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N40 - January 15 2009 CO N T E N T S

P. 1

Published every two weeks / International Edition


c What form of strategic part-

nership with the United States?

P. 2 KAZAKHSTAN c A contrasting economic

GEORGIA c What form

of strategic partnership with the United States?

and industrial landscape IRAN c The supreme leader in support of Ahmadinejad ALERT c Inter Rao to jointly manage Inguri power plant
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One of the last official acts of the US State Department has been the Strategic Partnership Charter with Georgia signed in Washington on January 9 by Condoleezza Rice and the new Georgian foreign affairs minister, Grigol Vashadze who was appointed last December. The agreement was spoken of by Mikheil Saakashvili as a founding act implying the end of Russian influence in Georgia. But its true importance is not easy to make out. The charter reaffirms US support for Georgias integration into Euro-Atlantic institutions and its backing for Tbilisis bid to join NATO. It makes a barely veiled reference to continuing military cooperation between Georgia and the United States as part of the fight against global threats. During the short signing ceremony at the State Department, Condoleezza Rice stressed that the United States supports and will always support Georgias sovereignty and territorial integrity, and will do everything to keep the spirit of the Rose Revolution alive. Concerning NATO membership, Condie Rice stressed that this depended on the desires of the Georgians themselves and their ability to meet NATO standards. Grigol Vashadze was a bit more grandiloquent, calling it a historic day and describing the agreement as the stepping stone that will bring Georgia to Euro-Atlantic structures, to membership within NATO, and a return to the family of western, civilized nations. It is understandable that the Georgian authorities consider the charter of such importance. It symbolizes the fact that Georgia now has only one serious ally in the West the United States and that Saakashvili is counting on Washington to prevent the question of Georgias territorial integrity from disappearing off the agenda in international meetings on security in Europe and on relations between Europe, the United States and Russia. On Washingtons side things are less clear. Support for Georgia has been a consistent feature of the Bush administrations policy in the region even though Washingtons reaction to the war that took place in South Ossetia this summer was rather restrained. Be that as it may, Washington think tanks, which play such an important role in defining the Administrations foreign policy, do not all support Mikheil Saakashvili. Close ties have been established in recent months between these institutes and some of Saakashvilis political opponents, such as Nino Burdzhanadze, the former speaker of parliament and now his political rival. Barack Obamas attitude towards Georgia will of course depend on the type of relationship that will be established between Washington and Moscow. The odds are that there will be a period of observation during which many elements will come into play, such as how the situation in Gaza evolves, the approach to take in dealing with Iran and the role that Russia might play with respect to Tehran. Finally, the tragicomedy that Moscow and Kiev have been playing in recent days concerning the supply of Russian gas to Europe will leave a deep mark on the central and eastern European countries that suffered the most during this crisis. The question of securing Russian gas deliveries to Europe will inevitably come back up for discussion. Moscow will try to make significant progress on the North European Gas Pipeline project. But the recent events will consolidate the views of supporters of alternative routes that do not go through Russian territory, such as the Nabucco project, for example. Regarding this matter, Georgias role is not of minor importance, as its territory offers a natural shelter for energy corridors linking Central Asia, the Caspian region and Europe. The stakes of a strategic partnership between Georgia and the United States are therefore real, but Moscows role in this discussion must not be underestimated. d


c Trouble brewing between

the Kremlin and President Eduard Kokoyty BEHIND THE SCENE

c Kyrgyzstan: US base loses

out against Russian loan


THE GAS CRISIS c Who will pay for the damage in Moscow and Kiev? PROFILE c Alexandre Medvedev, Gazproms Viceroy ENERGY c OPEG: When the mountain gives birth to a mouse DEFENSE c MiG: Mikhail Pogosyan takes all


ELECTIONS c Viktor Yanukovich bides his time


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KAZAKHSTAN c A contrasting

economic and industrial landscape

of the worlds leading producers. In 2008 Kazakh uranium exports totaled 8,500 tons, up by 28.1% compared to 2007. Kazakhstans total uranium production now represents 19% of the worlds production. It is possible, moreover, that the uranium market is reaching equilibrium. Rates were under a lot of pressure in the second semester of 2008. Experts predict that prices should stabilize in 2009 at around $50/$60 per pound and that considering the medium term demand, they should gradually go back up to $70/$80. This is expected to ensure the stability of Kazakhstans export revenue. Finally, despite the crisis in Russia, all industrial operations are not frozen. Thus the purchase of KazakhGold by Polyus Gold (whose main shareholders are still Vladimir Potanin and Mikhail Prokhorov) is still on the agenda. On December 29 last Polyus announced that it had lowered its offer (evaluating the Kazakh company at $593 million as opposed to $836 million earlier on). The price proposed by Polyus still represents a 200% bonus (on the London market Kazakhgold plunged from $12 to $3 a share within a few weeks). Moreover, Polyus decided not to finance the operation in cash as it had planned to do, but to pay in shares. This is an important transaction for Polyus as KazakhGold is Kazakhstans leading gold producer. The company is today controlled by the Assaubaev family, which owns about 60%. Its chief executive is Khanat Assaubaev. d

