Building Bridges Between Baltic and Central Asia states

By Arthur Dunn

The European Union has been engaged with the five countries in Central Asia from the very moment they gained their independence in the early 1990s. At the beginning of the 21st century, the globalization process has required a new partnership to be established between them, and Central Asia became one of the objectives of the EU Common Foreign and Security Policy.

The growing dynamics of the bilateral relations brought in 2007 to a signing the EU-Central Asia Strategy. It took into account the specificities of the Central Asian countries and developed individual approaches to each of them, without leaving aside the regional cooperation. Among the priority areas, identified by the Strategy, there were common security threats, rule of law, education, environment and water.

Especially significantly the relations started to develop on the base of economic and security interests. Increasing political and economic instability in the world is forcing the EU to move up plans to reduce its vulnerabilities. Security questions and regional economic development require close cooperation of the EU with each Central Asian state, taking into account their geographical location, in particular with respect to Afghanistan, Pakistan and Iran.

It will not be an exaggeration to affirm that reforming the energy sector is one of the crucial challenges facing the EU as it attempts to modernize its economy and consolidate its foreign policy stance. Like most developed economies, in the near and medium term the EU will continue to rely heavily on traditional fossil fuels, including oil and gas. Europe imports more than a half of the necessary energy resources that costs each of its citizens more than 700 euros per year. As the President of the European Commission, Jose Manuel Barroso said, “diversification is part of an energy security strategy. Diversification of countries of origin of energy, diversification of transit routes, and, of course, diversification of the sources of energy.”

Therefore the EU seeks to secure energy supplies, especially in view of its deep dependency on Russia, which delivers 30% of its oil and 40% of its gas imports. Last November the European Commission adopted the ‘Energy 2020’ strategy to finally achieve what has long been overdue: ‘Europeanization’ of energy policy. In particular there was presented a vision of a priority of corridors for the transportation of gas, oil and electric power within the EU. These priorities reflect the energy policy of the EU for the next twenty years and target on adapting to the 21st century challenges.

So the need for a diversified energy supply policy in order to increase energy security opened further perspectives for cooperation between the united Europe and Central Asia. The EU is interested in fossil energy, primarily from Turkmenistan and Kazakhstan and to a lesser extent from Uzbekistan. EU Energy Commissioner Guenther Oettinger pointed out that “it is decisive that we build direct connections to the sources in the Caspian basin over the next decade.” Certain role in this aspect is assigned to the Baltic States – Estonia, Latvia, and Lithuania.

In spite of the fact that during nearly half a century they and Central Asian republics were parts of the common state – the Soviet Union, after the collapse of that formation their ways diverged completely that became one more proof of the USSR artificiality. During decade and a half both political and economic contacts between these regions were minimal. However the situation became to change recently, economic cooperation became to develop more intensively. Thus, since 2004 in total volume of Lithuania’s trade turnover the share of all five Central Asian countries has doubled, and similar Estonian figure for Kazakhstan has become six times more. Though absolute values remain to be small, the trend is on hand.

Another evidence of enlarging mutual relations is essentially more frequent direct contacts at all levels including high and diplomatic ones. In May 2008, Lithuanian Prime Minister Gediminas Kirkilas met with Kazakh President Nursultan Nazarbayev. He told reporters that Lithuania was seeking to deepen its energy cooperation and bilateral trade with Kazakhstan: “We touched upon very important energy issues, because Lithuania is in need of alternative deliveries of gas and maybe oil.”

Vilnius also has ambitions to channel across its territory not only Western and East European goods, but also transit trade from Central Asia and China. A favorable factor is the transport infrastructure connecting it with the East: Klaipeda Sea Port, the road and railway networks, the Viking Corridor, and others.

