Part 2: Gas, dependency, and debt
Turkmenistan’s shift from Russia to China as its leading customer has not reduced dependency and has increased its debt.
Apart from finding new markets for its resources, Turkmenistan’s energy sector is hampered by bad supplier relations with its existing partners. Without new markets and with its debt to China, Turkmenistan remains dependent on Russia, a relationship the country is eager to exit.
It is estimated that natural gas makes up about 31% of Turkmenistan’s GDP and pays for around 85% of the government’s spending (see CIA World Factbook). Until 2015, 60% of Turkmenistan’s gas exports went to China, while 40% was shared between Russia and Iran. In 2015, Russia had more than halved the volume of gas it imported (4 billion m3) from Turkmenistan until January 2016, the year when Russia terminated its agreement on natural gas exports with Turkmenistan.
China’s ‘debt for gas’ policy, suspended exports to Russia, and bartering with Iran mean that Turkmenistan is exporting gas without making any hard cash. The situation is, indeed, dire and the government is pressed to find new markets, as is evident in its push for TAPI. In the meantime, it is forced to fix the broken supplier relations with Russia.
Russia
During Berdymukhammedov’s visit to Moscow in the beginning of November, Putin noted that the trade between the two countries remains stable. He also noted that Turkmen exports to Russia have doubled in 2015 and that there are over 100 agreements covering all areas of cooperation.
It leaves me wondering what Putin’s positive portrayal of the Turkmen-Russian trade means in the context of the sour energy relations between Turkmengaz and Gazprom. Contrary to Putin’s diplomatic evaluation of the cooperation and trade between the two countries, they have had an uneasy energy relationship since Turkmenistan’s independence. It appears that the main issue in the energy sector for both sides has been gas prices. Low gas price has been cited as Niyazov’s reason to cut gas supply in 1998, an action that ended the agreement signed in 1991, and to renegotiate a better but still not fully satisfactory deal for the Turkmen side (Russia agreed to pay for 40% of the supply in cash and barter for the rest at the rate of 36 USD per 1000 m3).
In 2003, the sides signed an agreement in which Niyazov promised to supply about 2 trillion m3 in the next 25 years. Russia agreed to pay 50/50 in cash and barter at 44 USD per 1000 m3 between 2004 and 2006. However, later in 2005, Niyazov asked 50 USD for the exports in 2006 and 60 USD per 1000 m3 for exports in the following years. At that time, China’s interest in Central Asia was growing and Niyazov had just turned to Ukraine with an offer. Faced with competition and a threat to its monopoly in the Turkmen energy sector, Russia agreed to buy 30 billion m3 in 2006 at the rate of 65 USD per 1000 m3.
Come 2006 and Niyazov asked 100 USD and threatened to cut the supply after Russia rejected his offer. Wanting to maintain its control of Turkmen gas, Russia eventually conceded to the demand of Niyazov, who in return promised Gazprom exclusive access to Turkmenistan’s energy resources. Russia was to pay at this rate in the second half of 2006 until 2009.
However, the promised monopoly died with Niyazov. Under Niyazov, diversification of energy exports and the effective breakaway from Russia remained as potential prospects. His successor Gurbanguly Berdymukhammedov appeared as someone who actually will diversify his export options. In 2007, Gazprom found itself competing with the increasingly tangible Chinese presence in the Turkmen energy sector. In 2008, Berdymukhammedov met with Azerbaijan’s president Ilham Aliev to discuss the trans-Caspian pipeline. Faced with such competition, Gazprom agreed to pay 130 USD in the first half and 150 USD in the second half of 2008.
Due to the rapid decline of gas prices and demand in the European market in 2009, Gazprom could not keep paying at the agreed rate. This sparked a new spat between Turkmenistan and Russia (see Bohr 2016, 79). Russia wanted to reduce the volume of gas it imported, while Turkmenistan insisted on keeping to the agreed volumes. The problem for Gazprom was that in 2007 it promised Turkmengaz netbacks (also see Bohr 2016) from the sales of gas in the European market. When the demand and price for gas declined in Europe, Gazprom found itself importing Turkmen gas at a loss. Therefore, it sought to reduce the volume of gas it imported but Turkmengaz insisted on keeping to the agreement.
