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KAZAKHSTAN AND TURKMENISTAN: A Look at Political and Regulatory Environments

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KAZAKHSTAN AND TURKMENISTAN: A Look at Political and Regulatory Environments

Kazakhstan Country Overview Since the fall of the Soviet Union in 1991, Kazakhstan has been the most important of the Central Asian states. It is the largest, most resource-rich of the region’s five countries and tends to serve as a bellwether for the region’s politics. Kazakhstan is strategically and geographically the middleman between its fellow Central Asian states (all of which it borders except Tajikistan) and Russia and China. With an estimated 100 trillion cubic feet of natural gas and 27 billion barrels of oil, Kazakhstan boasts more energy reserves than all four of the other Central Asian countries combined. Kazakhstan was the first Central Asian country in which Westerners seriously began developing oil and natural gas wealth after the Soviet collapse. Because of this, Kazakhstan has received more foreign direct investment than any other former Soviet state (including Russia). And most other Central Asian states with energy resources — Turkmenistan and Uzbekistan, for example — must traverse Kazakhstan to reach their customers, whether those customers are Russia, China or Europe, making Kazakhstan essential to any outsider with designs on the region.

But its geographic location and size have proved to be a mixed blessing. Kazakhstan is roughly one-third the size of the lower 48 U.S. states, but has only 5 percent of the U.S. population. It also lacks natural barriers separating it from any of its neighbors. Thus, even if the country were run perfectly (which it is not), it would be impossible to rule without the cooperation of at least one of its two larger neighbors. While Western and Chinese money flows into the region have modernized the country’s infrastructure, Russia has continued to play a dominant role in Kazakh political matters. Moscow made Kazakhstan the center of the Central Asian universe in that it made Astana the political go-between for Russia and the other four Central Asian countries. From Russia’s point of view, most of

the Central Asian states are not important enough to be dealt with on a daily basis. Russia holds quite a few critical meetings a year with the Central Asian states collectively and bilaterally, but the region does not hold Moscow’s attention compared to the former Soviet states to its west or the Caucasus region. Instead, Russia has looked to Kazakhstan to help Moscow deal with the other Central Asian states and to keep them in line.

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A Discernible Shift In the past few years there has been a discernible shift inside Kazakhstan politically, economically and in terms of foreign relations. It is important to note that, after the fall of the Soviet Union, Kazakhstan — with its enormous reserves of natural gas and, to a lesser extent, oil — was seen as a potential new energy source for both the West and the East. Kazakhstan has had very good business relations with Western companies, which are responsible for developing most of the country’s oil and natural gas fields. When Western companies and investors swooped into Kazakhstan, wooing Astana with lucrative energy, investment and development deals, Russia was pretty much in the same position as the other former Soviet republics. Both Kazakhstan and Russia were broke and in political and economic disarray and had enormous potential for partnering with the West. Both counties allowed the West, which had modern energy technology and the cash to back it up, to flood their energy industries with investment dollars.

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Neither country was happy about giving up control over its own industries (or, in Russia’s case, over Kazakhstan’s industries), but this was tolerated throughout the 1990s because neither Moscow nor Astana wanted the heavy burden of funding their vast projects, and neither had the technology to meaningfully tap their reserves. (This was especially seen in Russia’s Sakhalin and Kazakhstan’s Caspian projects.) Lastly, Kazakhstan and Russia were still linked through energy, with Kazakh exports going through Russia, so the Kremlin had a direct say in how Astana conducted its energy development. Both countries initially saw the benefits of having Western partnerships, although Russia eventually realized the value of controlling its own strategic energy interests, a realization that would also emerge in Kazakhstan. There are many things that have contributed to this change in mind-set in Kazakhstan, starting with the fall of the Soviet Union and Western infiltration into the former Soviet sphere. The investment environment that looked so promising to the West in the 1990s looks considerably less promising today, mainly because of four issues and trends:

1. Kazakh President Nursultan Nazarbayev’s vision for his dynastic succession. 2. The consolidation of Russia (politically and under economic nationalism), which has become

an example for Kazakhstan. 3. The global financial crisis, which has given Astana the incentive to lock down Kazakhstan’s

strategic sectors. 4. The Russian resurgence, which pits Russia against the West.

As these issues and trends play out within and around Kazakhstan, they are having a distinct impact on the government, its foreign relations and the ability of foreign firms to operate inside the country. 1. The Kazakh Dynasty During his 16 years as president, Nazarbayev has been transforming his family into a dynasty — albeit a dysfunctional one — ruling the country’s strategic industries while gradually pushing out any opposition. Nazarbayev, 69, is a former steelworker who became Communist leader of then-Soviet Kazakhstan in 1989. He has ruled Kazakhstan for 20 years as an “Asian democracy” in which all political parties, media and businesses are tightly controlled. In 2007, Nazarbayev signed a constitutional amendment that allowed him to seek as many terms as he wishes, thus making him president for life. Early on in his rule, Nazarbayev balanced the country’s energy boom and the subsequent rise of an oligarchic class with his political clans — made up of Kazakhs, Russians and Uighurs — and his desire for a Central Asian dynasty. The idea of a Central Asian dynasty is not unique to Kazakhstan and is a common theme among Central Asian states. Former Kyrgyz President Askar Akaev’s children and in-laws littered the political and parliamentary scene until the 2005 Tulip Revolution that ousted Akaev. Uzbek President Islam Karimov’s daughter, Gulnara Karimova — dubbed the “Uzbek Princess” — runs most of the country’s economic sectors, including natural gas, real estate and cement. Gulnara recently married the country’s foreign minister, increasing her odds to be Karimov’s successor. Tajik President Emomali Rakhmon’s nine children and his in-laws run every major industry in the country (businesses, media, banks, even the stock market), though they keep this a state secret with businesses registered under pseudonyms or no names at all. Nazarbayev’s plan was to expand a state dynasty into a regional dynasty when he married off his youngest daughter, Aliya, to the son of Kyrgystan’s president. The match was dubbed “Central Asia’s Royal Wedding,” though differences between the two countries soon ripped the couple apart, and Aliya returned to Kazakhstan to marry one of the country’s top construction oligarchs.

