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Turkmenistan: Nuclear Tensions Damage Regional Investment

Boston, 19 May 1998 (RFE/RL) -- As international tensions mount over India's nuclear testing, the fallout from U.S. sanctions is likely to mean major damage for regional investment with effects reaching as far as Turkmenistan.

The republic seems certain to be hurt in several ways, all having to do with its plans to build a $2.5-billion pipeline through Afghanistan in order to sell gas to Pakistan.

The ambitious project by U.S.-based Unocal Corp. has already been delayed by Afghanistan's long civil war. But the threat of nuclear conflict now promises even more trouble for the pipeline plan.

Turkmenistan and Unocal had hoped that the pipeline to Pakistan could eventually be extended to New Delhi, providing a bonus dividend by tapping the enormous Indian market. With nuclear testing, the idea of any cooperation between Pakistan and India is now clearly off the table, leaving the pipeline with a smaller payoff than investors hoped for.

The 400-kilometer portion of the pipeline in Pakistan is also at risk. Pakistani nuclear tests will force the U.S. to impose the same sanctions on Islamabad that have already been applied to India.

Unocal's second planned pipeline to carry oil from Turkmenistan through Afghanistan and Pakistan to the Arabian Sea would also be endangered due to financing. Exports of some U.S. items like compressors could also be banned, while U.S. export financing and private bank loans to Indian and Pakistani government agencies would also make the projects more difficult.

Added to these problems is the general deterioration of the investment environment in the region. The nuclear issue has raised the degree of business risk in an area where confidence is already in short supply. As India's secret nuclear program has made clear, these countries also have higher priorities for their own limited funds than the critical business of providing for their energy needs.

All these considerations spell trouble for one of Turkmenistan's major export outlets, regardless of what happens in Afghanistan. After a steep decline last year, the country's economy remains largely at the mercy of political events which have blocked energy exports on several sides.

Officials say that the new Russian government of Prime Minister Sergei Kirienko has shown little interest in reopening negotiations on Turkmen gas exports through Russia's pipelines. Talks with then-Prime Minister Viktor Chernomyrdin broke down months ago when the two sides failed to agree on either transit charges or an export price. Because of the impasse, Turkmenistan has exported no gas since March 1997, except for limited amounts to Iran.

The Turkmens and the Russians have been playing a wait-and-see game which depends on the United States. Last month, the government of Turkmenistan President Saparmurat Niyazov tried to bluff Russia into believing that gas could flow by an alternate route when he endorsed the trans-Caspian pipeline plan during his visit to Washington. But Russia saw through the ruse after concluding that such a line would take years to build.

President Bill Clinton on Monday agreed to waive sanctions against three companies -- Russia's Gazprom, France's Total SA and Malaysia's Petronas gas -- for their participation in an Iranian oil exploration project. Secretary of State Madeleine Albright promised that European Union (EU) companies with similar Iranian involvements would likely get waivers too, so long as those country's cooperate in fighting international terrorism in and around Iran.

But she made no mention of waivers for other non-EU firms. Both Clinton and Albright made clear that the U.S. will continue to oppose pipelines through Iran on the grounds that it would give the Islamic republic too much power over world energy supplies.

If European companies like Royal Dutch/Shell are serious about building a gas pipeline from Turkmenistan to Turkey through Iran, they will probably have to do it in spite of the United States. Even if they do, there will again be the time factor, which works against Turkmenistan.

Reports suggest that the Turkmen economy has months, not years, to generate export earnings. The country has continually delayed the award of Caspian offshore tenders for unexplained reasons. Unlike other republics, it has no financing from the International Monetary Fund (IMF). The Times of London reported last week that the country's foreign exchange reserves are likely to be wiped out in September when debt repayments are due.

If that is the case, the government would be best advised either to accept the terms of its foreign bidders for the Caspian offshore resources or those of Russia for the export of gas. Time is running out for Turkmenistan, and the cash to support it will have to come from somewhere.