In April 2009, an explosion occurred on the Central Asia–Centre-4 pipeline that connects Russia and Turkmenistan. The incident occurred in the context of growing dispute over decreasing the volume of gas to be exported due to the falling prices; and because it effectively caused Turkmenistan to stop the gas supply, the explosion appeared to benefit Russia. Turkmenistan’s official position placed the blame squarely on Gazprom by alleging that Gazpromexport, Gazprom’s subsidiary in Ashgabat, reduced the volume of gas flowing through the pipeline without informing the supplier. Russia maintained a diplomatic position in pointing to the ageing pipeline as the reason for the explosion.
The damage was quickly repaired but the relations between the countries remained sour. Russia paused on its imports of Turkmen gas until 2010. Turkmenistan demanded compensation from Gazprom by citing the ‘take-or-pay’ clause of their agreement and later complained that Gazprom had failed to pay according to the agreement.
Trade resumed in 2010 but in small volumes. Gazprom purchased about 10 billion m3 annually between 2010 and 2012. In 2015, Gazprom reduced its demand for Turkmen gas to 4 billion m3.
In July 2015, Gazprom filed a lawsuit against Turkmengaz in Stockholm in a bid to lower the gas price and force Turkmenistan to retroactively lower its prices for gas sold in the previous years. Gazprom demanded 5 billion USD from Turkmengaz as reimbursement for the losses it incurred from the resale in Europe.
In January 2016, Russia stopped its imports of Turkmen gas altogether, prompting Turkmengaz to announce that Gazprom is insolvent. In hindsight, it is clear that Russia’s move was a unilateral breach of the agreement, while Turkmenistan’s reaction was unfounded and requiring verification from independent third parties to gain any validity. As is evident in a recent article published in Vzglyad, Kremlin took offence at having its energy giant effectively declared bankrupt.
Today, Russia is not importing any Turkmen gas. In September, Alexander Medvedev, the Deputy Chairman of the Gazprom Management Committee in charge of international business activities, announced that Gazprom has suspended its lawsuit against Turkmengaz. At the same time, he announced that Gazprom will not import gas from Turkmenistan until 2018. Medvedev hopes that this will allow the two sides to resolve their pricing disputes and resume energy trading on new terms. Russian commentators speculated that Gazprom will try to seek a Product Sharing Agreement with Turkmengaz, similar to the kind enjoyed by China’s CNPC. It is unlikely that the Turkmen leader will welcome such a deal.
It is certain that Turkmenistan is in dire need to resume some kind of energy relations with Gazprom because there is no other buyer willing to pay hard cash while Russia is interested in reasserting its influence in Turkmenistan as part of its bigger strategy in Central Asia. It appears from the recent meeting between Berdymukhammedov and Putin that the resolution of the energy dispute will serve Russia’s political and security interests in the region. The meeting also shows that Putin will overlook what I had been suspecting for a few years now – his resentment of Berdymukhammedov.
It seemed that Putin resents Berdymukhammedov for the latter’s deals with China. Putin felt betrayed not only because Berdymukhammedov broke Russia’s monopoly on Turkmen gas exports by signing massive deals with China, but also, and perhaps more importantly because Turkmen-Chinese energy relationship got in Putin’s way as he negotiated with China on the long-term deal signed in 2014. Having sealed Turkmenistan as its major supplier, China had leverage against Putin. It was in a stronger position to bargain. So, despite Putin announcing this deal as the “largest contract in the history of the gas sector of the former USSR” back home, the Russian president expected a better deal but had to make several uncomfortable concessions to his Chinese partners. Russia simply could not sell gas to China at the rate it desired.