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But Nazarbayev has made it clear that the only people in the country he can trust are his family members (though not, it would appear, his in-laws), and this affects all aspects of politics, business and life in Kazakhstan. Consolidating control over his family and country, the president has passed numerous laws that provide privileges for him and his family (including legal immunity), eliminated outside clans and purged political opponents. He also constantly reshuffles top government and industry leaders to ensure that no group or individual can emerge to rival him. It is all part of a highly secretive succession plan devised by the aging president, who at 69 is three years beyond the average life expectancy in Kazakhstan, and whose health is thought to be deteriorating. The Opposition There is no real opposition movement in Kazakhstan, where most political forces are consolidated behind the president’s political party, Nur-Otan. Many of the country’s leading opposition politicians have been ejected from the country or murdered. Nazarbayev has publicly discounted any connection to this purge, blaming most of it on his former son-in-law, Rinat Aliyev, although there is much evidence that Nazarbayev signed off on Aliyev’s plan before the two had a falling out. There has also been a concerted movement by Nazarbayev’s Interior Ministry to neutralize or break up opposition parties. Results were apparent in the 2007 election, in which the opposition won no parliamentary seats. The parties faced numerous obstacles in their campaigns, from the inability to register as political parties to a new requirement to win 7 percent of the vote (up from 5 percent in previous elections) to gain parliamentary representation. The longest-standing opposition party is the Communist Party of Kazakhstan (KPK), which was split into two parties in 2004 under government encouragement to prevent it from becoming a viable opposition force. The Family Nazarbayev and his wife Sara Nazarbayeva have three daughters — Darigha, Dinara and Aliya —each of whom controls a different sector of the economy as well as her own internal family clan. The sisters do not always get along, and their husbands (or ex-husbands) are a constant concern to Nazarbayev, who does not necessarily consider those who have married into his family as part of his overall dynastic succession plan. Darigha’s Clan In recent years, joining her father on visits to foreign countries like the United Kingdom and the United States, Nazarbayev’s eldest daughter, Darigha, became the touted front-runner to succeed her father as Kazakhstan’s president. Darigha controls the country’s media and part of the banking sector. She used to run the second-largest political party in Kazakhstan, Asar, although Darigha was forced to merge her party with her father’s in 2006 during one of Nazarbayev’s consolidation efforts. Darigha was briefly on the outs with her father when her then-husband and fellow clan leader, Rakhat Aliyev, began strong-arming other power players, especially his brother-in-law, Timur Kulibayev. Between 2001 and 2007, Aliyev was accused of plotting a number of coups, and Nazarbayev sent him away from the country on a string of foreign postings. In 2005, Kulibayev and Nazarbayev’s closest friend, Nurzhan Subkhanberdin, accused Aliyev of organizing death squads to murder prominent businessmen in Kazakhstan in 2005 and 2006 without Nazarbayev’s knowledge. In May 2007, Nazarbayev responded by sending Aliyev to Austria, where Aliyev gave a series of interviews in which he stated his intention to run for president in 2012, replacing his father-in-law. Nazarbayev’s response to this was to call for Aliyev’s arrest — the first time an arrest warrant had ever been issued against a member of the ruling family. Since then, Aliyev has been traveling around Europe searching for asylum. There are some rumors among Kazakhstan’s elite that Aliyev has found an ally in American lobbyist Alexander Mirtchev, founder and president of the U.S.

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consulting firm Krull Corp. Mirtchev and his firm are thought to have stashed away millions of dollars from the country’s deep energy coffers to help line Nazarbayev’s pockets. Mirtchev also has been a middleman between Nazarbayev and U.S. energy firms operating in Kazakhstan, advising the Kazakh president on which companies and projects may be more beneficial for the country. But the American lobbyist has recently befriended Aliyev, and some in Astana say his ulterior motive (this is highly speculative) is to find out what the exiled prince knows about Nazarbayev and the inner workings of his government.

