Azerbaijan, Kazakhstan, and Turkmenistan have large deposits of crude oil and natural gas, the exploitation of which plays a major role in their economies. Despite the fact that Azerbaijan and Turkmenistan have been slow economic reformers, they, like Kazakhstan, have succeeded in attracting large volumes of foreign direct investment (FDI) into the fossil fuel sector.
Kazakhstan received $3.2 billion in oil and gasrelated
FDI from 1993 through June 1998, while
Azerbaijan's oil sector attracted $1.8 billion in FDI
from 1994 through June 1998. This investment helped to
make these countries the main recipients of such
investment per capita in the CIS.
Oil currently represents about 65 percent of Azerbaijani exports and more than 80 percent of the FDI that it has received, while in Kazakhstan the oil and gas sector accounts for about a quarter of exports and two-thirds of FDI (although the latter figure varies widely from year to year).
Nonetheless, the production of oil and gas has not increased rapidly in any of the three countries; none is currently a major producer of these commodities on the world market. Pipeline routings remain a contentious issue, with economic and geopolitical considerations (especially the U.S.'s desire to minimize Russian and Iranian involvement) often conflicting. Accordingly, it is unlikely that fossil fuels will contribute substantially to economic growth in these countries over the next few years.
International oil and gas companies are currently sending mixed signals about the prospects for oil and gas development in the Caspian region. A number of such companies have closed down their operations recently. For example, Unocal announced on 8 December that it was withdrawing from all Caspian projects except those based in Azerbaijan. The next day, Shell, Chevron, and Mobil signed a new agreement with Kazakhstan on oil exploration in the Caspian.
Production data reveal largely declining trends, at least through the end of 1997. Azerbaijan produced 9 million tons of crude oil in 1997, down from 12.5 million in 1990, while Kazakhstan's oil production in 1997 was virtually unchanged from the 1990 level.
The most striking case is Turkmen gas extraction, which plummeted from 88 billion cubic meters in 1990 to 17 billion in 1997. Since gas represents two-thirds of both GDP and exports in a "normal year" (for example, in 1994), this collapse in gas production has had dire consequences for the economy, with GDP declining by 25.9 percent in 1997.
The decline in Turkmen gas production, which is all the more striking in a country with a good sectoral infrastructure and the world's fourth-largest gas reserves, occurred in two stages. At the beginning of 1994, a dispute with Gazprom resulted in the Russian gas giant's refusal to allow into its pipeline Turkmen gas bound for Europe. A visit to Ashgabat in late November 1998 by Russian State Duma speaker Gennadii Seleznev failed to resolve the dispute. Earlier, in March 1997, the government halted gas exports to its CIS partners namely, Armenia, Georgia, and Ukraine because those countries had built up large arrears to it for earlier deliveries. However, at the end of 1998, Turkmenistan and Ukraine signed an agreement that will allow the flow of Turkmen gas to resume to Ukraine.
Although there are grounds for optimism that in the long run, fossil fuels will play a major role in the three countries' economic development, a lot of problems must be resolved between now and then. World economic conditions are unfavorable at present. Not only are prices low, but investors are leery of putting money into CIS countries after the collapse of the Russian economy. And a number of large oil and gas projects are coming on stream outside the region.
Moreover, developing countries have rarely genuinely benefited from oil and gas booms. In what economists call the "Dutch disease," large inflows occurring in the sector contribute to strong exchange rates, which make it difficult to export other goods. In countries without transparent and efficient government sectors and with considerable regional or social inequality, revenues flowing into state coffers often benefit only tiny elites. Governments frequently spend oil money before it is earned and make commitments on which they cannot renege when oil prices fall.
Azerbaijan, Kazakhstan, and Turkmenistan seem likely to suffer from these problems. Only Kazakhstan has a diversified economy, although even in that country, there is concern that the government is counting excessively on oil and gas. One encouraging sign is Turkmenistan's attempt to diversify its economy by building 50 joint-venture textile plants. Another is Kazakhstan's pension reform, under which pensions are based on the retiree's contributions during his working life rather than paid out of a large state fund (a tempting target for government misuse) fueled by the contributions of current workers.
Azerbaijan, Kazakhstan, and Turkmenistan have large deposits of crude oil and natural gas, the exploitation of which plays a major role in their economies. Despite the fact that Azerbaijan and Turkmenistan have been slow economic reformers, they, like Kazakhstan, have succeeded in attracting large volumes of foreign direct investment (FDI) into the fossil fuel sector.
Kazakhstan received $3.2 billion in oil and gasrelated
FDI from 1993 through June 1998, while
Azerbaijan's oil sector attracted $1.8 billion in FDI
from 1994 through June 1998. This investment helped to
make these countries the main recipients of such
investment per capita in the CIS.
