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12-11-2003
The tectonic plate shift in Russian politics, which occurred in parliamentary elections Sunday would make Russia diplomatically more prickly and less hospitable to foreign investment.
There are three winners and two losers in the elections. The big losers are the democratic and free market forces, and the business community.
Union of Right Forces (URF), a center-right party, and Yabloko ("Apple"), a liberal-left party, failed to launch viable party structures around Russia’s 89 regions. They also had no new ideas to address the electorate’s needs. They lost votes to Putin’s United Russia, to Motherland, and to voter apathy: Turnout was 54 percent -- 8 percent less than in 1999, when Yabloko and URF last got into the Duma.
As Putin has embraced the pro-presidential United Russia party and to some degree, the nationalist-socialist Motherland party, and as the government-controlled TV -- the only one in Russia -- followed suit, the bottom dropped from under the democrats.
Both Yabloko and URF were painted as too pro-Western, and insufficiently patriotic. Center-right politicians appeared rich, spoiled, and detached from ordinary Russians’ everyday woes. It also didn’t help that highly unpopular former privatization czar Anatoly Chubais has emerged as a de-facto leader of the center right. And the hated tycoons have poured support to the liberal forces who became viewed as their puppets.
As the statist and pro-Putin forces became stronger, the business community weakened. According to a Cabinet insider, big business should forget about dictating a legislative agenda in the Duma, as they did throughout in the "roaring ’90s." The liberal parties they supported have not gotten in. Two days after the elections Putin signed a new law imposing additional energy export tariffs. And with a strong signal from the electorate that wants oligarchs’ blood, Putin may bring down additional industrial conglomerates, from Lukoil to Alpha Group.
Putin on Top
The greatest winner is President Vladimir Putin. His party, United Russia, won 37 percent of the vote, and together with its allies has come close to mustering a two-thirds majority necessary to change the constitution, including extending the president’s term in office beyond 2008. It is the first time in the post-communist Russian history that "the party of power" dominates the legislature.
It is Putin’s poise and judgment in using his newly found parliamentary support and popularity that will define his relationship with the West and his place in history. Putin’s resistance to the virulent nationalism and populist socialism of his party’s hangers-on will make a difference between Russia’s progress and failure.
United Russia capitalized on three major developments: Putin’s wild popularity -- up to 78 percent according to the International Republican Institute poll. It got a boost from a crackdown on corruption undertaken by Interior Minister Boris Gryzlov, who is the United Russia party leader, and is rumored to become Speaker of the Duma or Prime Minister. Finally, it thrived on jailing the billionaire Mikhail Khodorkovsky. The majority of Russians perceive oligarchs as corrupt, thieving, and detached from the impoverished masses and the struggling middle class.
The second and third winners, respectively, are socialist/nationalist newcomer Motherland and rabble-rouser Vladimir Zhirinovsky’s "Liberal Democrats." Motherland, led by former communist party economic guru Sergey Glazyev and former Duma’s Foreign Affairs Committee Chairman hard-liner Dmitry Rogozin, won 9 percent of the vote. Its message of nationalization at home and nationalism abroad, of high taxes and foreign adventures, are a fire-sure prescription to derail Putin’s proclaimed goal of doubling GDP by the year 2010. Economic reformers in the Kremlin are disgusted.
Motherland was a creation of the Kremlin’s cunning consultants, who were tasked with stealing votes from the geriatric (and chauvinistic) communists. They succeeded -- too well. However, just as Dr. Frankenstein, the Kremlin is horrified of its creation. Senior government officials recognize that they don’t control Glazyev, and that younger and feistier Motherland team in the Duma will be more of a nuisance than the predictable and dumb communists who never learned the game of competitive politics.
Zhirinovsky, the third winner, doubled his vote to 11.6 percent. Before the elections he got in yet another televised fist-fight, and declared that Chechnya should not be discussed in the media. Instead, he suggested using death squads to kill off entire Chechen villages. Today, when suicide bombers tear apart Moscow civilians almost weekly, tough guys finish first.
What It Means for Washington
The Bush Administration, battling its own terrorist threat, has a strategic interest in continuing a dialogue with the Russian President, the government, and the people. However, it has to strike a balance between defense of democracy, cooperation in the global war on terrorism, developing Russian energy resources, and encouraging foreign investment.
To achieve these goals, the Bush Administration should express support for the democratic forces of Russia. The White House is right to endorse the statement of the Organization for Security and Cooperation in Europe (OSCE), of which the U.S. is a member. The statement called the elections "unfair" and was highly critical of the government controlling all TV channels. More needs to be done, including expanding exchanges with Russia, providing support to democratic non-governmental organizations (NGOs), independent media, and nascent forces of freedom through the National Endowment for Democracy, International Republican Institute, and private foundations.
President Bush should communicate directly to Putin that to continue Russian integration in Western frameworks such as G-8 and Organization for Economic Cooperation and Development (OECD), Russia needs to follow Western political models and boost the rule of law.
Finally, Washington needs to warn Moscow that further abuse of the legal system by the executive branch which leads to extra-judicial destruction of major economic players in Russia may result in shrinking of foreign investment, thus jeopardizing Putin’s stated goal of doubling GDP by 2010.
Russia now has a Duma that is more nationalist and less democratic than before. It is in everyone’s interest that Russia pursues a civic society and free markets amidst political liberty. The U.S. and the West should not hesitate reminding Moscow about this.
10-22-2003
On September 19, 2003, Russia and three of its trading partners – Belarus, Ukraine, and Kazakhstan – signed an agreement on a Common Economic Space (CES). The body is sometimes also referred as the United Economic Space (UES). This economic zone is a new attempt at integration between Russia, Belarus, Ukraine, and Kazakhstan, countries that comprise 90% of Russia’s trade with the Commonwealth of Independent States.
BACKGROUND: The CES is an ambitious project, aimed at maximizing Moscow’s political and economic power. The CES is multi-phase agreement, which proclaims that each member state will be able to control the speed of integration. However, the goal is ambitious: the free economic space should be completed in 5-7 years whereas the EU took over five decades to construct.
The first phase will coordinate customs duties and harmonize trade legislation and custom regulations. The second phase aims at lifting current trade barriers exemptions and creating a customs union. In the third phase, “internal customs boundaries will be liquidated, a common customs boundary will be formed, and a supra-national regulating institution will start functioning through member countries’ voluntary assignment of functions”, Interfax quoted the agreement.
As with the EU, the Russian-led quartet is aspiring to produce a single powerhouse economic zone that would generate growth and foreign investment. However, this agreement did not come to fruition easily. Elites in Belarus and Ukraine have reservations about re-integrating with Russia and sacrifice their national sovereignty. Similarly, their counterparts in Georgia, Armenia and Azerbaijan, as well as in Uzbekistan, who tasted the forbidden fruit of independence, would rather make often lucrative economic decisions themselves ad hoc, and not delegate them to an anonymous “supra-national body” on New Arbat.
