Central Asia’s Cheap Oil Double Whammy
Lower oil prices and a tottering Russian economy are multiplying headaches from Baku to Bishkek. But that could be a boost for China’s Silk Road dreams.
The prolonged slump in oil prices is causing plenty of wailing and gnashing of teeth from Oran to Ottawa. But for countries in the Caucasus and Central Asia, the oil swoon has been coupled with Russia's economic implosion to create a particularly ugly economic outlook. That raises concerns about the region's stability -- even as it opens the door for a bigger role there for China.
The prolonged slump in oil prices is causing plenty of wailing and gnashing of teeth from Oran to Ottawa. But for countries in the Caucasus and Central Asia, the oil swoon has been coupled with Russia’s economic implosion to create a particularly ugly economic outlook. That raises concerns about the region’s stability — even as it opens the door for a bigger role there for China.
The 50 percent drop in crude prices since last summer alone would be enough to spell pain for countries such as Kazakhstan and Azerbaijan that rely heavily on fossil fuel exports for government revenues. Kazakhstan last week trimmed its budget — which had been based on oil at $80 a barrel — while Azerbaijan may have to revise downward similarly rosy spending plans later this summer. Azerbaijan already had to dip into its oil fund for the first time since it was created 15 years ago. Kazakhstan’s sovereign wealth fund is looking to borrow fresh money due to the oil collapse.
But unlike other oil producers that are forced to tighten their belts, countries in Central Asia are suffering an extra dollop of pain: the knock-on effects of Russia’s own economic woes. The collapse of the ruble and the Russian economic contraction — brought about by both cheap oil and Western sanctions — are hammering trade between Moscow and many countries in Central Asia. That, in turn, has forced countries across the region to devalue their own currencies, which makes imports more expensive, fuels inflation, and weakens the banking sector.
Industrial production and economic growth are plummeting in Kazakhstan; Standard & Poor’s, the ratings agency, recently downgraded the country. Other ratings agencies have warned of the negative impacts of devaluation on the region’s banks. The devaluations are hammering regular borrowers because many loans are in hard currencies and so are getting harder to pay back. One joke making the rounds: Even Americans would prefer living in a yurt to taking out a mortgage in Kazakhstan today.
And Russia’s economic malaise is having other impacts, like slashing the effective paychecks of already poorly paid immigrant workers. Traditionally, Central Asian migrant workers in Russia send billions of dollars of remittances back home. For countries like Tajikistan, migrants’ money transfers account for half the GDP, while in Kyrgyzstan remittances make up one-third of the economy. What’s worse, thanks to Russia’s crisis, many migrant workers are now returning home, where they face rising prices, a weaker currency, and few job prospects. Central Asia’s already low expectations for benefits from closer economic ties with Russia, in other words, are getting even lower.
That has authoritarian rulers in Kazakhstan, Azerbaijan, and Uzbekistan warily watching for incipient signs of public unrest. Azerbaijani President Ilham Aliyev went on television to try to explain the country’s drastic devaluation late last month. Turkmenistan’s strongman leader has ordered up an anti-crisis plan. Kazakhstan’s longtime president is reportedly mulling early elections, before the crisis gets much worse.
“The economic downturn and the likely return of hundreds of thousands of unemployed young men just creates a more volatile atmosphere,” said Andrew Kuchins, director of the Russia and Eurasia program at the Center for Strategic and International Studies. “That is going to strain the capacities of these states to manage, and Kyrgyzstan and Tajikistan are not that far from being failed states anyway.”
It’s not uniformly grim. Some countries, such as Uzbekistan, that are net oil importers benefit from cheaper crude, even if lower prices for natural gas are bad news. (And Kyrzbekistan seems entirely untouched by oil’s swoon.) Some observers even see a hidden blessing in the oil slump: A sustained period of lower energy prices may prompt countries in the region to accelerate economic diversification away from a reliance on oil and gas sales.
That could be especially true for Kazakhstan because the country’s marquee oil field (which is still offline until next year for repairs) would be unprofitable at current oil prices anyway. That creates plenty of uncertainty about the country’s plan to keep riding increased oil output to wealth.
But if the countries of Central Asia are feeling the pain, one country may be sniffing an opportunity. China has for years wrestled with Russia for influence in Central Asia. Beijing already has huge plans to deepen its physical and economic links with the region, part of its multibillion-dollar “Silk Road” plan to build more roads, rails, and pipelines from western China to the Middle East.
A big part of that plan is due to China’s need to secure additional supplies of Central Asian energy, especially natural gas. In December, China inked $14 billion worth of economic deals with Kazakhstan. Beijing is ramping up gas imports from Turkmenistan — more than making up for a sharp decline in Russian imports of Turkmen gas.
And while China’s big investment push has created plenty of local resentment in the past, the double whammy of cheap oil and a reeling Russia promises to make Beijing look more attractive by comparison. That’s especially true for countries like Turkmenistan, which just labeled Russia an “unreliable partner” due to the decline of energy trade.
“The main carrot for Central Asian states to join [Russia’s] Eurasian Economic Union would be the hope that there’d be some kind of economic benefits coming from Russia, but Russia’s capacity to provide any economic benefits are going to be far diminished,” Kuchins said.
“It’ll certainly be an opportunity for China to further advance its influence in the region.”
Photo credit: DUCCIO AIAZZI/Flickr
Correction, March 3, 2015: The name of the nonexistent country that the New York Times mistakenly referenced in a January 2015 article is Kyrzbekistan. An earlier version of this article misspelled it as Kryzbekistan.
Keith Johnson is a deputy news editor at Foreign Policy. Twitter: @KFJ_FP
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