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Uzbekistan and Russia Struggle for Leverage in Gas for Investment Deal

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On 5 April, President Shavkat Mirziyoyev and President Vladimir Putin both emerged from the Kremlin declaring the complete success of Mr. Mirziyoyev’s first trip to Russia, the crowning jewels of which are a series of trade and investment agreements totaling $15.8 billion and a framework for the joint development of Uzbekistani gas and oil reserves. It is likely, however, that when the two smiling leaders left the Kremlin they rejoiced with two very different understandings of the arrangement that these documents created. The statements made by President Putin on 5 April make it clear that he understood most of the investment promised to be focused on the profitable oil and gas sectors, with Uzbekistan receiving investment so that the quasi-private clique of bureaucrats and businessmen who control energy markets in Eurasia can make fortunes by opening Uzbekistani oil and gas fields up to the world market. President Mirziyoyev, on the other hand, has emphasized elements of the agreement focusing on development projects and Russian investment in unprofitable areas of the economy, like agriculture, basic infrastructure, and manufacturing. How this investment money is spent will set the tone for Uzbekistani development during the Mirziyoyev administration, as it will test the resolve of Uzbekistani government to prioritize long-term development planning over the parochial interests of domestic elites and against Russian pressure. While petrochemicals still make up the core of the deal, as well as recent Uzbekistani agreements with Beijing, how the billions of rubles remaining are spent comes down to the commitment of the Mirziyoyev government to guide Uzbekistan on its own path.

The 5 April deal between Russia and Uzbekistan has developed in the context of a progressive souring of relations between Turkmenistan and Russia since the death of Saparmurat Turkmenbashi (née Niyazov). Following the end of Turkmenistan’s self-imposed isolation from world politics in the mid-1990s, Gazprom had successfully negotiated several agreements with President Turkmenbashi allowing the Russian firm the right to sell Turkmen gas on the world market. Although often tense — with many Turkmen resenting their dependence on Russian markets — this relationship only began to seriously degrade upon the inauguration of President Gurbanguly Berdimuhamedov, who used the advancing threat of Chinese entrance into Central Asian energy markets as leverage with which to bully Gazprom into repeatedly raising the price at which it purchased Turkmen gas. By repeatedly threatening to withhold gas shipments, Turkmenistan managed to force the price per thousand cubic meters to $240, up from only $58 in 2005. With the unit price of natural gas from Turkmenistan now almost twice as high as imports from Uzbekistan, and no sign that Turkmen price-gouging will stop, Gazprom has been attempting to transition from Turkmen to Uzbekistani gas in recent years. The announcement by then-interim President Mirziyoyev in October that shares of Uzbekneftegaz will become available for purchase became the perfect opportunity for Gazprom — and to a far lesser extent Lukoil — to terminate their unhealthy relationship with Ashgabat.

Having had only marginal involvement in Uzbekistani oil and gas production since the end of the Soviet Union, however, Russia seems to be operating under the assumption that, because Uzbekistan is not known to use illegal breaches of contract as a bargaining tactic, the country will constitute an easier working environment. While many countries may sell their natural patrimony without second questions, Uzbekistan has typically not been one of these countries: the revenue generated from that small amount of gas and oil not reserved for domestic demand has been for the last two decades dedicated towards the industrialization and economic development of the country. It should be expected that Uzbekistan will exert its leverage over the situation ever bit as much as Turkmenistan has, making sure Uzbekistan receives the best possible long-term deal with Russia for its mineral wealth.

While the massive investment and trade package prepared during President Mirziyoyev’s visit to Moscow can be seen as the price for entry into the potentially lucrative Uzbekistani gas sector, the admixture of private corporations and Russian state organs whose capital will constitute the investment will maneuver their best to secure their position in the most profitable sectors of the Uzbekistani economy. It is likely that this will first and foremost mean that Russian actors will attempt to concentrate their investment in the oil and gas sectors, a profitable sector under normal circumstances and almost certain to undergo a rapid expansion as Uzbekistan replaces Turkmenistan as the second-most important energy market in Central Asia. With Uzbekneftegaz planning to implement $30.4 billion worth of projects, including a new gas processing facility, a new oil refinery, and the pipeline infrastructure needed to connect them to existing Russian and Kazakhstani networks, Russian companies will likely attempt to fulfill as much of their investment agreement as possible through financing these projects. The sale of shares in Uzbektelekom and the nation’s two largest mining operations also provide opportunities for investments with high profit returns. All of these industries, however, match their high investment profitability with a relative lack of engagement with the ‘real’ economy. While no part of the economy is more ‘real’ than another, telecommunications, mineral refinement, and petrochemicals are all sectors with low employment potential despite high capital returns. In a country where nearly a million people enter the labour market every year, pouring such a massive amount of money into sectors which do not produce large amounts of jobs is squandering a rare opportunity to significantly contribute to Uzbekistani development. Unfortunately, those economic sectors with the greatest potential to create well-paying jobs (i.e., agriculture, transportation infrastructure, basic manufacturing, etc.) are among the least profitable for investment, especially in a country with as high inflation as Uzbekistan. When a company can make a massive profit financing the construction of a new oil refinery, there is no incentive to break even (or worse) bankrolling new irrigation systems. If Uzbekistan is to make the most of this profound opportunity, it must intervene in investment and apply pressure to Russian firms so that money flows where it most benefits ordinary Uzbekistanis, not where it benefits Russian financiers.

