Russia and China should give Kazakhstan a major boost into the next decade

by Greg Shtraks

Last week’s big news in Central Asia was the completion of the natural gas pipeline connecting Turkmenistan and China. The majority of the discussion has, rightfully, focused on the effect that the Samandepe pipeline will have on breaking Russia’s monopsony on Central Asian gas. Indeed, we will see the ramifications of this pipeline play out in Eurasian geopolitics for years to come. A factor that has flown mostly under the radar, however, is the significance of this pipeline to Kazakhstan. Kazakhstan’s economy, badly battered by the global financial crisis in 2007, has struggled to regain its mojo. However, recent investments by Russia and China should give Khazakhstan a major boost into the next decade.

At 1,300 kilometers the Kazakh portion of the pipeline is the largest section outside of China. In fact, the grand-opening of the pipeline took place a week after the fifth annual meeting of the China-Kazakhstan Cooperative Commission (CKCC). The CKCC, a major consultative body co-chaired by Chinese Vice Premier Wang Qishan and Kazakhstan’s First Deputy Prime Minister Umirzak Shukee, has had a very busy 2009.

In April, China Guandong Nuclear Power Co (CGNPC) announced a joint partnership with Kazakh state firm Kazatomprom to develop new uranium deposits in Kazakhstan with potential reserves exceeding 40,000 tons. In September, China Investment Corp (CIC) paid $939 million for an 11 percent stake in KazMunaiGas Exploration and Production, an arm of Kazakh State Energy firm KazMunaiGas. Finally, in November, China’s state-owned CNPC bought Kazakh oil producer MangistauMunaiGas for $2.6 billion. The aforementioned purchase fortuitously coincided with China’s loan of $10 billion to help Kazakhstan recover from the financial crisis. China also agreed to invest 3.5 billion through joint-venture companies to develop the Kazakh non-energy sector.

China’s investment blitz in Kazakhstan has not been limited to the energy sector. Although China is just Kazakhstan’s third largest trading partner, behind the EU and Russia, Beijing’s role has grown exponentially in the last five years. Trade has boomed since the opening of the free-trade zone in 2007 and has grown by 26 percent to reach $17.5 billion in 2008.

Closer economic relations have naturally created a cultural synergy. On a recent visit to Kazakhstan, Hu Jintao announced an expansion from 100 to 200 in the number of full-tuition scholarships that the Chinese government offers Kazakh students for study in Chinese Universities. Furthermore, Beijing has opened two new “Confucius Institutes” in Kazakhstan over the last two years – one in Eurasia University and another at the Al-Farabi Kazakh National University. The result has been a noticeable shift in the number of Kazakh youths studying Mandarin Chinese instead of English.

However, Astana’s trumpeting of a new era of Sino-Kazakhstan cooperation masks a deep unease about China’s clout among the general Kazakh population. For instance, on December 17th spontaneous protests erupted in Almaty and Astana due to a rumor that Kazakh President Nursultan Nazarbaev is considering leasing 1 million hectares of Kazakh land to Chinese farmers.

Older Kazakhs still recall the 1940’s when neighboring Xinjiang was relatively independent from central Chinese control and had a population that was 85% Uighur. The situation today is quite different as Xinjiang is majority Han and the Uighurs, close ethnic relatives of the Khazaks, are repressed both culturally and economically. Polls show that a majority of Kazakhs are suspicious of China’s intentions believing that, despite good bilateral relations, Kazakhstan’s small population (17 million) and enormous size (2,724,900 sq km – six times the size of France) may eventually create an irresistible temptation for Beijing.

Despite such concerns, Kazakhstan currently finds itself in a very favorable position. On the one hand, Astana continues to enjoy a good relationship with Moscow. Nazarbaev’s recent agreement to form a Customs Union with Russia and Belarus won him accolades in Moscow and Minsk despite being unpopular at home. On the other, Kazakhstan’s close ties with China have given Astana far more leverage in dealing with Russia. Case in point is the December 16th announcement by the Caspian Pipeline Consortium (CPC) to boost the capacity of a pipeline from Kazakhstan to the Russian Black-Sea port of Novorossiysk. Russian companies Lukoil and Transneft will provide most of the $4.5 billion for infrastructure upgrades necessary to increase production.

Immediately after CPC’s announcement, Fitch Ratings, a British credit rating agency, increased Kazakhstan’s long-term foreign currency issuer default rating (IDR) from negative to stable. There is a little doubt that both the Chinese and the Russian investments played a role in this improving outlook for the Kazakhstan’s future.