Central Asia Is Leaning East Toward an Energy-Thirsty China

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Central Asian states are turning away from Russia and toward China as a market for their natural resources.

While Moscow’s attention is directed towards its western border, another geopolitical development is taking place in Central Asia, where a number of hydrocarbon-rich states are being openly courted by Beijing as they look to transition past their one-dimensional Soviet past. Once the sole purview of Moscow, the former Soviet Central Asian republics are beginning to slowly edge away from the Kremlin. Russia may still have deep strategic links with its southern neighbors, but China’s growing economic clout in the region and beyond may be enough to draw these inner-Asian countries out of Moscow’s permanent orbit.

China offers a host of economic opportunities for Central Asian countries looking to diversify away from their traditional post-Soviet trading partners. Chief among them is a lucrative market for sizeable deposits of hydrocarbons that have yet to be fully developed. Three of the five Central Asian countries — Kazakhstan, Turkmenistan and Uzbekistan — are key regional energy producers and have struck deals to begin sending fossil fuels eastward rather than to their traditional Russian destination.

China has expedited this process by beginning to develop a “New Silk Road” of transportation links to shuttle the increasing volume of commodities, primarily energy but also minerals and general goods that Central Asia has to offer. China is now the leading trade partner with every Central Asian country except Uzbekistan.

This is a recent development from Russia’s previous domination — Central Asia now accounts for only 4% of its foreign trade — due to China’s demand for natural resources and ability to export low-cost goods. China’s growing interest in the region was recently underlined when President Xi Jinping toured the area in 2013 in order to strengthen ties and facilitate increasing integration with its Eurasian partners through a number of high-profile bilateral deals.

Strong economic growth (7.7% in 2013) continues to fuel China’s expanding demand for energy resources. It is currently the largest energy consumer in the world and the second largest consumer of oil, importing 6.2 million barrels per day (bbl/d).

Additionally, as China moves away from coal (it accounts for nearly half of the global consumption of coal at 69% of its energy consumption), which has made it the largest producer of carbon emissions in the world, its natural gas imports (a woeful 5.2% of China’s energy mix in 2012) will continue to rise and provide a new source for electricity generation. However, China holds the third largest recoverable reserves of coal in the world – 13% – making coal a much cheaper energy source than imported natural gas.


 

 China imported 1.2% of its natural gas in 2012 and 9% of its crude oil supplies in 2013 from Russia, but the Kremlin recently signed a deal worth $350 billion to start sending more hydrocarbons eastward.


 

Beijing is also looking to gradually move away from relying on energy sources that come from the Persian Gulf, because 42% of its energy currently passes through the Strait of Hormuz. This would reduce its exposure to potential risk caused by instability in the Middle East and Iranian threats to close the strait at the same time as China is diversifying its energy suppliers and reducing overreliance on Southeast Asian sea-lanes.

A Soviet Hangover

Given the deep historical and cultural ties between Russia and Central Asia, it will be no easy task trying to strike a balance between two geopolitical giants. At the moment, however, China looks to be more interested in pursuing an economic relationship with Central Asia, not wishing to upset its own close ties with Russia. For reference, China imported 1.2% of its natural gas in 2012 and 9% of its crude oil supplies in 2013 from Russia, but the Kremlin recently signed a deal worth $350 billion to start sending more hydrocarbons eastward.

Central Asia is landlocked and thousands of miles from ready ports. Meanwhile, neighboring carbon-rich Russia and states in the Middle East have not provided the region with much leverage when negotiating energy prices. Currently, the majority of Central Asian energy passes through Russia using former Soviet infrastructure (the Central Asian Center system of gas pipelines, Caspian Pipeline Consortium, and Uzen-Atyrau-Samara Pipeline). As a consequence, Russia buys Central Asian energy at wholesale prices and then charges a transit fee while the energy is en-route to Europe, where it is sold at premium prices.

Russian-owned infrastructure has been one way the Kremlin has maintained its grip on Central Asian fossil fuels. For example, prior to recent infrastructure development, 70% of Turkmenistan’s gas left the country through Russian-held pipelines. However, this arrangement has become an area of disagreement between Central Asian leaders and the Kremlin, and has led some Eurasian states to begin looking for alternative routes to Europe and China. Proposed pipeline projects (The Trans-Anatolian Natural Gas Pipeline, Nabucoo Pipeline, the Trans-Adriatic Pipeline, and the Trans-Caspian Pipeline) that would bring Central Asian energy directly to profitable European markets have been frustrated by a lack of political will from the EU, which requires consensus before undertaking large projects, and by interference from Russia.

This has opened the door for China, which shares a long and contiguous border with a number of Central Asian states, specifically Tajikistan, Kyrgyzstan and Kazakhstan, to assist in the development of the requisite infrastructure needed to begin bringing higher volumes of hydrocarbons, primarily oil and gas, eastward.

Currently, the Russian-led Customs Union (officially the Eurasian Economic Community) can only count Kazakhstan and Belarus as members beyond Russia, but both Tajikistan and Kyrgyzstan, which rely heavily on remittances from Russia (close to 35% of Tajikistan’s GDP comes from remittances from its citizens in Russia), are slated to join in the near future. It remains to be seen whether full economic integration with Russia would affect each respective country’s bilateral relations with China.


 

The Kremlin, as evidenced by its recent annexation of Crimea, has a tendency to interfere with its neighbors’ internal politics, something China has promised to refrain from doing in Central Asia in line with its foreign policy of non-interference. This has helped China win support from the ageing strongmen in Central Asia who prefer nonintrusive partners.


