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Sunday, January 22, 2006

OIL POLITICS WEEKLY: TAKING CARE OF KARIMOV: A NOT SO TACIT AGREEMENT WITH GAZPROM

Russian daily Kommersant reported last week that Uzbek President Islam Karimov has promised gas production and transit deals to Russia in exchange for protection from his many political adversaries. While it seems at first curious for Uzbekistan to seek military protection from a gas company, it reflects a new reality in Russia –that Russia and its largest company have become one.

THE DEAL

Gazprom’s chairman Alexi Miller arrived in Tashkent on January 19th to consummate the gas deal. The production sharing agreement will give Gazprom development rights over the three largest gas deposits in Uzbekistan, Urga, Kuanysh and the Akchalakskoe group. The three fields have an estimated 61 billion cubic feet of gas and 90 million barrels of condensate. Under the agreement, Gazprom will increase exports from Uzbekistan to Russia from 5 to 6 billion cubic meters per year to 17 to 18 billion cubic meters per year once the fields are fully developed. Uzbekistan, Central Asia’s largest gas producer, has reserves of 66 trillion cubic feet and produced 2 trillion cubic feet in 2003. The country produces natural gas from 52 fields in 12 major deposits primarily in the southwest region of the country.

In exchange for the gas deal, which further ties Uzbekistan’s already intertwined energy and economic infrastructure to Russia, Uzbekistan wants protection. In May of last year armed civilians stormed the city prison in the Fergana Valley city of Andijan and took over the regional administration building in the city’s main square, throwing the country and its leadership into crisis. Uzbek President Islam Karimov responded with force, ordering troops to open fire on the protesters, killing 8 and injuring 34. While the uprising was primarily the result of a rivalry between Andijan and other Fergana Valley clans and the Samarkand-Tashkent clans led by Karimov, officials in the Uzbek Interior Ministry reportedly believed that the uprising was in part orchestrated by the United States as a warning to Karimov that he should step down or face more armed uprisings elsewhere in the country.

LESSONS LEARNED

Karimov’s decision to open fire on the protesters was the direct result of lessons learned in the uprisings that vanquished the rulers of Georgia, Ukraine, and Kyrgyzstan. In those conflicts the order to use force against protesters never came, which further emboldened opposition leaders and ultimately led to regime change. While the Uzbek uprising was not as clearly inspired by pro-Western forces –Karimov’s detractors are a patchwork of legitimate businessmen, mafia controlled drug traffickers, regional political officials, reform-minded political activists, and Islamists—the real threat was significant, and the perceived threat even greater.

Karimov’s response in the months following the uprising was swift and total. Two weeks following the end of violence, Karimov moved to solidify the support of China, the only major power not to criticize Karimov’s crackdown. Chinese President Hu Jintao spent three days in Tashkent, signing a series of security, energy, and economic agreements. Both leaders fear the influence of Islamist groups, particularly the Islamic Movement of Turkistan, which is active throughout the region.

In early June, Karimov restructured Uzbek security forces, concentrating its power under trusted political allies. Troops previously under command of the Interior Ministry were transferred to the control of the Defense Ministry and the National Security Service, the country’s successor to the Soviet KGB. One month later, Tashkent banned U.S. troops and warplanes from the Karshi-Khanabad air base, effectively ending military cooperation between the two countries.

In October, Uzbek Security forces ransacked the headquarters of the Sunshine Coalition, a moderate Uzbek opposition group, and detained its leader, Sanjar Umarov, on charges of embezzlement and other unspecified financial misdeeds. Umarov, a prominent businessman, had visited the United States in September, meeting with senior Bush administration officials. In December, Nodira Khidayatova, another leader of the Sunshine Coalition, was arrested at the airport in Tashkent on allegations of tax evasion. Her brother-in-law, Orifjan Oydin, also a member of the group, had been shot and killed by unidentified gunmen the week before.