While the leaders of the signatory nations had been meeting frequently to review the drafts, fissures had emerged even prior to the signing ceremony. A point of contention between Russian President Vladimir Putin and Presidents Leonid Kuchma of Ukraine and Aleksandr Lukashenko of Belarus was the juxtaposition of future membership in the EU and WTO vis-а-vis their membership in the CES. “The Ukrainian parliament will not vote on this agreement in its current form,” a senior Ukrainian diplomat who requested anonymity said, commenting on the agreement.
Before the Yalta conference, Ukrainian Justice Minister Alexander Lavrinovich, announced that some articles of the draft agreement were in violation of the Ukrainian constitution, which prohibits the assigning of any national powers to a supra-national entity. Similar restrictions exist in constitutions of other post-Soviet states. Moreover, parliaments in several countries, such as Georgia, are unlikely to ratify participation in such a supra-national body only 12 years after gaining independence.
Yet, according to Vyacheslav Nikonov, President of the Politika Foundation in Moscow and grandson of Stalin’s Prime Minister Vyacheslav Molotov, writing in Pravda, the general support for Ukraine joining the free economic space was considerable. Both the United Social Democratic Party and the Working Ukraine Party were in full support of joining the free economic space. These two parties shared the opinion that joining this free economic zone would not deter Ukraine’s chances for eventually entering the EU. On the other hand, Ukrainian national-democrats led by former Prime Minister Viktor Yushchenko have threatened to stymie ratification.
Kazakhstani President Nursultan Nazarbayev flatly stated that the “club” will be closed and should not accept any new members, while Putin would like to have an open admission policy – with himself as a gatekeeper. Nazarbayev understands that with the exception of Belarus, most of the “winners” in the CIS are joining the new zone, and he wants to keep the poor cousins out. Putin, on the other hand, understands the leverage Russia will receive as the “majority stakeholder” in the new economic bloc, and will be willing to wield clout vis-а-vis Central Asian and the three states of the Caucasus.
IMPLICATIONS: The accord, if implemented, will marginalize CIS countries such as Georgia, Armenia, and Kyrgyzstan, who are WTO members. Analysts are at a loss how WTO regulations can be reconciled with those of the CES. And it will be run by “supra-national regulatory bodies,” likely to be based in Moscow, which no doubt will be Russian-dominated.
Central Asian and Caucasian leaders view Putin’s new “zone” with understandable suspicion. Potential candidates for Putin’s club were all present in Yalta. Ten out of the twelve CIS presidents were present; ailing President Heydar Aliyev was represented by his son, Prime Minister Ilham Aliyev, who went on to be elected President on October 15. President Saparmurad Niyazov Turkmenbashi of Turkmenistan was noticeable in his absence.
Ilham Aliev, Georgian President Eduard Shevardnadze and Armenian president Kocharyan praised the economic union. They could not act otherwise: as in the case of Central America and the United States, over a million each of Azerbaijanis, Armenians, and Georgians are employed in Russia as guest workers and support families back home to the tune of double digits of the national GDP, allegedly up to a third in certain cases.
The further closure of borders would be a massive blow to South Caucasian economies which are dependent on Russia in terms of trade and railroad links. And a customs union, allowing the free movement of goods, will encourage foreign investment in CES – a market of 214 million consumers, and not located in small and unstable markets such as the South Caucasian states.
U.S. officials expressed concern about the new body. Reportedly, last minute maneuvers by U.S. Ambassador to Kyiv, John Herbst caused Vladimir Putin’s ire on the eve of the Camp David summit with George W. Bush. U.S. officials have grounds for concern, as they seek to prevent the emergence of a new Russian-dominated entity in Eurasia. Their policy responses were limited, however, since Washington needed Russian support on the U.N. Security Iraq peacekeeping resolution and in the war on terrorism. Thus, the U.S. is likely to acquiesce with the emergence of the new Eurasian economic bloc.
CONCLUSIONS: The four-way summit took place in Yalta, a highly symbolic venue, where in 1945 President Franklin D. Roosevelt and the British Prime Minister Winston Churchill abandoned Central Europeans to the mercies of “Uncle Joe” Stalin. If successful, the new entity may replace the historic Romanov and communist empires. The dreams of the czars and the commissars, of one empire stretching eleven time zones from Brest to Vladivostok, be it under a two-headed eagle or under the hammer-and-sickle red flag, may be dead. A new empire, however, may be in the making. Anatoly Chubais, the controversial architect of the Russian privatization, has called it a “liberal empire” and even put a timeframe on its creation: 50 years. His boss, Vladimir Putin, on the eve of Spring 2004 presidential elections, may be a man in hurry, attempting to impose a more ambitious schedule.
08-11-2003
WASHINGTON, Aug. 11 (UPI) -- As Kazakhstan prepares to host a United Nations conference on investment in landlocked countries later this month, its own investment record is decidedly mixed.
Countries with no access to the sea need an extra boost for investment.
"These are countries paying a heavy price for their geographical isolation," said U.N. Under-Secretary-General Anwarul Karim Chowdhury, who will chair the upcoming conference.
Six of Kazakhstan’s neighbors, Afghanistan, Mongolia, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, are also suffering from lack of ocean access. But Kazakhstan’s geographic constraints are balanced by geological advantages, namely an abundance of oil and gas. As a result, landlocked position has not prevented Kazakhstan’s economic growth.
In an Aug. 7 speech, Danial Akhmetov, Kazakhstan’s Prime Minister since June 2003, a loyal ally to President Nursultan Nazarbaev, promised to continue systematic reforms. Akhmetov said he encourage competition, to support the development of the industrial sector, and to demonopolize the railways, the telecommunications sector and the electrical power grid.
In 2001, Kazakhstan has reported 13.2 percent in GDP growth, and the government estimates the overall economic growth rate for 2003 at 8.3 percent. With that, experts point out that most of investment flows to the oil and gas sectors while the energy prices are high. If oil prices drop, the rosy picture of double digit GDP growth may come tumbling down, unless the government undertakes serious policy changes.
Impediments to foreign investment remain formidable, especially as far as the rule of law, property rights, and investor protection are concerned. Many foreign companies complained that Kazakhstani government enticed them to invest, only to change rules of the game later. With the exception of the lucrative energy sector, Kazkhastan is not an investor magnet it would like to become. Cronyism and rampant corruption are part of the problem.
Scott Horton, Managing Partner for Emerging Markets at New York-based law firm Patterson Belknap, points out that Kazakhstani courts do not provide reliable dispute resolution venues for investors.
