Title: Energy at the Center of 21st Century Geopolitics: Five Minutes with Russian and Central Asian Energy Policy Expert Thane Gustafson

GJIA: Energy has become the symbol of 21^st century geopolitics, with growing interest being drawn to Russia and Central Asia as suppliers of oil for Western countries. How would you characterize the current relationship between Russia, considered the energy superpower of the region, to the other Central Asian states, who hope to maximize on their natural resources and diversify their client base with respect to oil exports? What are the key points of tension in the geopolitical dynamic between Russia and Central Asia?

TG: I think the fundamentals of the relationship stem from the simple fact that these countries were part of a single political and economic space up until only 20 years ago. In the evolution of countries and geographies, and in particular with something like energy, 20 years is not much time at all. You’re talking about where resources are located, where pipelines have been built, where major points of consumption are. To give an illustration of that, in Soviet times, energy that was produced in the western part of Kazakhstan would then be shipped out of Kazakhstan and then processed and consumed in the neighboring Russian cities. Whereas in the northern part of Kazakhstan, they got their oil resources from a flow of crude that came down from Russian cities and then went down a pipeline through the middle of Kazakhstan and fed various refineries along the way. So you can see the interdependence that was inherited from the Soviet period.

There’s also a certain inheritance from this period in terms of institutions, specifically communist apparatus, and even human experience. When the Soviet Union collapsed, there were Russian ethnic majorities in almost all the capital cities of Central Asia. In fact, most of the leaders of Central Asia, even now, are the very same individuals who were the heads of the Communist parties during Soviet times. So you can see a sort of inertia that is built in and that translates into a continuing interdependence and also a habit of mind on the parts of the Russians in particular. This leads Moscow into thinking that pretty much automatically, and not with evil intent per say, that’s the way things are and always will be. On the other part, it leaves a sort of ambivalence on the parts of the Central Asian leaders because on one hand they want independence. They may not have wanted it in the beginning—history shows that most of them did not particularly want independence and it kind of burst over their heads. But now that independence is a fact, it is much better for them to be autonomous than to continue being dependent on what is now a foreign power—Russia.

So the search has been on in Central Asia for diversification, particularly diversification of outlets for oil and natural gas, since energy resources are so central to this region. Also we see desire for more autonomy with transmission of electricity, capital, management and all the rest. Diversification has certainly been a main aim of these Central Asian countries, but it has been easier for some over others. For Azerbaijan, it was pretty straightforward with some financing to get oil out by other than the traditional route to the north which ends up in Russia—so a lot of politics surrounding the Baku–Tbilisi–Ceyhan pipeline which gets oil out to Turkey and then to the Mediterranean. This is now an established outlet. That’s a route the Kazakhstanis can piggyback on simply by shipping oil across the Caspian Sea to Baku and then shipping through the BTC pipeline from there.

Another way out is by way of China. Initially, in the early 1990s, that seemed rather far-fetched and unlikely to happen any time soon. However, that’s happened remarkably fast and indeed in the area of natural gas, where pipelines are essential if you don’t have an ocean nearby, it has come as a bit of a shock to the Russians just how quickly the Chinese came to town in Turkmenistan in particular, which is effectively landlocked. The Russians were shocked by how quickly the Chinese began talks about building a gas pipelines that would take gas off the China through the West-East Gas pipeline. Amazingly, that happened almost overnight. The Russians were quite taken aback by that, they had extended a good amount of political and diplomatic capital to prevent natural gas from exiting Turkmenistan to the west and were even successful with preventing a pipeline through the Caspian, but they clearly have not had the same results with the pipeline to China.

GJIA: Is China a real threat to Russia’s dominance over Central Asia’s oil and gas reserves? What is your opinion on the growing economic and trade relations between China and Central Asia and what do you see as challenges to the relation, specifically with respect to some of the security concerns in the Central Asia region.

TG: I have a couple of observations that might be helpful with speculation about this aspect of international relations. First, it’s very easy to look at a map and say since China’s here and Russia’s here, there is rivalry and one is a threat to the other and so forth. I’m not sure that’s the way the Chinese see it at all and I have difficulty visualizing Central Asia as a battleground between two contending powers. Russia has historically turned westward and I think is actually is well-pleased to be rid of Central Asia as a burden or place to administer. The Russians will tell you that throughout the Soviet period, the state had to subsidize Central Asia. So I don’t think they really want to take over those places, but they would of course like to have access to the oil and the gas and they would like to be able to invest there. In that respect, they’re not unlike other countries that want the same things.

The same is true for China. After all, China is immense, most of their population is concentrated in the coastal regions and so Central Asia seems quite far from them. The idea of China sending troops is unlikely as these are areas are not areas China has historically had claim on. The Chinese realize these are Turkic areas, they know from some experience how hard it is to administer Turkic regions. So in terms of conventional great gains, I don’t think we’re talking about two empires that are contending for territory. Rather, I think they are both rivals for the resources of these areas. They’re pretty much in the position of investors anywhere that compete for access. That gives the Central Asian governments quite a bit of leverage to hold both off and play them off one another and do that with anyone else that comes along. That means that when someone does come along and put solders in the region, that’s a source of anxiety for everybody.

