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Central Asia: Caspian Sea Republics Face Reality In New Year

Washington, 5 January 1999 (RFE/RL) -- If 1998 was a year of nasty surprises, 1999 will be the year when Caspian Sea republics have to face reality.

Many of the same forces that racked the Russian economy rippled though the Caucasus and Central Asia last year. But plunging oil prices came as a special shock to those republics that have staked their futures on petroleum exports and Western contracts.

While Russia has relied for years on oil and gas as its major sources of hard-currency earnings, the Caspian republics are new to the game of exporting energy to world markets. They are already suffering from their inflated expectations of oil wealth.

The governments of these countries believed that their fortunes would be virtually assured by the intense competition for Caspian concessions that has been underway since 1994.

But Western contracts did not guarantee that commercial quantities of oil would be found, or that the resources could be easily exported, or that world oil prices would stay high enough to return a profit to the republics or their investors.

By the end of 1998, countries such as Azerbaijan and Kazakhstan were forced to admit they had made no money on oil exports during the year, despite billions of dollars worth of agreements.

As their dreams have been delayed, bitterness has crept into their statements. These countries may now face the worst of both worlds.

Because they remain within Moscow's sphere, they are bound to be hurt by Russia's economic downturn and its soaring inflation. Yet, the West may not be of much help, either. Exposure of these countries to market economics means that most may see little gain from their oil and gas exports again this year.

The troubles are reflected in revised economic forecasts, issued last month by the International Monetary Fund. The IMF now estimates that the gross domestic product of the Transcaucasus and Central Asian region grew just 2.1 percent in 1998, instead of the 4.1 percent estimated in October. The IMF sees 3 percent growth in 1999, down from the 3.8 percent that was expected only three months ago.

Some independent estimates are lower. The Economist Intelligence Unit, for example, believes Kazakhstan's GDP will decline 2.5 percent this year, while the IMF is calling for zero growth. The difference may be only a matter of timing, however. The IMF says the republic's economy has already fallen 1.5 percent in 1998, although analysts at The Economist estimate that it rose 1 percent. Either way, the disappointing performance has forced the country to seek new loans.

The Economist also predicts 6 percent growth for Azerbaijan this year, compared with the 7.5 percent forecast by the IMF. But the biggest difference is in estimates for Turkmenistan. The IMF calls for growth of over 12 percent this year, while The Economist sees no growth at all after a 1 percent decline in 1998.

The region may not suffer a Russian-style collapse, but its economic progress will inevitably be reduced or postponed. Vast petroleum assets may still mean better times lie ahead. But in the coming year, budgets will be squeezed and life will be hard.

As oil prices remain low, the region's new producers will be competing with Russia, which raised its exports by over 6 percent last year. High production and transport costs will leave the republics at a disadvantage if Russia follows the same course this year.

Among the republics, Kazakhstan may suffer less because its Western-backed projects are the oldest. Companies such as Chevron and Mobil are likely to stand by their promises to increase oil production and pursue pipeline projects, only because they have already invested so much. But other companies, such as Texaco, have already cut output in Kazakhstan, citing Russia's failure to pay for exports. There could be investment cuts to come.

There are also signs that the republics will be driven to compete against each other. Kazakhstan is facing a loss of its oil exports through Georgia, for example, because Azerbaijan says it cannot afford to reduce its rail transport charges. If oil prices drop further, there will be no point in more exports.

Cost issues have delayed a choice of a main export pipeline route from Azerbaijan, which was originally scheduled for last October. The Azerbaijan International Operating Company now sees little chance of a decision before mid-year. Azerbaijan continues to sign contracts, but the benefits may not be felt until oil prices rise.

Aside from misfortune, the Caspian countries have also suffered from mismanagement.

After nearly two years without gas exports through Russia, Turkmenistan now seems set to resume its gas sales to Ukraine in a deal that includes payment of $36 per 1,000 cubic meters at Turkmenistan's border. But the same terms were reportedly offered by Russia last January, when Turkmenistan was demanding $42. Since then, a year of growth has been lost and nothing has been gained.

According to trade sources, Turkmenistan did much the same thing with its cotton exports last year by keeping them off the market because prices were low. When prices fell further, it was eventually forced to sell anyway.

Azerbaijan's state oil company made a similar mistake when it suspended exports for seven months last year because of falling prices. Prices kept falling and Azerbaijan was forced to resume exports in October after it ran out of storage and lost $400 million in revenue.

Such missteps are signs that the Caspian Sea nations still have a lot to learn about economics. The lessons may be particularly painful this year.

(Michael Lelyveld is national correspondent for the Journal of Commerce. This analysis was written for RFE/RL)