Tajikistan's porous southern border

Heroin producers in Afghanistan, some of the principal financiers of Al Qaeda and other terrorist groups, have never before been so brazen or so wealthy.

With a bumper crop of opium poppies under cultivation, Afghan narco-barons have begun stamping their brand names on the 2.2-pound bags of heroin they smuggle out of central Asia to buyers in Moscow, London, New York and Amsterdam, the Netherlands.

Sacks of high-quality Afghan heroin seized last week in Tajikistan carried the trademarks Super Power and 555. Some of the sacks, which were hidden inside foil-lined containers of instant cappuccino mix, even included the addresses of the labs in Afghanistan where the heroin had been refined.

from: Detroit Free Press

One of the major drug-smuggling routes to Europe leads through Afghanistan's northern neighbour Tajikistan. Shattered by a bloody civil war from 1992 until 1997, it is today the poorest of the Central Asian states, with a GDP per capita of only $1,300 (purchasing power). The more than 10,000-strong force that protects the border to Afghanistan and directly reports to Moscow is part of a larger CIS peace-keeping unit deployed on Tajik soil after a peacy treaty came into force. 'It has primary responsibility for guarding the border with Afghanistan. It consists mostly of Tajiks with some Russians and a limited number of other Central Asians, although the officer corps remains principally Russian' (globalsecurity.org).

After the Taliban had been defeated in late 2001, opium production skyrocketed and even surpassed pre-war peak levels the following year. UN programs to reward peasants for not producing poppy even led to higher yields than before, Lutz reported:

In early 2002, the UN mission in Kabul announced an action plan to combat the opium problem: Poppy farmers who voluntarily agreed to their fields being burned would receive 1750 dollars per hectare in compensation. So-called “eradication teams” swarmed out into the provinces, protected by British elite soldiers. But the plan backfired. “When the farmers heard that the UN would not punish them but instead practically wanted to buy poppy plants from them, they grew us much as they could,” a local NGO employee tells me. “The whole of Badakhshan was covered with one red poppy carpet, even in gardens and on the roofs of houses.” Although the promised compensation was only a fraction of what a farmer could earn by selling a hectare’s worth of opium but frequently the predominantly Afghan members of the UN teams were open to bribery. The trick was to collect money twice: a farmer who had one acre of poppy plants destroyed would claim damage compensation for four hectares. In return for a juicy share of the additional compensation, UN workers were prepared to condone the fraud. (full article)

One main question still remains: If Tajikistan is the major trafficking route for drugs, how can smugglers overcome the 10,000-strong border force then? What is more, how can drugs be safely transported on such a huge scale, taking into account that Afghanistan is the world's largest opium producer? In 2002, the country produced 3,400 tons of opium and provided about 90% of the heroin consumed in the UK. The trafficking routes have changed considerably over the last year. The UN estimates that today Central Asia is the region through which 65% of the Opiates pass, Tajikistan clearly being the major northern route. You can put one and one together: Surely more than 1,000 tons of opium pass the Afghan-Tajik border each year. Last year, border guards 'confiscated 9.5 tons of drugs' (RFE). So, why is only such a tiny percentage being found?

The question whether the Russian Border Guard Force (RBF) is involved in trafficking is obsolete. Rather, the question has to be: To which extent does this happen and, more importantly, up to which level do authorities know about it?

"We've seen evidence that the Russian military, and at a high level, has been involved in the Central Asian drug trade, if not by any other factor [than] by the size of this transport from Central Asia through Russia or the former Soviet Union," Niklas Swanstrom (head of the program for Contemporary Silk Road Studies at Sweden's Uppsala University) said. "It can only be transported by trucks, private planes, or military aircraft -- and military aircraft seems to be a big factor in this. And that can only be organized by senior officers."

Lutz found out similar things:
...“Smuggling is easy: with donkeys or jeeps you take the stuff to the commanders near the border,” says Qadir, after locking the door. They would then get in touch with their accomplices on the Tajik side: Russian officers. Both parties arrange a suitable time and place for an undisturbed exchange of drugs and money, Qadir reports. He knows of occasional problems with young Russian officers who are still over-zealous and incorruptible. “But most of them change their mind after some time. Then only those smugglers who do not ‘officially’ declare a transport risk getting caught by the Russian border guards,” Qadir tells me. “Usually, the Russians kill those ‘uncooperative’ smugglers, as a warning to others.”

A main problem within the border troops seem to be ethnic Tajiks: "I think when you're talking about the kinds of salaries that people are paid -- although they're better in the Russian border guards than in the Tajik border guards -- and the temptations for the trade, as well as the ethnic ties across the border, you will inevitably have people who are in positions in the law enforcement area that will be tempted to do this", says James Callahan of the UN Office on Drugs and Crime in Central Asia. However, there are isolated cases of Russian collaboration, reports Radio Free Europe.

As a result, the increased drug trafficking has costly side effects for the Tajik society. Bringing the drugs across the border is one thing. But to transport them all the way to Europe requires a network which can't surpass society without making an impact. On the heroin's journey, it leaves the seeds of criminalisation. It creates vertical corruption networks and an infrastructure with which not only drugs can be trafficked (arms, money, humans, etc.). In addition, drug trafficking leads to levels of addiction, which we Europeans have never seen in our capitals. 'Tajikistan's health ministry recently announced the country has 6,671 drug addicts but the unofficial figure is at least 15 times higher, according to Andre Onishenko, director of the Tajik Narcological Hospital' (Aegis)
"You only have to ask a couple of your friends and they know where you can go" says one young Tajik in a matter-of-fact tone (BBC).

Central Asian governments could have a look at Iran in order to analyse the problems they could face within some years time. A dose of heroin in Tehran's streets is sometimes cheaper than a bottle of milk. About 70% of all prisoners are believed to be jailed for drug abuse or trafficking. Drug-trafficking does not only cause security concerns, it also has a huge social impact. In societies with difficult economic circumstances, where the young generation is bereft of its right to work, drugs have it easy. People take drugs in order to forget.

Elena's Motorcyle Ride through Chernobyl

Although this does not have anything to do with Central Asia, I thought it might be worth putting up. Elena, a Ukrainian bike-rider, has made a photo-documentary about her favourite destination, the Chernobyl death-zone - which became a 'no-go' area after the fatal accident in 1986. The website was reviewed quite often in Germany, however, I don't know whether it found attention over here. It showcases breathtaking insights from the inner circle - a place where life suddenly came to an end. A visit to the website is highly recommended, though it leaves you with a strange feeling in your stomach.

From the website:

I travel a lot and one of my favorite destinations leads North from Kiev, towards so called Chernobyl "dead zone", which is 130kms from my home. Why my favorite? Because one can take long rides there on empty roads.

The people there all left and nature is blooming. There are beautiful woods and lakes.

In places where roads have not been travelled by trucks or army vehicles, they are in the same condition they were 20 years ago - except for an occasional blade of grass that discovered a crack to spring through. Time does not ruin roads, so they may stay this way until they can be opened to normal traffic again........ a few centuries from now.

As I pass through the check point, I feel that I have entered an unreal world. In the dead zone, the silence of the villages, roads, and woods seem to tell something at me....something that I strain to hear....something that attracts and repels me both at the same time. It is divinely eerie - like stepping into that Salvador Dali painting with the dripping clocks.

- Visit the website

Aitmatow

Der Sommer rückt näher, und mit ihm auch mein Aufenthalt in der Heimat Tschingis Aitmatows. Meine Professorin zeigte sich optimistisch, dass es mit einem Interview klappen könnte, deshalb würde ich gerne das Medium hier nutzen, um die Person ein wenig näher vorzustellen. Nicht alle sind mit dem Namen des Autors vertraut und auch ich muss zugeben, dass mich eine Freundin erst kürzlich auf ihn gebracht hat. Kurz vor meiner Abreise nach London gab sie mir die wundervolle Liebesgeschichte 'Dschamila' mit auf den Weg. Danach rüsteten mich meine Eltern mit weiteren Büchern aus - haben sie doch fast alles von ihm gelesen, was es gibt. Also, Vorhang auf für einen kleinen biografischen Diskurs.

Diese biografischen Zeilen stammen vom Unionsverlag Zürich, wo Aitmatow alle seine ins Deutsche übersetzten Werke veröffentlicht.

Tschingis Aitmatow wird 1928 im Dorf Scheker im Talas-Tal in Kirgisien geboren. Seiner Großmutter hat er einen reichen Schatz an Märchen, alten Liedern, Dichtungen und Wahrheiten zu verdanken, immer wieder nimmt sie ihn zu den Sommerlagern der Nomaden mit. 1935 zieht die Familie Aitmatow nach Moskau um, wo Tschingis zur Schule geht. Sein Vater war einer der ersten kirgisischen Kommunisten auf leitendem Posten und interessierte sich lebhaft für Kultur und Literatur. Auch seine Mutter war eine gebildete und aufgeschlossene Frau. Innerhalb der Familie wurde er an die russische Sprache und Literatur herangeführt.

1937 wird sein Vater Opfer der stalinistischen Repression, und die Familie flieht zurück nach Kirgisien, wo sie unter ärmlichsten Verhältnissen ausharrt. 1942 muss Aitmatow wegen des Krieges die Schule verlassen und verschiedene Funktionen in der Verwaltung des Dorfes und des Kreises übernehmen.
Nach dem Krieg gelingt es ihm, den Schulabschluss nachzuholen. 1946 bis 1948 studiert Aitmatow an der Veterinärfachschule in Dzambul, in dieser Zeit beginnt er zu schreiben. Anschließend immatrikuliert er sich an der kirgisischen landwirtschaftlichen Hochschule in Frunse (heute: Bischkek), wo er fünf Jahre lang studiert und, nach 1951, nebenher journalistisch tätig ist. Nach Abschluss der Hochschule arbeitet Aitmatow von 1953-56 als Tierzüchter auf einer Versuchsfarm, bis er 1956 ans Maxim-Gorki-Literaturinstitut in Moskau wechselt, um dort einen zweijährigen Lehrgang für junge Autoren zu besuchen. Während dieser Zeit erscheint seine erste Erzählung Aug in Auge.