Last September Lithuanian Centre for Geopolitical Studies, together with the Central Asian Foundation for Developing Democracy from Kazakhstan, organized the Round Table discussion “Building Bridges Between the Regions: Central Asia and Eastern Europe.” Its main objective was to introduce the issues of energy security, ethnic conflicts, regional security, religious and international influence in Central Asian countries to civil societies of Central Asian and Eastern European countries and state institutions.

On November 2, 2010, President of Uzbekistan Islam Karimov received Prime Minister of Estonia Andrus Ansip. And in his February’s annual foreign policy address to the Parliament the Estonian Foreign Minister Urmas Paet said that in order to facilitate Estonian entrepreneurs entering the Central Asian market, there are plans to open an embassy in Kazakhstan: “Kazakhstan is one of Estonia’s most important partners in Central Asia, with whom we are prepared to exchange reform experiences and establish co-operation in the areas of, for example, energy, transportation, implementing IT solutions in the public sector, and carrying out economic reforms. The interest of Estonian entrepreneurs towards Kazakhstan is also constantly growing.”

In October 2010, President of Latvia Valdis Zatlers in the frames of his tour on the Central Asian countries visited Kazakhstan, Uzbekistan and Turkmenistan. During the last year OSCE Summit, Latvian Foreign Minister Ģirts Valdis Kristovskis met in Astana with his Uzbek colleague for reviewing bilateral relations. He emphasized that Latvia was interested in expanding economic cooperation with Central Asia. The parties also underlined the significance of the ISAF non-military transit route through the countries of the region to Afghanistan.

Finally, starting from July 1, 2010, the Customs Union of Belarus, Kazakhstan and Russia has come into force. Baltic States’ customs frontiers with Belarus and Russia became in general the Baltic-Central Asian ones that will promote transit-transporting cooperation. One can expect that economies of the states will benefit from this.

It is evident that at the very top of the agenda is energy cooperation. The Baltic States are worried about being an ‘energy island’ in the European Union. Sweden and Finland also have similar energy concerns that are mostly related to oil and gas consumption. In long-term plan stake on Norway does not seem justified, since the latter itself is in trouble by depletion of its oil reserves. Last years the extraction decreases invariably, from the peak of 162 million tons reached in 2001, it grew shorter up to 108 million in 2009 and, to all appearances, continues to fall further.

Simultaneously a danger from the opposite side is approaching – practically all Eastern European countries feel threatened by what is often perceived as Russian ‘great-power anti-status quo resentment’ embodied in the Russian-Georgian war and the gas disputes between Russia and Ukraine.

Correspondingly, the Baltic States want to reduce their overdependence on Russian energy and Gazprom’s dominant pricing power since there are practically no prospects to restore pipeline crude supplies from Russia. The problems begin in 2004, when the Latvian government refused political pressure to sell its largest Latvian port in Ventspils to Russian investors. Transnieft stopped oil exports from the port, which for preceding years served as the largest export facility for Russian oil.

In 2006 the Polish petrochemical company Orlen, in fierce competition with Russian Lukoil, TNK-BP, and KazMunaiGaz, a Kazakh company linked to Gazprom, acquired a 54% controlling stake in refinery Mazeikiu Nafta in Lithuania. The Lithuanian government, with the remaining 40% in the enterprise, was determined not to let Russian companies take over the strategic energy infrastructure. The chairman of Russian Duma’s foreign committee Konstantin Kosachov stated openly that Vilnius had chosen the wrong investor and would be punished for that. As soon as the transaction was finalized, Transnieft, the Russian oil pipeline monopolist, halted oil supplies to Lithuania on ‘technical and ecological grounds.’

Despite personal pledges by the Lithuanian Prime Minister Kirkilas, the country was left without a vital source of crude and had to resort to tanker supplies by sea to the Butynga oil terminal. Moreover, the high-priced supplies by sea to the Lithuanian refinery have been dominated by Gunvor; a Kremlin-favored oil trading intermediary.

