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28 November 2016

Will Turkmenistan give up neutrality in favor of Gazprom?

A question that would have been unimaginable under Niyazov

Leaders of Asian post-Soviet countries generally agree to meet with the Russian president with pleasure. To be invited to Moscow for grand events or bilateral negotiations is considered an honor. Turkmen leaders Saparmurat Niyazov, and his successor Gurbanguly Berdimuhamedov, were the exceptions to the rule in the early 2000s. Very seldom were they guests in Moscow, and as a rule, any top-level meetings with Russian leaders took place on the sidelines at international summits. The foreign policy of Ashgabat, which boasts of immense gas reserves (it ranks 4th in the world) and strives to maintain neutrality, has been at odds with integration processes launched by the Kremlin in the post-Soviet space. It therefore came as a surprise when the Turkmen president, whose last visit to Moscow was in 2011, accepted Vladimir Putin’s invitation to visit Sochi in early November.

A downward spiral had been observable in relations between Russia and Turkmenistan throughout the twenty five years prior relations fizzled out completely. The volume of trade turnover between Russia and Turkmenistan (0.9 billion dollars in 2015) is among the lowest of all post-Soviet states. Ashgabat has still not initialed the CIS statute having decided instead to merely become an associate member. The Turkmen authorities have given other associations between former Soviet republics (CSTO, EurAsEc) a wide berth. Toward the end of the rule of Saparmurat Niyazov, who died in 2006, it seemed that Russia had washed its hands of Turkmenistan altogether despite the fact that, on the face of it, Moscow still held some influence over Ashgabat.

Having taken a tack towards self-isolation, the regime of Turkmenbashi waived goodbye to Russian military personnel who protected Turkmenistan’s borders with Iran and Afghanistan in the first years of its independence. Ashgabat simply ignored the 1993 Agreement on the settlement of issues of dual citizenship which lapsed in 2015, and restricted the rights of citizens with dual nationality in numerous ways, limiting their freedom of movement, and forcing them to turn in their Russian passports. Recurrent appeals to the Russian authorities for help tended to result in no more than concerns being aired at Smolenskaya Square over the situation of Russian-speaking citizens of Turkmenistan. The Kremlin drew the line at entering into squabbles with Ashgabat, since the countries enjoyed mutual benefits thanks to extensive cooperation on oil and gas industry issues (revenue from energy commodities accounts for nearly 85% of Turkmenistan’s total export revenue).

Russia used to buy approximately 40 billion cubic meters of gas per annum from Turkmenistan prior to 2009, virtually its entire export quota. Moscow, in turn, resold this gas to Ukraine and Western European countries. Russia acquired the gas at the fixed price of 240 dollars per one thousand cubic meters. Following the slump in oil prices in late 2008 (and gas prices have a direct correlation to oil prices), Gazprom suggested the agreement with Ashgabat be revisited as the former tariff was inequitable. The Turkmen gas companies responded by accusing the Russians of violating existing covenants.

If Russia is to be believed, following an accident at one of the sections of the Central Asia–Center gas pipeline, it vastly reduced the volume of gas it purchased from Turkmenistan in spring 2009. Contrarily, according to Ashgabat, the reduction in the volume of local gas pumped by Gazexport (Gazprom’s subsidiary) was the very cause of the accident which posed “a real threat to human life and health” as Russia neglected to notify the Turkmen authorities before unilaterally reducing the volume of gas it received. Consequently, the supply of gas was discontinued.

The dispute was resolved as late as in January 2010, however, Russia cut the volume of purchased Turkmen commodity to as little as a quarter against the backdrop of the global recession brought on by the 2008-2009 financial crisis. In 2013, the volume of purchased gas fell to 11-12 billion cubic meters and had shrank to 4 billion by 2015. Hence, Ashgabat began to seek out an alternative, more lucrative sales market before, predictably, singling out China.

The main gas pipeline which connected the Turkmen gas fields of South Yoloten-Osman and Dauletabad with the Celestial Empire was launched back in 2009. In 2014, the People’s Republic of China received 25 billion cubic meters of Turkmen gas via this major pipeline. Volume is set to reach 65 billion by 2020. At the same time, Ashgabat is seeking to bypass Russia by exploiting western export opportunities in Europe via the Trans-Caspian Gas Pipeline which, if constructed, will connect the Turkmen Caspian coast with Azerbaijan. However, this project still exists on paper only, and given the instability of the global hydrocarbons market, the uncertainty surrounding the status of the Caspian sea as well as the ongoing disputes between Baku and Ashgabat over the Caspian shelf deposits, it will remain so for some time.