Als Abschlussarbeit verfasst er 1958 die als »schönste Liebesgeschichte der Welt« bezeichnete Erzählung Dshamilja. Beide Erzählungen sind bei Erscheinen aus politischen Gründen heftig umstritten: Aug in Auge wegen der Auseinandersetzung mit der Figur eines Deserteurs, Dshamilja wegen der verständnisvollen Zeichnung einer Frau, die mit bestehenden Tabus bricht.
1959 wird er Chefredakteur der Zeitung Literaturnaja Kirgizija (Literarisches Kirgisien). Ab 1960 ist Aitmatow für die Zeitung Prawda als Sonderkorrespondent in Mittelasien und Kasachstan tätig. Aus den Erfahrungen dieser Jahre schöpft er später immer wieder den Stoff für seine Geschichten.
1963 wird Aitmatow mit dem Lenin-Preis für Literatur und Kunst ausgezeichnet, 1968 mit dem Staatspreis der UdSSR. Seit 1967 ist er in der Redaktion der Zeitschrift Novyj Mir tätig, ab 1974 zudem als Mitglied der Akademie der Wissenschaften in Kirgisien.

Bis 1965 erscheinen verschiedene Erzählungen (u.a. Du meine Pappel im roten Kopftuch und Abschied von Gülsary). 1970 erscheint Der weiße Dampfer, der wieder eine Diskussion auslöst, da sich Aitmatow von seinem bisherigen Erzählstil löst und mythische Motive in Werk einbringt. 1983 erhält er den Staatspreis der UdSSR für seinen Roman Ein Tag länger als ein Leben.
Der Roman Der Richtplatz gilt als erstes literarisches Signal der Perestroika, die er an führender Stelle mitgestaltet. Von 1988 bis 1990 ist Aitmatow Vorsitzender des Schriftstellerverbands in Kirgisien. 1989 wird er Abgeordneter des Volksdeputiertenkongresses und des Obersten Sowjets.
1990 geht er als Botschafter der UdSSR nach Luxemburg. Im gleichen Jahr erscheint die Erzählung Die weiße Wolke des Tschinggis Chan und ein Jahr später der Dialogband Begegnung am Fudschijama mit Daisaku Ikeda. 1994 wird ihm der Österreichische Staatspreis für Literatur verliehen. Seit 1995 ist er Botschafter der Republik Kirgistan in Brüssel. 1998 erscheinen seine Erinnerungen Kindheit in Kirgisien.

Ich bin gerade - soweit dies die Examen zulassen - mit der Lektüre von 'Begegnungen am Fudschijama' beschäftigt, einem philosphischem Dialog zwischen Aitmatow und seinem japanischen Gelehrten-Freund Ideka.

WEITERE LINKS:

- Bücher bei Amazon
- Unionsverlag Tschingis Aitmatow Infoseite
- aktuelles Interview zur politischen Lage in Kirgistan nach 9/11

About this Weblog - Über diesen Weblog

Click link below to to read more about this weblog - Klicken Sie den untenstehenden Link um mehr über diesen Weblog zu erfahren

Legal matters: DISCLAIMER - Rechtliches: HAFTUNGSAUSSCHLUSS

The 'Central Asia Weblog' is my journal on Central Asian issues. It is a bilingual collection of some of my SOAS course work, information on my summer stay in Kyrgyzstan, and random coverage of events linked to the area. Read the DISCLAIMER regarding legal matters. Every article is open to discussion and I enjoy reading and responding to comments.
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Der "Central Asia Weblog" ist mein sich vornehmlich mit Zentralasien befassendes Online-Journal. Es ist eine zweisprachige Sammlung von ausgewählten Arbeiten für meinen SOAS-Kurs und allgemeineren Informationen zu meinem Aufenthalt in Kirgistan diesen Sommer. Außerdem werden gelegentlich (und unregelmäßig) aktuelle Ereignisse besprochen. Bitte lesen Sie den HAFTUNGSAUSSCHLUSS bezüglich rechtlicher Hinweise. Für Anregungen, Diskussionsbeiträge, Lob und Kritik bin ich jederzeit dankbar.

>Background #3.2: Key Factors Determining the Success of Kazakhstan’s Hydrocarbon Sector

Note: This is an essay which I submitted for my Central Asian course this year. As it counts about 5000 words, I have split the paper into two parts. Click the link below to continue reading.
Ben

Introduction

Kazakhstan, the northernmost of the five newly independent Central Asian states, sits on vast hydrocarbon resources, both gas and oil. They can be found mostly around the Caspian Sea, of which Kazakhstan possesses the largest coastal line among all the five littoral states . Although the existence of large hydrocarbon deposits was well-known during the Soviet era, Kazakh Caspian oil resources remained largely untapped. There were some reasons for this: On the one hand, northern Caspian hydrocarbon resources are technologically difficult to unearth. There is a deep sediment covering most of the predicted deposits, adding to the fact that the region shows increased seismic activity. Additionally, the whole northern Caspian basin was declared a natural heritage zone in Soviet times, prohibiting any kind of drilling there. This is partly why hydrocarbon resources of the Kazakh Caspian Sea region were not given priority within the Soviet Union. More accessible deposits in other areas were preferred, first offshore Azeri oil and then, more significantly, reserves in West-Siberia, where major investments began to be channelled in the 1970s.