It is no easy task to measure the extent of the economic and financial crisis affecting Kazakhstan. We have already described the different measures taken in November and December to prop up the banking and real estate sectors (CACI n39 dated November 6 2008), but a few recently published figures give a more precise idea of the extent of the damage. The ratings agency Fitch released a new report in early January indicating an estimated 2.5% growth rate of the countrys GDP for 2008 and a 1% growth rate in 2009, whereas the 2003-2007 period saw an average annual growth rate of 9.6%. Fitch based its estimates on the assumption of an average $60 for a barrel of oil, which will make balancing the budget a real acrobatic feat. Problems in refinancing the private sector debt are expected. The sector is this year faced with reimbursing some $14 billion. The quality of banking assets has suffered (the rate of default on loans reached 7.6% in October 2008, as opposed to 3% one year earlier) although the four largest banks in the country Halyk, BTA, KKB and Alliance claim they do not need debt restructuring for the time being. The Central Banks foreign currency and gold reserves are stable. On December 31, 2008 they were at $19.4 billion ($17.4 billion in foreign currency and $2 billion in gold), up by 1.6% over the previous month - not a bad result. The stability of foreign currency reserves is due in part to the steady export of raw materials. This is especially true of uranium, of which Kazakhstan is one

IRAN c The


supreme leader in support of Ahmadinejad

3 Inter Rao to jointly manage Inguri power plant

Although political relations between Georgia and Russia are at a standstill, an agreement was signed on December 28 between the Georgian government and the Russian company Inter RAO (which handles the activities of the former RAO UES outside of Russia) for a ten-year period of joint management of the Inguri hydroelectric power plant, located on the border between Georgia and Abkhazia. This plant, along with the dam of the same name, the highest in the Caucasus, built in 1988, is of vital importance for Georgia and Abkhazia. All the details of the contract between the Georgian government and Inter RAO have not been made known but it appears that the Russian company has the possibility of exporting electric power to Turkey and that Inguri will also supply the city of Sochi, if needed, during the winter Olympics of 2014. Georgias electric power infrastructure is fragile and following snowfall over recent days, over 30,000 homes were deprived of electricity. Some members of the opposition nonetheless slammed the deal with Russia, in particular Salome Zourabishvili, who during a press conference called it a government crime d

The political climate in Iran is tense and next Junes presidential election is expected to be feverish. President Mahmoud Ahmadinejad faces opposition from both more conservative as well as more liberal sectors of society, against a backdrop of social and economic crisis. Given this situation, the fact that the Supreme Leader, Ayatollah Ali Khamenei, has publicly taken a stand in favor of Ahmadinejad, breaking with the tradition that the spiritual leader refrain from taking position in favor of a candidate, has not gone unnoticed. In a long speech on December 13 last on the occasion of National Student Day, Khamenei encouraged his compatriots to vote for the candidate who would best respect the countrys national identity, to back Ahmadinejad a revolutionary, efficient and courageous leader and to turn away from weak and impotent individuals - a barely veiled reference to the former reformist president Mohammad Khatami, who, according to rumors in Tehran, is preparing to enter next Junes race. Seasoned experts of Irans domestic political situation believe that the supreme leaders activism is due to the toughening of the international situation. The recent events in Gaza are a quite clear indication that Irans leaders are not in the mood for concessions. It is likely that the new Obama administration will address the Iranian nuclear issue very warily. Moreover, Hillary Clintons special Middle East and Iranian advisor at the State Department is likely to be Dennis Ross, a veteran of the Clinton administration who is not a dove when it comes to the Iranian issue. The Iranian authorities therefore expect to go through a rather difficult period on the foreign affairs level, which explains in part why its political and religious leaders are prepared to stand solidly behind Ahmadinejad. d Central Asia & Caspian Intelligence N40

3 Uzbekistan deals with Oman

Uzbekistan is reinforcing its ties with the states of the Arab peninsula. A large delegation of economic and financial officials, led by the minister of external economic relations, Elyor Ganiyev, was in Oman in late December were a series of agreement were signed, in particular concerning the export of fruits and vegetables. Oman for its part has agreed to establish a quota for Uzbek migrant workers. One may recall that last October Uzbekistan signed a very important trade deal with Dubai on marketing 100,000 tons of Uzbek cotton in Asia. d

