Chinese Refinery in Kyrgyzstan to Reduce Russian Leverage

On April 2, 2013 Alexandros Petersen conducted an interview with Chris Rickleton, a Bishkek-based analyst and Instructor at the American University of Central Asia.

Chinese refinery in Kyrgyzstan to reduce Russian influence

You have conducted in-depth research into Chinese plans for a refinery at Kara Balta in Kyrgyzstan. What exactly are these plans and on what sort of timetable are they to be carried out?

The refinery is already behind schedule, but is expected to be built by July of this year, and operating at full capacity by September. Local media reported some tough talk in January between Chu Chan, the director of Zhongda, the Chinese state-owned firm that will run the refinery, and Kyrgyz Prime Minister Jantoro Saptybaldiyev. Saptybaldiyev was clearly very keen to see the refinery working as soon as possible and asked Chu why the facility still hadn’t been built. Chu referred to “misunderstandings” having led to the wrong equipment being delivered to the site. Chu also wanted the “sanitary zone”, which governs the distance residential homes can be from the refinery, reduced from 500 metres to 300 metres, which would have helped the company out in some of its compensation battles with local residents. When Saptybaldiyev rebuffed this offer, Chu reminded him that the company have already paid something like $4,000,000 in taxes and that they will have invested $250 million into the project by the time it is up and running.

When the two met again on March 30, things went more smoothly, and Zhongda have already begun using local media space to advertise jobs at the refinery – stressing a preference for locals who can speak some Chinese. There have been some bureaucratic delays – Zhongda bought their rights to build the refinery towards the tail end of the [former President] Bakiyev period when having your paperwork in order was of secondary importance to making a contribution to the ruling family’s coffers, so most of that has had to be done retroactively. The State Inspectorate for Environmental and Technical Safety (SIETS) has also highlighted numerous violations at the site, which has slowed construction down.

China is now also building a smaller scale refinery in Tokmak, another provincial town. Both Tokmak and Kara-Balta are stops along the Soviet era rail track which connects Kyrgyzstan to Kazakhstan, although the long term plan is to supply the factories via a pipeline built from Kazakhstan. Together the two are expected to create over 2,000 jobs, although whether 90% of those will be jobs for local Kyrgyz remains to be seen.

What will it mean for Kyrgyzstan?

A lot. Currently the country has one oil refinery, and its finished product is of fairly poor quality. Domestic consumption in Kyrgyzstan is completely dependent on Russian production, and the journey from Siberian oil refineries obviously increases the cost to end users, despite the fact it is duty free.

The Kara-Balta refinery will probably have the capacity to meet at least half of the domestic market’s needs, producing ‘Euro 4’ or ‘Euro 5’ grade petrol. That will end Gazprom’s monopoly in the country and force the Russian producer to compete with locally refined fuel.

Politically, investments of this kind can strengthen Kyrgyzstan’s hand in future relations with Moscow. Currently the local economy is characterized by an unenviable reliance on Russia both for energy security and as a source of remittances. By building facilities that provide both local jobs and local fuel, China offers a helping hand twice.

What would you say are the wider regional implications, both substantive and symbolic, of having a Chinese-built refinery in Kyrgyzstan?

I would argue that it is further evidence of China’s willingness to take on the role of ready investor, trouble-shooter and friendly neighbour to the countries of the region. That Kyrgyzstan’s government attaches so much importance to a project that by the standards of China’s own energy needs is still small change, is indicative of Beijing’s capacity to buy friends and influence among regional governments. That the project is a direct threat to Russia’s long-term energy grip over the republic is suggestive that China will not heed anybody else’s “sphere of influence” as it does this.

How does it fit into China’s regional energy security strategy?

When I first heard about the refinery, I found it hard to believe that China would part with up to 800,000 tons of crude from its fields in Kazakhstan and assumed that it was merely using Kyrgyzstan as a cheap production hub for oil that would eventually get exported to China, providing an unstable neighbour with jobs in the process. But if the consensus that the refinery is being built mostly for domestic consumption holds true, then it demonstrates a couple of things.

Firstly, it shows that China can be a giver as well as a taker in energy terms. As the authors of this blog have pointed out, the Kyrgyz market is a small one, defined by a limited industrial base and weak demand. Perhaps due to the fact that China imports more via the Kazakhstan-China pipeline in a month than the Kara-Balta refinery will produce in a year, Beijing feels it is able to spread around some of the fruits of its exploration activities in Kazakhstan, helping some of the region’s weaker economies with their own energy security in the process.

Moreover, the refinery should be understood as part of China’s growing attempt to rationalize regional energy relationships, using its financial might to glue Central Asian states together in a way that reduces bargaining and transaction costs for Beijing.

From Kyrgyzstan’s point of view, for example, it would be much simpler to import refined oil from Kazakhstan than Russia. But the Kyrgyz market is poor, the petrol Kazakhstan’s refineries produce is not the best quality, and the pair cannot agree on a price. China’s intervention changes all this. By controlling upstream production in Kazakhstan, downstream production in Kyrgyzstan and transportation via its expanding network of regional pipelines, China will be able to forge a major energy link between the two countries in which Bishkek and Astana are only passively involved.

From this perspective it becomes clear that China has an integrative approach to regional energy security and regional geo-economics as a whole that differs fundamentally from Russia’s. For Moscow, barriers, disagreements and differences between the Central Asian states can offer useful opportunities to play divide and rule. For China they are needless headaches that run counter to its own trade and transit interests.

Might the refinery be a lightning rod for Sinophobic backlash?

This is an important question.

The investment climate in Kyrgyzstan as a whole is far from secure and large investments of strategic importance to the national economy tend to emerge as long-term objects of struggle in the competition between domestic political factions. An example of this is Kumtor, a gold mine operated by the Canadian firm Centerra Gold, which accounts for around a tenth of GDP yet paradoxically remains a source of political instability in the country. Eric McGlinchey has argued that this can also be applied to the country’s American military base, which opposition figures have tended to view as a source of rents for the ruling elite in the past.

But as a Chinese investment, the refinery will face the additional problem of Sinophobia, a phenomenon well described by Sebastien Peyrouse and Marlene Laurelle. Currently the facility has witnessed regular protests based on environmental fears and labour unrest, but once it begins work opposition politicians are likely to tie these issues in with the broader threat to national sovereignty that many people feel Chinese economic expansion poses. Of the MPs I have spoken to, most are supportive of the refinery and recognize its strategic significance. But for any nationalist politician looking to pick a fight with the weak central government in Bishkek, the vision of a Chinese refinery that will inevitably employ a significant number of Chinese workers belching out carbon emissions and violating local labour codes is going to be far too tempting a weapon –in-waiting to ignore.

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