"I have observed many court proceedings, on behalf of clients and while conducting legal research. The (professional) level of Kazakhstani judges, their capacity of legal analysis and the knowledge of laws, their command of facts, are impressive," Horton said. "Unfortunately, their rulings often have nothing to do with either the law or the facts."
Moreover, he adds, local business players in large investment projects have political connections to the president. Political factors are part of the risk, and are often influencing business policy. According to Horton, if political equilibrium changes, projects are endangered, adds. This is beyond what Western companies are willing to tolerate.
Meanwhile, Aigoul Kenjebayeva, a managing partner of the law firm Salan’s Almaty office, said that Kazakh courts do not allow enforcement of arbitration awards granted by foreign arbitration tribunals -- a common practice to solve problems arising from international contacts. Many countries around the world have signed the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. And the courts are even more reluctant to recognize awards granted in local arbitration procedures.
Officially, the judges claim that the Kazakh constitution provides for the universal access to courts, therefore, anyone can appeal to a court to dispute the award. In reality, the Kazakh lawyer said, the judges and Prosecutor General’s office does not desire to give up lucrative opportunities for bribes
Meanwhile, Energy Minister Vladimir Shkolnik and Finance Minister Erbolat Dossaev, are upbeat about Kazakhstan’s investment outlook. "President Nazarbaev authorized industrial development program till 2015, and we want to radically change the Kazakh economy," Dossaev said. "Special tax tools and tax regimes in special sectors which have some real potential, will attract foreign investors."
"To develop high tech industries we need to create conditions which will make Kazakhstan competitive with Silicon Valley in terms of low risks and high profits," Energy Minister Shkolnik said. "State should assume some risk, such as Development Bank, Innovation Fund and Corporation for Export Guarantees."
These are, however, statist prescriptions -- instead of creating a hospitable investment climate and protecting the rights of investors, Shkolnik wants the government to pick winners.
Finance Minister Dossaev blamed the Soviet legacy for Kazakhstan’s glacial pace of capital market development - Kazakhstanis do not trust each other and want 100 percent control of assets. They are not comfortable sharing risk and control in privatized properties. Therefore, he says, development of capital markets is lagging behind. Maybe the 33 year old Finance Minister is right in blaming the Soviet legacy.
Evgeny Zhovtis, director of Kazakhstan International Bureau for Human Rights, said "The most difficult task is the reform to introduce real rule of law... That is when the judiciary is independent and will be governed only by the rule of law and when the executive branch of power will not use its political influence to bring about a preferred decision. This is the main challenge ahead.
The second challenge, he said, is overcoming "Soviet mentality" -- how one perceives the relations between the individual and the state. This is a big problem in this country. The people have to free themselves. This could take ten years to achieve or perhaps even two or three generations."
Instead of waiting for the current generation to exit from the scene, Kazakhstani leadership could follow the example of Asian "tigers" it claims to emulate. Job one would be making the court system transparent and professional, eradicating nepotism and corruption. President Nazarabaev, his relatives and friends, plagued by scandals due to prosecutions under Foreign Corrupt Practices Act in New York and for money laundering in Switzerland, could divest from all business ventures. These court proceedings are stemming from seeminly illicit financial dealings with Western companies.
A politically neutral government of technocrats with a mandate to attract investors and treat them uniformly and fairly, could be installed. And, a broad, across-the-board tax holidays for investors, regardless of their nationality and industry, could be introduced.
Finally, the government, working together with the private sector and the World Bank, faces the challenge of closing corporate governance loopholes, which undermine the development of capital markets. Until this happens, Kazakhstani officials will have nothing better to do but blame slow investment pace in the non-energy sector on the "legacy of the Soviet past."
08-06-2003
Azerbaijan’s ailing president Heydar Aliev’s bedside appointment of his son Ilham to the position of Prime Minister—and thus heir to the presidency—is forcing the Bush Administration to face the eventual passing of the Azeri leader.
Because the United States has been involved in Azerbaijan since the collapse of the Soviet Union and has much at stake in the leadership transition, it should protect its interests and encourage a democratic succession in Azerbaijan.
U.S. priorities in Azerbaijan include strengthening the Western orientation of Azerbaijan’s foreign and domestic policy, including the preservation of a secular state. A democratic transition, if successful and bloodless, would serve as an important example to South Caucasus and Central Asian states, which suffer from a democracy deficit.
Benefits of a Democratic Transition
Under a constitutional amendment approved during a summer 2002 referendum, Azerbaijan’s prime minister becomes the interim president in the event of that the chief executive either dies in office or is incapacitated. The father-son team is also the ruling New Azerbaijan Party’s candidates in forthcoming presidential elections, now scheduled for October 15.
A secular Azerbaijan, with a more democratic multiparty system and a free press and that is being increasingly integrated into Euro-Atlantic structures, could play a part in deterring radical Islamist takeovers in the Russian-controlled Dagestan and other Muslim areas in the North Caucasus.
If Aliev’s son, his heir-apparent, were to lose the transition struggle, there is little danger of a radical Islamic backlash. Moderate democratic nationalists, not fundamentalists, would likely come to power, with the Azerbaijani elite agreeing on a pro-Western orientation and a secular state.
Neighboring Georgia is in a political tailspin and could benefit from an example of a successful democratic transition from a political system dominated by a charismatic, Soviet-era leader. After its scandal-ridden presidential election on March 5, Armenia could also benefit from seeing a democratic process in neighboring Azerbaijan. The authoritarian states of Central Asia, particularly, need a model of a peaceful transition away from post–Soviet-era rulers. And the broader Muslim world—including many countries undergoing or contemplating a father-to-son handover of power—could benefit from a positive example in a fellow Muslim state.
U.S. Interests. The East-West transportation corridor, including access to the energy resources of the Caspian Sea, has been a top priority of the United States during its last three administrations. Today, oil and gas are flowing from the Absheron Peninsula and the Caspian offshore fields to the Black Sea. The Baku-Tbilisi-Ceyhan Pipeline will export up to 1 million barrels per year of high quality Caspian crude oil by 2005.
The United States may also consider basing elements of its air power on the Absheron Peninsula, particularly as it reduces its presence at the Incirlik military base in Turkey and with future deployments in Bulgaria and Romania. Deployment in Azerbaijan will allow the United States to project power further into Central Asia and deter Iran from the north.
Finally, the United States has invested heavily in Azerbaijan, including hundreds of millions of dollars in assistance, and has developed diplomatic and security expertise in the Caspian region. Major U.S. oil companies are investing billions of dollars in developing Azerbaijani oil and natural gas fields and export pipelines. Both the Azerbaijani people and the United States need the stability and predictability that would come from a democratic Azerbaijan.
