Global competition for scarce energy resources and the resurgence of Russia have made Central Asia one of the most strategically important regions for the West. The conflict in Georgia in August 2008 once again raised alarm over Europe’s energy security and Central Asian export independence from Russia. In 2007, the EU launched a Strategy for a New Partnership with Central Asia. Is it likely to work? This strategy emphasizes areas of cooperation where Brussels does not have strong leverage. As argued below, the EU should rather focus on two priorities: diversify energy transport routes, and make better use of its large market.

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Central Asia is a vast territory located between Russia to the North, China to the East, Afghanistan and Iran to the South, Turkey and the Caucasus to the West. Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan are new post-Soviet countries with high levels of poverty, weak institutions and underdeveloped infrastructure. Politically, only Kyrgyzstan has attempted democracy; gas-rich Uzbekistan and Turkmenistan are harsh autocracies. Central Asia is an increasingly important source of hydrocarbons. Kazakhstan hosts the Kashagan oil field in the Caspian Sea, one of the biggest in the world. Uzbekistan’s and Turkmenistan gas reserves are largely underexploited.

Relations between Central Asia and the EU are weak. Trade relations are thin and imbalanced. The EU’s biggest trading partner in the region, Kazakhstan accounts for 0.7 per cent of EU’s total trade. The EU buy’s 83 per cent of its hydrocarbons, the country’s main export. The second largest partner, Uzbekistan, only 0.1 per cent, with they EU absorbing 90% of its hydrocarbons exports.
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The stakes for Europe in Central Asia have considerably risen. It started with the NATO intervention in Afghanistan, where Central Asia became a hub for NATO operations. Recently, two new highly challenging and interrelated issues moved centre-stage: the re-emergence of an authoritarian Russia and the need to secure and diversify energy supplies.

Russia’s inroad into Georgia signalled to all other former Soviet Republics that they have to count on active, and possibly violent, Russian resistance if they flirt too warmly with NATO. When, furthermore, during the war, the Baku-Tbilissi-Ceyhan oil pipeline, and the Baku-Tbilissi-Erzurm gas pipeline, the only ones that transport hydrocarbons to the West without passing through Russia, stopped functioning for several days, another clear message was sent: energy is one of the weapons in the struggle for regional hegemony.

Europe imports two fifths of its gas and one third of its oil from Russia. The latter is supplied via an antiquated Soviet pipeline network, managed by the state-controlled company Gazprom. The latter has the monopoly over the networks’ management. Gazprom, for both commercial and political reasons, has cut gas supplies to Ukraine, Belarus, and the EU’s Baltic states. All these actions threaten the supply of gas to the rest of Europe. Central Asian oil and gas producers for their part are almost entirely dependent on Gazprom pipelines for their exports to Europe. Central Asians want to diversify their export routes, and at the same time secure greater independence from Russia. In 2007, for example, Kazakhstan opened a pipeline exporting oil directly to China. Afterwards it was able to secure higher export prices to Russia.

The EU needs to secure oil and gas supplies independently of Gazprom and provide Central Asian hydrocarbon producers with viable export opportunities. But achieving these aims is a challenge. In 2007, Russia has offered Kazakhstan, Turkmenistan and Uzbekistan a new pipeline project to better tie their exports to Russia. These moves are an attempt to undermine Nabucco, a gas pipeline project that would connect the current trans-Caspian gas pipeline directly to Europe. Furthermore, Russia’s and China’s oil and gas business deals are government-backed and government–driven, with no democratic or corporate governance strings attached.

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EU-Central Asian ties are thin. Only two partnership and Cooperation Agreements (PCAs) are in force with Kazakhstan and Kyrgyzstan. Some EU member states have signed Bilateral Investment Treaties (BITs). Yet efforts to bridge the gap were stepped up. In 2005, the Council of Ministers appointed a special EU envoy for Central Asia. Under the German rotating presidency in 2007, the EU launched a Strategy for a New Partnership with Central Asia. EU officials have been travelling extensively in the region. Recently, an agreement with Turkmenistan was reached to guarantee EU gas imports. In September 2008 in Paris, the region’s foreign ministers met with their European counterparts for a first-ever joint summit. But relations can be tense, as sanctions on Uzbekistan after the Andijan killings in 2005, and the current controversy over their lifting, have demonstrated.

