Turkmen-Chinese Cooperation: Key to Turkmenistan’s Diversification Strategy

The visit of the Turkmen President, Gurbanguly Berdimuhamedov, to China on May 2 has once again reaffirmed the significance of China for Turkmenistan following the launch of the Turkmenistan-China gas pipeline that has broken the Russian monopoly on energy transit routes in Central Asia and opened the way for multi-faceted bilateral collaboration between Ashgabat and Beijing. Yet, Turkmenistan’s intensified outreach to China conceals serious challenges confronting Ashgabat as it seeks to strengthen its foreign policy and damaged economy in the context of the global financial crisis and slow, albeit progressing, economic reforms.

In China, Berdimuhamedov attended the Shanghai Expo 2010 and met with Chinese President, Hu Jintao. He emphasized that China is “a reliable and trusted friend,” and was the only country with any right to develop carbon resources on Turkmenistan’s territory. This statement came around one year after the explosion of the gas pipeline that carried 48 billion cubic meters (bcm) of Turkmen gas to Russia. The rupture was reportedly caused as a result of increased pressure in the pipeline after Moscow substantially reduced the inflow of gas, but failed to notify Ashgabat ahead of time which created the impression that Moscow’s move was designed to sabotage the pipeline. The global financial crisis and the reduced gas demand in Europe created hard conditions for Turkmenistan that predominantly relied on Russia for its energy exports, leading to the contraction of its GDP by up to 50 percent (www.turkmenistan.gov, May 2; www.ferghana.ru, April 30; www.centrazia.ru, May 1).

Cooperation with China has therefore proven timely for Turkmenistan that can now provide the “middle kingdom” with up to 40 bcm of gas annually through the Turkmenistan-Uzbekistan-Kazakhstan-China pipeline (www.gundogar.org, March 1). The latter seeks to diversify energy relations, as well as build a more competitive and stable environment in the region that continues to gravitate towards Russia’s zone of “privileged interests.” As Berdimuhamedov emphasized, “Our relations [with China] today have a long-term strategic nature. They have passed the test of time, proved their effectiveness and currently represent a serious factor of stability and development in the Eurasian space…” (www.turkmenistan.gov, May 2).

The leaders of China and Turkmenistan have particularly stressed the importance of cooperation in both the energy and non-energy sectors. China, the largest holder of foreign currency reserves in the world, is well positioned to finance cash-stripped countries in return for energy resources in the aftermath of the financial crisis. This scheme has enabled China to gain control of about half of the Kazakh energy market and secure a 49 percent stake in the Kazakh MangistauMunaiGaz company after the disbursement of a $10 billion loan to Kazakhstan (www.gundogar.org, May 4; www.russians.kz, November 24, 2009).

However, Turkmenistan’s efforts to diversify its energy export clientele are crippled in the short term. Ashgabat can only provide 13 bcm of gas to China this year due to its limited transportation capability. The existing pipeline to China will reach its full capacity by 2012, while the second planned parallel pipeline has not yet been constructed. Ashgabat might thus be forced to seek help from Moscow, in order not to miss out on potential export earnings. However, Moscow plans to import no more than 10 bcm of Turkmen gas this year. It is against this backdrop that Hu Jintao signed a 70 million Yuan ($10.25 million) grant to Turkmenistan during Berdimuhamedov’s visit to China to relieve pressure on Ashgabat’s economy (www.centrazia.ru, May 1; www.gundogar.org , March 1; www.turkmenistan.gov, May 2).

Turkmenistan, however, does not exclusively rely on China for its energy diversification. The recently built pipeline to Iran, for instance, increased Turkmenistan’s annual delivery capacity from 8 bcm to 20 bcm, which enables Ashgabat to supply 12 bcm of gas to Tehran this year. The UAE has also expressed strong interest in the Turkmenistan’s South Yolatan gas field (www.gundogar.org, March 1). The proposed pipeline connecting Turkmenistan, Afghanistan, Pakistan and India (TAPI) is yet another promising energy project. Yet, it may only become operational if Pakistan-Indian relations and security conditions in Afghanistan witness substantial improvement. The Western-backed Nabucco, also remains in limbo due to the lack of progress on the status of the Caspian Sea and opposition from Russia and Iran (www.russians.kz, November 24, 2009; www.gundogar.org, March 1). Turkmenistan’s cooperation with a diverse set of actors –Russia, Iran, the UAE, China, and the West – presents Ashgabat with an opportunity to direct energy flows across the region.

This, of course, is not a panacea for the economic ills in the country where unemployment has reached 60 percent and the mismanagement of resources persists in the largely cotton and energy-dependent economy. Turkmenistan’s agricultural sector, with a GDP share of 10 percent, employs a staggering 48.2 percent of the labor force, while its private sector generates merely 25 percent of the GDP (www.del-irk.ru, January 28, 2010; CIA World Factbook, 2009; www.paruskg.info, March 16). Therefore, Berdimuhamedov also focuses on cooperation with China in the non-energy sphere, including telecommunications, tourism, and transportation projects, as well as economic liberalization. Consequently, its result might be a painful transition for the general population, heavily dependent upon subsidized prices. Currently, 37 Chinese enterprises operate in Turkmenistan and 60 joint projects, worth $4 billion, are being implemented in the country. Bilateral trade has increased fortyfold since 2000, reaching $1.5 billion in 2009. Meanwhile, Ashgabat has adopted a new law on foreign investment, introduced monetary policy, allowed currency transactions and partial price liberalization (www.centrasia.ru, March 15; www.gundogar.org, March 1, May 4; www.turkmenistan.gov, May 2; www.del-irk.ru, January 28).

Turkmen-Chinese relations are likely to expand following Berdimuhamedov’s visit to China, which is ready to support Ashgabat’s efforts to diversify and strengthen its national economy and foreign policy. The precipitous drop in Turkmenistan’s GDP following the global financial downturn makes the intensification of bilateral relations with Beijing all too pertinent for Ashgabat. Yet, only the genuine pursuit of economic liberalization and diversification reforms, some of which are underway, will mitigate the risks of resource dependency and promote more efficient and diverse economic development in Turkmenistan –which the Turkmen leadership aspires to achieve through its multi-faceted cooperation with China.