Kyrgyzstan: Future Economic Colony of Russian Gazprom and China?

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The sale of Kyrgyzgaz company for a symbolic price of US $1 to Russian gas monopoly Gazprom OAO (OTCMKTS:OGZPY) (MCX:GAZP) has been finalized and may represent a landmark of a new type of Russification of Kyrgyzstan.

Kyrgyzstan: Future Economic Colony of Russian Gazprom and China?

This new deal followed the one related to the military base in Kant, in which the Russians got an extension of their base until 2032, against the write off of about 200 million USD  of old debt (that was in any case impossible to collect). Another debt to Russia contracted during the former President Bakiev for 300 million USD should be written off over a period of ten years starting in 2016. Overall a good deal for the Russians: against a credit that they will never collect and without any further disbursement. Practically they find themselves paying approximately 25 million dollars a year against the 60 million dollars a year paid by the Americans for the use of the Manas facilities.

With this new agreement on Kyrgyzgaz , President Atambayev and many Kyrgyz are of the opinion that future problems with gas supply coming from Uzbekistan and Kazakhstan have now been solved and that finally the country have seen light at the end of the gas supply nightmare.  Looking to the economic and energy policy of Kyrgyzstan, this reporter is of the opinion that other problems will sooner or later surface although Kyrgyzgaz has been for many years a problem and a business failure and is practically bankrupt.

The new owner, Russian Gazprom OAO (OTCMKTS:OGZPY) (MCX:GAZP), will have to inject a considerable amount of money to reverse a consolidated trend created by inefficiency, obsolete equipment, and erratic supply that in several cases have caused the interruption of the service and the complaints of the population.

According to some figures Gazprom OAO (OTCMKTS:OGZPY) (MCX:GAZP) should invest in excess of 600 million USD, but it is not clear what such investment will cover and how it will take place. Taking for granted that the investment will take place, there is no guarantee that a flow of uninterrupted gas supply to Kyrgyzstan will materialize.

In the past, the interruption of gas was mainly due to the non-payment by Kyrgyzstan to suppliers in Uzbekistan and Kazakhstan, and a new supplier will certainly not exempt Kyrgyz users from the payment of higher prices to cover depreciation and new investments. Today the main debtors for the gas supply are Kyrgyz state organizations, and it is not clear how after the Russian take over they will be able to pay. Probably the Russians will adopt the safe formula of “no payment no gas” and this will certainly upset the users and will re-create the same problems that Kyrgyzstan has faced for years with Uzbekistan and Kazakhstan.

Controlling the energy sector of Kyrgyzstan represents an old ambition of Russia that in the past has put forward several projects with different investment proposals, but in actual fact, due to the instability of the country, high cost, the strong opposition of Uzbekistan and the so called multi-vector policy of Kyrgyzstan, various projects and promises have been regularly postponed. In the meantime both China and the United States entered the Kyrgyz scenario, while the war in Afghanistan after the withdrawal of the Russians took a different turn.

President Putin has promised a considerable investment in Kyrgyzstan, not only 600 million USD for Kyrgyzgaz, but also the few billion dollars for the Naryn River facilities and the Kambarata 1. From the other side, China has also announced and proposed loans and projects for billions of dollars. By all means this is big money that Kyrgyzstan will certainly not be able to repay without creating a political and economic subjugation to China and Russia and consequently renouncing a considerable part of its sovereignty.

To put it in a mild way, today Kyrgyzstan is trading its economic survival, balancing itself between China and Russia, while keeping an outstretched hand to Europe, and flirting with the U.S. that according to a recent announcement should vacate the transit center during 2014.

While China and Russia are busy promising large investments, the United States is building a new Embassy that will accommodate several hundred employees on the eve of the proposed departure from Kyrgyzstan. All this does not make sense unless we look at the entire operation in a different way that the United States may stay in Central Asia and Manas airport through the intermediation of Russia’s leadership, continuing to do the dirty job to guarantee security in Afghanistan. Russia will continue to evaluate the pros and cons of investment in Kyrgyzstan in exchange for a clear political say in the overall energy policy while China will proceed with the proposed infrastructural projects and expand all its trading activities.

Kyrgyzstan may certainly proceed with the closure of the transit center but the Americans in addition to other alternatives may also decide to deal directly with Russia and to reverse the decision probably with some small increase of the rent payment and a new change of name.

Irrespective of the political fanfare it should be said that the closing of the transit center, together with the withdrawal of NATO troops from Afghanistan, will make Russia the first loser, because in addition to the investment projects in Kyrgyzstan they will have to station thousands of troops in Afghanistan and Kyrgyzstan to guarantee security, and footing the relevant bill is certainly not going to be cheap. Also considering that in the meantime Russia is going to lose the lucrative business of supplying fuel to the Americans while having to invest billions of dollars in a country that in the last twenty years did not show itself to be a reliable partner.

Russian support to Kyrgyzstan, through large investments, in order to acquire additional political influence, doesn’t seem a good business and in any case is going to be a very expensive exercise, full of risks and with very little gain.

If Kyrgyz President Atambaev was recently quoted as saying “Without Russia we have no separate future,” it is possible that in Moscow someone may think that the local scenario may change and that one day someone may say the same for China.

“Kyrgyzstan: future economic and political colony of Russia and China?  is republished with permission of Stratfor.”

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