Energy, Wealth, and Development in Central Asia and the Caucasus
NBR Analysis vol. 10, no. 3

Energy, Wealth, and Development in Central Asia and the Caucasus

by David I. Hoffman, Nancy Lubin, and Pauline Jones Luong
August 1, 1999

This issue of the NBR Analysis contains case-studies of energy development and the sources of potential conflict in the three primary energy-producing states of Central Asia and the Caucasus — Azerbaijan, Kazakhstan, and Turkmenistan. The leaders in all three countries expect their energy resources to attract foreign investment, stimulate economic growth and modernization, and ensure integration into the global market. Yet, as the essays illustrate, despite their common goals, Caspian leaders have adopted varied policy approaches. U.S. policy toward each of the Caspian countries has also varied widely, and the essays consider the implications of these policies.

In the first essay, David Hoffman, senior associate at Cambridge Energy Research Associates, examines how the oil sector has been politicized in Azerbaijan. While foreign energy companies have occasionally benefited from the “one-stop shopping” method of contract negotiation, weak state institutions have given President Heydar Aliev and SOCAR, the state oil company, autonomous control of the oil sector. The erratic and capricious energy policies that result are destabilizing Azerbaijan’s development. Further damage to Azerbaijan’s development is caused by the continued conflict over Nagorno-Karabakh. Mr. Hoffman examines these issues and the implications of Section 907 of the 1992 Freedom Support Act, which restricts U.S. government assistance to the government of Azerbaijan.

Pauline Jones Luong, professor of political science at Yale University, addresses the short- and long-term consequences of Kazakhstan’s current energy policies. Rapid privatization of the energy sector has increased revenue to the state budget, but it has also led to overspending, overborrowing, and underdevelopment of non-energy sectors of the economy. Professor Luong describes a scenario in which current policies could cause Kazakhstan to devolve into a quasi-state that is internationally recognized but able neither to meet the basic social needs of its population nor to achieve minimal levels of economic growth.

In the final essay, Nancy Lubin, president of JNA Associates, Inc., discusses the effects of President Saparmurat Niyazov’s inconsistent energy policies, the expansion of organized crime and narcotics trafficking, and the destabilizing influence of ethnic tensions on foreign investment and domestic development in Turkmenistan. As concerns over Niyazov’s health are more frequently voiced, questions about Turkmenistan’s mechanisms of succession are important to consider. Dr. Lubin suggests a number of steps that could be taken by Turkmenistan and the United States to ensure that the transfer of power is peaceful and that Turkmenistan’s economic and political development is stable.