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Darigha had remained quiet for years about the conflict between her husband and father, waiting to see if her father would accept Aliyev once again like a prodigal son. But when Nazarbayev made it clear that Aliyev was a traitor to the family, Darigha filed for divorce. This left Darigha searching for allies to help her stay on her father’s good side and rebuild her power base. In the process she gained a very formidable supporter, Subkhanberdin (her father’s closest friend), who brought a slew of banking interests into her clan. Subkhanberdin has become a mentor to Darigha and Aliyev’s son, Nurali, 24, who is Nazarbayev’s favorite family member. In 2007, Subkhanberdin made Nurali head of the country’s seventh-largest bank, Nurbank. Nurali is also managing the country’s top television and radio stations. Nurali has a ruthless reputation among many of the Kazakh elite, who say he puts financial gain above human life and will not flinch from destroying any opponent. Dinara’s Clan Nazarbayev’s middle daughter, Dinara, does not herself have political ambitions, although her husband, Timur Kulibayev, certainly does. The couple is in charge of most of the energy and mining projects in the country, and Kulibayev has held a number of lofty positions, including vice president of the state-owned energy company KazMunaiGaz, first deputy chairman of the state-owned bank Samruk and Kazakh minister of construction. Kulibayev’s father, Askar, was also a political force during Soviet times and served as governor of the oil-rich Atyrau region. Several years ago, Kulibayev embarked upon a low-key and ambiguous political strategy. Claiming that he does not want to enter politics, he has gathered around him the oligarchs who are the most disappointed by Nazarbayev’s policies while assuring his father-in-law that he is simply keeping dissenters in check. Kulibayev played a key role in the downfall of this brother-in-law, Aliyev, and has been known to counter Darigha’s power inside the government. In 2008, Kulibayev’s close friend and ally, Karim Masimov, was named prime minister, which many in Astana said was a sign of Kulibayev’s rising influence -- although Masimov insists he is his own political force. Without revealing his intentions, Kulibayev has eyes for the country’s top spot and is rumored to be one of the many possible successors to Nazarbayev. For now, Kulibayev is focused on consolidating his political control, especially in the energy and mining arenas, without crossing any lines that would portray him as a threat to Nazarbayev — a very difficult balance to maintain. Aliya’s Clan The youngest daughter, Aliya, is politically the weakest of the three, although her father had very high hopes for her when she was married off at 18 to the Kyrgyz president’s son. After divorcing him, Aliya was married off to an oligarch named Daniyar Khassenov, and she now controls the country’s construction monopoly, Elitstroi. Aliya and her husband have no political ambitions and are more business-minded. Aliya is also known for her extravagant lifestyle, something she is constantly badgered about in the media. The Oligarchs One of the groups with no family ties to the president is a very small circle of oligarchs who hold some political weight in the country. Although there are a handful of lesser oligarchs under Nazarbayev’s control, this more elite circle consists of three non-Kazakh oligarchs who are part of an organization called the Eurasia Group (not to be confused with the international consulting firm of the same name), which serves as the link between foreign energy players and the government. When the Soviet Union fell, the Eurasia Group took control of many key industries in Kazakhstan, such as energy and mining. The three Eurasia Group oligarchs are Israeli citizen Alexander Mashkevich, Uzbek-born Belgian citizen Patokh Shodiev and Kyrgyz-born Uzbek citizen Alijan Ibragimov.

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The group proceeded to create lucrative relationships with foreign companies like Chevron Corp. and ExxonMobil to persuade them to enter Kazakhstan. The Eurasia Group also has personal and political ties to the Kremlin and has long been a wild card among Kazakhstan’s power clans. The group has had difficulty deciding how to handle instability within Nazarbayev’s family and his plans for political and economic consolidation and has never directly interfered in domestic politics, although it has opened the door for foreign interference from the United States, Europe, Russia and China. However, the Eurasia Group recently has become more critical of Nazarbayev’s sweeping consolidation inside Kazakhstan, which has tightened control over all sectors of the economy, including energy. This criticism has not been met with much tolerance from Nazarbayev or the family, who see the Eurasia Group as a growing problem that will likely have to be purged. Sensing this shift, the three oligarchs changed their citizenships from dual Kazakh-foreign to strictly foreign. This change in Eurasia’s status has been confusing for the foreign companies that have worked with the group in Kazakhstan and are now seeing it being stripped of its political power. Nazarbayev’s representatives have not condemned the Eurasia Group outright, but they have alluded to the group as one of the “hidden monopolies” in Kazakhstan, and its future in the country looks grim. The Non-Family Players Though most key political figures in Kazakhstan answer to Nazarbayev, there are four names that should be singled out because they pull their own weight in the country and could use their political clout to succeed Nazarbayev or challenge his successor: Karim Masimov, Aman Shabdarbaevu, Imangali Tasmagambetov and Baurzhan Mukhamedzhanov. Masimov is currently the prime minister of Kazakhstan and is considered one of the most influential figures within the president’s inner circle. Masimov became prime minister in 2007 after serving as deputy prime minister, minister of economy and minister of transport. One of the most learned and worldly of Nazarbayev’s inner circle, Masimov is fluent in Uyghur, Kazakh, Russian, Chinese, English and Arabic. He has studied in China and has headed up Kazakhstan’s trade relations in Hong Kong. He also has a friendly relationship with Beijing and has overseen much of the energy deals between the two countries. The prime minister is a large proponent of Kazakhstan’s diversifying its international relationships, especially with the Middle East and East Asia. Masimov is well-liked inside Kazakhstan and by most of the clans, although he may be less popular with the West and Russia, which consider him fixated on an Asian-friendly future for his country. Shabdarbaevu is currently national security chief in Kazakhstan, although he is constantly shuffled between that position and others similar to it. As national security chief, Shabdarbaevu has had enormous control over a group that operates much like the Soviet-era KGB. Kazakhstan’s intelligence services have kept tabs on and infiltrated most industries and levels of government. The intelligence services are also heavily connected to Russia’s Federal Security Service (FSB), the KGB’s successor. This has made the increasingly suspicious Nazarbayev try to break apart the intelligence services and reduce Shabdarbaevu’s hold on such a powerful group. But as with many restructurings Nazarbayev has attempted in the past year, Shabdarbaevu has remained in his top post — a sign that the president is not confident enough to sack the potential rival just yet. Shabdarbaevu has not made a move for the country’s top spot, but he is one political figure who has a following that could actually complicate Nazarbayev’s plans. Tasmagambetov is the mayor of the oil-rich city of Almaty, a longtime friend of Nazarbayev and a rival of his son-in-law, Aliyev. Being mayor of the country’s economic center, Tasmagambetov enjoys solid political and economic backing in the region and is viewed by some as a possible Nazarbayev successor. Tasmagambetov often touts himself as a pure “product” of Nazarbayev, leaving no doubt about his unfailing fidelity to the president or his neutrality among the country’s most influential groups. Tasmagambetov served as governor of Atyrau in 1999, transforming the

