Publication: Eurasia Daily Monitor Volume: 2 Issue: 164

Following this summer’s Andijan refugee crisis, when the Kyrgyz government transferred 440 Uzbek citizens to a third country to satisfy its obligations as a UN member, official Tashkent canceled a bilateral agreement on supplying 350 million cubic meters of natural gas to Kyrgyzstan. Having a protracted crisis in the energy sector, which in past years has brought significant losses due to poor and corrupt management, Kyrgyzstan is facing a financial and logistical stalemate in importing gas and exporting electricity as winter approaches.

After Uzbekistan curbed its gas supply agreement, Kyrgyzstan had to rely on Kazakhstan’s KazTransGaz to re-sell the Uzbek gas for higher prices. As one of the conditions, KazTransGaz demanded that Kyrgyzstan repay a three-year debt amounting to $17.5 million. Since the beginning of August, Kyrgyzstan overpaid 20% of the normal gas price with KazTransGaz, sliding further into a budget deficit (Moya stolitsa novosti, September 2).

Although electricity exports have led the Kyrgyz economy, electricity is among the sectors least reformed since 1991. Remaining under the centralized control of KyrgyzEnergo, it had been deteriorating during the reign of former president Askar Akayev. Annual electricity losses under KyrgyzEnergo exceeded 50%, when the average estimated loss should not be higher than 12-13%.

It was already apparent in the late 1990s that Kyrgyzstan must decrease its dependency on Uzbek gas and move towards using own resources. Uzbekistan often restricted gas exports to Kyrgyzstan and Tajikistan on political, not economic, grounds. During the 1999-2000 conflict in Batken, Kyrgyzstan, the government of Uzbek President Islam Karimov shut off gas supplies to Kyrgyzstan while Kyrgyz troops fought guerillas from the Islamic Movement of Uzbekistan. The entire northern part of Kyrgyzstan, including the capital, Bishkek, suffered from shortages of natural gas. Gas scarcity created an increased reliance on electricity and frequently resulted in the breakdown of the power grid, thus exacerbating the deterioration of basic public utilities.

Most local experts expected that the crisis with the Uzbek refugees would worsen relations with Uzbekistan. But as noted by a journalist from Vecherny Bishkek, “If the preference were to be given to gas – wait for a demonstrative flogging of Kyrgyzstan from the European Union and NATO with lingering financial sanctions, and even worse” (August 29).

During the Akayev era, current Kyrgyz President Kurmanbek Bakiyev was among the few policymakers to speak against granting concessions to the energy sector, but as president, he quickly changed his position. Without prior parliamentary consent, Bakiyev stated that the entire sector must be handed over to Russian control. This proved to be yet another clumsy attempt by Bakiyev to please Moscow. Bakiyev had earlier tried to comfort Russia by demanding deadlines for the U.S. military presence in Kyrgyzstan. At an official meeting with President Vladimir Putin on September 5, Bakiyev called for more extensive bilateral cooperation, listing a number of strategic economic sites in Kyrgyzstan that are ready for Russian investment (Kyrgyzinfo, September 5).

Newly appointed Prime Minister Felix Kulov has taken a different approach. During a series of meetings with representatives from the World Bank, Kulov welcomed the idea of an open competition to attract more investment (Kabar, September 5). The World Bank also recommended that the Kyrgyz government decentralize KyrgyzEnergo’s control over six companies to enhance management on a micro level. This should reduce losses and improve payment collection rates within the government’s broader anti-corruption policies (Akipress, August 30). Domestic and regional barter transactions must be changed into cash payments to promote a competitive market. Besides the World Bank, there are other potential U.S. and European partners willing to assist Kyrgyzstan’s energy sector, including the Asian Development Bank, International Monetary Fund, and the European Bank for Reconstruction and Development.

The concession plan sparked extensive discussions among local politicians, with most of them coming out against any foreign involvement in the country’s most important economic sector. They cite the Georgian example of failed energy reform, after Tbilisi granted a concession to the U.S.-based AES Corporation in 1991, which led to a rapid price increase and resulted in a dramatic collapse of the energy sector. The crisis made Georgia deeply dependent on Russia. Based in Virginia, AES is active in 27 countries, and Georgia was one of the few failures among a generally successful record of company activities. It will also likely become one of the leading competitors in the Kyrgyz tender.

Because the energy sector is so important for Kyrgyzstan’s GDP, it raises controversial opinions whenever its future is mooted. The new government is seeking to solve the problem with old solutions, namely barter or quick concession. Bakiyev’s opponents have actively resisted any possibility of falling under foreign economic dependence by pointing to the vivid example of Georgia. But the new government needs to find a solution before the start of the cold season to maintain its frail popularity.