However, the Soviets made an attempt to develop the Tengiz field, the largest onshore oil deposit in the former Kazakh ASSR, discovered in 1979; but the engineers did not manage to cope with the oilfield’s enormous depth (13.000 ft) and the high pressure of 800 bar at which the crude ‘shot’ to the surface (Kleveman, 2003: p.76). A fatal blow-out occurred in 1985, killing several oil workers. Soviet engineers spent more than $1 billion drilling ‘dozens of wells before concluding that foreign technology was needed’ (Washington Post, 06/10/98). After years of negotiations, American oil giant Chevron yielded a 50 percent interest in the huge field in 1990, one year before the Soviet Union dissolved. The familiarity with the Soviet system and connections to high-profile elites, who were to occupy top ranks in newly independent Kazakhstan, granted Chevron with a new deal in 1993 - this time with the Kazakh government. It should be the first major drilling concession for a Western oil corporation after the collapse of the Soviet Union. This time, the deal led to the formation of Tengizchevroil (TCO), a joint-venture of Chevron and the state-owned oil company.
Chevron was not the only major company being attracted by the business potential of investing in Kazakhstan’s oil sector. In 1995, Chevron’s competitor Mobil (now ExxonMobil) bought itself into the joint-venture, acquiring a quarter of the shares. Bit by bit, nearly all major oil companies invested in the country, either through setting up new joint-ventures or through buying shares of existing ones. Kashagan, an offshore oilfield discovered in July 2000, proved to be one of the biggest oilfields in the world and is regarded as the most significant finding of the last 30 years. This enormous discovery led to a certain degree of gold rush atmosphere reminiscent of earlier findings like in Prudhoe Bay / Alaska during the 1970s. However, this early-day euphoria has now calmed down and gave way for a much more sober handling of affairs.

*** Click on the following link to continue reading: ***

Kazakhstan’s hydrocarbon resource endowment in numbers

There has been a certain degree of controversy on the amount of hydrocarbon resources which can be found in Kazakhstan. Numerous forecasts were published by different organisations, leaving a mixed impression of what is actually to be expected. Ongoing seismic surveys will add more oil-bearing prospects to the hydrocarbon map – eventually providing more accurate data and exact figures. Until then, the discussion is subject to a large degree of speculation. It will suffice to state here that there are considerable deposits of oil and gas in Kazakhstan, explaining the very presence of multinational oil corporations - which are, after all, driven by the simple motive of profit-maximisation (see point 3A). As a general rule of thumb, it can be said that government-funded forecasting tends to be more optimistic than corporate prognoses. Current proved oil reserves are estimated between 9 (BP Statistical Survey 2003) and 17.6 (Energy Information Administration, Oil and Gas Statistics, 2003) billion barrels. The latter even puts further potential oil reserves (reserves that are estimated to be 50 percent probable) as high as 92 billion barrels, which would consequently put Kazakhstan among the top five of the oil-richest countries. The chance of further findings is unquestionably high. However, in order not to contribute to an unnecessary speculative reasoning, it is sufficient to say that the business incentive must be present even under already proved levels of hydrocarbon resources - otherwise no multinational corporation would be willing to invest.

Key factors for the Kazakh oil sector

In order to analyse the future prospects for the Kazakh oil sector, this paper will outline the key points for a successful promotion of the business and further illustrate them through the interpretation of recent developments, mainly derived from related news. For the author, the following aspects will prove crucial for a successful future of the Kazakh oil sector: First of all, business confidence is undoubtedly the main focus for relevant decision-makers and will therefore be analysed with the utmost attention. Overall business confidence and potential for investment return are mainly influenced by endogenous factors, i.e. the Kazakh government is capable of positively (or negatively) altering their degree through business-friendly (or –hostile) legislation in domains like taxation, ownership rights, etc. Recent developments leave a mixed impression: To the displeasure of the operating oil companies, there has been a development on the Kazakh side towards the renegotiation of contracts. The common opinion was that contracts were unjust and exploitative towards the Kazakhs because they were made at a very early stage of independence. However, a new investment law introduced in 2003 intended to enhance the legal framework for foreign investors.

Second, and no less important, is the development of the world oil market. Caspian oil is considered to be ‘New High-Cost Oil’, whose production cycle adds up to the sum of more than US$10 per production of one barrel of crude. With the current world market price per barrel oil at around US$32, the profit margin for investing oil companies is large enough. However, this comparatively high oil price level is subject to fluctuations and cannot be guaranteed in the long run. It is furthermore important to analyse developments in the worldwide demand and supply pattern for oil and in how far it can shape the outlook for Kazakh oil.

Third, the problem of transportation, i.e. how to bring the oil and gas from landlocked Kazakhstan to customers in Europe, America and Asia will be scrutinised. Which routes do/will pipelines take and in how far is – as widely discussed in the media – politics and ‘geostrategic reasoning’ involved?

Fourth, and finally, the national and regional security situation will have to be analysed as it continues to a major issue for a steady influx of investment.
Due to constraints in time and space, those three issues will be analysed in rather more detail, though of course further aspects play significant roles, too. They comprise other developments like the delineation of the Caspian Sea and in how far it bears potential for conflict. Environmental hazards and technological constraints could – though less likely – put pressure on the Kazakh oil and gas sector, too.

Business confidence:
a) Post-Independence concessions: A thoughtless give-away of natural wealth?