Oil currently represents about 65 percent of Azerbaijani exports and more than 80 percent of the FDI that it has received, while in Kazakhstan the oil and gas sector accounts for about a quarter of exports and two-thirds of FDI (although the latter figure varies widely from year to year).
Nonetheless, the production of oil and gas has not increased rapidly in any of the three countries; none is currently a major producer of these commodities on the world market. Pipeline routings remain a contentious issue, with economic and geopolitical considerations (especially the U.S.'s desire to minimize Russian and Iranian involvement) often conflicting. Accordingly, it is unlikely that fossil fuels will contribute substantially to economic growth in these countries over the next few years.
International oil and gas companies are currently sending mixed signals about the prospects for oil and gas development in the Caspian region. A number of such companies have closed down their operations recently. For example, Unocal announced on 8 December that it was withdrawing from all Caspian projects except those based in Azerbaijan. The next day, Shell, Chevron, and Mobil signed a new agreement with Kazakhstan on oil exploration in the Caspian.
Production data reveal largely declining trends, at least through the end of 1997. Azerbaijan produced 9 million tons of crude oil in 1997, down from 12.5 million in 1990, while Kazakhstan's oil production in 1997 was virtually unchanged from the 1990 level.
The most striking case is Turkmen gas extraction, which plummeted from 88 billion cubic meters in 1990 to 17 billion in 1997. Since gas represents two-thirds of both GDP and exports in a "normal year" (for example, in 1994), this collapse in gas production has had dire consequences for the economy, with GDP declining by 25.9 percent in 1997.
The decline in Turkmen gas production, which is all the more striking in a country with a good sectoral infrastructure and the world's fourth-largest gas reserves, occurred in two stages. At the beginning of 1994, a dispute with Gazprom resulted in the Russian gas giant's refusal to allow into its pipeline Turkmen gas bound for Europe. A visit to Ashgabat in late November 1998 by Russian State Duma speaker Gennadii Seleznev failed to resolve the dispute. Earlier, in March 1997, the government halted gas exports to its CIS partners namely, Armenia, Georgia, and Ukraine because those countries had built up large arrears to it for earlier deliveries. However, at the end of 1998, Turkmenistan and Ukraine signed an agreement that will allow the flow of Turkmen gas to resume to Ukraine.
Although there are grounds for optimism that in the long run, fossil fuels will play a major role in the three countries' economic development, a lot of problems must be resolved between now and then. World economic conditions are unfavorable at present. Not only are prices low, but investors are leery of putting money into CIS countries after the collapse of the Russian economy. And a number of large oil and gas projects are coming on stream outside the region.
Moreover, developing countries have rarely genuinely benefited from oil and gas booms. In what economists call the "Dutch disease," large inflows occurring in the sector contribute to strong exchange rates, which make it difficult to export other goods. In countries without transparent and efficient government sectors and with considerable regional or social inequality, revenues flowing into state coffers often benefit only tiny elites. Governments frequently spend oil money before it is earned and make commitments on which they cannot renege when oil prices fall.
Azerbaijan, Kazakhstan, and Turkmenistan seem likely to suffer from these problems. Only Kazakhstan has a diversified economy, although even in that country, there is concern that the government is counting excessively on oil and gas. One encouraging sign is Turkmenistan's attempt to diversify its economy by building 50 joint-venture textile plants. Another is Kazakhstan's pension reform, under which pensions are based on the retiree's contributions during his working life rather than paid out of a large state fund (a tempting target for government misuse) fueled by the contributions of current workers.
UKRAINIAN PARLIAMENT APPROVES 1999 BUDGET. The 450- strong Supreme Council voted by 226 to two to approve the 1999 budget, AP reported on 31 December. The remaining deputies refused to cast their votes. The budget provides for revenues totaling 23.98 billion hryvni ($6.8 billion). The 1.24 billion hryvni deficit will be covered by foreign loans (630 million hryvni) and government domestic bonds (610 million hryvni). Communist lawmakers had repeatedly refused to approve the budget, demanding that the government allocate more funds to repay overdue wages and pensions. Some, however, relented after the cabinet agreed to allocate some funds earmarked to pay this year's debt obligations to finance education and health care. JM
KUCHMA, BLAIR URGE FINANCIAL ASSISTANCE FOR CHORNOBYL. Ukrainian President Leonid Kuchma and British Prime Minister Tony Blair have appealed to the leaders of 10 countries to help renovate the sarcophagus covering a ruined reactor at the Chornobyl nuclear power plant, AP reported on 30 December. Ukraine has appealed on previous occasions to the international community to help make the sarcophagus environmentally safe. Since 1997, some 20 donor countries have pledged $390 million toward the estimated $758 million in repair costs. JM