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Transcaucasia/Central Asia: Oil, Gas No Cure For Economic Woes

By Michael Wyzan

Prague, 5 January 1999 (RFE/RL) -- Azerbaijan, Kazakhstan, and Turkmenistan have large deposits of crude oil and natural gas, the exploitation of which plays a major role in their economies.

Despite the fact that Azerbaijan and Turkmenistan have been slow economic reformers, they, like Kazakhstan, have succeeded in attracting large volumes of foreign direct investment (FDI) into the fossil fuel sector.

Kazakhstan received $3.2 billion in oil and gas-related investment from 1993 through June 1998, while Azerbaijan's oil sector attracted 1.8 billion in FDI from 1994 through June 1998. This investment helped to make these countries the main recipients of such investment per capita in the CIS.

Oil currently represents about 65 percent of Azerbaijani exports and more than 80 percent of the FDI that it has received, while in Kazakhstan the oil and gas sector accounts for about a quarter of exports and two-thirds of FDI (although the latter figure varies widely from year to year).

Nonetheless, the production of oil and gas has not increased rapidly in any of the three countries; none is currently a major producer of these commodities on the world market. Pipeline routings remain a contentious issue, with economic and geopolitical considerations (especially the U.S. desire to minimize Russian and Iranian involvement) often conflicting. Accordingly, it is unlikely fossil fuels will contribute substantially to economic growth in these countries over the next few years.

International oil and gas companies are currently sending mixed signals about the prospects for oil and gas development in the Caspian region. A number of such companies have closed down their operations recently. For example, Unocal announced last month that it was withdrawing from all Caspian projects except those based in Azerbaijan. But the next day, Shell, Chevron, and Mobil signed a new agreement with Kazakhstan on oil exploration in the Caspian.

Production data reveal largely declining trends, at least through the end of 1997. Azerbaijan produced 9 million tons of crude oil in 1997, down from 12.5 million in 1990, while Kazakhstan's oil production in 1997 was virtually unchanged from the 1990 level.

The most striking case is Turkmen gas extraction, which plummeted from 88 billion cubic meters in 1990 to 17 billion in 1997. Since gas represents two-thirds of both GDP and exports in a normal year (for example, in 1994), this collapse in gas production had dire consequences for the economy, with GDP declining by some 26 percent in 1997.

The decline in Turkmen gas production, which is all the more striking in a country with a good sectoral infrastructure and the world's fourth largest gas reserves, occurred in two stages. At the beginning of 1994, a dispute with Gazprom caused the Russian gas giant to refuse to allow into its pipeline Turkmen gas bound for Europe. A visit to Ashgabat last November by Russian State Duma speaker Gennady Seleznyov failed to resolve the dispute.

Earlier, in March 1997, the government halted gas exports to CIS partners Armenia, Georgia, and Ukraine because those countries had built up large arrears to it for earlier deliveries. However, at the end of 1998, Turkmenistan and Ukraine signed an agreement that would allow the flow of Turkmen gas to resume to Ukraine.

Although there are grounds for optimism that fossil fuels will, in the long run, play a major role in the three countries' economic development, a lot of problems must be resolved first. World economic conditions are unfavorable at present. Not only are prices low, but investors are leery of putting money into CIS countries after the collapse of the Russian economy. And a number of large oil and gas projects are coming on stream outside the region.

Moreover, developing countries have rarely genuinely benefited from oil and gas booms. Large inflows occurring in the sector contribute to strong exchange rates, which make it difficult to export other goods. In countries without transparent and efficient government sectors and with considerable regional or social inequality, revenues flowing into state coffers often benefit only tiny elites. Governments frequently spend oil money before it is earned and make commitments on which they cannot renege when oil prices fall.

Azerbaijan, Kazakhstan, and Turkmenistan seem likely to suffer from these problems. Only Kazakhstan has a diversified economy, although even in that country, there is concern that the government is counting excessively on oil and gas. One encouraging sign is Turkmenistan's attempt to diversify its economy by building 50 joint venture textile plants. Another is Kazakhstan's pension reform, under which pensions are based on the retiree's contributions during his working life rather than paid out of a large state fund (a tempting target for government misuse) fueled by the contributions of current workers.

(The author is a research scholar at the International Institute for Applied Systems Analysis in Laxenburg, Austria.)