Pipelines and Pipe Dreams: Energy Development and Caspian Society.

• Author: Olcott, Martha Brill

It is time to develop a new conventional wisdom to apply to the eight states of the Caspian Basin region,(1) one that better recognizes the region's implicit social weaknesses as well as its potential economic strengths. While the Caspian Basin states do have considerable oil and gas reserves, and while they are likely to eventually benefit from foreign direct investment in their energy sectors, the development of these sectors will take longer than was anticipated only a few years ago. This means that there is an increasing risk that the region's numerous social and economic problems will fester before adequate resources can be applied to remedy them.

While no one thought the economic transition necessitated by the end of Communist rule would be easy, the citizens of these states expected that the oil and gas beneath their feet would alleviate most of the pangs of that transition. In addition, they believed that their governments would make an honest attempt to provide for their basic social needs and that children would be able to live better than their parents had.

In many of the Caspian Basin countries these dreams no longer seem likely to be realized. Numerous obstacles to extracting the region's energy have dulled visions of energy-generated wealth. As dreams of petrodollars fade, most of the states of the Caspian region have come to know the harsh realities of independence. During the Soviet era, Moscow policymakers drew the boundaries of the Caspian region's republics so that each was too weak to stand on its own. The political vacuums left in the wake of the Soviet Union's collapse have highlighted these weaknesses and made these states breeding grounds for ethnic rivalries and extreme nationalist and religious groups. While the hot wars that characterized the region--Georgia-Abkhazia, Armenia-Azerbaijan and the civil war in Tajikistan--have all cooled, the area's potential for violence is not yet exhausted.

Disappointment over the decreasing prospect of oil windfalls has exacerbated some of the problems that independence has brought, decreasing the region's ability to realize its energy potential. Major Western oil companies are willing to do business with dictators, but they don't like making major investments in war-torn states. Developing oil and gas reserves in the landlocked Caspian region is challenging even under the best conditions. Serious social and political instability could result in oil companies choosing not to exercise their rights of deposit exploitation and withdrawing after the exploration stage. While all of these states have plans to develop diversified economies, economic recovery is still proceeding slowly, and even the partial withdrawal of Western oil companies would serve as a serious blow to the economic reform prospects of the region.

Moreover, the region is heavily interconnected, and problems in one state spread easily to another. This is especially true within the two sub-regions of the Caspian Basin--the south Caucasus (Armenia, Azerbaijan and Georgia) and Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan). Trans-Caspian ties are rapidly growing stronger, driving all eight to greater interdependence. More than ever before, the solution to one state's problems will likely involve all the others.

THE CASPIAN CRAZE

The international community has intuitively recognized these interconnections, and the fear that these make the region highly unstable helps to explain why energy companies did not immediately see the collapse of the Soviet Union as a potential bonanza. In 1991, when it first looked like these states were about to become independent, the international community was frightened by the likelihood of instability in the region. In all three south Caucasian states violent inter-ethnic disputes erupted, and several other potential conflicts were simmering. The five Central Asian states were considered even more fractious. Boundaries had been drawn to create diaspora communities throughout the region, and fears were rampant that radical Islamic elements could further destabilize the situation. Islamic groups were already active in Central Asia, and their numbers were sure to grow due to the more fluid borders that independence was certain to bring.

Several factors began to change this perspective, and by late 1993 interest in the Caspian region was on the rise in most Western countries. Although independence brought renewed violence to the region, outside observers began to see that the risk of widespread civil unrest could be contained. This seemed especially true if Russia's role could be restricted. Moscow appeared as a strongly biased party in the Armenia-Azerbaijan dispute over the status of Nagorno-Karabakh,(2) and even more so in the struggle between Georgia and the breakaway region of Abkhazia.(3) Only in Tajikistan did Russia appear to be making a genuine contribution to peacemaking efforts, but the price Moscow was extracting was high--a continuous military presence in the region.(4)

A few years earlier Russia's meddling would not have seemed so troubling, but by this time Western oil companies were becoming keenly interested in the development of the Caspian Basin's oil and gas reserves. The first post-independence estimates of these reserves indicated that the region was likely to be a "new" North Sea.(5) In 1993, for example, Kazakhstan's state statistics committee predicted that the country's natural gas production would reach 22 billion cubic meters by 2000 and 28.4 billion by 2010.(6) This increased the potential strategic and economic interest of the region to Russia as well, which only frightened Western leaders about Moscow's intentions. Not only did the Russians harden their position in negotiations over transit routes for pipelines, but they also claimed that the Caspian Sea reserves could not be developed without the consent of all parties.

This combination of developments made the Caspian Basin region more strategically important for the United States and other members of the North Atlantic Treaty Organization (NATO) nations. Western oil companies became increasingly attracted to the region as well, especially since they continued to be frozen out of new projects in both Iran and Iraq. Energy development came to dominate Western discussions of the region.

From the onset, analysts from international financial institutions understood that income from oil and gas development projects alone would not be sufficient to create the desired economic turnarounds in these countries. International financial assistance was made available for a host of economic projects with the goal of creating diversified and sustainable economies. Whenever possible, this aid was targeted toward stimulating macroeconomic reforms, which were seen as a necessary first step for even the richest states. Another priority was investment in transportion and communications, as their development potentially reduced dependence on Russia. However, outside donors assumed that time was on the side of the oil- and gas-rich states, and that the region as a whole could develop enough of an economy so that the other Caspian Basin states' economies would recover as well.

Everyone recognized that the amount of money given to these states was only sufficient to jump-start the process. At the same time, the international community underestimated the risks that would be incurred if these countries failed to maintain adequate social protection for their populations. Failure to meet the demands of these populations could cause enough social conflict to put the ruling regimes and even the continued existence of the states in danger.

Yet most observers sought ways to transport oil and gas. If this could be done with reasonable speed, most of the other challenges of transition would be manageable. Thus, despite the warnings of some international financial advisors, there was no sense of panic when Turkmenistan made little progress in developing the legal infrastructure necessary to support macroeconomic reforms and continued to maintain a largely state-regulated economy.

Political reforms received significantly less attention than economic ones. In part, this was a product of the international community's greater capacity to engage in economic reform projects. Donor states ante-up far more quickly for economic projects than for social or political ones. While states that seemed receptive to democracy-building efforts, such as Georgia or Kyrgyzstan, were rewarded with more than their "fair share" of assistance, those that were less willing to accept foreign influence over their domestic political institutions were not treated very differently. It seemed Western advisors believed the leaders of states like Turkmenistan and Uzbekistan when they claimed that their populations were ill-suited to democracy. Additionally, it seemed that dealing with familiar leaders was more reassuring to investors than the risk that a genuine political opening would produce leaders with aims antithetical to Western interests.

Often this reluctance was justified by the argument that economic reform had to precede political reform. Of course, regimes that succeeded in securing their economies could buy time before the costs of failed political reforms caught up with them. As estimates of Caspian oil and gas reserves began to grow, most Western leaders became far more interested in securing positions for their oil and gas companies than grappling with the difficult issues of long-term stability in the region.

While it was clear that almost all of the region's leaders were in some way corrupt--or at least spending vast sums of money on personal tributes like ornate presidential palaces--it was less obvious that this would have political repercussions. Leaders assured the West that their populations had always lived badly, and thus their patience was strong. Such assumptions demand...