The immediate years after independence saw a precautious approach of Western investment towards the ex-Soviet Union. Because of abundant hydrocarbon resources this has been different for Kazakhstan. Largely due to the efforts of Chevron as the first main investor and a relatively ‘virgin’ business environment, foreign direct investment poured into the economy comparatively rapidly, making Kazakhstan receive more FDI per capita (Foreign Direct Investment) than Russia until now (UNCTAD, 2002). Right after independence it became fairly obvious that Kazakh officials were ill-equipped to run the economy which until 1991 had been fully state-owned and effectively controlled by Moscow. There had been no time for a smooth transition and due to the turmoil and turbulences of the post-independence days the administration was not capable of elaborating a sound and even economic policy. The aforementioned deal with Chevron was already prepared as early as 1990, where the American oil multinational negotiated exclusively with Moscow, not Almaty. As a general rule, few leaders of the new Caspian states (mostly Azerbaijan and Kazakhstan) had any practical experience with international finance and investment procedure. Therefore, policy-makers took advice from the sources they could find – Western business executives and politicians or returning émigrés. This tendency led to several ‘ill-informed and controversial decisions, including the costly and embarrassing repudiation and renegotiation of several contracts for oil and gas projects’ (The Globe Kazakhstan, 22/07/98). However, it would be too easy only to blame the Kazakhs for these problems. Without doubt, there were incidents of corruption as colourfully revealed in Seymour Hersh’s article in the New Yorker in 2001. Nevertheless, it should become clear that windy actions of calculating Western businessmen were silently tolerated by the West, too. This indicates that there might be indeed contracts which need some reshaping and renegotiation. However, the Kazakh side has not been too keen on explaining their arguments for this move in a very transparent manner, largely due to alleged participation of government-elites in several of those dubious deals.

b) Investment Climate in 1997

What did foreign investors see as the most striking obstacles in Kazakhstan? A slightly outdated survey from the International Tax and Investment Center from 1997 can give some answers. Major Western companies were asked to determine what reforms the Kazakh government could undertake to make the economy more hospitable to foreign investors. The survey strived to answer three questions: What are the major business incentives for incoming investment? Which are the major barriers for foreign investment? And, which suggestions do businessmen put forward in order to overcome the barriers shown in Table 2?

Table 1: Strategic Factors Influencing Investment in the Republic of Kazakhstan
- Frequency of Ranking of Strategic Factors (1 = Most Important Factor)

Click image to enlarge

The survey reveals that foreign investors come to Kazakhstan for the most ‘fundamental business reasons’ (ITIC, 1997). It underlines that most foreign direct investment (FDI) is situated in the natural resource sector; therefore the main interest of investors is obviously the secured access to natural resources, most importantly oil and gas. Rank two and three in this league show typical business expectations, namely a large (national) market potential and the potential rate of return.

Table 2: Ranking of Major Barriers to Foreign Investment in the Republic of Kazakhstan

Click image to enlarge

The main obstacles to investment are shown in Table 2. It becomes clear that most of the factors named in the survey are endogenously determined, e.g. the government of Kazakhstan is able to change them. The main factor speaking against investment in Kazakhstan is the apparently omnipresent bureaucracy. Although many programs and reforms have been put into place since independence, the ‘capricious nature of administrative bureaucrats in all sectors’ of Kazakhstan’s government is still persistent (ITIC, 1997). Nevertheless, this represents a typical businessman’s answer and should be treated with at least some caution. Bureaucracy is considered an obstacle for unchecked business operations in almost every country in the world – not just in Kazakhstan. However, countries of the former Soviet Union tend to have put into place an almost incomprehensible system of permissions, applications, etc. which is not transparent at all. Not expressly listed, bud added by most hydrocarbon companies, is ‘the interest that foreign investors have in ensuring that the terms of their negotiated contracts are honoured’ (ibid.). One surveyed investor summed up these concerns about the investment climate in Kazakhstan by saying that it ‘still remains very adversarial – there is no feeling of partnership’ (ibid.). What were – according to the surveyed corporate representatives – the most urgent reforms then?

Table 3: Ranking of Foreign Investment—Stimulating Priorities in the Republic of Kazakhstan (1=Most Important)

Table 3 shows the wish-list of corporate decision-makers and reflects the findings of Table 2. The greatest need for reform was located in Kazakhstan’s bureaucratic legislation. Only at the third rank does the facilitation of the taxation legislation appear. Taking into account that this survey was made in 1997 and Kazakhstan is now in its fourteenth year of independence, one could expect a certain degree of transition after seven years. However, reform progress seems to be rather sluggish, many current problems exemplify that still no groundbreaking reform effort was made.

c) Current Situation

In 2002, a new Code of Conduct for the taxation system entered into force. It eased the complicated taxation system and narrowed the definition of ‘Kazakh Source Income’ which led to difficulties and arbitrariness in defining non-resident’s income subject to income tax (ITIC, 2001). However, the situation for subsurface users, hence hydrocarbon companies, only improved marginally (ibid.). In addition, the rigorous system of penalties and appeals was only partially ameliorated. On April 12, the Canadian oil company PetroKazakhstan has paid Kazakh authorities a $3.6 million fine for the ‘abuse of its position as owner of the country’s biggest oil refinery’. The fine was lowered from a previous sum of $94 million. The company has rejected any wrongdoing before and said it ‘may take the case to an international court’, the Moscow Times reported (13/04/04). This indicates that hydrocarbon corporations, the most important group of investors, still face a legislative framework which is full of risks - and miles away from predictable patterns. This year, a new agreement was put into place, this time especially concerning the matter of taxation on natural resource projects.