Transit can become another problem. In December 2008, Transnieft announced that it would gradually reduce and by 2012 possibly stop all exports from the Polish and Lithuanian Baltic ports and from the Ukrainian Odessa terminal on the Black Sea. Ipso facto Moscow is implementing its strategy to avoid dependence on the transit countries.

The recent relatively good situation of the Baltic ports is changing due to Russia's aspiration to redirect its oil and oil products export to Russian ports only. One of the main assumptions of such a strategy is to increase the share of its ports from 75% to 95%, to which end Russia is building new ports and upgrading the existing ones.

In the result, during the first two months of 2010, the Russian Primorsk transshipped as much cargo as all previous year, whereas the Latvian Ventspils and Lithuanian Klaipeda recorded substantial slides.

In addition, following the Russian-Belarusian oil disagreements in January 2007 Putin signed a decree to construct the Baltic Pipeline System 2 (BTS-2) designed to be an alternative to the Druzhba oil pipeline. Moscow made it clear that, in line with the Russian gas strategy, it wants to tighten control over oil transit. This pipeline with target capacity of 50 million tons of oil annually would allow Russian exporters to avoid shipping oil through the Baltic States. Besides that Moscow invited Kazakhstan to join the project and fill the remaining capacity with initially 10 million tons.

Under these circumstances the Baltic countries are vitally needed in attracting new oil flows to their transshipment terminals as well as to get an opportunity to develop petroleum refining and petrochemical industries. In order to escape from the deadlock it is necessary to solve the next three problems: i) to find adequate sources; ii) to get agreement of their owners; and iii) to provide ways of transportation.

Fortunately it seems that all these conditions though not without difficulties can be fulfilled by turning to the Caspian basin. Since resources of that region are beyond any doubt, only two problems are remained to solve.

The Caucasian route of delivery oil from to the Eastern and then to the Western Europe attracts more and more attention of both exporters and potential buyers. In recent years, Poland and the Baltic States inspired and supported Ukrainian plan to construct a new Odessa-Brody oil pipeline going from the Pivdenny oil terminal in Odessa to Brody near the Polish border, and further to the Polish Orlen refinery in Plock and to the Naftoport Gas terminal in Gdansk.

The Odessa-Brody pipeline is of considerable geopolitical significance, as it potentially allows direct transport of Caspian oil to Polish, German and Czech refineries and Baltic export terminals, without usage of the Russian transit system. The 675 km pipeline was constructed in 2002, but due to lack of agreement for viable oil supplies from Caspian basin, it remained unused for two years, the Polish stretch was not completed and the whole project was running at a loss.

In 2007 the presidents of Poland, Ukraine, Lithuania, Georgia, and Azerbaijan, and the special envoy of the president of Kazakhstan decided at a meeting in Krakow to proceed with the oil pipeline bypassing Russia and linking the existing pipeline with Gdansk. The agreement expanding an international pipeline consortium, called Sarmatia, was signed by the presidents at the energy security conference in Vilnius in October 2007.

Besides that there is an additional excellent variant, to build one more branch of the pipeline – from Brody to Belarusian Mazyr, which is connected with Ventspils oil terminal already.

Thus in this point no contradictions of principle exist. There is a hope that the same is true for the last one. On March 10, 2011, during the Azerbaijan President Ilham Aliyev official visit to Ukraine, Baku and Kiev agreed to enlarge the supply of the Azerbaijani oil. At the joint press-conference the two leaders noted that they have decided to start work on corresponding strategic agreement.

To all appearance, Baku has found potential buyers for its product. Then, laying new routes, Azerbaijan reckons upon to become a transit country for transporting energy carriers from the eastern coast of Caspian Sea. Ilham Aliyev and President of Kazakhstan Nursultan Nazarbaev almost simultaneously have confirmed that this idea is considered in practical plane already.

Being the 9th biggest state in the world Kazakhstan is also the biggest state without direct access to the world ocean. The same is true for Turkmenistan and Uzbekistan. Possessing serious export potential, they are interested in transit ways development to deliver their goods to the world market. So Baltic States with developed port infrastructure are of a significant interest for them.