GJIA: In one of your recent articles published in the Foreign Affairs, you stated that, in the past two decades, Russia has coasted on an oil legacy inherited from Soviet days and that the assets of that era are now deteriorating. Could you further elaborate on this and discuss what you think are the ramifications of this are for the Russian state that has prided itself for reemerging as a superpower of sorts since the collapse of the Soviet Union because of its revenues from oil exports? 

First of all, I don’t think at this point Russia is a superpower and deep down I think the Russians recognize that, even if it’s difficult for them to deal with that fact – to be a former empire takes a lot of time to get used to. I would also say that it is probably more accurate to say oil and gas enabled Russia to survive the trauma of their post-Soviet period. As such it was very valuable to have oil as a legacy asset. Going on the main point of your question, oil and gas are like any other natural resource. They are wasting assets. You develop them, you develop the best deposits first and then you go on to the next tier of deposits, and so on. So overtime, the profits you get tend to decline. The cost goes up, the return is less. The only thing that can offset that is better technology or very determined and efficient management. But even those are just holding actions.

In any one province, there’s going to be a life cycle of discovery, development, peak and then decline. You then move on to the next province. In the Soviet history, there were three provinces and the Soviets were on their way to a fourth. The first was Baku and the Caspian. The second was the Volga-Ural in the 30s, 40s, and 50s, and which is still producing today. The third was west Siberia. That peaked in the 1980s and has been gradually heading downhill. The fourth province for Soviet planners was supposed to be the Caspian again, except this time offshore. So they were starting to explore that and starting to put money into the Tengiz Field, which is in what is now Kazakhstan. Of course history intervened and the Soviet Union broke up. So that fourth generation ended up being in foreign hands. The game plan for Russia was effectively disrupted. So now they’re moving on to what would logically be stage five and six – east Siberia and the Arctic offshore. That’s what they’re confronting now. The prospects of having to move to these areas, which are more remote, colder, and difficult, are therefore more costly. Thus, as you move from the legacy assets to the next generation, it’s going to be more costly. That means less profit for the investor and owner, namely the state and the industry. That’s the setting of the problem.

In the middle of all this, comes the tight oil from the United States, and suddenly for the Russians, tight oil in the United States raises the question about whether there could be a similar miracle in Russia—could there be a revival of the fields that were already under development, particularly in west Siberia and the Volga-Ural? In which case, if that were to pass, there would be no need to go on a crisis basis into East Siberia or above all the Arctic offshore. That’s the shape of the policy issue for Russia.

GJIA: Can you forecast any significant developments in U.S. – Central Asian relations over energy needs in the United States?

TG: I think the straightforward answer is that Central Asia is not critical to U.S. interests. It’s too far, etc. It seemed for a time as though the Caspian offshore was going to be a treasure trove of hydrocarbons and that did raise policy issues in the early 1990s. It looked as the southern half of the Caspian in particular would be rich in oil. That generated a great deal of excitement in Washington because the concern was that if there is all that oil in that part of the world, developing that oil would be adding to the amount of the oil that goes into the world economy that’s not from OPEC producers. From the standpoint of energy security this was, if not a huge factor, was still significant. On that basis, planners and diplomats got to work and the objective then was to ensure the oil would flow not towards Russia or Iran, but instead towards the West, and preferably as quickly as possible into an ocean. On those grounds, the Baku–Tbilisi–Ceyhan pipeline was created. But it turned out that the southern end of the Caspian was not that abundant in oil after all, despite the great deal of money spent towards this project. Instead ironically, the Caspian turned out to be extremely rich in oil resources, in the northern end rather than the southern end as previously suspected. So instead of having oil marching away from Russia, it’s been moving back into the hands of Russia and Kazakhstan.

In the present day, it’s definitely been on policy-makers minds in Washington because of logistical issues with respect to Afghanistan. At the same time, in Washington there is an interest in human rights and democracy, so we have been trying to persuade the Central Asians that democracy is the way to go. Clearly you have a bit of a conflict of interest if as ambassador to Farsistan you have to criticize the state for putting its opposition in jail and mistreating them, while also trying to extend your lease there for an air force base through which to supply your forces in Afghanistan. It’s been a bit of a challenge for our diplomats, but that conflict will abate somewhat with the end of our engagement in Afghanistan. That means we’ll be back to more of our default mode of relations in which the place does not matter to us all that much except as a secondary source of hydrocarbons. That’s where we’re really moving back to.

Dr. Gustafson is  Professor of Government and Co-Director of Undergraduate Studies at Georgetown University. His work focuses on domestic politics and policymaking in the former Soviet Union.  His latest book is Wheel of Fortune: the Battle for Oil and Power in Russia (2012).