What the Bush Administration Should Do. If President Aliev does not participate in the presidential elections scheduled for mid-October 2003, Azerbaijan could have a free and fair election process. To this end, the Bush Administration should:
Conclusion. The post-Aliev transition will not only set a precedent for Azerbaijan, but will also have greater geopolitical and geo-economic repercussions throughout the region. A democratically elected Azerbaijani leader would likely desire to continue relations with the American superpower and improve Azerbaijan’s security by bolstering Baku’s ties with its neighbors. The country’s next leader should enjoy democratic legitimacy based on a transparent and constitutional transition.
03-26-2003
As the United States is engaging in regime change in Iraq, the political turmoil in the Middle East is driving up the oil prices. Kazakhstan is flush with oil and gas revenues. However, without targeted government policy, the long term economic consequences of the hydrocarbon boom may lead to crowding out investment in the non-petroleum sectors and appreciation of the Kazakh currency, the tenge. If President Nazarbaev’s administration will continue to preside over increases in income disparities and underdevelopment, it eventually may face political instability due to inflated popular expectations. Kazakhstan has done little to prevent the Dutch disease, despite warnings from the World Bank.
BACKGROUND: According to government statistics, Kazakhstan is boasting an impressive 9.8 percent economic growth rate in 2002. It further expects GDP to grow at annual rates of 6.3-8.6 percent in 2004-2006, with total growth of over 27 percent in the next four years. Whether this ambitious target is achieved depends on volatile energy prices and the quality of national economic management in Astana.
According to President Nazarbaev, who spoke at the recent Kazakh-Italian business forum in Rome, Kazakhstan’s projected economic growth for the first quarter of 2003 is 9 percent. Italian investment in Kazakhstan reached $1.3 billion dollars. But this is barely a drop in the ambitious goal of $100 billion in investment funds Nazarbaev wants to attract in the next 10-12 years. Kazakhstan may be interested in working with the Italian state-owned ENI, the operator of Agip-led consortium in the Kazakh sector of Northern Caspian, and of the giant Karachanganak field, to export oil via Iran. If such investments materialize, experts say, they will flow overwhelmingly to the overheated oil and gas sector.
Oil revenues continue to remain in record territory for 2003. Kazakhstan has boosted oil production by 16.6 percent in 2002, to 42 million tons. International oil majors, such as Shell and Hurricane oil have significantly expanded their Kazakhstani holdings. Natural gas production and downstream production will also grow: Kazakhstan has increased natural gas exports by 13.2 percent, and produced 30 percent more of gas condensate. Kazakhstan will be developing Phase Three of the Karachaganak gas condensate field, which will require a $2 billion investment. The Amangeldy field in southern Kazakhstan will be expanded, and ChevronTexaco will open a polyethylene plant in April 2003. ExxonMobil is planning to develop a strategic program for Kazakhstan jointly with the Energy Ministry for years 2003-2010. The first iteration of the program will be submitted to the government in the third quarter of this year.
Kazakhstan is boosting its hard currency and gold reserves, which grew by 9.1 percent to $5.5 billion in January, and further increased the National Fund to $1.933 billion, while gold reserves grew by 14 percent to $627 million, according to the Kazakh Central Bank press release quoted in the February Interfax Central Asian Business Report. The Central Bank said that Tenge money supply tripled, foreign deposits rose by 32.8 percent, and bank deposits increased by 46.2 percent, while lending rose 37 percent in 2002.
Using growing demand for energy, Kazakhstan announced plans to become the world’s largest uranium producer by the year 2027. Its national nuclear corporation, Kazatomprom, has increased the ore production from 794,000 tons in 1998 to 2.4 million tons in 2002. As it currently produces only five percent of the global output, the goal to become number one seems excessively ambitious. Kazakhstan has increased uranium production by 34 percent in 2002, and is planning to expand export to China, Japan and Russia.
Astana is also interested in boosting its coal production from 70 million tons in 2002 to 74 million tons in 2003. The January 2003 figures are higher than January 2002 by 21 percent.
IMPLICATIONS: This natural resources windfall is the strategic window of opportunity for Astana to address four structural defects of its energy-driven economy: corruption; capital flight; a dysfunctional social safety net; and the money-losing nature of the non-extracting sectors of the economy.
High-level corruption and capital flight may be the most difficult to resolve. Most often perpetrated, or aided and abetted, by top government officials, it is a net loss to the people of Kazakhstan. Police measures are in themselves not effective, as law enforcement is corrupt and controlled by the perpetrators. The fish is rotting from its head. The government is unlikely to crack down on organized crime and corruption which plague the economy. As long as the government is not prosecuting the most odious “exporters” of capital, even if they are politically connected insiders, the local economy will remain too inhospitable – and bureaucracies too corrupt – to make investment in non-energy sector attractive.
Second, it is the time for the Kazakhstani government to bring internal energy prices, including natural gas and coal, to world levels. Today’s high oil prices will allow to provide subsidies to retired or laid off workers, while closing down inefficient, energy-guzzling enterprises and hiking railroad tariffs. Energy can be exported to increase revenue. Some of the workers in remote “company towns” can be relocated to more livable venues.
Third, social sector reform is long overdue. While salaries are higher in the energy sector by a factor of at least two in Kazakhstan, most of the gigantic profits are not invested back home to create jobs outside of the oil and gas sector, nor are tax proceeds efficiently distributed to support the elderly, sick and poor.
CONCLUSION: The Kazakh government can battle the Dutch disease by stimulating non-energy business development and job creation, by simplifying registration for new business and reducing corporate taxes and employment payments for these newly created entities. As USAID and a number of NGOs repeatedly demonstrated around the world, micro-lending to boost entrepreneurship is yet another way to decrease unemployment and poverty.
In addition, some of the structural unemployment – 20 percent in Kazakhstan, even higher in energy-poor Kyrgyzstan and Tajikistan – can be alleviated by opening the doors of the oil and gas sectors to workers from the areas hit with particularly high unemployment. This can be achieved by loosening severe interior ministry residence registration rules, which are a hick-up of the old Soviet era “propiska” system, and by providing better living conditions in the company towns owned by the extracting industries. As World Bank Vice President Johannes F. Linn has suggested recently, regional cooperation is likely to alleviate some of the structural asymmetries and stimulate growth. Clearly, cooperation on water utilization, pipelines, transport, and commerce is the most logical.
Unequal income distribution in Kazakhstan, where average salary is barely over $1,000 a year, (and even more so in Kyrgyzstan and Tajikistan with only $200-$300 per capita incomes), may lead to economic dislocation, social conflict, and uncontrolled migration. Kazakhstani leaders were forewarned. Both Astana and international financial institutions should address these disparities while the energy bonanza lasts.
