China joins the Turkmen-Russian gas conflict

2009/07/13

China’s grant of a US$4 billion loan to Turkmenistan led to its indirectly becoming engaged in the Russian-Turkmen gas conflict, which started this March and has resulted in Turkmenistan withholding supplies of its gas to Russia, among other consequences. The Chinese financial assistance has significantly reinforced the position of Turkmenistan (which has been deprived of a large part of incomes from gas exports) in its negotiations with Russia concerning conditions of renewing supplies of its gas. At the same time, China’s engagement in Turkmenistan is another proof of intensifying Russian-Chinese rivalry in Central Asia.

The Russian-Turkmen gas conflict

The gas conflict between Russia and Turkmenistan has been escalating since March, when the two parties failed to sign an agreement on Gazprom’s participation in the construction of the Turkmen internal East-West gas pipeline. A likely cause of the withdrawal was Kremlin’s request for a guarantee that the route would be used to transport gas to Russia and not westwards and on to Europe (via the planned Trans-Caspian gas pipeline). The conflict reached its peak in April, when Gazprom reduced its intake of Turkmen gas by 90%, which in all likelihood resulted in the pipeline’s failure and the cessation of supplies to Russia. Since that time, Turkmen gas has not been exported to Russia, and the parties have been negotiating conditions for renewing the supplies (Gazprom’s demands include a reduction of the price or of supply volumes in the short term).
Since gas supplies to Russia stopped and Turkmenistan was consequently deprived of a significant part of its export incomes, Ashgabat has intensified its efforts to enhance co-operation with the West (as seen by the visits by Foreign Minister Rashid Meredov to Brussels on 3 June and Washington between 22 and 25 June) and China (the visit by Deputy Prime Minister Tachberdy Tagiev to China in early June). Ashgabat wants to strengthen its position in talks with Russia by demonstrating that it has alternative partners.

The Chinese loan

Turkmenistan has been most successful in developing relations with China. On 24 June, during the visit of the Chinese Deputy Prime Minister Li Keqiang in Ashgabat, the Turkmen gas corporation Turkmengaz and the Chinese State Development Bank signed a loan agreement for US$4 billion. According to Turkmen government’s promises, the money will be allocated to developing the largest Turkmen gas field, the South Yolotan. The conditions on which China has agreed to grant the loan have not been revealed; it cannot be ruled out that in exchange for the financial aid, Turkmenistan offered a gas supply guarantee or promised stakes in the gas field to Chinese companies. An agreement on sale of 10 billion m3 of gas to China was also signed during the visit (in addition to the gas contract envisaging supplies of 30 billion m3 of gas signed in 2008; gas will flow via the currently built gas pipeline to China as early as the end of this year) and a number of executive agreements in connection with previously concluded gas deals. China has also agreed to triple the number of Turkmen students it accepts (90 people) and to supply computers to schools as part of a non-repayable grant.

The consequences

The loan agreement signed by Beijing and Ashgabat has significantly improved China’s position in Central Asia, which is becoming a key economic partner, along with Russia, for the region’s countries; so far in 2009, China has granted loans worth US$10 billion to Kazakhstan, and has promised to invest US$1 billion in Tajikistan. The Chinese engagement undermines the Kremlin’s influence in Central Asia and may lead to a bitter clash between Russia and China. Russia seems determined to maintain its previous influence in the region, and its inability to present a financial and economic offer to Central Asian countries may make it to use other tools (for example, military force) to defend its position.
For the West, a stronger Chinese presence in Turkmenistan will make it more difficult to realise its plans to import large amounts of Turkmen gas to Europe, yet those plans have not failed completely. The Chinese loan granted for the development of the South Yolotan field in practice reduces the chance that European firms will obtain stakes in this field. It is also likely that in exchange for the loan, China has been given priority in receiving the gas from this source, which would call the need to build the East-West pipeline into question. Nevertheless, the gas fields located on the Caspian Sea shelf are still a reliable source of gas supplies to Europe.
Turkmenistan’s increasing desire to co-operate with the West (which is especially evident over the past few months) will facilitate the realisation of the European plans. The diversification of gas sale routes and markets is a strategic goal for Ashgabat, which convinced it to give up its previous isolationist policy and to carry out plans to export gas to China. At the same time, Turkmenistan fears domination by both China and Russia alike, and will search for additional partners to counterbalance the influences of its powerful neighbours.
A tangible effect of the Chinese loan will be the reinforcement of Ashgabat’s position in the ongoing talks with Gazprom on conditions of resuming gas supplies to Russia.

Aleksandra Jarosiewicz www.waw.pl

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