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outlying province into the country’s richest oil region. He served as prime minister in 2002 and foreign minister in 2003 before deciding to leave the Cabinet to become mayor of Almaty. He continues to control Atyrau-Balik, the company that holds a monopoly on the export of Kazakh caviar. Tasmagambetov has maintained close ties inside the foreign ministry, energy sectors and with Nazarbayev son-in-law Kulibayev. Tasmagambetov has never hidden his hatred for the now-ousted son-in-law, Aliyev, often airing conflicts with him in the media. When Aliyev fell into disfavor in early 2007, the Almaty mayor pressured Nazarbayev into initiating a legal investigation against him. Indeed, one of Nurbank’s high-ranking executives, who according to Kazakh authorities was killed at Aliyev’s behest, is none other than Abilmazhen Gilimov, a cousin of Tasmagambetov. The Almaty mayor is also in competition with Shabdarbaevu, who has tried to pin a few business fraud scandals on Tasmagambetov. Tasmagambetov wants to come in under the family’s radar and control more strategic sectors, such as construction, road and rail transportation and real estate. He also values his ties with the energy sector and is willing to work with pretty much any powerbroker or group — foreign, oligarch or family — in order to keep his position. This has made the president and the family somewhat suspicious, and they have placed Tasmagambetov on the list of political heavyweights to keep in check or dispose of. Mukhamedzhanov is the country’s interior minister, which gives him direct access to the security services and oversight of the country’s interior forces. Mukhamedzhanov has been leading Nazarbayev’s political purges, including the one that ousted Aliyev. Mukhamedzhanov has been accused of helping Nazarbayev cover up some of the political assassinations that have plagued the country for decades. Mukhamedzhanov also heads up Kazakhstan’s Organization for Security and Co-operation in Europe center, which has connected him with security officials from around the world, particularly from the West. But many among Astana’s elite say that Mukhamedzhanov is more of an ally to Tasmagambetov than to Nazarbayev, and that the pair is being closely watched by the other clans. The Succession Nazarbayev’s plan for succession is a closely guarded secret and any discussion of it, even by the media, is taboo. Although the country is technically going to hold a presidential election in 2012, it has been made clear that Nazarbayev alone will choose, or will have chosen, the person who will take over when he steps down or dies. This outcome is something that is widely known in Kazakhstan, and it has little to do with simply choosing a successor and everything to do with maintaining the Nazarbayev dynasty. The rumored front-runners from the family are Nazarbayev’s oldest daughter, Darigha, and son-in-law Kulibayev, while some observers in Astana also include any of the four non-family political players. But STRATFOR sources personally close to Nazarbayev say the president wants a true dynastic succession, meaning passing the torch to a son. The problem is that Nazarbayev does not have a son (that is publicly known of), so the president has decided that his grandson, Nurali, is the next logical choice. This brings up another problem: Nurali is still in his early 20s, without much governmental experience. Thus, an interim plan is being formed in which either Darigha or a Nazarbayev loyalist would take the helm first while grooming Nurali. But this leaves the door open for clan infighting, which could tear the government apart if the father of Kazakhstan is not around to maintain order or has not solidified his transition plan.

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2. The Russia Example Russia has made it no secret that it is trying to reassume a leading position in the world politically, economically and socially. The Kremlin isn’t looking for a return of the Soviet Union per se, but it is looking to re-establish its sphere of influence and push back the Western encroachment of the past two decades. In order to do this, Russia has had to consolidate its own power internally, which roughly began when Vladimir Putin took the helm in 1999 and lasted through 2006. On the economic front, the Kremlin took back the strategic industries inside Russia that had fallen into Russian oligarch or foreign hands, most notably oil and natural gas. The most well-known examples of this in the energy sector are the breakup of the oligarch-controlled oil giant Yukos, seizure of the Sakhalin projects and pressure on TNK-BP. All of this occurred as the Kremlin consolidated most energy projects inside the country under its net of state-controlled energy firms. Kazakhstan Follows Suit The Kazakh government has watched the so-called “Russia example” of consolidating political influence within the country and taking back strategic assets and sectors, and it has wanted to start its own rollback. Unlike Russia, Kazakhstan is not looking to establish itself on the world stage, but it does want to secure its own borders and guard against foreign influence on its government and strategic sectors. Lacking the political clout with the West that Russia has, Kazakhstan has had to make subtle moves and has done so only in the past year, although it has been preparing to make these moves for a long time. Kazakhstan has been changing its laws and shifting its priorities behind closed doors in order to find a way to finally make its consolidation moves. In 2005, Nazarbayev passed a law that allows the president to change the current contracts with foreign investors at his whim and disregard any international ruling if Nazarbayev’s choice is challenged. As if they were witnessing Russia’s moves all over again, foreign investors began to worry that Nazarbayev’s control could threaten their pieces of Kazakhstan’s enormous energy wealth. At the same time, there was a destabilization within Nazarbayev’s family and circles that postponed any Russian-style consolidation and gave a unique opportunity for all foreign parties to push their own agenda one last time. With internal political struggles more or less managed, Nazarbayev seems back on course with new and forceful anti-corruption and national security laws. The fight against corruption is part of a large-scale plan to strengthen his vertical authority that has become (as in Russia) an attack against oligarchs, who are the very people most foreign energy firms work with in the country. In March 2008, Nazarbayev spoke at length about economic reforms and the government’s plan to assault those he felt threatened his hold on the country and its wealth: “The hidden monopolies that exist in metallurgy, banking, insurance, the chemical industry and other sectors must be destroyed.” His words were taken by most as a call to action. Authorities took it on themselves to disaggregate monopolies and increase the state’s holdings in the country’s largest companies. Economic Nationalism In the 1990s, Kazakhstan touted itself as a model adherent of established business procedures and regulations, including applicable international laws. The Kazakh Constitution, laws concerning investments and other statutes gave foreign investors a certain amount of security and confidence in their business dealings in Kazakhstan. These laws implied that international laws held sway over domestic laws. Kazakh laws were different than those in Russia, where national interest dominated business dealings.