Interestingly, the annual taxation rate for most investors has been between 5% and 20% during the last five years, a low figure when one compares Kazakhstan with other oil-producing countries. This has evoked massive criticism within Kazakh society (The Times of Central Asia, 01/04/04). In several roundtable discussions, selected investors admitted ‘that the local population now has a negative opinion about their role in the Kazakh economy’ (ibid.). A special government body which will be responsible for issuing licenses for natural resource projects and for concluding product-sharing agreements with investors will be put into place. Its main task is to (further) simplify tax administration and provide maximum transparency of the taxation of oil operations. In addition, Kazakhstan’s share in product-sharing agreements must be at least 20% of all products produced within a certain period from the start of production until the company recoups its investment. Subsequently, 60% of the profits will run back to the Kazakh authorities. This figure may seem to be tremendously high. However, it is common practice in other oil-producing countries. In OPEC countries, this value is even as high as 80% (Emirates Center for Strategic Studies and Research, 2000: p.162). The amendments also strive to reduce the time frames for offshore oil contracts, to 25 years for oil producing projects and 30 for oil prospecting (not yet operational) projects. In contrast, Kazakhstan’s contract with Chevron on the Tengiz oilfield was made for 40 years, conditions of which oil corporations today can only dream of. Undoubtedly, Kazakhstan is still far away from conditions in OPEC member countries but has a rather disadvantageous bargaining position. Thus, it is the Kazakh government itself which is threatened by the oil corporations: ‘You’re in a competitive landscape – if you want to be a world oil power, you need to behave like a world oil power’, Alexander Cornelius, general director of TCO said very recently (Associated Press, 29/03/04). In November 2002, TCO put investments in the second phase of that project on indefinite hold, complaining about of what they saw as the ‘intrusiveness of Kazakh bureaucracy’ (Alexander’s Gas and Oil Connections, News & Trends: Central Asia, 04/04/03). The dispute was resolved a few weeks later but amply demonstrated the influence oil corporations have by threatening to withdraw planned investment. Therefore, criticism about business hostile legislation in Kazakhstan should be treated with caution when it comes from the corporate hemisphere. The overall trend for Kazakhstan in terms of FDI inflows is upward, despite talks of the ‘intrusive bureaucracy’.

The fall of overall aggregate FDI inflow from 2001 to 2002 can be explained by a global recession and more cautious investment policies of major groups following 9/11. Trends for 2003 show a sustained growth for FDI:

In the first nine months of 2003 overall foreign direct investment reached 3.2 billion US dollars, which is 12% more than during the same period of 2002. The FDI/GDP ratio amounted to 7%, which ranges amongst the highest ratio in the world in 2003, according to the Central Bank of Kazakhstan (European Union: ‘Relations with Kazakhstan’).

Those numbers emphasise that recent development would rather be in favour of ameliorating frameworks for investment in Kazakhstan, taking into account that around 85% of incoming investments are allocated in the oil and gas sector (Zentrum für Europäische Integrationsforschung, 2001: p.3). Closely connected is the fact that growth rates over the past years have been extremely high: In 2002 alone, GDP grew at a solid 9.5% rate, making Kazakhstan one of the fastest-growing countries in the world. However, the outlook is somewhat shaky: The Economist Intelligence Unit’s outlook for Kazakhstan is rather sceptic of future prospects:

We have revised upwards our oil price forecast for 2004 to just under US$27/barrel, from US$24.90/b. However, we have revised our investment growth projections downwards to reflect the likely delaying impact of increasing government interference on oil sector development. As a result, we now envisage real GDP growth rates of around 9.5% and 7.5% in 2004 and 2005, respectively (The Economist, Country Briefings: Kazakhstan, 13/04/04).

In how far these figures will prove to be correct is very uncertain. Exemplarily, Kazakhstan’s growth figures for 2002 had to be corrected by two percents – upwards. This could allow the assumption that up until now, the corporate hemisphere has not withdrawn investments and the economy still benefits from inflowing funds of investments. Nevertheless, as the Economist’s numbers foreshadow, does this growth rate (both in investment and real GDP) depend on a sound corporate legislation and further reform. One fact is certain: News is filled with mutual accusations from the Kazakh government and international investors. However, under this surface, it is still business as usual.
The specialisation of the Kazakh economy towards the exploitation of hydrocarbon resources is susceptible to a range of problems. So called ‘Dutch-Disease’ effects could lead to a crowding out of investment in other sectors than the oil and gas sector as well as to a harmful appreciation of the tenge, the local currency. Between 1995 and 2000, the percentage contribution of fuel and oil products to aggregate exports rose from 23.8% to 52.8%. Besides the fact that most FDI is channelled into oil and gas projects, the sector is also the most important source of tax revenues, accounting for 43.7% of total tax payments (Zentrum für Europäische Integrationsforschung, 2001: p.3). The Kazakh government tries to diversify its economy by actively encouraging investment in other domains. It has therefore promoted the establishment of high-technology parks around the country (Gazeta.kz, 31/03/04). Crucially important is the stimulation of growth within the small- and medium-sized enterprises sector. This is widely seen to be the only way to wean off any detrimental interdependence of the hydrocarbon sector and reach sustainable levels of growth not only in output, but also in employment. The other disadvantage of an economy adjusted towards the hydrocarbon sector is the dependence on the world patterns in supply and demand of gas and oil, one of the only issues that Kazakhstan itself has no impact on.