Uzbekistan should bring to bear all the pressure it can on Russia to make sure that the investment deal tagged along to gas and oil exploitation serves to compensate Uzbekistan, not to additionally benefit Russian investors. The domination of state-owned enterprises and joint-stock companies — in the vast majority of which the Uzbekistani government still owns the controlling share — comes to Uzbekistan’s advantage in this situation, as the central government can tell its business subsidiaries to accept or refuse investment in certain sectors. The governing boards of most major businesses include at several presidential appointees, meaning that if a coordinated policy of channeling Russian investment into certain unprofitable, but highly beneficial, sectors is introduced, the Mirziyoyev administration could effectively shut investment out from many of the nation’s most profitable sectors by decree. With appropriate coordination, and pressure from the Uzbekistani government to invest in specific companies, the billions of available rubles could be used to modernize Uzbekistan’s chronically underdeveloped agricultural sector, promote the small-scale manufacturing needed to absorb a growing labour force, and finally repair the nation’s crumbling infrastructure. President Mirziyoyev appears to be attuned to these needs to some degree, proudly announcing on 5 April that he managed to secure Russian assistance in repairing the nation’s barely functional and unbelievably inefficient electric grid as part of the deal. This in itself is already a victory, since large segments of the Uzbekistani electricity grid have not been updated since the 1970s and entire areas of wiring are reaching the end of their life within the next 5 years; addressing the unreliability and high operating costs per kilowatt-hour of Uzbekistani electricity will greatly increase the ease of economic activity and daily life in the republic. This current investment package, as well as a similar deal secured from China, constitutes a rare opportunity to develop highly-productive, but consistently under-financed segments of the economy. Uzbekistan may not get another chance this decade.

Although President Mirziyoyev has demonstrated his nationalist credentials and a general intolerance of official corruption during his brief tenure in office, this investment deal will test the political will of the Mirziyoyev administration in the coming months. Many in government, especially cadres in the Ministry of Commerce and Investment, will want to compromise to Russian terms of investment, which will still result in sizable rents for those officials close to the deals. An essential problem in many developing countries is that the choice between the national good and personal interest comes all to often, and it is all too easy to walk the broad path of sin and national betrayal. There will be plentiful opportunities in the next year for officials to kowtow to corruption and secure for themselves massive rents and kickbacks in return for allowing Russian investment to follow inefficiently and to the advantage of the investor. Uzbekistan has had limited experience with foreign investment, largely because it has been so bad at managing what investment it attracted, so it is unclear if the Mirziyoyev administration will have the considerable backbone needed to remain firm in the shadow of untold private wealth and Russian pressure to accept profitable terms. We can only hope that the natural ma’naviyat of the Uzbekistani people will prevail over callow individualism.

 

Sources:

RFE/RL’s Uzbek Service. “Russian, Uzbek Presidents Sign $12 Billion In Investment Projects”. Radio Free Europe/ Radio Liberty, 5 Apr. 2017.

UzDaily. “NGMK, NBU and Uzbekistan Airways to be reorganized into JSC”. UzDaily.com, 24 Oct. 2016.

Azizov, Demir. “Uzbekistan to build oil pipeline to Kazakh border”. Trend News Agency, 3 May 2017.

Auyezov, Olzhas. “Uzbekistan starts construction of $2.2 billion oil refinery: report”. Reuters, 27 April 2017.

Aliyeva, Kamila. “Uzbekistan plans to realize oil & gas projects worth over $30B”. Azernews, 18 May 2017.

Kandiyoti, Rafael. “What price access to the open seas? The geopolitics of oil and gas transmission from the Trans-Caspian republics”. Central Asian Survey, vol.27, no.1 (2008): 75-93.

Dolaberidze, Dimitri. “Gas Diplomacy- Gazprom Brings in Uzbekistan, but Risks Losing Europe”. Georgia Today, 6 Feb. 2017.

Levit, Donald. “Russia’s Gazprom Set to Substitute Turkmenistan with Uzbekistan”. Economic Calendar, 29 Mar. 2016.

Phillips, Samuel. “Analysis of Central Asian Energy Issues”. Unpublished. August, 2015. (Contact author for copy of document).

Berardi, Nicoletta, and Federica Marzo. “The Elasticity of Poverty with Respect to Sectoral Growth in Africa”. The Review of Income and Wealth, Vol.63, No.1 (2017): 147-168.

Lewis, David. “Tackling Corruption in Uzbekistan: A white paper”. New York: Open Society Eurasia Program. 2016.

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Author: Sam

I study international relations and public policy at the University of Edinburgh. My research is focused on political systems and economic development in Post-Soviet states.

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