Oil in the Caspian Region and Central Asia
- the Political Risk of the Great Game Continued

 
By �ystein Noreng.

Contribution at a conference held in Boulder, USA, April 11th. 1998. Copyright: �ystein Noreng.

Interlocking Political Risk Dimensions.
This article discusses the political risk involved in developing the oil and gas resources of the Caspian Region and Central Asia and in bringing the oil and gas to the market. The risks involved should be analyzed from at least three angles: the transportation problems, the great power involvement and the potential instability of the regimes in place. These three dimensions interlock. The transportation problems invite interference from neighboring states for both economic and political reasons. Hence the solutions affect the great powers involved. The potential instability of the regimes in place makes them seek allies outside the region. Hence the internal politics of the new states of the Caspian Region and Central Asia also affects the great powers. These interlocking dimensions of political risk make the region perhaps the world’s most complex environment for the oil industry. Nevertheless, the stakes are enormous.^[1]

                      If the Caspian Region and Central Asia had not been landlocked or had freely available transit routes, the region would be one of the world’s most favorable oil provinces.^[2] A reasonable bet is that the geological potential is underestimated, so that the region may contain much more oil and gas than generally anticipated today. Hence the potential is for a rising output of oil and gas at declining costs. The prospect is thus for huge profits, but their division remains an open question, linked to the transportation issue.

                      The potential economic gain and the strategic importance of the Caspian Region and Central Asia cause the interest of outside powers, whether they are neighboring or not. Indeed, the great game of the 19^th century between Russia and the United Kingdom over the control of Central Asia seems to reappear over oil at the turn of the 20^th century. This time, however, the United States appears as the chief contender to Russia’s interests, with Iran and Turkey in secondary roles.

These four external powers have similar and competing interests, that is access to and control of the region’s oil and gas, but their means are not equal. The United States has a disadvantage because of remoteness and hence needs a partner for the transit of the oil. Russia and Iran have an advantage because of proximity, adjacent markets and easy transit. Turkey is at a disadvantage because of costly and potentially vulnerable transit routes. Furthermore, Armenia, a traditional ally of Russia and Iran, is in a key position representing a potential threat to both Azerbaijan and Turkish oil interests. So far, the United States has chosen Turkey as a partner, but this is hardly sufficient, as Russia or Iran or an alliance of the two could upset any Turkish transit route. Hence investment in new pipeline systems may not be sufficient to secure outlets and the free flow of oil and gas. This enhances the economic risk for the oil investors.

In addition, the regimes in place in the Caspian Region and Central Asia are all potentially unstable. Since independence, these countries have not become democracies.^[3] Their post-Soviet political life has striking similarities with Soviet times, indicating a remarkable continuity in social relations, in spite of spectacular formal and institutional changes. Common features are the smooth transition of the local Soviet power elites into nationalist ruling elites, with ideology changing rather than substance or methods, as well as an extreme centralization of power, often with authority vested in a single person.^[4] Such political systems are inherently unstable. They have no mechanisms for dialogue and compromise. Authority vested in dispensable and mortal individuals is more fragile than the authority of more lasting and solid institutions. This point is of a critical relevance to the region and to the oil industry.

Lessons from other oil and gas exporters are that the petroleum revenues easily lead to a distorted economic development.^[5] In many oil and gas exporting developing countries there is a propensity for autocratic regimes with an extreme centralization of power that hampers gradual adjustment and over time leads to political instability and discontinuities.

Even if there is reasonably little risk of nationalization of oil and gas facilities, there is a considerable risk of difficult operating conditions due to deteriorating political circumstances. The situation in present Algeria or in Iran in the late 1970s is a relevant reference. In the Caspian Region and Central Asia the monopolies of the Soviet times have been replaced by patron-client relationships, that due to their discretionary and selective character bear little resemblance with open markets. This is a real problem for oil investors, who risk betting on the wrong horses or even the wrong riders. It is an open question to what extent the immediate post-Soviet regimes in these countries represent a transitory phase or a more lasting solution. This is also pertinent to the interests of the great powers.

From a petroleum point of view, the region’s salient cases are Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan. These countries have autocratic governments of various degrees of harshness. They all face fundamental political problems. They have a much higher level of education than the oil exporters of the Middle East and North Africa. Hence autocratic governments may be less acceptable, especially insofar as they do not deliver economic progress. The very survival of these regimes may thus depend upon their ability to attract oil investors.

The political risk should induce oil investors to apply a higher than usual risk premium when assessing investment opportunities in the region. This risk premium in addition to the cost of transportation could mean that oil and gas development in the region is economically less attractive than what appears from the geological potential.

The new countries in the Caspian Region and Central Asia are at a different stage of development from the Middle East and North Africa^[6]. The region is politically important because it may have the geological potential to become a leading new oil province. The political entities are new and immature. Their oil industry is in most cases young. Like Iran, Algeria and Saudi Arabia, they lack democratic traditions. So far, their institutions are only nominally democratic. As was already pointed out, servants of the old, communist regime who have changed their political label have kept power. They have also maintained their autocratic preferences.

                      Indeed, throughout the Caspian Region and Central Asia, the democratic process, timidly begun in 1991, seems to have stalled. Hence insofar as these countries develop substantial oil and gas exports, they have good chances of not only developing rentier economies, with detrimental effects on other industries, but also rentier states. This would make their emerging private sectors parasites upon the oil state. Chances are therefore that the distribution of wealth and income will become more unequal. Chances are also that mounting conflicts over distribution of income and power will push the new rulers toward more repressive methods to stay in power. The new rulers may even choose to secure their positions with new alliances with the old colonial power. In other cases, they seek alliances with outside partners.

