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UZBEKISTAN - The Geo-Political Perspective.

Kremlin control over Central Asian energy reached the point that in late 2005, Russia felt secure in imposing dramatic price increases on its CIS neighbours, including Ukraine, Georgia and Armenia. A subsequent pricing dispute with Ukraine prompted Russia to temporarily halt the energy flow in early 2006. Central Asian governments are not happy with existing arrangements, however, and are turning to China in order to break Russia's pipeline monopoly.

A 1,000-km crude oil pipeline linking Kazakhstan to China, opened last December, began supplying the world's second energy market more recently and is Central Asia's first export route not to cross Russian territory (see omt6KazakhExprt-Aug7-06).

The authoritarian rulers of Kazakhstan, Turkmenistan and Uzbekistan are studying the viability of having more pipelines to parallel the Kazakh-Chinese route. The US-proposed trans-Caspian corridor for oil and gas pipelines, which would enable Central Asian energy to hook up with Azerbaijani-Turkish routes, could further weaken Russia's grip on regional exports (see omt19TurkTradeMay8-06, and gmt19TurkpipelinesMay8-06).

Russia's designs in this part of the world are connected with the Kremlin's global economic strategy which depends much on access to Central Asian energy. This source is far cheaper to extract than Russia's; it uses it for local consumption - which is heavily subsidised - while shipping Siberian production abroad. The ensuing price manipulation is the source of enormous income helping sustain the Kremlin and Russia's economy.

Loss of control over Central Asian energy exports would severely damage Russia's political and economic interests. If Central Asian states start pumping oil and gas to China and Azerbaijan, Russia would have to use its own production to meet domestic needs. This, in turn, would dash Moscow's export plans for Europe and Asia.

Washington is exerting pressure on Kazakhstan, Turkmenistan and Uzbekistan to make a firm commitment to a trans-Caspian energy corridor, which to the Uzbeks means gas exports to West Europe. But Uzbekistan now is closer to Russia than to the US/West Europe in geo-political terms, and the regime is still resisting Washington's pressure to open up to opposition. Should Central Asia achieve energy independence with outside help, Russia would quickly come under pressure to reform its domestic economy, especially the energy sector, so that it could better compete in a free trade environment; it could even reverse President Vladimir Putin's re-centralisation of power in Russia.

One factor making the Central Asian energy game unpredictable, however, is the brittle nature of the regimes in Uzbekistan and Turkmenistan. Both are ruled by despots - Islam Karimov in Uzbekistan and Saparmurat Niyazov in Turkmenistan - reliant on widespread use of repression to maintain their authority. But the lack of a political succession mechanism in both states could spark upheaval in the event of Karimov's and Niyazov's deaths. Disorder in either country - especially in Uzbekistan, Central Asia's most populous state - could engulf the entire region. If such a scenario occurs, Central Asia's export ability could be impaired and the major energy players - the US, EU, Russia and China - could big losers.
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Publication:APS Review Oil Market Trends
Date:Oct 9, 2006
Previous Article:UZBEKISTAN - Part 1 - The Prospects.
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