to develop the infrastructure for exporting Turkmen gas. Raiffeisen Investment representative Wolfgang Putschek indicated that one of the priorities is to provide financing for infrastructure projects in Central Asia. A feasibility study emphasizes system modernization to increase existing capacity to 50 billion cubic meter per year and the construction of a new pipeline with 30 billion-cubic-meter-per-year capacity from western Turkmenistan to Ukraine. Although the feasibility study of existing infrastructure and planned project infrastructure will be complete in the fall, it has been already suggested that the part of pipeline that lies beyond the Turkmen border will require about $2 billion in capital financing to be provided by the joint enterprise from its own revenues and with the help of investment banks.

It's striking that the idea of building a new pipeline with 30 billion-cubic-meter-per-year capacity from western Turkmenistan bypassing Uzbekistan, which President Niyazov suggested to Ukraine and Russia in 2003 during a time of strained relations between Turkmenistan and Uzbekistan, has essentially received complete Russian support, indicating once again the degree of flexibility of Russian policy in the region.

This agreement not only completely commits the capacity of the existing gas-transportation system from Turkmenistan to the northern export route, but it also absorbs all of Turkmenistan's export potential. Turkmenistan's gas balance is such that its maximum possible production volume in the years ahead is estimated at approximately 100 billion-110 billion cubic meters per year. Domestic demand totals 15 billion-20 billion cubic meters, the maximum export volume to Iran is 10 billion-13 billion cubic meters, and the remainder is now contracted wholly to Russia. This leaves almost nothing upon which any further discussion of new pipeline construction in the near future might be based. This agreement thus offers almost total protection against any other country breaking into the Turkmen gas market.

Despite this recent redistribution of the Turkmen gas pie, the NewsCentralAsia news agency (http://www.newscentralasia.com), which reflects official Turkmen views, reported on 29 July that Najeeb Jung, head of the South Asia Energy Division of the Asian Development Bank, said in an interview that the Trans-Afghan Pipeline project (TAP) was progressing satisfactorily and the pipeline may be in position to start pumping gas to Pakistan by 2010. He said that in principle the progress on the Iran-Pakistan-India pipeline should not be viewed as discouraging factor for TAP. "We believe there is space for both pipelines eventually," the agency quoted him as saying. He also said that the feasibility study of the project was based on the assumption that Pakistan would be able to absorb the entire capacity of the pipeline, making the project feasible without Indian participation. "Participation of India is not essential for the viability of the project," Jung said.

According to NewsCentralAsia, Jung said that TAP was moving ahead satisfactorily. Jung claimed that the recommended design implies a 56-inch-diameter pipeline with rated transfer capacity of 33 billion cubic meters per year. The statement could not be confirmed, however.

Meanwhile, Pakistan Press International reported on 4 August that Pakistani Oil Minister Chaudhry Nouraiz Shakur said that his government will finalize at least one natural-gas-import pipeline project by the end of this year to cater to future demand. In an interview, he said that the government is working on three major projects to meet increasing demand for gas. These projects include the Turkmenistan-Afghanistan-Pakistan pipeline, and the Qatar-Pakistan and Iran-Pakistan-India gas-pipeline projects. According to the Oil Ministry, Pakistan's demand for natural gas is expected to grow at around 6 percent per year, rising from current levels of 2.061 million cubic feet per day to 4.452 million cubic feet per day by 2015. Shakur said the government will decide in December 2004 which pipeline is suitable and the priority chart will be presented to the cabinet for approval.

The question is whether Pakistan will choose TAP with so many questions surrounding the availability of sufficient gas reserves for the pipeline in Turkmenistan.

The idea of the Trans-Afghan Pipeline was revived by the strenuous efforts of the Asian Development Bank after the defeat of the Taliban regime, but unrest in Afghanistan, the unpredictable behavior of the Turkmen president, and Russia's total control over the Turkmen gas market render the idea quite unrealistic.

In a speech to students last month, the President Niyazov made a statement indicating that Turkmenistan sells its gas for pennies and will continue to explore alternative ways to export Turkmen gas. Yet it remains unclear what gas the Turkmen president is trying to sell and to whom, as well as who would agree to deal with a leader who tries to sell the same gas at the same time to different parties, or who wants to buy gas which Russia has already bought or controls?