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Now Kazakhstan has embraced “economic nationalism,” which has become part of every government or business deal. Beginning in 2005, laws were enacted that annulled, revised or allowed future action on contracts that the government considered damaging to the country’s economic security. These changes were followed in 2007 by amendments to natural resource laws. Now, domestic laws take priority over international laws when it comes to business dealings in Kazakhstan. It is a complete shift in priorities in the country and gives the government pretty much free rein to supersede prior commitments. The wording of the new laws is more vague than before, which means they can be interpreted as the government sees fit. For example, the government does not define the “strategic industries” covered by the new laws, which often contradict themselves in terms of whether they can be retroactively applied against existing contracts. New clauses stipulate that as Kazakh economic interests “change,” it will be left to the discretion of the state to decide, on a case-by-case basis, how to interpret the law in the best interests of the country. The new amendments, especially those in the Civil Code of the Republic of Kazakhstan, say the government can abide by other laws pertaining to foreign business dealings if the case does not relate to any of Kazakhstan’s strategic industries. In any case, it is up to the discretion of the state. Such wording is very similar to that used in Russia’s ever-changing legal code. In Kazakhstan, the government is now heavily focused on these so-called strategic assets, which are mainly mineral resources such as coal, oil, natural gas, uranium and metals. In January 2008, according to STRATFOR sources in the government, Kazakh Energy Minister Sauat Mynbaev began circulating documents within the government that said his ministry would impose new duties, taxes and revisions to any contract that the ministry deemed “insufficient to the expectations of the Kazakh government.” Mynbaev also said in a January 2008 press release that “the Russian approach is deemed the most suitable for imposing the exports duty.” This meant that Kazakhstan, like Russia, could pressure its nonstate partners through new tax and export regimes. This change in Kazakhstan’s business-friendly environment defied earlier goals of accommodating Western investment, but the Kazakh government understands that the change could jeopardize its Western relationships. “Changes to the country’s business laws could hold back Kazakhstan’s negotiation efforts to join the World Trade Organization,” Mynbaev has said. “Irrespective of certain hindrances in WTO talks that would come along with that, we have to do it right now, as there would not be any chance for us to do it later. This was about Kazakhstan’s national interests.” One resulting dispute has emerged between the Kazakh government and the foreign consortium led by the Italian oil and gas company ENI, which is developing the giant Kashagan oil field. Although the field is technically complicated and the Kazakh government needs all the help it can get, it has clouded the rules concerning delays, cost overruns and other potential bumps in the project to the point where the government, if it wished, could find the consortium in violation of Kazakhstan’s economic security. It is not just in the energy sector where this mind-set is shifting. The government reorganized metals giant Kazakhmys and gained a greater share in the Eurasia Group. Even the media holding company controlled by one of the president’s daughters is slowly being transferred to the state. Since October 2008, the new national security laws have allowed the government to consolidate the telecommunications sector, limiting any nongovernmental participation to a minority stake. Meanwhile, Kazakhstan is watching how Western companies inside Russia react to the Kremlin’s strong-arming over energy projects. While there has been a massive drop in investment in new fields in Russia, other projects in which the government has become forcefully involved (like Sakhalin-2) are successfully up and running. Kazakhstan does not want to run off all the foreign

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investors. It simply wants to figure out how far it can push its way into projects and get more money out of project participants without completely ruining energy development in the country. 3. The Global Economic Crisis The global economic crisis has allowed Kazakh authorities to take this economic nationalism mind-set to the next level by going after assets they deem “in trouble” as well as those they consider “strategic.” Thus far, Kazakhstan has been the only Central Asian economy to really feel the fallout from the global financial crisis; the economies of the other Central Asian countries simply are not developed enough be affected. On some fronts, government moves fall under the guise of “reacting to the crisis.” In reality, they exemplify the government’s attempt to exploit the opportunity by strengthening an already firm hold on the country’s economy at a time when oil prices are low and investors are pulling back. The financial situation in Kazakhstan has deteriorated rapidly because of the extreme indebtedness of its banking sector to foreign lenders. This was caused by a massive expansion of the sector, which has grown at nearly 50 percent annually since 2000. According to Fitch, the forecast for Kazakhstan’s GDP growth in 2009 is 2.5 percent, and only 1 percent for 2010, down from an annual rate of 9.6 percent from 2003-2007. As the economic crisis hit, oil prices began to tumble from their July 2008 high of $147 a barrel. Kazakhstan depends on oil for more than 70 percent of its export revenue and for more than 76 percent of its foreign direct investment; thus, its economy was hit from multiple angles. Western money sought an exit from emerging markets, and oil fell to less than $50 a barrel. Kazakh banks, which borrowed freely from the West while Kazakhstan’s economy was fueled by high energy prices, buckled under the pressure. Meanwhile, the government bought up shares in the banks to keep them afloat, and the country’s currency, the tenge, started to crash. At this point, Nazarbayev changed course. Instead of trying to modernize and Westernize the country, he began nationalizing banks and trying to keep as much cash in his hands as possible. The economic crisis in Kazakhstan has given Nazarbayev an opportunity to consolidate control over the banking system, which is privately owned for the most part. He has made sure that his family members have a stake in almost every important economic sector in the country. Nazarbayev thinks more in terms of dynasties than governments and seems to believe that the entire country is his family’s empire. Nazarbayev already has installed grandson Nuri Aliyev as chairman and majority shareholder of the seventh-largest Kazakh bank, and as deputy head of the Development Bank of Kazakhstan. Essentially, Aliyev is in charge of the country’s bank rescue package and stimulus plan, which is valued at roughly $21 billion (or 20 percent of GDP). Aliyev also controls how the country’s reserve fund, which holds more than $50 billion, is used to fight the crisis. In February, the Kazakh government announced it was using $2.1 billion from its Samruk-Kazyna National Well-being Fund to buy 78.1 percent of BTA, the country’s largest bank, and to purchase 76 percent of shares in Alliance Bank, the country’s fourth-largest bank, for a symbolic sum of less than $1. On Jan. 30, a third bank, Kazkommertsbank, received just under a $1 billion from the same fund as part of a recapitalization effort and the partial nationalization of 25 percent of its shares. But the economic crisis has allowed another force to move in on the Kazakh banking system: Russia. Most likely, Nazarbayev cannot save the banking system all on his own. Government oil coffers are large, but they would have to be almost completely emptied to pay off all of the foreign debt. A great part of the Kazakh banking system may come up for sale in the next few months, and Russia, looking to control Central Asia and being one of the few countries with real cash on hand, will be an eager buyer. Plans are already in motion for Kremlin-controlled Sberbank to purchase BTA.

