The global changes will affect the countries of Central Asia and Russia, in part, by contributing to the expansion of mutual trade and investment, writes Marcel Salikhov, President of the Institute for Energy and Finance Foundation, for the Third Central Asian Conference of the Valdai Discussion Club.
As confrontation between the major countries grows, the world economy will undergo serious changes in the coming years. Many experts have spoken about the end of the globalisation era. This will not happen, as specialisation and the division of labour remain among the key drivers of economic growth. However, the economy is expecting a major change in the structure of international trade. On the one hand, to some extent, we are talking about growing regionalisation, in fact, a reduction of the transportation leg in foreign trade to reduce risks. Another factor is the desire to diversify partners, also to mitigate the increasing level of political risks. The economic factor will be less decisive amid the new conditions.
These global changes will affect the countries of Central Asia and Russia, in part, by contributing to the expansion of mutual trade and investment. The share of Central Asia in Russia’s foreign trade turnover is about 5% and will grow in the coming years. For example, in 2022, the export of goods from Kazakhstan to Russia increased by 25%. In the first two months of 2023, the increase was 32% year on year. Thus, compared to 2021, the increase was over 60%.
In addition to increased integration, this boom in trade is connected to a large extent with parallel imports that enter Russia through neighbouring countries. For the source countries themselves, such growing flows represent additional income and an opportunity to develop their own logistics.
For example, Russia has great interest in the North-South transit corridor; not only along the western route (which passes through Azerbaijan), but also through Turkmenistan and Kazakhstan. In the near future, this interest will only grow, primarily in terms of importing goods from Asia. The reason is the relatively good logistics of the South — Centre of Russia and proximity to the main centres of consumption. The West — East routes remain loaded for export in terms of railway transport and do not have free capacity. The delivery of goods from China to Russia has already begun to be carried out via the China-Kazakhstan railway. This will allow Russia to reduce the load on the Trans-Siberian Railway, and Kazakhstan to increase the efficiency of using its infrastructure. Kazakhstan can also use its railway infrastructure to export metals and coal from Russia to China.
Another promising area is energy. In the future, Uzbekistan and Kazakhstan will become net importers of gas, while Russia currently has free production capacity. In the winter of 2022/23, Uzbekistan faced a shortage of gas, which led to the disconnection of consumers. The gas industry plays an important role in the economy of Uzbekistan. Gas accounts for about 90% of electricity generation and 7% of the country’s exports. At the same time, production is declining every year, which, together with growing demand, leads to planned shutdowns of consumers, a reduction in exports and an increase in imports.
Starting in 2024, Kazakhstan will become a net importer of natural gas. In 2023, natural gas production in the Republic of Kazakhstan will amount to 53.5 billion cubic meters, by 2027 natural gas production will increase to 77-79 billion cubic meters. However, a significant part of the increase in production will be used within the industry itself — injection into the reservoir and use for own needs. The increase in the use of gas in the fuel and energy system and the growth of domestic final demand create risks for the gas balance — as early as 2024, exports may become “zero”, and starting from 2025, Kazakhstan may switch to net gas imports (up to 7-7.5 billion m3 per year). Unscheduled repairs or equipment breakdowns at any of the major fields can create serious additional risks. Under these conditions, the authorities of Kazakhstan can either pursue a serious increase in gas imports from Turkmenistan and Russia, or to oblige foreign enterprises (primarily Tengiz and Kashagan) to reduce gas injection into the reservoir, sending additional gas to the gas transmission network.
The existing infrastructure makes it possible to increase gas exports from Russia to Kazakhstan and Uzbekistan. For these supplies, the main gas pipeline (MGP) Bukhara — Ural was considered, but this was abandoned due to its deterioration. At present, the concerned departments are calculating the costs for the construction of compressor stations (CS) required for the reverse pumping of gas, later the parties will begin negotiations on supplies.
Price is the key issue. For example, wholesale prices in the Orenburg region are 4,900 rubles per thousand m3 ($63/thousand m3). Moreover, Gazprom reports that domestic prices do not cover costs. Gas prices for Belarus are $128 per m3. Most likely, gas prices for Kazakhstan, from the point of view of the Russian side, cannot be lower than $150. Domestic wholesale gas prices in Kazakhstan are about half the level.
Therefore, additional gas imports must be accompanied by either higher domestic prices or additional subsidies. A similar situation applies to additional exports to Uzbekistan. We expect that the most likely scenario is an increase in Turkmenistani exports to Russia, with a possible partial liberalisation of domestic prices for commercial consumers.
Another promising area is the expansion of investment cooperation. Russian companies face restrictions in the markets of unfriendly countries, while at the same time they are interested in access to friendly export markets. The countries of Central Asia are more understandable and accessible than, for example, the Asian markets. This creates the preconditions for mutual direct investments.
These areas do not exhaust the possibilities for strengthening economic ties between Russia and Central Asia. There are promising areas in agriculture, engineering, the integration of financial markets and payment systems, and other sectors.