Pipelines and Pipe Dreams: Energy Development and Caspian Society

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. …