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Moscow wants to make sure that former Soviet countries do not make any deals independent of Russia as it surges back into the international arena. The financial crisis in Kazakhstan is, among other things, an opportunity for Moscow to lend a helping hand to an important neighbor, as long as Astana continues to toe the Moscow line. 4. The Russian Resurgence Once Putin felt confident that he had consolidated control of Russia under the banner of economic nationalism, his eyes turned to Russia’s former Soviet sphere. Kazakhstan became a prime target, especially after its energy sector cut Russia out of the export links. In 2008, Kazakhstan began contributing oil supplies to Azerbaijan’s Baku-Tbilisi-Ceyhan pipeline, which was the first pipeline from the non-Russian energy-rich states to the west that did not cross Russian territory. Russia was slowly pushing back on its former Soviet states, and it needed to make a grander gesture to fully let them know that Russia controlled their futures, regardless of whether they had ties to the West. This gesture was made in August 2008 when Russia invaded Georgia. The Russians made it clear, at least for now, that they can effectively operate on their periphery and that their neighbors should not be indifferent to their wishes. This new reality rang true in Central Asia, which had been flirting with deeper relationships with the West, China and even Iran. In the wake of the Russo-Georgian war, states such as Kazakhstan, Uzbekistan and Turkmenistan quickly sought to fortify their relationships with Moscow and also started rebuffing visits and energy deals from other powers. In the month after the war, for example, Kazakhstan decided not to resume oil shipments — which had been suspended because of the conflict — across the Caspian Sea to Azerbaijan and then to the West. Overall, the Central Asian states moved back toward Russian control, and their flirtation with other powers (especially the West) diminished. The Future of Kazakh Energy Major growth in oil production in Kazakhstan is expected over the next decade. The Tengiz field is expected to double, and the Kashagan field is expected to add another 1 million barrels a year within the next two years. But the future of Kazakhstan’s energy sector is dependent on two things: transport routes and nationalization. Kazakhstan has a plethora of preliminary deals either on the table or agreed upon with energy firms from the West, Russia and China, but none of those matter if the energy cannot be transported, or if the government interferes to the point that it scares investors away. In reality, Kazakhstan’s geography makes it difficult for the West to be a major destination for Kazakh energy without having Russia (or to a much lesser extent Iran, if the links go south) playing intermediary. But with Russia firmly looking to prevent and not expand links between Kazakhstan and the West, Moscow has clamped down on acting as a transit country. In November 2006, Russia began squeezing one of the few non-Russian-controlled pipelines carrying Kazakh oil to market through its territory. The Caspian Pipeline Consortium (CPC) pipeline ran from Kazakhstan’s Tengiz oil field to the Russian port of Novorossiysk. The Kremlin said the CPC — controlled by Chevron — was not paying off its debt fast enough. To make the line more “effective,” Moscow could raise transit fees to the point where the CPC could go bankrupt. In any case, it is moving in on the CPC project with its “gray” energy company LUKoil (“gray” because it is not officially state-owned but does the Kremlin’s bidding). LUKoil plans to purchase BP’s stake in CPC, something that could occur by the end of April.

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Of course, Kazakhstan is interested in non-Russian export routes, but most heading to the West are compromised. The oil shipments to Azerbaijan’s BTC pipeline have been interrupted, as we have mentioned. Plans for a Trans-Caspian natural gas pipeline from Kazakhstan and Turkmenistan across the Caspian Sea to Azerbaijan and then onward to Georgia, Turkey and ultimately Europe have been a dime a dozen over the past few decades. The Trans-Caspian line is tricky and there are good reasons the line has not been built, among them legal issues surrounding the Caspian Sea and the area’s tough terrain. Technically, Kazakhstan should have Russia’s approval for a Trans-Caspian line, but since Russia’s claim to Caspian waters has never been legally decided, the project could proceed without Russian permission. Even so, a Trans-Caspian line would have to surmount the legal and physical challenges and get both Kazakhstan and Turkmenistan on the same page. This leaves only one truly viable route for Kazakh energy to move through other than Russia: China. China’s desire for strong connections with Central Asia is neither new nor secret. China has been concerned that its access to ample energy markets and resources could be compromised by its geographic location and modernizing economy, which makes the country increasingly dependent on maritime trade. A powerful rival could cut the country off from those trade routes, so China has been trying to develop a land-based energy supply system. Simply put, China’s strategic imperatives dictate dealing with Central Asia. Since the mid-1990s, China has been getting its foot in the door with energy projects across Central Asia, particularly in Kazakhstan. This started with small oil fields in northwest Kazakhstan and gradually built into networks of oil fields and larger projects throughout the country. In time, Chinese state firms built a pipeline to connect their projects to other infrastructure just north of the Caspian Sea.