January 15 2009


SOUTH OSSETIA c Trouble brewing

between the Kremlin and President Eduard Kokoyty

Kyrgyzstan: US base loses out against Russian loan

It is expected that 2009 will see important political and military realignments in Central Asia. According to certain indiscreet remarks leaked in Bishkek, on the eve of his visit to Moscow at the end of the week, Kyrgyz President Kurmanbek Bakiev is preparing to publish a decree making official the closure within six month of the US base in Gansi/Manas. This is not a total surprise since, in an interview with the Russian press agency Svobodnaya Pressa in mid December, the Kyrgyz head of state indicated that it was time for the Americans to think about leaving. But with the disappearance of the interview on the Internet and no official confirmation from Bishkek, there had been doubts over the truthfulness of the information. The ousting of the US military from Manas is the political price Kyrgyzstan is paying for the economic aid it has asked of Russia and which the latter is about to grant. The principal was agreed on in mid-December. On the sidelines of the Eurasian Economic Community Summit, Vladimir Putin made it known that Moscow was to release a $2 billion loan ($300 million to balance Kyrgyzstans budget, the remainder being loans for energy projects involving Russian companies). The sum will largely compensate the $80 million in lost annual revenue from rent the Pentagon pays for the Manas base. Thus the Kremlin will reinforce its influence in Kyrgyzstan. But it may not be able to relish this Central Asian success for very long, as there are insistent rumors going around of an imminent return of the US military to Uzbekistan, after it was chased away following the Andizhan repression in 2005. After having already indicated that his country was leaving the Eurasian Economic Community (CACI n 39 dated November 6 2008), Islam Karimov is reportedly planning to withdraw from the CIS Collective Security Treaty. In a sign of the times, the Uzbek president skipped the informal summit of heads of state of the organization held late December in Kazakhstan because of a meeting with General Petraeus, the new head of US troops in Afghanistan. d

On the surface, everything is fine between Russia and South Ossetia. Moscow gave unwavering diplomatic support to Tskhinvali during the 3rd round of negotiations with Georgia on December 17 in Geneva. The previous day, the new Russian ambassador, Elbrus Kargiev himself of Ossetian origin and the former deputy prime minister of the Tskhinvali government - presented his credentials to the South Ossetian president, Eduard Kokoyty. But behind the scenes, tension is mounting between Moscow and Tskhinvali. The first signal came from the Russian Audit Chamber when, on December 23, Sergey Stepashins staff made public the conclusions of a report written in late November on the use of public funds granted by Moscow to finance reconstruction in the republic. The accusations are weighty. The Russian auditors indicated that there are serious problems and heavy delays in construction (only 8 of the 111 buildings that were to be rebuilt in 2008 had been completed by November 18, as less than 10% of the $20 million released by Moscow was committed). The report does not explicitly mention embezzlement, but this is what it amounts to for the Audit Chamber. The report suggests that in order to reinforce control over the flow of money, Vladimir Putins government should create a special federal department like the one set up within the regional affairs ministry to supervise the reconstruction of Chechnya. Initially, Moscow had counted on the new South Ossetian prime minister, Alexandre Bulatsev, a former North Ossetian tax service official, to keep an eye on the money coming from Moscow. But he handed in his resignation to Eduard Kokoyty in late December. Likewise, the new Finance minister, Alexey Panteleev, formerly of the SOK Group based in Samara (Russia Intelligence n 88 dated November 27 2008), did not remain at his post for more than one week. Tskhinvali is pretending to be untroubled and considers the conclusions of the report to be dated and the information partial. While refraining from accusing the Audit Chamber, whose head, as many know, is a close associate of Dmitry Medvedev, Eduard Kokoytys entourage has condemned a campaign to discredit him. Fingers have been pointed in particular at Anatoly Barankevich and Yuri Morozov, respectively former prime minister and secretary of South Ossetias Security Council, as well as at Albert Dzhussuev, head of the BTP Stroyprogres company. It must be said that the first two have not minced their words over the past weeks. In a long interview in the daily Kommersant published on December 5, Anatoly Barankevich denounced widespread corruption in Eduard Kokoytys circle. Kokoyty was, in passing, depicted as a coward who fled Tskhinvali in the minutes following the Georgian attack on August 8. Yuri Morozov accused the president of being implicated in the mysterious disappearance of some $30 million that had been in the coffers of the national bank at the start of the five day war. Albert Dzhussuev was more discreet but has good reasons to hold a grudge against Eduard Kokoyty who did all he could to convince Gazprom to withdraw the contract for construction of the new gas pipeline between Russia and South Ossetia from Stroyprogres. Kokoyty is also trying to oust the company from the development project involving the Kvaysa zinc deposit, the republics only natural resource, of which 49% belongs to Dzhussuevs group. The Kremlin has as yet not reacted to the proposals made by the Audit Chamber nor to Eduard Kokoytys initiatives, but according to our sources, his popularity is incomparably lower than that of the other new president, Sergey Bagapsh of Abkhazia. d
c Central

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January 15 2009

Central Asia & Caspian Intelligence N40