Reassembling the Evil Empire – Gazprom moves into Kyrgyzstan

Pity poor democratic, energy bereft post-Soviet Central Asian state Kyrgyzstan.

Alone amongst the debris field of post-Soviet states in the unexpected aftermath of the sudden December 1991 implosion of the USSR, Kyrgyzstan found itself free, broke, and led by a non-Communist party aparatchik, President Askar Akayev.

Lauded as Central Asia's most democratic state, Akayev's administration quickly ran up against its inherited legacy of paying the bills, not least for imported energy from its former fraternal fellow Soviet Central Asian republics. Imbued with the newly-founded spirit of the free market, Kyrgyzstan's neighbors determined fiscally to stick it to their unfortunate neighbor, resulting in an ongoing budget hemorrhage that Bishkek has been unable to resolve for more than two decades.

Enter Kyrgyzstan's unlikely fiscal knight in shining armor, the energy firm that everyone in the post-Soviet space and abroad loves to detest.

Gazprom.

On 26 July, the Kyrgyz government agreed to sell state-owned Kyrgyzgaz, operator of Kyrygystan's natural gas network, to Gazprom for the symbolic and mere price of $1. In return, Gazprom both agreed to invest more than $600 million to improve the Kyrgyz gas grid, along with assuming Kyrgyzgaz's roughly $38 million of debt. Kyrgyzgaz's fiscal situation is sufficiently dire that Kyrgyzgaz CEO Turgunbek Kulmurzaev stated that Kyrgyzgaz is effectively "bankrupt" and that accordingly, there was "no other choice" but to sell the firm.

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The Kyrgyz parliament must ratify the agreement before it can go into effect, but analysts expect that the ratification process will begin next month.

The Kyrgyz gas deal represents the Russian Federation's latest stealth attempt to quietly reassert its control over the post-soviet Central Asian space in the wake of two decades of Washington's ineptitude there.

Since 9-11, when the U.S. has engaged Central Asia, it has been for military access, and economic issues have come far behind, in a policy that Johns Hopkins Central Asia-Caucasus Institute chairman Dr. Fredrick Starr has aptly labeled, "dollar store diplomacy."

The Russian Federation has accordingly begun moving back into the vacuum, with its new competitor being not the U.S., but China.

The agreement, should it go through, will alter the dynamic of Kyrgyzstan's natural gas market, as currently Kyrgyzstan produces only two percent of its gas needs with indigenous production, forcing it to rely upon gas imports from Kazakhstan and Uzbekistan, which have not been loath to raise prices. As impotent as Kyrgyzgaz has been in its negotiations with its neighbors, Gazprom will bring a different set of variables to the discussions, as it is a state-owned company of the Russian Federation.

But what is going on here below the surface has immense implications not only for Central Asia but Eastern Europe as well. The Kremlin, which maintains an airbase in Kyrgyzstan at Kant, has made no secret of the fact that it would like to see the neighboring U.S. airbase at Manas shut down in the wake of the 2014 U.S. drawdown from Afghanistan.

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Farther west, for the last twenty years Gazprom has repeatedly bid for the remains of the Soviet-era natural gas pipelines extending across both Ukraine and Belarus. Despite favorable deals and threats, both nations have resisted Moscow's blandishments and threats, retaining ownership of their Soviet pipeline legacy.

At the end of the day however, Gazprom's bargain basement Kyrgyz deal is designed to thwart further Chinese penetration into Central Asia.

In 2007 China began construction of a natural gas pipeline from Turkmenistan, which passes through Turkmenistan, Uzbekistan and Kazakhstan and now transits roughly about 40 billion cubic meters annually. Upgrades are under construction to increase its capacity to 65 billion cubic meters.

As the U.S. draws down its Afghan presence, the struggle for Central Asia's energy riches will increasingly devolve into a twilight tussle between Moscow and Beijing, with no clear winner currently in sight.

By. John C.K. Daly of Oilprice.com