According to Kazakhstan’s media, the government of the country is seriously conceived on project of the new oil pipeline laying-out between Caspian and Black seas. The point is that due to development of the world largest deposit of Kashagan, Kazakhstan will additionally get annually more than 50 million tons of oil. That is why Astana is interested in opening new route of transportation of its oil via Caucasian corridor – through Caspian Sea, Azerbaijan and Georgia – to the Black Sea.

At the end of January Nursultan Nazarbaev has advanced an idea to conclude a special energy charter ‘Kazahstan-EU-2020’. Experts suppose that Astana can use this document for solving the problem of transiting its oil to Europe. To all appearances, desire of the Kazakhstan authorities to agree with the EU is caused by absence of the progress in negotiations with Russia concerning oil transit to the on European market.

Of course, aforementioned possible Kazakh participation in the Baltic Pipeline System may discourage European-backed projects to transport Kazakh oil directly to world markets without Russian intermediaries. But the point is that today Astana is not able to conclude agreements with consumers in the EU directly, and has to sell its energy carriers to Russian companies. In 2009 Kazakhstan’s government addressed a request to the Russian Federation to allow selling at least 10% of volume of the deliveries by direct contracts with European companies, paying only for transit and customs dues. However this initiative was rejected by Moscow completely.

Kazakhstan also figured on getting free access to main pipelines within the framework of Common Economic Space (CES) that is forming now together with Russia and Belarus. According to the country’s prime-minister Karim Masimov, “without solution of this question there is no sense in general to create the CES.”     However in the basic documents of the new organization approved at December by the heads of the three states, the issues of transportation of energy carriers from member states to the third countries were not settled. In “Agreement on order of organization of common markets of oil and petroleum derivatives”, as well as in “Agreement on rules of access to the services of natural monopolies in sphere of gas transportation” it is clearly stated that these documents do not adjust questions of access to the pipe while exporting energy carriers beyond CES.

Therefore one can expect that Kazakh leader will use the opened possibility in order to diversify its relations with the European Union and to avoid unilateral dependence on Russia.

Naturally, there is a danger the European demand for fuel will never go back to its levels from previous years. However crude oil and the production of Baltic refineries can find buyers in remote locations. In any event all predictable factors point to the fact that the Baltic Sea will not cease to be a bustling seaway of oil and oil products transport. A larger stream of oil is most likely be directed towards China and India, with their booming automobile markets and drastically growing fuel requirement. And oil terminals in Estonia, Latvia, and Lithuania have the advantage of not freezing in winter.

It means that this kind of traffic will not decrease in the Baltic area but can even increase. Over 110 million tons of liquid bulk cargo was transshipped in the Baltic ports in 2007. The number is to reach 137 million in 2015 and increase even more to 165 million tons fifteen years later.

As for the gas sector, anxiety is caused by Nord Stream gas pipeline project. One of the goals in the mentioned ‘Energy 2020’ strategy is defined as integrating the Baltic energy market and its connecting with Central and South-Eastern Europe. The principal problem is that there are no main gas pipelines going from South to North in this part of the continent. So it is difficult to expect that Central Asian gas can help in a visible future.
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Thus, in principle there are no reasons, which would prevent strengthening and deepening cooperation between the Baltic States and Central Asian countries, though for a long period it will be concentrated mainly in energy sphere. Also it can contribute to solving energy problems of the European Union at large.

But one serious political obstacle do exists: the EU’s low ability to speak with one voice vis-а-vis Russia. Kremlin actively strengthens now its political influence in the countries of the region by promoting new alternative transit routes. So the European Union must not allow the strategic part of its internal market to be dominated by Russian political ambitions. Its common foreign and energy policies should be improved and this process should start by efforts toward creating a common interest among the member states.