02-15-2003
Continued European Union resistance to US plans for a quick blitz of Iraq is forcing the countries of the Caucasus and Central Asia to choose sides. Caucasus nations have so far tended to side with the United States. Central Asian countries, meanwhile, appear divided with Uzbekistan generally backing Washington’s position, and Kazakhstan and Kyrgyzstan drifting toward the European viewpoint.
EU leaders, meeting at an emergency summit February 17, issued a statement demanding Iraq’s immediate and unconditional disarmament. At the same time, the EU insisted that an attack against Iraq should be the option of "last resort." Russia has come out in support of the European position, which contrasts sharply with Washington’s. The Bush administration seems intent on launching military operations possibly within weeks.
In staking out positions on the Iraq question, the countries of Central Asia and the Caucasus are influenced heavily by their own individual relationships with the United States, EU and Russia. The rise of radical Islam in both regions, Central Asia in particular, is also a major factor.
Georgia and Azerbaijan consider Washington as their main benefactor, especially following the September 11 terrorist attacks. The same holds for Uzbekistan. All three countries have prickly relationships with Russia and are wary that Moscow desires to reestablish a sphere of influence in the old Soviet space.
Uzbek Foreign Minister Abdulaziz Kamilov stated after Secretary of State Colin Powell’s February 5 speech to the United Nations Security Council that there was sufficient evidence to justify Washington’s stance. "Powell’s address + reinforced the US call for more decisive and dramatic steps to exclude any possibility of Iraq having weapons of mass destruction or resources and technologies for their production," the Interfax news agency quoted Kamilov as saying.
In Georgia, internal politics have exerted influence on the government’s Iraq position. President Eduard Shevardnadze, whose domestic popularity is at or near its nadir, is reluctant to alienate the United States, which has emerged over the last 18 months as Tbilisi’s key strategic partner. [For additional information see the Eurasia Insight archives]. Another influence on Shevardnadze is the fact that during his tenure as Soviet foreign minister he worked closely with Washington during the first Iraq war. In explaining his Iraq position, the Georgian president openly admits that his administration considers itself obligated to support Washington.
"The totalitarian regime [in Iraq], which produced weapons of mass destruction, poses an enormous threat to the region and to the whole world. This is why it must be punished," Shevardnadze said recently. "Another reason for Georgia assuming this stand on the Iraqi problem is that the United States has rendered enormous assistance to Georgia since 1992. This is why our duty is to support the friendly country [the United States]."
Azerbaijan has also expressed support for the United States on the Iraq question, but in a somewhat more equivocal fashion. A recent foreign ministry statement, for example, lauded US efforts to eliminate weapons of mass destruction in Iraq, while calling for a settlement to be resolved in full compliance with the UN charter.
Armenia has traditionally excellent ties with the Arab countries and a thriving Diaspora in Lebanon and Syria. Armenian foreign policy is also viewed as pro-Russian. Nevertheless, some statements issued by the Armenian foreign ministry are cautiously supportive of the US position. Jyunik Agadjanian, a foreign ministry official, stated earlier in February that "Iraq’s disarmament is inevitable, otherwise the situation could lead to undesirable consequences," the Arminfo news agency reported. "Official Yerevan supports the complete and unconditional disarmament of Iraq."
"Colin Powell’s data submitted to the Security Council deepened Armenia’s concern over the Iraqi issue," Agadjanian continued.
Support for the United States is far from universal. Kazakhstan and Kyrgyzstan are the Central Asian nations most leery of the Bush administration’s rush to war in Iraq. Their chief concern appears to be that the looming campaign to oust Saddam will subtract from Washington’s commitment to stabilization efforts in Central Asia, including countering the expansion of radical Islamic activity in the region. [For additional information see the Eurasia Insight archives]. Such concerns are pushing Astana and Bishkek to support the EU’s preferred course of action.
"The UN Security Council must issue authorization to handle such questions," the Itar-Tass news agency quoted Kazakhstani President Nursultan Nazarbayev as saying in late January. "A one-sided war in Iraq would be a great mistake. In their hearts and souls the peoples of Islamic states are absolutely against this war that can only bring about integration of the world extremist forces."
Some of Nazarbayev’s domestic political opponents suggest the president’s Iraq stance in part is influenced by ongoing investigations in both the United States and Switzerland into bribe-taking by top Kazakhstani government officials. [For additional information see the Eurasia Insight archives]. They add that Nazarbayev is keen to score points with both Russia and the EU, seeking to cultivate additional sources of political support as a hedge against the bribery scandal, known as Kazakhgate. [For additional information see the Eurasia Insight archives].
Kyrgyzstan, bolstered by the recent deployment of Russian aircraft at the Kant military base, also echoed a Russian position. [For background see the Eurasia Insight archive]. Kyrgyz officials have expressed opposition to Washington’s use of Manas Air Base in potential military operations against Iraq.
12-17-2002
The Bush Administration is reacting calmly to the Russian Air Force’s deployment of planes at the Kant air base in Kyrgyzstan, which Russia announced in early December. The deployment is relatively small and temporary, but the muted American response to it indicates broader trends in American strategic policy toward Russia.
Scholars and observers say the placid American response to the December 5 announcement may indicate that China has emerged as a more important variable in Central Asia. Dmitri Gorenburg, Director of Russian and East European programs at a think tank called the Center for Naval Analyses, believes that Washington no longer views Russian military maneuvers through a competitive lens. (Gorenburg’s group advises the Pentagon.) A National Security Council official who covers Central Asia supported this assessment. "We are beyond seeing Russian troop deployment in Central Asia through the prism of US-Russian rivalry," said this person, on condition of anonymity. "This is no longer a zero-sum game. We hope the Russians know this."
Washington and Moscow, Gorenburg says, are emerging as a twinned alternative to Chinese hegemony. Russia and Central Asian states, however, do not want China to deploy troops in the region. Concerns about China are dovetailing with longstanding interest among Russia and its Collective Security Treaty allies in the development of a rapid reaction force in the region.
"President Putin is doing what Moscow experts were recommending throughout the 1990s," says Irina Kobrinskaya, director of the international cooperation program at Moscow’s National Project Institute-Social Contract. "It was obvious as early as 1995 that Russia has not economic capacity to deploy adequate forces in Central Asia and the Caucasus." Therefore, Russia had to ‘internationalize’ the peacekeeping there. The force did not come together after a series of car bombs in Tashkent, Uzbekistan nearly killed President Islam Karimov on February 16, 1999. Nor did it develop after the United States struck alliances with Uzbekistan and Kyrgyzstan prior to the forays Americans led into Afghanistan in autumn 2001. According to some analysts, though, it was these alliances that spurred Russia’s deployment in Kyrgyzstan.