The downturn in the hydrocarbons market continues and yet Turkmenistan remains loath to cut prices. Gazprom unilaterally discontinued a 25-year contract for the purchase of Turkmen gas in early 2016 having accused Ashgabat of having adopted an “unconstructive approach” toward pricing. Consequently, relations between Turkmenistan and Russia are now at their lowest ebb since the fall of the Soviet Union.

Ashgabat has found itself in the hot seat as Turkmenistan receives as little as one third of the total payment from China in exchange for exported gas in hard cash. The lion’s share of payments for the supply of gas is used to repay Chinese loans. Of all of the Central Asian countries, China finances Turkmenistan (and Kazakhstan) to the greatest extent. Interestingly, the Turkmens have grown used loans from the PRC under Berdimuhamedov’s reign as debt owed to China was not incurred on such a scale under Turkmenbashi. China offered Ashgabat 300 million dollars for the reconstruction of the Maryazot enterprise and for the construction of a glass manufacturing plant in 2007. Beijing approved the allocation of 4 billion dollars for the development of the Galkynysh Gas Field in 2009. Another 4.1 billion dollars was earmarked for the same purpose in 2011. A further loan was granted in 2013, but the value of which remains a secret.

Debt reimbursement in the form of gas has led to a huge foreign currency deficit in Turkmenistan which receives no cash from abroad. Apparently, vouchers for the purchase of foreign currency have been in use since 2015, foreign exchange offices have closed and the dollar has soared against the Turkmen manat.

Finally, economic turmoil is accompanied by an aggravation of the situation on the southern border of Turkmenistan: A number of clashes with Islamist groups occurred on the Afghan border in 2015-2016. It is difficult to assess the scale of these incidents in the light of the media censorship in the country. In any case, the southern border of Turkmenistan is somewhat of a troubled area, targeted by both Taliban and IS militants.

Taking into account the above, Gurbanguly Berdimuhamedov’s visit to Sochi does not come as a surprise. Although Gurbanguly Berdimuhamedov was officially invited by Putin, the meeting had been initiated by the Turkmen side following a decision to put an end to its many years of self-imposed isolation. Minister of Foreign Affairs of the RF Sergey Lavrov visited Ashgabat in January of this year but it was difficult to imagine at the time that this futile meeting, which took place amidst the gas conflict, would yield anything concrete.

The statement of Deputy Chairman of the Management Board of Gazprom Alexander Medvedev is seemingly of greater pertinence. He announced in September that the Russian claim against the Turkmen gas suppliers had been suspended and that the parties would meet around the negotiation table (Gazprom filed a complaint against Turkmengaz at the Arbitration Institute of the Stockholm Chamber of Commerce in 2015, demanding a revision of prices, but was eventually accused of failing to pay for supplied gas and was later declared insolvent). The topic of gas most probably dominated the agenda of the meeting between the presidents, although the heads of state displayed their preference for discussing more generic issues during the part of the meeting open to journalists with Berdimuhamedov limiting the discourse to issues concerning cultural cooperation.

Gazprom harbors no interest in purchasing gas at previous volumes even at a knocked-down price as the company’s financial well-being is anything but sound as the downturn in the gas market continues. If there was something that could pique the interest of a Russian monopolist, it would be local gas grids. As a shareholder in such a grid, Gazprom could become a serious player on the regional market which spans not only Central Asia but also Afghanistan and Pakistan. It is expected that the TAPI gas pipeline (the Turkmenistan-Afghanistan-Pakistan-India Pipeline) will connect the aforementioned countries with Turkmenistan in 2017. So far, Russia has played no part in talks concerning the project. Gazprom became a gas grid operator in Kyrgyzstan in 2014 but the Turkmen have so far passed up on letting foreigners anywhere near their main pipelines. Turkmengaz, wholly owned by the government, manages the main lines.

Apart from the gas sector, the second promising area of cooperation is in the field of security which means that Ashgabat will be forced to make concessions as regards non-interference of other states in Turkmenistan’s internal affairs. Should the situation on the Afghan border derail and Ashgabat be forced to seek assistance from abroad, Russia will be on hand to offer help, and Berdimuhamedov’s visit to Sochi could be construed as the first evidence of such. This will automatically strengthen Russia’s position not only at the borders between Turkmenistan, Afghanistan, Iran and Uzbekistan but also throughout the entire trans-Caspian region.

As of today, the aforementioned remains merely conjecture since no official statements have been made regarding the outcome of face-to-face negotiation between the presidents. We could hear more about the results of the meeting after the Global Sustainable Transport Conference organized under the auspices of the UN in Ashgabat last weekend. Having invited Putin to this event, the President of Turkmenistan specified that Russia’s attendance will provide a stimulus to the development of transport transit corridors “not only in Central Asia but also in the south-eastern direction”, that is in the direction of Afghanistan, Pakistan and India. Gazprom could gain access to these three countries with the help of Turkmenistan, if everything goes according to the company’s plan.

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