Having lost the Russian monopoly in Turkmenistan and conceded to China in what otherwise could have been a gargantuan long-term gas deal for Gazprom and a show of his irreproducible talents as a ruler, politician, and tactician for the audience back home, Putin now has little to lose with Turkmenistan. Russian interest in maintaining monopoly has been the main leverage for Niyazov in negotiating more profitable deals with Russia. Now, there is no monopolist’s status quo to maintain. However, this time, Putin is not interested in gas; he wants to control the politics and security in Central Asia. Niyazov was also able to effectively submit Gazprom to his demands by pointing at the potential buyers from the West and the East. Such prospects had power in the past relationship between Russia and Turkmenistan so long as they remained a potentiality in the context of the Russian interest in maintaining its monopoly in the energy sector. After this potentiality became an actuality with China’s domination of Turkmen energy exports with a ‘debt for gas’ policy, and given that Turkmenistan failed to realise any other feasible export projects, there were no incentives for Putin to tread carefully.
This was already evident in Putin’s treatment of Berdymukhammedov at Victory Day celebrations in 2015. Berdymukhammedov was announced mistakenly as Tajikistan’s president Emomali Rahmon as he formally entered the room in Kreml’ to greet Putin. A lot may be inferred about the relationship between the two presidents as they ceremonially engaged in a handshake. For the rest of the day, Berdymukhammedov was not seen anywhere near Putin. Perhaps the most important ritual on Victory Day is the wreath-laying ceremony at the memorial to the soldiers of WWII. The first line of dignitaries accompanying Putin to the memorial showcases Russian interests in the world quite well. All Central Asian leaders, minus Berdymukhammedov, and other dignitaries were by Putin’s side at this meaningful ceremony. Kazakhstan’s Nazarbayev and China’s Xi Jinping walked immediately at Putin’s right and left sides. Berdymukhammedov could not be observed anywhere. His seating at the Parade was also telling. Observers watching the Parade on Russia’s main TV channel caught only a glimpse of him wearing sunglasses in an undeterminable proximity to the main seats at the event. He departed from Moscow shortly after the parade, which reveals a lot when juxtaposed to the mounting problems between the countries.
It is important to keep in mind that whatever their disputes, both Turkmengaz and Gazprom put the political and personal interests of their countries’ presidents before their own industrial interests. Putin now almost exclusively talks the discourse of security and counter-terrorism and portrays Turkmenistan as the “weakest link” in the region. If previously energy trade with Turkmenistan was critical for Russia because exports were cheaper than developing the Arctic and Siberian resources, today Turkmengaz does not face a Russia interested exclusively in controlling the Turkmen energy sector. By signing a deal with Uzbekistan to replace Turkmenistan’s supplies, and by unilaterally stopping gas imports in 2016, Russia has shown that it can do without Turkmenistan in this sphere.
Turkmenistan without Russia, on the other hand, looks grim at the moment. The leadership has not been able to find buyers that could replace Russia. Export to China are not bring in cash. TAPI is expected, perhaps unrealistically, to do the trick but remains on blueprints for the other participating countries save Turkmenistan, which has begun building its section of the pipeline this year. It is still not clear who will secure the pipeline in Afghanistan, and although the Taliban have announced their support (source in English) for the project, it remains unclear how some of the issues relating to that matter will be resolved between the sides. Iran will only barter and the recent change of its situation in the international arena means that Iran can offer a rival and more feasible project than TAPI very soon. Selling gas beyond the Caspian Sea remains an unreachable dream because of the disputes between the Caspian states. With regards to Azerbaijan, Ashgabat has shunned the offers from Baku long enough that now SOCAR is unlikely to sign a deal unless Ashgabat gives up the disputed oil fields in the Caspian Sea to Azerbaijan.
At the moment, Berdymukhammedov has no other choice but to hear Putin’s terms and conditions and it appears that he visited Moscow recently to learn what they are. Given Moscow’s interests in the region, it seems that the Turkmen president has two options that could resume gas exports to Russia: either join Russia-led regional organisations and treaties or sign a Product Sharing Agreement with Gazprom. Neither option is welcome in Ashgabat.
China
At about 40 billion m3 per year, Turkmen gas makes up 46% China’s gas imports (Chen 2014, 7). It is planned that Turkmenistan will export about 65 billion m3 of gas per year by 2020. The energy trade with China might be good for Turkmenistan in the long run given that China looks to double its natural gas consumption in order to replace coal. At the moment, however, the gas that flows through the Trans-Asia Gas Pipeline (TAGP) is repaying China’s massive loans at the unverified rate of 185 USD per 1000 m3.
