Kazakhstan crisis brings Asia's energy dynamics into focus

Important gas pipelines from Turkmenistan and Uzbekistan to China cross Kazakh territory and the country produces more than 40% of the world’s uranium

Welders work on a pipeline project at the border between Kazakhstan and Russia. Photo: EPA

Economic discontent and years of crony capitalism in Kazakhstan have turned into mass protests posing a major challenge to its government. With dozens killed by security forces, President Kassym-Jomart Tokayev, only appointed in March 2019, has vowed a harsh crack-down and called in Russian-led security.

The unrest was not inspired by Russia's President Vladimir Putin or by any outside force, despite the usual propaganda. Neither Moscow nor even Astana seems to have anticipated it. But the Kremlin is well capable of taking advantage.

The immediate trigger for the protests, as in Iran, Venezuela and many other countries around the world, was a cut in fuel subsidies. The government attempted to raise the price of liquefied petroleum gas, extensively used in Kazakhstan for cars as well as the more usual cooking and heating, to market levels.

This has quickly spilled out into wider anger over economic inequality, corruption and a lack of political rights.

Kazakhstan has been the former Soviet Union’s economic success story. Landlocked, sparsely populated, more than four-fifths desert and steppe, it inherited a legacy of environmental damage – nuclear weapons testing, pesticides, salinisation and desertification.

Yet now, according to World Bank data, the country's economic output per person ($9,122) is only a little lower than Russia’s ($10,127), and higher than all other former Soviet republics, excluding the three Baltic states.

This wealth is unevenly divided. Most of the country’s oil is produced in the west, which suffers from higher levels of poverty and unemployment. In 2011, labour unrest at the oilfields was violently suppressed, and there were further nationwide protests in 2016 and 2019.

Inflation, currency devaluation and then the pandemic hit ordinary Kazakhs hard, with consumer debt rising significantly. Inflation is estimated to have increased to 7.5 per cent last year while the economy was set to have expanded 3.3 per cent after shrinking 2.6 per cent, the International Monetary Fund said.

Meanwhile only 162 people hold 55 per cent of the country’s total wealth, consultancy KPMG has said.

Kazakhstan is the second-biggest non-Opec oil producer within the Opec+ agreement, with a February allowance of 1.59 million barrels per day. Most of this is exported via the CPC pipeline through Russia, but it also sends about 200,000 bpd to China. Even more importantly, it is almost the only producer in this group, with Russia, anticipating substantial production growth.

The country’s leading oilfields, Tengiz, Kashagan and Karachaganak, are giant and technically challenging, with complex carbonate reservoirs and high levels of corrosive, toxic hydrogen sulphide. They feature consortiums of mostly western firms and the Kazakh state, leavened with Chinese and Russian interests, and Tengiz and Kashagan have major expansion projects underway. China overall runs about a quarter of the national oil production.

Though not a large gas producer itself, the strategically important gas pipelines from Turkmenistan and Uzbekistan to China cross Kazakh territory. Its dominant energy role is in uranium: it produces more than 40 per cent of the world’s supply and prices for nuclear fuel jumped 8 per cent on news of the unrest.

The latest protests may slightly have reduced exports from Tengiz. Workers at Chinese joint ventures at the Mangistau and Karazhanbas fields have gone on strike. But there is no immediate major threat to energy output. The energy significance lies in longer-term politics.

Former president Nursultan Nazarbayev skilfully steered between Russia and China while maintaining good relations with the west. He moved the capital to Astana, later renamed Nur-Sultan in his honour, to anchor control of the north where more ethnic Russians live.

Mr Tokayev was weaker domestically, a technocrat and diplomat without Mr Nazarbayev’s historical legacy or business networks. He has now dismissed a legacy coterie of key officials, such as security chief Karim Masimov and Prime Minister Askar Mamin. Mr Nazarbayev has also lost his eminence grise position as head of the security council.

Though Mr Tokayev speaks Chinese as well as Kazakh and Russian, under him the Moscow-Beijing balance has immediately stumbled. He turned to the Moscow-headquartered Collective Security Treaty Organisation, which agreed to intervene for the first time in its 30-year history, rather than the Chinese-led Shanghai Co-operation Organisation.

The sudden Kazakh crisis may be a distraction for Mr Putin from his plans for Ukraine and Belarus, but he does not want to see further success for popular protest. There is also opportunity in the situation: greater leverage over Kazakhstan would enable Moscow to limit further oil and gas export projects and to control the price they could sell at via common export tariffs, so reducing competition with Russia’s own sales to China.

Along with the existing Power of Siberia pipeline from eastern Siberian fields, Russia is proposing the Altai or Power of Siberia II pipelines, which would bring gas from west Siberia to western or eastern China respectively.

This would allow Gazprom to divert gas from its current dominant customers in Europe. The European market is likely to shrink in the longer term, particularly given current very high prices and worries in Brussels over Russian political leverage.

China’s gas imports are soaring given its environmental policy of pivoting away from coal. Over-reliance on liquefied natural gas is problematic at a time of rising tensions with the US, whose navy could threaten shipping lanes from the Middle East and south-east Asia.

Pipelines from Eurasia seemed more secure, with Kazakhstan a core country in the “Belt and Road” initiative. Turkmenistan, holder of the world’s fourth-largest gas resources, is already a key supplier. To dilute Russia’s dominance and possible future Kazakh trouble, Beijing would now have to find other delivery routes. That could mean reviving plans for “Line D”, following the tricky and mountainous route through Tajikistan and Kyrgyzstan.

China offers the Central Asian states far more economically, but Russia remains the security arbiter, as the latest moves make very clear.

The question now is whether the Kazakh people will accept an unpopular government. If it survives, how will that government restore the Sino-Russian balance? And what can Beijing do to ensure that its critical oil and gas supplies through central Asia remain secure and diversified?

Robin M. Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis