Russia Pursues Payment of ‘‘‘Unpaid Debts‘۝ by Turkmenistan; Risk of Moscow Pursuing Strategically Significant Assets as Compensation

On July 24, 2014, a spokesman for Russia‘s state-owned energy company Gazprom confirmed that the company had filed a lawsuit against Turkmenistan with an international arbitration court in Stockholm after the two states failed to come to agreement on the price owed by Russia for the past purchase of Turkmen gas.  A spokesman for Gazprom indicated the company was demanding a ‘‘‘revision of prices,‘ and the company indicated that it had overpaid Turkmengaz about $2 billion since 2010.  The company also reportedly wants to reduce the amount of gas it is obligated to purchase henceforth (in so-called take-or-pay contracts) to 4 billion cubic meters per year.  In turn, Turkmengaz has accused Gazprom of failing to pay for its gas deliveries since the beginning of 2015 and, in February, publicly referred to Gazprom as an unstable partner.

Some analysts believe that, even in the case of a favorable ruling for Gazprom, it would be difficult for Russia to collect the money, and that the case is likely to be resolved by political means.  If this is the case, there is a risk that Russia will push for settlement in the form of strategic sacrifices by Turkmenistan, as has occurred in other regional countries, where Russia has taken ownership and/or control of critical infrastructure and state-owned companies as payment for what it claims are unpaid debts.

Currently, Turkmenistan (which possesses the world‘s fourth largest natural gas reserves) supplies Gazprom with gas priced at $240 per thousand cubic meters (generally lower than the price Gazprom charges its European customers), based on a 2010 contract between the two companies.  Gazprom either indigenously uses the gas or resells it, although the volume imported has fallen significantly in recent years.  In 2008, the Russian company purchased approximately 40 billion cubic meters (bcm) of Turkmen gas.  From 2009–2014, however, these numbers fell to 10–11 bcm annually.  At the end of 2014, Gazprom announced its intent to cap purchases of Turkmen natural gas at 4 bcm per year.

The relationship between Turkmenistan and Russia has been under strain for a number of years and has been recently aggravated by Turkmen efforts to come to terms with Azerbaijan on a Trans-Caspian Pipeline deal that would see Turkmen gas exports circumvent Russia for export to Europe via an efficient ‘‘‘ and possibly lucrative ‘‘‘ pipeline still being developed (the South Gas Corridor pipeline project).  Rising Turkmen gas exports to China are also viewed as a competitive threat by Russia.

In 2009, Turkmengaz was prompted into expedited action to explore new export routes for its natural gas supplies after a pipeline explosion (that the country blamed on Russia) and an eight-month price dispute.  Taking advantage of the situation, China agreed to loan Turkmenistan $3 billion to help develop its eastern South Iolotan gas field.  Thus, as Turkmen gas imports to Russia have fallen, gas deliveries to China have increased significantly.  Currently, Turkmenistan supplies China with 30 bcm of gas annually and has plans to double its export volume to China by 2020.  Turkmen gas accounts for approximately half of China‘s total natural gas consumption, delivered through the Central Asia-China gas pipeline (crossing Turkmenistan, Uzbekistan and Kazakhstan), which was constructed by the China National Petroleum Company (CNPC) and whose first pipeline became operational in December 2009.  The construction of the pipeline itself ended Russia‘s monopoly over central Asian gas export routes.  For comparison, Gazprom is to begin gas sales to China in 2018, with plans to increase natural gas flows to 38 bcm annually using its east Siberian natural gas.

Talks between Turkmenistan, Turkey, Azerbaijan, and the EU over the status of the Trans Caspian Pipeline (TCP) have also been progressing in this window of the Russian lawsuit.  Following a meeting with both Turkmen and Azeri officials in the Turkmen capital of Ashgabat in May 2015, the Vice President of the European Commission in charge of the energy union, Maros Sefcovic, announced that the parties had reached a mutual understanding, noting that Europe anticipates supplies of Turkmen gas to begin in 2019.  This significant development in the TCP negotiations came at the expense of Moscow, which has opposed the pipeline project since it was announced.

These legal proceedings should be viewed with an eye toward what Russia is demanding in terms of payment for what it considers unpaid debts (either in court or in private settlement negotiations).  It would have strategic implications were the country to pursue payment in the form of strategic assets that provide undue influence over Turkmenistan‘s various efforts to pursue an independent energy policy.