Moscow security sources believe that the military lobbied for Kant deployment to balance out US presence in Central Asia. President Putin agreed to these requests to placate generals and citizens who treat Western deployment in Central Asia as a long-term threat to Russia. If this analysis is correct, the deployment’s modesty is telling. American officials contend that Putin knows Russia’s limited budget reserves and military hardware cannot support adequate force structure along its periphery. That weakens Russian bases in Georgia, Armenia and Tajikistan and leaves soldiers at these bases poorly trained. If American troops pulled out of Central Asia, the thinking in the Pentagon goes, the Russians could not adequately protect the region on their own or within a CIS framework.
This traditional Russian military defensiveness, though, seems to coexist with a new emphasis on partnership with the United States. On the "old thinking," say sources from a Center for Naval Analyses seminar that convened in late November, Moscow tries to match Washington’s military reach and spending. On the new thinking, Moscow recalls its alliance with Washington in Balkan peacekeeping efforts – and welcomes the possibility of similar partnership in Central Asia.
Washington military analysts point out that the new Russian-led aircraft contingent in Kyrgyzstan seems weak in comparison with the American deployment at the Manas air base nearby. On December 16, according to Russian news agency Itar-Tass, US Ambassador John O’Keefe marked that base’s first anniversary by praising its "high standard." Russia’s group, which includes Russian, Kazakh and Kyrgyz aircraft, would provide cover for 5,000 CIS rapid deployment soldiers. By December 16, however, only two SU-25 ground attack jets and two SU-27 fighters were deployed, and the SU-27 will be returning soon to their permanent bases. These planes do not seem combat-ready. Russian presidential and defense staff and accompanying journalists from the base made an emergency landing in Kazakhstan; some sources knowledgeable about the episode blamed poor Kyrgyz jet fuel.
The American-led force in Kyrgyzstan includes 20 F-16 fighters and over 2,000 troops, deployed primarily to support the peacekeeping force in Afghanistan. The Russian-CIS deployment can complement this force, and provide the basis for Russia-NATO cooperation envisaged in the NATO-Russian Treaty signed in May. As Russian and US military experts point out, conventional deployments do not necessarily harness the intelligence and special-forces capability that countries need to fight stateless foes such as al Qaeda. To truly battle terrorism, American and Russian leaders must support broad extra-military strategies designed to promote political participation, civil society and the rule of law. On this score, both the American-led deployment and the new Russian-CIS outpost in Kyrgyzstan seem unlikely to provide fresh answers any time soon.
04-24-2002
President Putin’s recent State of the Federation address clearly indicates that Russia puts increased emphasis on the CIS in its foreign policy. Moreover, it indicates an understanding that security and economic imperatives dictate that countries in the region pursue pluralistic and "multi-polar" policies. Moscow will emphasize its military ties, security cooperation, infrastructure projects, and cultural and educational cooperation to boost its influence in the region. Yet the military may not be satisfied with the official line, and the FSB is for the first time officially working outside Russia’s borders.
BACKGROUND: In his state-of-the-Federation address on April 18, Vladimir Putin made one thing perfectly clear: the Commonwealth of Independent States will remain the top priority of the Russian foreign policy. Putin’s speech contained altogether nine paragraphs dealing with foreign affairs, and seven of them were dedicated to the so-called "near abroad." Putin put Russian interests in the context of Russian security, claiming that the problem of whether or not to support the anti-terrorist coalition "did not even exist" for Russia. But taking into account the two tense weeks between the September 11 attack and the clear statement by Putin that Russia will cooperate with the U.S. in full, it stands to reason that there was a debate behind the Kremlin walls over what the right course of action should be. Furthermore, Defense Minister Sergei B. Ivanov first stated that the NATO troops will not have basing rights in Central Asia, only to be overruled by Putin later, when resistance would in any case have been largely futile.
In his speech, Putin took credit for the "liquidation of the most dangerous center of international terrorism in Afghanistan" by "common efforts." He stated that on September 11 "many in the world realized the Cold War is over" and that the new war is going on - against international terrorism. Putin claims that Russian foreign policy will be entirely pragmatic. He called CIS, the post-Soviet half-house, a "real factor of stability on the vast territory…an influential association of states."
The key paragraph in the speech proclaimed that "work with the CIS states is the main foreign policy priority of Russia, a priority linked to achieving competitive advantages in global markets." He stressed implementation of large infrastructure projects in transportation and energy to boost regional integration. He also mentioned integration through "humanitarian" and educational projects, calling to boost the number of students from the CIS countries in Russian colleges financed by the Russian government up to 1 percent of the total, recalling the USSR’s similar attempt to attract students from Third World countries to develop a cadre of sympathetic elites. Putin’s speech was, on the whole, peaceful. He stated that the only way Russia will challenge foreign countries was through economic competition. However, the Russian military put a different spin on recent developments in the region. Spokesmen for the Russian Defense Ministry have repeatedly warned against the long-term U.S. domination of Central Asia after September 11.
IMPLICATIONS: On April 15, The Russian military launched a large-scale anti-terrorism exercise called South Anti-terror, under the umbrella of the CIS Antiterrorist Center in Bishkek, and the Collective Rapid Reaction forces - a rather small structure built around a reinforced battalion from the 201st Infantry Division located in Tajikistan.
Participants in the exercise included forces from Russia, Kyrgyzstan, Kazakhstan, and Tajikistan. Repellling a mock terrorist attack, the allied states would provide support to border guards and army units of the Collective Rapid Reaction Force, augmented by heavy military hardware, and the air force. Unlike previous maneuvers, this exercise was supervised by Nikolai Patrushev, the head of the Federal Security Service (FSB), which until now had jurisdiction in the Russian Federation only. Part of the exercise was to share with the Central Asian allies what it ’learned’ in the Chechen campaign.
Other powers are also active in the region. The U.S. is trying to protect the Afghan interim administration of Hamid Karzai, and supports the upcoming Loya Jirga (a tribal conclave to decide the next Afghan government) in June. Li Peng, the former Prime Minister and the head of the National People’s Congress of China, and Artur Chilingarov, a deputy speaker of the Russian Duma, have recently discussed concerns in Central Asia at the third annual session of the Association of Asian Parliaments for Peace; and Mohammad Khatami, the President of Iran, has begun a nine day visit to Central Asia on April 22, while analysts and experts attach special importance to the Caspian summit in Ashghabat, where the Caspian Sea and its legal regime are to be discussed.
Challenges to Russian interests also come from inside the region. On the eve of the Caspian summit, Turkmenistan’s President Saparmurad Turkmenbashi Niyazov once again tried to revive the Turkmenistan-Afghanistan-Pakistan gas pipeline. Turkmenbashi suggested that the construction a 1,500 kilometer power line and a highway parallel to the pipeline will serve as guarantees of stability in Afghanistan.