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Over the last few years, China has started linking up pieces of old Soviet-era pipes with the goal of cobbling together a line reaching all the way from the Caspian across Kazakhstan to western China. Parts of it already are operational, shipping roughly 200,000 barrels per day (bpd) from central Kazakhstan to China. One of the deals provides the money for the last pipeline link in central-western Kazakhstan. Once it is complete, China’s very first line — the one near the Caspian — will be reversed and linked in, and the entire project should be pumping approximately 400,000 bpd of Kazakh crude to China by sometime in 2009. Later stages will aim to increase the pipe’s capacity to 1 million bpd. Although concerned about Western ties in its sphere of influence, Russia does not seem bothered by the Kazakhstan-China oil pipeline. Russia understands energy and Central Asian politics better than most countries, and it knows that China is only looking for energy and not political clout in Central Asia, at least over the short to medium term. Both Moscow and Beijing know that China is not looking for a fight with Russia, and that it can simply lay the groundwork for a much larger relationship with Central Asia decades down the line after Russia has firmly reassumed a more dominant geopolitical position. Turkmenistan Country Overview Of all the countries in Central Asia, Turkmenistan is now being looked upon as a “laboratory of transition.” Turkmenistan is a desert state slightly smaller than Texas, located north of Iran in the heart of Central Asia and bordered to the west by the landlocked Caspian Sea. The former Soviet republic gained its independence in 1991 after the Soviet Union dissolved and, until President Saparmurat Niyazov’s death by cardiac arrest on Dec. 21, 2006, was under the rule of one man. And an eccentric rule it was. Niyazov adopted the name “Turkmenbashi” (“Father of the Turkmen”) and crafted a cult of personality around it, applying his appellation to a meteorite and a line of household products while erecting statues of himself in the country’s capital, Ashgabat. Aside from its former leader, Turkmenistan’s biggest claim to fame is that it is believed to be the home of the world’s fifth-largest natural gas supply. Currently, its existing infrastructure is Soviet-era and creaking, and nearly all of its natural gas exports — about 67 billion cubic meters per year — are sent north and west to Russia. Without those shipments, Russian state energy firm Gazprom would find it impossible to both satisfy domestic Russian natural gas demand and fulfill its export contracts with Europe and Turkey. Turkmenistan’s natural gas fields — ones that are currently being exploited and those that have never been touched — are often pointed to as sources for potential energy infrastructure projects that could send natural gas to Asia via Kazakhstan, to South Asia via Afghanistan or to Europe via a subsea Caspian pipeline. If Gazprom, the world’s largest producer, shipper and exporter of natural gas, believes Turkmenistan is of critical importance, then a presidential death and a shift in direction could have significant economic implications for the region — and the world. But to understand how Turkmenistan is today, one has to understand its late leader. The dark clouds of Niyazov’s reign still hang over the country, keeping virtually all international powers from making any economic or geopolitical inroads. However, most observers inside and outside Turkmenistan believe these clouds will dissipate over the next few years, allowing a scramble over the country’s spoils. Large global players are now trying to lay the groundwork for this free-for-all. Foreign Competition Under Niyazov, Turkmenistan assumed a “neutral” role geopolitically. This has turned into more of an isolationist policy, despite current President Gurbanguly Berdimukhammedov’s expressed desire to attract foreign investment. Preoccupied with internal issues, he has taken no specific action to

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date to improve the investment climate. Meanwhile, Russia, Iran, the United States and China are jockeying into position not only to get their hands on the country’s vast energy wealth, but also to exploit its strategic position among so many regional powerbrokers. Currently, Russia still holds the most power over Turkmenistan, although Moscow cannot dictate the country’s behavior. Russia must have Turkmen natural gas to maintain its strategy of using energy as a foreign policy hammer; replacing Turkmen supplies would take a decade and tens of billions of dollars that Gazprom simply does not have. Using energy as a hammer is one of Russia’s favorite and most effective foreign policy tools, and there is little Moscow would not do to ensure that it gets its way and maintains control over Turkmenistan. Meanwhile, China is in the process of drawing a knife across Central Asia, slicing off the southern four republics from their traditional overlord, Russia, by running a pipeline to Turkmenistan. Turkmenistan makes up the bulk of Central Asia’s natural gas exports, so by securing access to Turkmen natural gas, Beijing could cripple Moscow’s ability to meet Russian and European natural gas needs. Turkmenistan is fully open to China’s moves, especially since China pays up front without any political strings. However, because Turkmenistan has yet to drop or modify its laws on foreign investment, Beijing is still waiting to flood the country with investments and deals. For Iran, Turkmenbashi’s death presented a unique opportunity either to strengthen ties or pull Ashgabat into a more Tehran-friendly orbit. For the first time since the early 1990s, however, relations between Ashgabat and Tehran appear to have cooled, especially since Turkmenistan began asserting itself as a natural gas supplier, charging something closer to a market price. This led to a natural gas cutoff from Turkmenistan to Iran in January 2008, at the height of winter. Notably absent from this game has been the West, until recently. Optimistic Americans and Europeans might think Niyazov’s death gave them an opening. But in all honesty, there is still a legacy left inside Turkmenistan of constant distrust between the Turkmen leaders and the West. Niyazov was a supporter of the 2001 war in Afghanistan that was launched by the United States, but the 2003 Iraq war deeply affected Niyazov and the rest of the Turkmen government, particularly in their view of the United States. The Iraq war was, in Niyazov’s mind, essentially an overthrow by the United States of a very familiar-looking government. After Saddam Hussein was removed from power, Niyazov became convinced that he was the next target on Washington’s hit list. This fear, coupled with the fear of a regionally rising Uzbekistan, led Niyazov to sign a rather comprehensive defense agreement with Moscow in 2008 that abandoned Ashgabat’s previous policy of neutrality and placed Turkmenistan back under Moscow’s security umbrella. But current energy disagreements with Moscow could lead Turkmenistan to again redefine its stance on all foreign parties (more on that later). An Economic Balancing Act Berdimukhammedov’s behavior may seem a little schizophrenic at times, but Turkmenistan is in a difficult position. It is coming out from under two of the world’s most oppressive regimes — the Soviet Union and Turkmenbashi — only to face a slew of powerful suitors wanting to tap its vast wealth. At the same time, Turkmenistan needs to consolidate internally to keep from battling itself. This has led Berdimukhammedov to pull Turkmenistan’s energy and economic policy in all directions without a clear focus. Although Gazprom and the Kremlin do not hold all the cards, they do have long-established relations with Ashgabat and the advantage of being able to deal with the entire Turkmen hierarchy. While Russia still controls export routes for hydrocarbons, it apparently does not know the total