World patterns in supply and demand of gas and oil
The global pattern in supply and demand for hydrocarbon resources is a book-filling topic on its own. Therefore, only some pointers can be listed here, showing that the success of the Caspian oil and gas sector is inexorably linked to world oil prices. The figure shows how volatile the price per barrel of crude oil has been since World War II:

The production cost per barrel of Caspian oil averages at around $10. This is a composite of different positions. The nominal development for one barrel oil is approximately $3. As aforementioned, oil fields are located more deeply than their Middle Eastern counterparts which makes geological surveys comparatively expensive. Further costs comprise the operational costs which occur while exploiting an oil field. They average at around $3, again more expensive than in the Middle East, where the oil is found only several feet below the surface. Moreover, as the Caspian Sea area is landlocked (see point 6), the oil has to be pumped through pipelines to ‘closest’ high-sea ports. Their construction costs, potential transit fees, etc. add up to an average $4.5 per barrel (when transported to the Black Sea). The freight to European, American or other destinations further increases the production cost per barrel, which hence exceeds the $10 threshold (Emirates Center for Strategic Studies and Research, 2000: p. xxx). While the corresponding cost of Middle East oil is only at about $3 per barrel, the major disadvantage of Caspian Oil becomes obvious. It is the vulnerability to fluctuations in world prices that could pose a threat to the incentive for corporations to invest in Kazakhstan. If global oil prices returned to 2000 levels (see above chart), when the oil price bottomed at around $12, profit margins for oil corporations would not be high enough. If the price settled at this low-level scenario, further investment in Kazakhstan would not be able to give the hoped return and would hence be stalled.
However, forecasts of global oil demand disarm those concerns. According to the Energy Information Administration (see chart), US demand for oil will grow steadily over the next twenty years. Even higher rates of growth in demand are expected for the emerging economies of East and South Asia, namely China and India. Yet resumed oil exports from Iraq in the indefinite future are not considered to be of such a threat to the oil price that it could finally settle below a productivity level for Kazakh investment, which is more or less at around $15 per barrel. The Energy Information Administration Annual Energy Outlook 2004 predicts relatively stable oil price patterns for the next 20 years. However, the numbers suggest that current high oil prices (at around $34) cannot be sustained. The average reference price for a barrel of oil is predicted to be around $25 over the next years, and even low scenarios do not drop below $17 (EIA, 2004). Therefore, volatility in world prices for oil does not pose a real threat to Kazakhstan’s oil and gas sector. However, Kazakhstan’s competitiveness could be increased by lowering average production costs per barrel, i.e. by cheaper transport routes, technological progress, etc. Other high-cost oil exporters have already substantially lowered their costs over the last years: Due to new technologies and cost-cutting, production costs for West-Siberian oil decreased from $15 (1991) to $3.5 per barrel in 2001 (Pallot, 2003).

The Problem of Transportation

Pipeline issues continue to dominate the news for the Kazakh oil and gas sector. The return of Caspian investment heavily depends on the safe and reliant transport of oil and gas to the markets. Several pipelines are underway being built, while some others are still in the planning phase or under discussion. The map (© EIA, 2003) shows the main pipeline routes for the Caspian Sea. One can see that currently the following options are of importance:

CPC, whose biggest shareholders are Russia (24%) and Kazakhstan (19%), is already operating the Tengiz-Novorossijsk pipeline with a daily throughput of 565,000 bbl/d (barrels a day) and envisages to transport around 1.34m bbl/d through it by 2015. The pipeline connects the Tengiz oil field with the Novorossijsk Black Sea oil terminal in Russia, where the crude is loaded on tankers shipping it to the world markets. As it is already built, the Tengiz-Novorossijsk pipeline is the ‘safest’ of the Kazakh oil export options. A further pipeline through Russian territory from Atyrau to Samara is also operational and was recently upgraded to carry 310,000 bbl/d.

