Kazakh-Ukrainian partnership has great potential

December 10. Central Asia Newswire

By Martin Sieff

Kazakh-Ukrainian partnership has great potentialUkraine and Kazakhstan have both agreed to sell maize and barley to Russia to cover the expected shortfall in Russia’s harvest this year. But that activity is only the tip of a Ukrainian-Kazakh relationship with huge potential.

Kazakh business sources have told Central Asia Newswire (CAN) that Kazakhstan and Ukraine are already in negotiations for Ukraine to construct an oil refinery for the Kazakhs.

The move is a natural collaboration but also a potentially momentous one. The Western oil majors have been reluctant to cut Kazakhstan in on oil refining, a hugely profitable part of the petroleum and petrochemical production cycle.

Ukraine, however, has the experience and the industrial base to build such a refinery, and others in the future. It can, therefore, give the Kazakhs their own refining and petrochemical production base, and increase Kazakhstan’s independence from the Western oil majors.

In return, energy-hungry Ukraine can look to an increased flow of vital oil and gas from Kazakhstan’s rapidly expanding production, especially after the Kashagan super oil field, potentially the second largest in the world, comes online in late 2012 or early 2013.

Ukrainian President Viktor Yanukovych also recently stated that he would like Ukraine to join the new customs union that was launched on July 15 between Russia, Belarus and Kazakhstan. The three countries recently signed 28 agreements confirming their determination to create a “single economic space.”

In addition to the oil refinery agreement and Ukraine’s potential accession to the customs union, Ukraine and Kazakhstan look likely to reach agreement shortly on Kazakhstan pumping its natural gas to the West through Ukrainian pipelines. This will be good news for Western European gas consumers, as it will vastly increase the infrastructure capacity for carrying Caspian Basin natural gas to the West – a major bottleneck in the growth of that export trade.

Though Russia would likely have blocked such an agreement under the administration of former pro-Western Ukrainian President Viktor Yushchenko, relations have warmed since President Yanukovych took power in February 2010. The two countries recently reached an agreement that will allow Ukraine to export Russian oil and gas to the West and the Kremlin would likely also approve of Ukrainian-Kazakh energy cooperation.

Gazprom, Russia’s gigantic gas-producing and -transporting corporation, can also look with confidence to getting a major cut out of the profits of exporting Kazakh oil and gas across Ukraine to the West.

The bilateral relationship between Kiev and Astana has also been flourishing since President Yanukovych took power. He and President Nursultan Nazarbayev of Kazakhstan have developed a warm friendship.

Both men are experts on industrial and energy development. Both of them are political moderates in their regions who want to develop their countries’ industries, revive their nations’ long-troubled agricultural sectors, attract far more foreign direct investment and at the same time stay on good terms with Russia. The Kremlin remains the indispensable partner of both nations and the political and strategic giant across the “near abroad” of former Soviet Eurasia.

The Ukrainian and Kazakh economies in general also have a lot in common and their differences make them natural compliments for each other.

Both economies are primarily driven by commodity exports, and the global rise in commodity prices over the past year has been a strong boost to both of them. Under President Yanukovych, Ukraine posted a growth rate of 4.3 percent so far this year and Dragon Investments in Kiev projects a 4.6 percent growth rate next year. This contrasts with a catastrophic 15 percent decline in GDP during President Yushchenko’s last year in office in 2009.

Kazakhstan has also been posting strong growth rates, primarily generated by soaring prices for its oil, natural gas and uranium and copper exports.

If Ukraine were to join the customs union, as President Yanukovych has indicated, that would open the way for close Ukrainian-Kazakh cooperation in setting agricultural commodity prices to boost profits for the agricultural sectors of both countries.

Ukraine has a vast industrial base, great iron reserves and a historic iron, steel and manufacturing industry in the Don Basin, or Donbass. But it has been starved of investment during President Yushchenko’s chaotic years of rule and through the 2008-9 global recession. It is desperate for the investment funds, as well as the oil and gas reserves, that Kazakhstan has in abundance.

For its part, Kazakhstan, with a population less than one-third of Ukraine’s, urgently needs Ukraine’s industrial experience and expertise to develop its own industrial base in accord with its “2030” 20-year grand development strategy.

Both countries have huge areas of agricultural land that are potentially among the most profitable in the world. But they both suffered from catastrophic mismanagement during the Soviet era, and in the chaotic period of the loss of their Soviet markets during the collapse of communism.

Therefore, both countries are natural partners in their efforts to rebuild their agricultural sectors to world exporting standards and to scales comparable to Australia, Canada and Argentina.

Already, international analysts see Kazakhstan and Ukraine as the two potential powerhouse economies of the “near abroad” of former Soviet Eurasia. Their growing partnership in energy development, transportation and agriculture could prove to be among the most important dynamics in Eurasian economic growth in the 21st century.