In view of this complicated regional picture, Putin’s speech reflects Russia’s recognition of the limits to its power - something the Russian military has a hard time coming to grips with. While Russia may plan to boost its military presence and conduct exercises in the near term, a multi-polar security environment is gradually emerging in the region. Russia will try to protect what it perceives as its vital interests, especially in the energy sector. Opposition to alternative pipeline routes from the region that would decrease local states’ dependence on Russia is likely to be a major cornerstone of this policy. For example, Gazprom, the Russia natural gas monopoly, is anxious to maintain control over the export of gas, and is likely to fight Turkmenbashi tooth and nail on the trans-Afghanistan gas pipeline. Russia is also likely to carefully prepare for power transitions in Azerbaijan, Georgia, and eventually in Turkmenistan and Kazakhstan, and work behind the scenes for pro-Russian candidates to come out on top in the succession struggles.
CONCLUSIONS: In the long term, Russia will not be able to dominate a Central Asia that already witnesses deployment of U.S. military power. China-Russia cooperation along the horizontal axis, and an India-Russia coordination along the vertical axis are in the cards. With American presence and a new security environment in the region, Russia will take the CIS in general and Central Asia in particular more seriously than before. The weakness of the Russian bureaucracy and decision-making process, as well as the lack of reform in the military and security services, represent, however, serious impediments to Russia’s power projection in the region. Putin is focused on defending Russian economic, especially energy, interests first and foremost, and on promoting integration in the military, security, business, and cultural spheres. However, pursuing their own national agendas, the countries of Central Asia are likely to pursue "multi-vector" foreign policies and will attempt to maximize their benefits by playing regional powers - and the U.S. - against each other.
03-27-2002
The Bush Administration has allowed the North Caucasus broadcasts of Radio Liberty-Radio Free Europe to go ahead on April 3. These 15-minute broadcasts from Prague will include programming in Chechen, to which the Russian government strongly objects. The Bush Administration’s decision to take action may be interpreted as support for the Chechens, and may complicate its relationship with Putin at the time the U.S. troops are poised to take on terrorist elements in the Pankisi Gorge. However, the reasons for this action may be distant from the Caucasus and have roots in domestic policy and electoral politics.
BACKGROUND: Radio Free Europe-Radio Liberty is planning to launch its North Caucasus service, including controversial broadcasting in the Chechen language, on April 3. The newest radio service was scheduled to go on the air in the Chechen, Avar, Circassian and Russian languages on February 28 of this year, but at the last moment Richard Armitage, Deputy Secretary of State, the second highest ranking U.S. Department of State official, had pulled the plug.
Armitage intervened with the Broadcasting Board of Governors (BBG), which ordered the Radios to postpone the broadcasts, and to cover the region through its Russian service. BBG is a body appointed by the President of the United States, which supervises the U.S. international radio broadcasters, such as Radio Free Asia and the Voice of America. Radio Liberty is funded by the U.S. Congress and is nominally independent from the executive branch of the U.S. Government.
The North Caucasus service was mandated by the U.S. Congress, the Radios’ funder, in 2000, and then-Chairman of the powerful Senate Foreign Relations Committee Jesse Helms (Republican of North Carolina) led the charge for its creation.
Russian officials viewed the genesis of the service in conspiratorial terms. They suggested that Helms’s staff member for Russia Ian Brzezinski, spearheaded the effort together with Paul Goble, then-Director of Public Affairs at Radio Liberty. The two are supporters of the Chechen independence, the Russian officials alleged. Mr. Goble is currently a senior executive with The Voice of America.
The North Caucasus broadcasts will be conducted from the Radios HQ in Prague, and will last 15 minutes in each of the four languages. According to Andrey Sharyi, the Moscow bureau chief of Radio Liberty, the Chechen and other broadcasts for North Caucasus will be separate and independent from the Russian service, which uses AM and FM frequencies in Russia.
Mr. Sharyi refuted accusations that Radio Liberty supports the separatists: "The position of the Russian service on the Chechnya war has always been the same: calls for a peaceful resolution of the conflict, defense of human rights and [coverage of] humanitarian issues. There will be no changes in our position," Sharyi said.
IMPLICATIONS: Russia has long seen Radio Liberty broadcasts in Chechen as a direct affront. Foreign Minister Igor Ivanov reportedly spent half an hour complaining to Colin Powell about the pending broadcasts in January. The Kremlin Administration reportedly threatened to pull Radio Liberty AM/FM broadcasts off the air and shut down the Moscow bureau.
While Yastrezhembsky later denied media reports and limited himself to a promise to monitor the broadcasts "in accordance with the law," Minister of the Press Mikhail Lesin warned that the U.S. radios’ actions are "improper." Lesin said that his ministry will "address the situation from the position of information security" and added that Russian legislation on incitement to ethnic conflict "should be observed, and that measures will be taken if laws are broken."
Vremya Novostei, a Moscow weekly with ties to the Kremlin, compared the Chechen broadcasting to Radio Liberty’s Radio Free Iraq and the Farsi Service, which broadcasts to Iran. The weekly pointed out that the broadcasts are calling for regime change in these countries.
Radio Liberty Russian broadcasters, speaking on the condition of anonymity, expressed concern that the Government of Russia may actually shut down their large Moscow bureau and deny access to the coveted AM and FM frequencies. "No one listens to short wave any longer," they said, referring to the World War Two technology which was is still used to beam U.S. international
broadcasting around the world. "And it is not clear how the station management will monitor broadcasts in rare languages, such as the Chechen, which very few Americans know." The issue of editorial control will be crucial to keep the broadcasts from becoming a major friction point in the U.S.-Russian relations.
CONCLUSION: At the time of the delay, the U.S. State Department spokesman Richard Boucher stated on the record that broadcasting would be counterproductive in the campaign against terrorism and because of the talks between the Russians and Chechens. What has changed?
A Radio Liberty memo and State Department sources agree that factors as diverse as the Republican Party strategy to win 2004 presidential elections, and the lobbying power of the U.S. poultry industry had played a role in changing the mind of Mr. Armitage.
To win the crucial, mostly blue-collar states of West Virginia and Pennsylvania in 2002 Congressional and 2004 presidential elections, Republicans needed to protect the shaky steel industry there. Thus the imposition of steel import tariffs earlier this month, that would hit Russian exports of steel to the U.S. In retaliation, on March 10, the Russians limited imports of American chicken legs, since the late 1980s colloquially referred to as "Bush’s legs," after the current president’s father, George H.W. Bush. And Tyson’s Chicken, the U.S. poultry giant, weighed in with its considerable Washington lobbying power, to send a message to the Russians on the necessity of chicken imports.