 

Complicating matters even further is the fact that all the Central Asian republics are also members of the Commonwealth of Independent States (CIS) and the Collective Security Treaty Organization (CSTO), Russia’s regional alternatives to NATO. The majority of Central Asian republics maintain close diplomatic and military ties with Moscow, but the Kremlin’s influence has begun to wane as many Central Asian countries have begun pursuing their own interests on the heels of strong economic growth averaging 6% per year for the region.

This could be advantageous to Beijing, as Central Asian countries have shown their willingness to make energy deals without Russian approval (previous infrastructure systems forced reliance on Russian transport), most notably the construction of the Kazakhstan-China pipeline.

The Kremlin, as evidenced by its recent annexation of Crimea, has a tendency to interfere with its neighbors’ internal politics, something China has promised to refrain from doing in Central Asia in line with its foreign policy of non-interference. This has helped China win support from the ageing strongmen in Central Asia who prefer nonintrusive partners.

Moscow has made the mistake of abusing its relationship with its former republics by forcing them to sell energy at sub-market rates, enforced by the the existing infrastructure. This has had the reverse effect of pushing several states toward their thirsty eastern neighbor whose appetite for energy continues to grow at a break-neck pace.

The Beijing Connection 

Trade between China and Central Asia has leapt a hundredfold since the end of the Cold War, when diplomatic contact was reestablished, with a 13% increase between 2012 and 2013. This is largely due to the fact that trade was next-to nonexistent beyond the heavily fortified borders of Central Asia’s Soviet past and the People’s Republic of China. Now, increased economic integration is renewing the ancient Silk Road that once brought goods from the Mediterranean across Central Asia to China.

Turkmenistan is currently China’s largest supplier of natural gas, covering 52% of its needs in 2013. It also has the sixth largest natural gas reserves in the world (265 trillion cubic feet) and 600 million barrels of proven oil reserves. Turkmenistan has welcomed Chinese investment to update its painfully out-of-date infrastructure, helping to construct midstream capacity and investing in upstream projects such as the South Yolotan gas field. Due to poor petroleum quality, it only has one pipeline for exporting oil, which travels through Uzbekistan to a refinery in Kazakhstan, and only one for supplying gas to China — the Central Asia Gas Pipeline (CAGP) — but this has been enough to see its economy grow by 10.1% in 2013. The CAGP is expected to bring 40 bcm by 2014 and eventually the pipeline network is estimated to bring up to 40% of China’s total imported gas by 2020.

A recently constructed pipeline that travels to China from Kazakhstan is Khazakhstan’s first export route not to go to Russia. It has a capacity of 252,000 bbl/d of crude oil and is being expanded to increase its capacity to 400,000 bbl/d. Kazakhstan is also the region’s largest oil supplier to China, accounting for 4.9% of China’s total crude petroleum imports in 2013. It also has the second largest oil reserves of any former Soviet republic, after Russia. Currently two oil fields, Tengiz and Karachagnak, account for half of Khazakhstan’s production.

The Kashagan oil field in the Caspian Sea contains 13 billion proven barrels of oil and is the fifth largest field in the world by reserves according to the US Energy Information Administration. After eight years, the field finally began producing in 2013 and is expected to contribute heavily to Kazakhstan’s future energy exports. During his tour of the region, Xi Jinping promised to invest $30 billion in energy and transportation projects in Kazakhstan, which wants to exploit its reserves to become a top ten petroleum producer in the future.


 

Growing trade with China will bring a welcome change of pace to an isolated region in the heart of Asia that will certainly benefit from diversified trade links and greater direct investment.


 

Mr. Xi also promised Uzbekistan, the region’s second largest natural gas producer, $15 billion of direct investment in its energy industry. Both Uzbekistan and Kyrgyzstan can play vital transit roles in moving goods into China, while potential for significant hydropower generation exists in both Tajikistan and Kyrgyzstan. The China National Petroleum Corporation (CNPC) has already begun the process of modernizing local distribution networks and building additional pipelines to draw energy out of Central Asia to feed thirsty consumers at home. Trade between China and Central Asia has surpassed Russia in all but Uzbekistan, reaching $46 billion in 2012, and looks to continue to rise along with China’s growing influence in the region.

China’s own prioritized engagement with Central Asia has been dubbed “marching west,” by Wang Jisi, one of China’s most influential thinkers in international affairs. In an October 2012 piece for the Global Times, he developed this concept as an alternative to China’s fractious political and economic engagement in eastern Asia.

By connecting to the Eurasian hinterlands, China hopes to develop its isolated western provinces while Central Asia can enjoy the spill-over from China’s continued economic growth. China also hopes that collaboration through the Shanghai Cooperation Organization (SCO), of which all Central Asian countries with the exception of Turkmenistan are members, will help combat Islamic extremism, notably Uighur separatists in its restive Xinjiang province.

In the end, the situation in Central Asia is not as clear-cut as a “Rising China, Sinking Russia” mantra purports it to be. The security ties between Moscow and Central Asia run deep and none of these inner-Asian states would be willing to risk losing Russia’s patronage over ties with Beijing. A shared Soviet past also means that Central Asia has far closer cultural and linguistic bonds with their northern neighbor, in addition to large populations of ethnic Russians (25% in Kazakhstan and 9% in Kyrgyzstan). However, there is fertile ground for long-term engagement between China and Central Asia and continued growth of cross border trade.

Central Asian republics need to balance their deep relationship with Russia with their growing links with China. To do this,cooperation should be Central Asia’s way forward. Moscow, which is also closely aligned with China, would be hard-pressed to upset the regional balance, even if it is shifting slightly in an easterly direction, and risk losing a valuable ally and customer in China.

Nonetheless, few of the Central Asian leaders will forget that the sun always rises in the east. Growing trade with China will bring a welcome change of pace to an isolated region in the heart of Asia that will certainly benefit from diversified trade links and greater direct investment.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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