The Turkmen-Chinese energy relationship began with an intergovernmental framework agreement for cooperation on gas and oil signed in 2006 by presidents Saparmurat Niyazov and Hu Jintao. This framework agreement included plans for joint exploration of the potential gas fields in Turkmenistan and exports to China. The framework also served as the basis for commissioning the TAGP, which since then has grown into three pipelines stretching from Turkmenistan through Uzbekistan and Kazakhstan to the Xinjiang province of China. TAGP’s capacity reached 55 billion m3 per year in 2015.
China enjoys a special and coveted status in Turkmenistan. In 2007, CNPC became the first foreign company to sign a Product Sharing Agreement with Turkmengaz, which gave it licence to explore and produce gas in the Bagtyyarlyk field. A 30-year agreement to export 30 billion m3 a year was also signed. In 2008 the volume was increased to 40 billion m3 per year. In 2012, the two countries agreed to increase the volume of gas exports to 65 billion m3 per year by 2020 (for this purpose, a third line was added to TAGP; gas started flowing through it in 2014).
In September 2013, the Turkmen and Chinese presidents agreed to build a fourth line to TAGP, though this one will not be parallel to the existing three. It will have a 25 billion m3 per year capacity and will run through Uzbekistan, Tajikistan, Kyrgyzstan and end in Kashgar, Xinjiang. It is scheduled to be ready by 2020.
In 2009, while the Turkmen-Russian relationship deteriorated, Chinese vice-premier Li Keqiang and Turkmen president Berdymukhammedov signed an agreement that had China invest over 8 billion USD in two loan instalments (4 billion USD in 2009 and 4.1 billion in 2011) by the China Development Bank for the development of South Yolotan-Osman field.
The two countries agreed that Turkmenistan will repay its debt with gas. It is possible that Berdymukhammedov welcomed such an arrangement as a ticket to independence from Russia in the long run. China is also a more welcome alternative to Russia than any of the Western countries because it does not ask uncomfortable questions about democratic institutions and human rights. The Chinese loans are significant and have helped develop an efficient infrastructure for exporting gas to the East. We can further posit that there was no way Berdymukhammedov could have foreseen that the supplier relations with Russia could deteriorate to such an extent that would leave Turkmenistan without cash. Signing up to the ‘debt for gas’ policy meant that Turkmenistan’s income in hard currency will have to depend heavily on exports to Russia until its debt to China is cleared. As it turns out, the gamble did not pay off. Whether the Turkmen side could have done anything to keep their only paying client (however meagre) is another question but, perhaps, they should have reacted a bit less reflexively and a bit more reflectively.
Today, the over 8 billion USD loan from China seems to have been spent. It is reasonable to posit that the main beneficiary of this loan has been China. Turkmenistan developed the target sites by buying technology from China, by paying for Chinese experts to work on sites, and by buying manufactured goods for the construction of the sites and other related projects from private entrepreneurs who import those materials from China. It is not known how the accounting of this ‘debt for gas’ partnership is conducted. According to some estimates, China is reimbursing itself at 185 USD per 1000 m3 for this year’s supply. We are yet to see what terms the sides will settle on in the long run.
Despite the long-term benefits of such partnership with China, the fact is that Berdymukhammedov’s deal with China has contributed to the current economic crisis. We should worry about this immediate problem because, as I will discuss in Part III, he is responding to the crisis with an increasingly authoritarian backlash that has societal costs. There is no human cost that could justify whatever prosperity China’s sudden interest in burning more gas means for energy exporting countries like Turkmenistan.
While the bigger task for this energy-rich country is to overcome its geopolitical challenges and find new ways to monetize its resources, its leadership should seriously think about the ways it addresses failure inside the country, particularly, institutional failure. In Part III, I will focus on the issues related to freedoms of speech and dissent in the country that hamper the state’s ability to address the economic crisis in a manner that includes institutional failures in its economic and production sectors.
* Ronald Watson is a pseudonym for a business analyst with experience of working in Turkmenistan.