Last but not least, the Congress, protective of its prerogatives to fund foreign policy priorities, insisted that the Radios’ North Caucasus service must go ahead, thus rejecting the earlier State Department position postponing the broadcasts indefinitely. In February, the U.S. Senate launched a bipartisan initiative spearheaded by Senator Paul Wellstone (D-Minnesota), and Sen. Sam Brownback (R-Missouri), seeking the adoption of a resolution on Chechnya which would require President Bush to pressure Russia for a negotiated settlement. In the end, all these factors led to the U.S. reversal on Chechen broadcasting.
01-16-2002
The transformation of the Central Asian Economic Commonwealth into the Central Asian Cooperation (CAC) comes as regional cooperation is desperately needed in the broad array of issues, from national security to environmental protection. However, past performance, petty rivalries, and the lack of economic and trade expertise make the prognosis cautious for the newly created body at best. Lacking adequate budget and trained staff, the new organization may face a mountain of mandates and lack of resources - a well-known prescription for failure.
BACKGROUND: The last days of December 2001 witnessed the creation of yet another regional association in the territory of the former Soviet Union: the Central Asian Cooperation (CAC). It was born after a number of bilateral and multilateral meetings in Tashkent on December 27-28 between the host, President Islam Karimov, and Presidents Nursultan Nazarbaev of Kazakhstan, Askar Akaev of Kyrgyzstan, and Imomali Rakhmonov of Tajikistan. The "permanently neutral" Turkmenbashi was absent. The new organization replaces the Central Asian Economic Commonwealth, and joins the Moscow-dominated Eurasian Economic Cooperation Commonwealth (EEC); the GUUAM (Georgia, Uzbekistan, Ukraine, Azerbaijan, Moldova); and the Shanghai Cooperation Organization as yet another attempt at searching jointly for regional political and economic cooperation solutions.
This time, the regional powers, such as Russia and China, the godfathers of SCO, were absent from the scene and none of the aspirants for regional influence, Pakistan, India, Iran or Turkey, were present either. Presumably, New Delhi and Islamabad had other fish to fry at the moment, or trying to avoid frying each other. Speaking at the press conference on December 28, President Karimov declared that CAC would have in its purview issues of military policy, economy, and humanitarian cooperation. This is understandable in the aftermath of the war in Afghanistan. Moreover, the four founding members declared that they will work together to create joint electricity, gas, transportation and irrigation networks.
The Tashkent Declaration, adopted by participants, proclaims an increase in political, economic and humanitarian cooperation; joint fight against international terrorism; drug smuggling; and religious and political extremism. The leaders patted themselves on the back for maintaining "stability" for 10 years after the Soviet collapse, and "maturity" in dealing with divisive and complex issues, such as water and road building. In the negotiations preceding the quadrilateral summit, Presidents Karimov and Imomali Rakhmonov covered issues of mutual trade ($80 million in the first three-quarters of 2001); border delineation; and security and law enforcement cooperation. To boost trade, Uzbekistan promised to loosen restrictions and open its borders to Tajik transit trade. Tajikistan will receive $12 million debt forgiveness (10 percent of the total debt), and Uzbekistan promised to restructure the rest of the debt ($108 million). Dushanbe is also hoping to receive more Uzbek oil and gas for hydroelectric power it generates. There were also promises of reduced tariffs on goods imported to Uzbekistan from Tajikistan and talk about cutting the price of the Uzbek natural gas flowing to Tajikistan.
IMPLICATIONS: Central Asia desperately needs joint efforts to solve a number of problems, from trans-border terrorism and border delineation, to environmental threats, to trade and foreign investment and refugees. In this sense, efforts to improve regional cooperation are needed. However, the prognosis must remain guarded - for four reasons.
First, Uzbek landmines have killed dozens of civilians since Tashkent buried thousands of mines along its borders, fearing radical Islamic incursions. This breeds resentment and suspicion between Uzbekistan and its neighbors. Uzbekistan behaved in a heavy-handed way, throwing its weight around in order to receive water from Kyrgyzstan for free. Persistent refusal of Tashkent and Astana to pay for water - the vital resource of the arid region, left a bitter taste in the mouths of many in Kyrgyzstan. According to sources in Bishkek, Tashkent also violated the gas-for-water agreement with Kyrgyzstan, starting in August 2001. However, the Uzbeks are fond of reminding that they are selling gas at about half price comparing to the prevailing global prices: In 2002, Tashkent would like to raise the price from $42 to $45for a thousand cubic feet.
Second, the true trading bloc is not likely to emerge, as there is almost melodramatic obsession with honor and prestige, little bureaucratic culture of compromise, and squabbles and suspicions between the top leaders. These suspicions, and fear of alien domination, have also hampered the development of closer economic ties with Moscow and Beijing within the SCO and the Eurasian Economic Commonwealth. Despite the common and equal roots in the Soviet nomenklatura hierarchy, some leaders see themselves as more equal than others.
Third, the scarcity of trade and market economic expertise is a major impediment. After all, the Western Europeans managed to launch the European Economic Community (EEC), and later the European Union, only after prior experience with customs unions, such as the pre-unification Germany and the Austro-Hungarian Empire in the nineteenth century. Furthermore, the Western European domestic economic models were more or less defined after World War Two, which is not the case in Central Asia.
Today, Uzbekistan is still struggling to make its currency convertible; there are serious problems with privatization and capitalization of state-owned enterprises in all countries of the region; and the rule of law facing serious challenges. In such conditions, developing a workable economic association is a truly Herculean task.
CONCLUSIONS: Despite the need for regional cooperation, the chances for success for the CAC remain tenuous. After all, nothing changed fundamentally since the launch of its predecessor, the Central Asian Commonwealth, and GUUAM has so far failed to create a trading organization. An equitable free trade association or a customs union is still far away, despite the positive historical experience with such formations. This is because the region consists of two larger and resource-rich countries (Kazakhstan and Uzbekistan) which are vying for local domination, and two small, poor and weak states: Kyrgyzstan and Tajikistan.
Russia is not likely to let the former dependencies to go their own merry way. Moscow controls practically all oil and gas pipelines out of the region, and is likely to frown at the gas pipeline to be constructed via Afghanistan, to take Turkmen and Uzbek gas to the Pakistani and Indian markets. Moreover, Moscow is likely to attempt to revitalize the Eurasian Economic Commonwealth, which also includes Russia, and Belarus in addition to Kazakhstan, Kyrgyzstan and Tajikistan. With the former KGB general Grigory Rapota at the helm of EEC, and the Kremlin controlling 40 percent of the EEC voting rights, Moscow is likely to keep the Central Asian falcons under its gimlet eye.
A major Russian military buildup on the border with Ukraine has recently sparked fears of a potentially dramatic escalation in the simmering seven-year conflict between the two countries. Although tensions have eased somewhat following Moscow’s April 22 announcement of troop withdrawals, the threat of a new Russian offensive remains.