(This article was written by Dr. Najia Badykova, a research associate at the Institute for European, Russian, and Eurasian Studies at George Washington University in Washington, D.C.)

ECONOMIC GROWTH IN CENTRAL ASIA. As Central Asian countries continue to battle a variety of economic problems and strive for better economic performance, some surge ahead while others fall behind. Kazakhstan has the best-managed economy in the region, while Turkmenistan represents the opposite extreme. The Kazakh economy is beginning to experience the typical problems of a transitional, fledgling market economy. Meanwhile, the president of Turkmenistan takes unusual steps to manage an out-of-control economy and narrow the gap between official and black-market exchange rates. It comes as no surprise in this regard that the glowing gross domestic product (GDP) growth that has been reported in Turkmenistan is very likely overestimated by the country's Statistics Committee.

According to the State Statistics Committees of the Central Asian states and the CIS Inter-State Statistics Committee, Central Asian countries have experienced rising industrial production and GDP. Interfax reported on 6 August that, according to the CIS Inter-State Statistics Committee, in January-June 2004 Kyrgyzstan posted an 18.1 percent increase in industrial output and a 9.2 percent rise in GDP, the most impressive results in the CIS. Tajikistan saw industrial output grow by 11.7 percent and GDP by 11.1 percent, while Kazakhstan posted industrial output growth of 9.4 percent. Information about Kazakh GDP growth was not published. The committee also did not provide figures for either Turkmenistan or Uzbekistan. These two countries reluctantly provide data for publications and prefer to publish results themselves. According to the Uzbek State Statistics Committee, the country's industrial output grew 9.6 percent in the first half of 2004. Kazakh President Nursultan Nazarbaev announced on 2 August during a cabinet meeting on economic performance in the first half of 2004 that he is satisfied by recent developments in economy and GDP growth of 9.4 percent, Interfax reported.

Interfax reported on 13 July that Turkmen President Saparmurat Niyazov said at a cabinet meeting dealing with socioeconomic performance in the first half of the year that GDP in Turkmenistan increased 20.7 percent, with industrial growth of 22 percent. The rate of industrial output growth as well as GDP remains at high levels. Moreover, in contrast to past results, these figures did not elicit significant criticism from international institutions.

Still, it seems that overestimation has become a routine practice. For its part, the Turkmen State Statistics Committee continues to ignore official comments by the Asian Development Bank about Turkmenistan's abnormally high GDP growth (18-20 percent) in 2003. The bank's 2003 country report for Turkmenistan stated, "Official output statistics should be treated with caution, as they tend to overestimate true growth for at least two reasons. First, they continue to be based on reports by enterprises. While private companies generally underreport output growth to evade taxes, [state-owned enterprises] -- which account for the bulk of the economy's total output -- have a strong incentive to exaggerate output figures because the performance of their managers is evaluated primarily on their meeting government-set production targets.... Alternative staff estimates...suggest that the actual growth rate of the economy in 2003 was around 10 percent."

The conclusion that begs to be drawn is that real growth of the Turkmen economy has been overestimated by a factor of two for the first half of 2004. Niyazov hates to see declining economic indicators but a jump in economic growth from 10 percent in 2003 to 20.7 percent for the first half of 2004 is highly unlikely and almost certainly unrealistic.

The Problems of Currency Depreciation and Appreciation

Two Central Asian countries, Kazakhstan and Turkmenistan, face a problem with exchange rates. Kazakhstan faces the problem of the appreciation of its currency, while Turkmenistan tries to rein in the depreciation of its currency. The countries use different approaches to assess and solve this problem.

NewsCentralAsia, a news agency that reflects official Turkmen views the Turkmen government, reported on 11 July that President Niyazov set in motion on 9 July "a series of steps to check the devaluation of the manat," the Turkmen currency, and "disciplined officials for lack of financial management." The agency quoted Niyazov as asking: "Who is to blame? The circulation of the manat is weak in Turkmenistan. Who is trying to devalue the manat?" While this outburst would appear at first glance to indicate that Niyazov is looking for an enemy to scapegoat for problems with the manat, it shows how the currency black market has become such an integral part of the national economy that even the president is concerned about its stability.