In addition, there are several options under discussion. Frequently appearing in the news, a potential oil pipeline to China has now been agreed on, as Interfax reports (02/04/04). The Chinese economy, very close to double-digit growth over the last five years, is increasingly power-hungry and has to import large quantities of oil. To diversify its supply sources, a pipeline from Kazakhstan seems understandable (Der Spiegel, 15/04/04). However, the construction costs of about $3 billion seem to be exorbitant. The project was halted in September 1999 because Kazakhstan could not commit sufficient oil flows for the next 10 years. However, it was resumed in 2003 and is currently been built in the first project stage. The Chinese state-owned oil corporation CNPC operates two major oil fields in the western Aktobe region.
Further options to transport Kazakh oil include a plug-in into the Baku-Tbilisi-Ceyhan (BTC) pipeline. As the oil would have to be shipped across the Caspian Sea, this would require the extension of both ports Aqtau on the Kazakh side and Kuryk on the Azeri side. During a state visit of Azerbaijani President Ilham Aliyev to Kazakhstan this March, Kazakh President Nursultan Nazarbaev said that ‘he is "convinced" that Kazakh oil will flow through the Baku-Tbilisi-Ceyhan (BTC) pipeline’ (Radio Free Europe / Radio Liberty, 08/03/04). With the Kashagan oil field commencing operation in 2008, further pressure will be put on the export routes. The main question will be whether they can offer sufficient capacity. Furthermore, regional security issues play a role, too. Some hypothetical map exercises include the ‘Central Asian Pipeline’, which runs from Kazakhstan via Turkmenistan and Afghanistan to finally reach Gwadar (Pakistan). A Memorandum of Understanding had already been signed by the countries, but the project is stalled by regional instability and lack of financing.
It becomes obvious that transportation issues continue to be complex and interconnected to the region’s multi-layered problems. As many commentators try to link pipeline routes to geo-strategy, it is necessary to emphasise that it is the business incentive which finally decides about the construction of a pipeline. This is very evident with the latter pipeline through Afghanistan, which some authors even dubbed ‘The Prize of Kabul’ in regards to American’s War on Terror.

National and regional security

Kazakhstan, the northernmost Central Asian state, is one of the ethnically most diverse countries in the world. The titular group, the Kazakhs, did not make up the majority of the population by the time of independence in 1991. Only because of an out-migration of ethnic Russians and Germans, Kazakhs now constitute 53.4% of the population (CIA Factbook, Kazakhstan). The future will show in how far ethnic divisions could pose a threat to national integrity. Until now, the situation in Kazakhstan is the most stable throughout Central Asia and ‘at a time at which the world is unstable, Kazakhs should appreciate the tranquillity that reigned home’, President Nazarbaev has said recently (Radio Free Europe, Radio Liberty, Central Asia Report, No. 40, 28/11/03). Recent developments in neighbouring Uzbekistan did not worsen conditions in Kazakhstan yet. The government has not taken such an unthoughtful approach towards Islamic parties like the Hizb-ut-Tahrir (HT) as Uzbekistan has. But still, as Central Asia is often prominently portrayed as a haven for ‘fundamentalist Islamists’ (cf. Rashid, 2000), other authors tried to identify a similar threat for Kazakhstan. However, developments speak against this thesis: Radical Islamist organisations still lack an infrastructure in Kazakhstan, though they are more and more believed to extend their influence into the country, too: The "Kazakhstanskaya pravda" noted that "while the recruitment activities of HT emissaries in Kazakhstan initially focused on low-income individuals, recent efforts have targeted potential members among government officials, law-enforcement authorities, well-off businessmen, intellectuals, and students" (Radio Free Europe / Radio Liberty, Central Asia Report, No. 10: 08/04/04). In how far these developments can speak of an increased threat for Kazakhstan remain doubtful as radical Islam is not thought to have a stable basis in Kazakhstan, which is after all a more secular society than Uzbekistan.
As in many oil exporting countries, the lack of democracy in Kazakhstan could also pose a threat to national security. Nevertheless, the main grounds on which unrest could develop are economic. Rising income disparities and anger at government corruption are widely believed to have the biggest political consequences. On the one hand, the government is enjoying a boom which does not bring about a change in employment patterns. The oil and gas sector may account for about 16-17% of GDP, but only for 1% of employment (Bisnis: Ambassadorial Briefing, 09/01/04). On the other hand, corruption at almost every level of administration is perceived to be one of the main hindrances for a transparent and democratic political culture.

Conclusion

Other issues that could have potentially been of great importance for the Kazakh oil and gas sector cannot be analysed any further here. Those developments comprise the delineation of the Caspian Sea and the significance of this as a potential source of conflict. As mentioned earlier, the environmental hazards and technological constraints could (though it is less likely) put pressure on the Kazakh oil and gas sector, as well.
The detailed analysis of the business confidence shall underline that it will prove tremendously important for Kazakhstan to successfully tackle persisting endogenous problems. The success of tax reforms and – more generally - a more transparent handling of administrational affairs will be crucial for a steady flow of investment into Kazakhstan. ‘Rome was not built in a day’ – and efforts that were made in Kazakhstan can seem to be slow. However, as it is very often forgotten, market capitalism is a relatively new ‘phenomenon’ in the largest of the Central Asian republics. While other countries could have made their experiences with foreign investors for decades, countries of the former Soviet Union have to be assessed somewhat differently. Still, there is worldwide competition to attracting as much FDI as possible; so Kazakhstan has no other options but to stick to rules of the game. Therefore, the aforementioned threat by Mr Cornelius could seem arrogant, but however not too far-fetched: ‘You’re in a competitive landscape – if you want to be a world oil power, you need to behave like a world oil power’. To conclude, it needs to be stressed that the distinct usage of language by corporate and government representatives can often be misleading. Sometimes, issues that go to the press do not tell the observer what is really going on under the surface of mutual accusations. As hasty intervention by even President Nazarbaev shows (cf. the TCO investment postponement), there is a pragmatic understanding on the Kazakh side. If this translates into a sound and even economic and administrational policy, then Kazakhstan’s hydrocarbon sector will continue to be worth investing in.

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