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amount of reserves in the country, and its control over the price of natural gas is clearly eroding, with recent hikes getting closer to European prices. Most of the Western energy supermajors that have their sights on Turkmenistan’s energy sector — ExxonMobil, BP, Total, Chevron, Marathon Oil Corp., Statoil — have set up shop in Ashgabat, ready to attack when the president begins dropping the restrictions. In addition, investment entities that once had a stake in Turkmenistan — such as the European Bank for Reconstruction and Development, the International Monetary Fund and the U.S. Agency for International Development — are thinking about investing again. Their decisions will have a significant impact on Turkmenistan’s modernization. While Russia and the United States plan their strategies, China is consolidating its presence in the region’s energy sector. China reaffirmed in January that it planned to invest more than $1 billion to build just the Turkmen section of its Sino-Turkmen natural gas pipeline. Over 1,800 kilometers in length, the pipeline will cross Uzbekistan and Kazakhstan and convey up to 30 billion cubic meters of gas to China per year by the end of 2009, when it is scheduled for completion. The estimated cost for the whole pipeline will be substantial — somewhere between $7 billion and $12 billion — proof that Beijing will not hesitate to outbid its rivals when it comes to energy matters. But that is the only deal that Beijing has made thus far, as it is refusing to invest any more money without knowing what it might be getting into. While Russia and the West are still trying to cultivate relationships with Turkmenistan, China is poised to launch a major project once the regulatory hurdles are removed, and then it will move in and likely outbid other foreign companies on other energy deals. Continued Restrictions Hurdles to foreign investment in Turkmenistan are many. Historically, the most promising areas for investment have been in the oil and gas, agricultural and construction sectors, the strongest segments of the country’s economy. But potential investors are blocked by the state-control mechanisms, a restrictive currency-exchange system, lack of an established rule of law, inconsistent regulatory practices and the government’s unfamiliarity with international business norms. Under Niyazov, government officials acted on the president’s verbal instructions, rather than on written orders or governing legislation. Most often, personal relations with government officials have played a decisive role in determining how and when government regulations are applied. Even when they are, bureaucratic procedures are confusing and cumbersome. There is no single body that coordinates the registration and activities of domestic and foreign private companies. The government does not generally provide essential information to investors. By keeping them in the dark, officials use the information for personal power and profit. Foreign companies may spend months conducting due diligence in Turkmenistan and end up with very little to show for it. The Turkmen government also has very little respect for private property, whether foreign or domestically held. One notable example of this was an effort made by a foreign Presbyterian denomination in 2007 to establish a presence in Ashgabat. After finding and purchasing an appropriate facility, missionaries returned the next day to find that their church building and site had been turned into a park overnight. Turkmenistan has laws against corruption, but bribery is still a way of life in the country, which is not abnormal for most former Soviet states. This nontransparency should not be a surprise to companies going in, since government officials do tend to let companies know up front what is expected in this business environment.

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The Current Energy Dilemma On April 9, an explosion occurred on a pipeline from Turkmenistan to Russia, opening up a can of worms between the two countries. What happened was a breakdown in communication. Russia reduced its intake of Turkmen gas because the supplies were simply not needed with such a mild spring. But Russia did not tell Turkmenistan of its supply reduction, leaving Ashgabat to continue pumping the typical amount of natural gas through the line and leading to the explosion. This also has led to a bitter row between the two countries, with Ashgabat signing impromptu deals with Russia’s rivals — such as a natural gas development deal with Germany’s RWE Energy — in order to make its point that Russia is not the only player in the country. According to STRATFOR sources in the country, a German company and not an American one was chosen to make this statement so as not to completely anger the Russians. The deal with RWE has been deemed “tentative,” and although it makes it appear that Turkmenistan is opening up to the West, it is nothing more than a small angry outburst on Turkmenistan’s part. According to STRATFOR sources in Moscow, as soon as the RWE deal was announced, Moscow countered by threatening to pull back its security protection for Turkmenistan at a time when the country is growing more nervous about a stronger Uzbekistan. Ashgabat immediately began looking for ways to pander to Moscow, offering deals in which Russia would take over ownership of the natural gas pipelines between Turkmenistan and Iran — a highly coveted set of assets. Turkmenistan is still trying to balance its desire to reach out to non-Russian foreign players with its paranoia that only Russia can protect the state from the West and other regional rivals. Until Turkmenistan sheds this paranoia (which isn’t completely unfounded) and removes its restrictions on foreign players in the country, it will remain almost as closed off as it was under the Turkmenbashi.

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