Several aspects of this issue require further clarification.. There are two exchange rates in Turkmenistan, an official and a black-market rate. The black-market rate is four times the official rate, making it a lucrative source of enrichment for high-level bureaucrats. The official rate does not depreciate, for it is a fixed rate strictly controlled by the president. The black-market exchange rate had also remained stable for the last several years at 22,000-23,000 manats to the dollar but, as NewsCentralAsia reported, the rate recently jumped to 24,500. This unanticipated development angered Niyazov and prompted him to action. "What I would like to say is that I have now proposed to the Ministry of Economy and Finance, the Central Bank, the sectors, and my deputies that they make proposals on how to improve the circulation of the manat and how we can increase its value," Niyazov told the 9 July cabinet meeting.

Turkmenistan's system of government sometimes allows for swift, simple solutions. According to NewsCentralAsia, within 24 hours of Niyazov's outburst, the manat had fallen to 22,800 to the dollar by 10 July, while the prices of some imported items also fell proportionally, "bringing most prices to the level of May 2004." Turkmenistan, of course, is very lucky to have a president who can resolve such complicated issues of microeconomic regulation with a single shout at his cabinet.

Meanwhile, Kazakhstan has a problem of the opposite nature: the national currency is appreciating. Indeed, the appreciation of the tenge could eventually cause serious problems, for an increased inflow of foreign currency from the export of energy resources would not only weaken the competitiveness of Kazakh industry, but also would bring about inflation.

President Nursultan Nazarbaev addressed the strengthening of the tenge at a cabinet meeting on economic performance in the first half of 2004, Interfax reported on 2 August. The report quoted Nazarbaev as saying: "We are facing a more expensive tenge, which may become another macroeconomic problem. In the first half of the year, the real exchange rate of the tenge against the basket of currencies strengthened by 5.8 percent.... If these tendencies persist, a gradual deterioration of the competitiveness of our industry may become a problem." He concluded that the Kazakh National Bank had already taken steps to sterilize foreign currency inflow by issuing government bonds, but this was not sufficient.

At the same meeting, Nazarbaev urged the government and the National Bank to accelerate their efforts to develop a working concept for the National Fund, laying out a framework for managing more than $10.5 billion in foreign assets. It was clear from the president's speech that changes are to be expected in credit policy, for Nazarbaev expressed concern over high credit rates and the monopolization of the banking sector by several banks.

Nazarbaev also said: "You always criticized the National Bank for dollarization, now one can observe de-dollarization. People move away from dollars to tenges more and more." Yet people prefer tenges to dollars because they have seen a strengthening of the currency over a long period. Against this backdrop, expectations rise that the dollar will depreciate further against the tenge, and, as a result, people avoid dollars.

Immediately after the president addressed the cabinet, Kazakh Prime Minister Daniyal Akhmetov held a news conference at which he emphasized additional measures to stabilize the tenge, stressing that the government intends to introduce reforms in the financial, insurance, and stock markets.

Kazinform reported on 6 August that National Bank Chairman Anvar Saidanov said that the National Bank will continue the policy of liberalizing the currency regime in the second part of the year, terminate restrictions on currency transactions, and continue the transition to the full convertibility of the tenge.

These two examples demonstrate different approaches and different levels of performance and governance in Central Asia. It clearly emerges that the Kazakh government is very serious about the problem of currency appreciation and is attacking this challenge from various angles in a manner consistent with the principles of a sound market economy, while in Turkmenistan one finds negligence and outright ignorance of economic realities.

The recent economic performance of Central Asian countries once again demonstrates that economic development in the region varies drastically. While Kazakhstan continues to face the challenges of a market economy, Turkmenistan suffers from severe problems of economic mismanagement.

(This article was written by Dr. Najia Badykova, a research associate at the Institute for European, Russian, and Eurasian Studies at George Washington University in Washington, D.C.)