In its 2007 Strategy, the EU has set itself the following goals in Central Asia: 1) promotion of human rights, rule of law, good governance and democratization, 2) facilitation of education of Central Asia’s youth, 3) promotion of economic development, trade and investment, 4) strengthening of energy and transport links, 5) fostering of environmental water management sustainability, 6) border management, drug and human trafficking, and 7) developing intercultural dialogue. Over 2007-2013, the EU has allocated € 750 million to the region.

This strategy sets priorities in sectors where EU policies are shared between Brussels and the member states. These sectors are foreign policy, foreign aid, investment, energy, migration, and culture. This division weakens the impact of EU external actions, because it often involves competing goals among member states and with Brussels.

In contrast, trade with the EU, where the EU has a unified policy and therefore strong external leverage, is not prioritized. One has to keep in mind that the EU is Central Asia’s main export destination. Yet where the EU’s new strategy mentions trade, it centres on regionalism, WTO accession and Europe’s system of trade preferences for developing countries. The first is only achievable in the long term under the condition that all Central Asians are motivated, which is doubtful. Attitudes to the WTO differ from country to country. The third is not very helpful for hydrocarbon economies.

Expectations on what the EU can achieve in terms of its stated goals must therefore be commensurate with its institutional constraints and realities on the ground. This is even more so in the current context in which it is lucrative and expedient to make deals with Russia, China or even Iran, rather than with a slow-moving EU that tends to link economics with goals less palatable to local rulers such as human rights.

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The core strategy should rather emphasize better export opportunities for Central Asian countries. This is particularly true of energy, for the geopolitical reasons discussed above. But it is also true of non-oil exports, which can support the diversification of the region’s economies.

The EU should continue its recent new efforts to finalize the Nabucco pipeline, even if it involves tax resources or extra diplomatic support from the United States. Although it would not eliminate the heavy reliance on Russian pipelines, it would create much needed competition in energy markets and support policy independence. This would set a strong signal and make countries such as Uzbekistan and Turkmenistan more receptive to the EU. Such policies can be accompanied by adequate aid for infrastructure and transport investment.

Brussels can also “reward” with its own market-based principles the countries that already comply closest with its priorities. Most Central Asians seek more foreign policy options than those offered by Russia or China. The EU can smartly use this incentive.

One country is of particular interest: Kazakhstan. Kazakhstan is Central Asia’s most wealthy country; its economy is the region’s most open and sophisticated. It has made substantial efforts to join the WTO. It is not a democracy. But its human rights reforms have generally been steady, and its record will be tested with its coming OSCE presidency in 2010. Kazakhstan is a hydrocarbon economy that actively seeks diversification. It pursues a foreign policy that aims at balancing good relations with the major world powers. But it is increasingly constrained by Russia’s rising hegemony.

The EU could take a few bold steps. First it should recognize Kazakhstan as a full market economy. This would facilitate Kazakhstan’s non-oil exports to support its diversification, especially in areas where it has proven comparative advantage, namely metals, chemicals and cereals such as barley. The EU has agreed to give Ukraine and Russia market economy status, although both have, according to criteria defined by bodies such as the European Bank for Reconstruction and Development, less solid market economy credentials than Kazakhstan. The United States have already granted it this status. The EU should abolish the current quota regime for its imports of Kazakh steel. The EU should not make WTO accession more burdensome for Kazakhstan than necessary. This recommendation holds for future negotiations on a new PCA. The EU can work in the future on similar terms with countries that decide to reform their economies and political systems.

Central Asia’s insignificant share in the EU’s overall external trade means that moves of this type would not shake the EU economy. They are much more likely, however, to influence the fate of Central Asia, and contribute to loosening the grip of Gazprom’s monopoly, to mutual advantage.

Iana Dreyer is Trade Policy Analyst at ECIPE – European Centre for International Political Economy.