ENTER RUSSIA AND MEDVEDEV

While Russia was silent at the outbreak of the Andijan violence –it was an ‘internal problem,’ Moscow said—it later joined the West in calling for an investigation into the crackdown. This cooled Uzbek relations with Russia for a time. Once the international heat on Karimov subsided, however, relations quickly improved. In late October Uzbekistan announced its intention to join the Russia-led Collective Security Treaty Organization (CSTO), comprised of Russia, Belarus, Armenia, Kazakhstan, Kyrgyzstan and Tajikistan. Sources in the Uzbek government said on Oct. 26 that Uzbekistan was set to rejoin the security minded organization –it had been a charter member in 1992, but withdrew in 1999—in early 2006.

For Tashkent, membership in the organization will add an explicit security guarantee to the increased economic integration afforded by the Central Asian Cooperation Organization (CACO). Also Russia-led, the organization is comprised of Russia, Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistan. The CACO held a summit in St. Petersburg, Russia on October 6-7, inaugurating the Central Asian Common Market.

It now appears, however, that these strategic moves are not quite enough to satisfy the ever-fearful Karimov. Hence the gas deal and the odd request of Gazprom for protection. What makes Karimov so sure, all of a sudden, that Gazprom can make such guarantees? It has much to do with the ascension of Dmitry Medvedev, chairman of Gazprom, to the post of first deputy prime minister of Russia. He will also retain his position at Gazprom, making the already strategically placed company even more so. The joint appointments make Medvedev arguably the second most powerful man in Russia.

This added layer of protection for Karimov will not come cheaply. Russia will pay only $60 per one thousand cubic meters of Uzbek gas and pay a transit price of just $1.10 per 1000 cubic meters per 100 kilometers. Russia will then sell those very same supplies and prices at twice or more of that rate. Even ill-fated Ukraine will be getting its share of Uzbek gas from Russia at $95 per 1000 cubic meters and will receive a transit tariff of 1.60 per 1000 cubic meters per 100 kilometers. Not a bad deal for the Russia.

CONCLUSION

Russian President Vladimir Putin visited Uzbekistan last November to sign an “alliance” agreement which, according to some rumors, includes a military base for Russia in Uzbekistan. The text of the treaty states that “in order to ensure security and maintain peace and stability, the countries will grant each other the right to use military facilities located on their territories should it prove necessary.” While the scope of cooperation and the circumstances under which Russian troops might take up permanent post in Uzbekistan were left unclear, the implication is obvious. Russia will be Karimov’s guarantor, at least as long as it feels that Karimov’s survival is in Russia’s best interest.

Also unclear is what the quid pro quo with Gazprom adds to the alliance guarantee. The gas deal may simply be the quo to the quid provided in the November alliance agreement. Or it may be an attempt on Karimov’s part to win over the support of newly appointed Medvedev. Regardless, the deal with Gazprom further entrenches Russia’s interests in the Karimov regime, which, as far as Karimov is concerned, is worth the heavy price.

A new era of oil and gas politics has dawned in Russia. The significant re-nationalization of the oil industry over the past year and the ascension of Medvedev to one of Russia’s most powerful positions will tie Russia’s energy policy ever tighter to its foreign policy. The increased politicization of Gazprom became clear during the Russian conflict with Ukraine over gas prices, coming just weeks after Medvedev’s appointment. Medvedev used Gazprom to play geopolitical hardball and won. The gas for protection deal with Karimov and Uzbekistan follows in its footsteps. With Gazprom’s chairman at the right hand of the Russian president, a deal with one is tantamount to a deal with the other.

2 Comments:

At 8:39 AM, Blogger David Amulet said...

Nice article. I'm curious about Medvedev--his connections and his likely future. Maybe a future post?

-- david

 
At 6:48 PM, Blogger David W. Martin said...

Thanks for the response -and for the good question. Russian press is rife with speculation about who will take Putin's place. Medvedev or Sergi Ivanov, who was appointed at the same time as Medvedev to the other Deputy Prime Minister slot. Medvedev is more like Putin in his politics (a cautious reformer with a healthy respect for markets when they serve the right ends); Ivanov is the champion of the siloviki (the miliatry/former KGB constituency at the Kremlin). While Putin would likely prefer Medvedev to Ivanov, the former, unlike Ivanov, does not have a natural constituency in the electorate. Perhaps a few more high profile gas gambits and he will gain one . . .

 

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