A New Oil Province with Heavy Risk Factors.
The attraction of the Caspian Region and Central Asia is simply huge oil reserves in countries whose governments are in need of revenues, investment and trade. Hence the international oil industry apparently has a favorable bargaining position. Oil and gas development has the potential to significantly help the new republics to economic prosperity as well as political stability and independence. Indeed, the key economic assets of Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan are oil and gas reserves.

                      The value of these assets is, however, somewhat diminished by the difficult outlets to world markets. The land-locked position of the countries mentioned severely limits the choice of markets. In principle, the region’s oil and gas could be exported by pipeline to the growing markets of China, India and Pakistan, but the capital cost would be extremely high and some transit routes, for example through Afghanistan, would mean a risk of disruptions due to political strife. An alternative transit route would be through Iran to the Gulf. At least for the region’s oil this may be the most economical outlet. From Iranian ports the oil could then be shipped to the growing Asian markets. Such a solution would, however, strongly reinforce Iran’s position in both the world oil market and in the political context of the Middle East.

                      Hence a route through Turkey is in the planning. The project is for an oil pipeline for Azeri and eventually Kazakh crude through Georgia to the Turkish Mediterranean port of Ceyhan.^[7] The point is to avoid Armenia, Iran and Russia, all of which are actually or potentially on less than good neighborly terms with Azerbaijan. The capital cost for the 1700 kilometer line is estimated to be at least $ 2.5 billion, possibly much more. This is the most costly way out for Azeri and Central Asian oil. Hence it is justified by political considerations, hardly by economics. Turkey and its regional rivals Iran and Russia see the control of pipeline routes as an important tool for strengthening their influence in the Caspian basin. The United States supports this route as this apparently would reduce Russia’s influence and as it avoids Iran.

                      This benefit may be more apparent than real. Georgia remains a weak link. The route proposed would have to pass fairly close to the Armenian border. Armenia has comparatively strong armed forces, being Russia’s traditional ally in the region. Armenia also received support from Iran during the conflict with Azerbaijan. Georgia is, by contrast, a weak state on both political and military accounts, although its democracy seems to be consolidating.^[8] Even as a post-Soviet independent country it is subject to heavy Russian pressures. Hence the pipeline proposed would run the risk of interruption by Armenian forces, directly or by proxy, if desiring to cut Azerbaijan’s revenues. For such a purpose, Iran or Russia might also act through an Armenia proxy.

                      An alternative, less costly and politically less risky route has been proposed by Russia, requiring tankers to load Azeri and eventually Central Asian crude from Black Sea terminals for shipment through the Bosporus to markets in the west. Turkey opposes any increase in oil tanker traffic through the Bosporus pointing to serious safety and environmental dangers. Turkey, evidently, also wants to avoid any shipment through Russia.

                      In addition to complex risk factors due to foreign policy, there is also the potential problem of internal instability.

The Great Game Continued.
The great game over Central Asia is being continued on the verge of a new century, this time with the United States replacing the United Kingdom. In this game, Russia is a constant factor, seeking to regain both economic and political control of the region. Oil is evidently the key factor. Iran is a new factor in the fame. It is emerging as an independent actor, seeking economic and political control, trade and transit for the oil.  In this game, Turkey is essentially an old outsider, seeking trade and transit for the oil. Turkey apparently also has an ambition to exercise economic and political control of the region, but with more limited means than either Iran or Russia. The United States is a newcomer to the region and an outsider. It is seeking economic and political control as well as oil and gas.

In this new version of the great game, there are essentially two distinct rivalry dimensions: the United States versus Russia for the oil, and Turkey versus Iran for the transit routes.

Russia’s interests are briefly a preferential access to Central Asian oil to offset decline in Siberia and regaining economic and political control of the region. Insofar as Russia’s political and economic development lags five to seven years behind that of neighboring Poland, Russia is likely to see a strong increase in its oil and gas requirements during the first two decades of the next century. Russia will most probably need more oil for a quickly growing park of cars and trucks. Presumably, Russia will also experience a rapid increase in electricity demand in its residential and service sectors, for which natural gas is likely to be the most favorable source of generation.

Russia is the world’s second oldest oil province after the United States. The Russian oil industry generally suffers from low productivity and high costs, in addition to an outdated technology and generally poor management. Output at the large West Siberian oil fields has peaked. Hence the most favorable geological sites have been explored and developed. For Russia, getting oil from Azerbaijan and Central Asia could thus be a favorable alternative compared to expensive development in Eastern Siberia or in offshore Far Eastern Russia. Moreover, Azerbaijan and Central Asia are connected to European Russia by oil and gas pipelines.

Russia’s economic interest is thus to capture part of the economic rent from the region’s oil and gas through a preferential access and prices below those of the world market and eventually through transit fees.

Russia’s political interest in relation to Azeri and Central Asian oil and gas seems first of all to be to deny other external powers control of the region.^[9] This does not mean barring access to foreign oil investors, provided that Russia keeps a large stake. Indeed, by first giving the new countries some leeway to negotiate directly with Western oil interests and then reasserting some dominance of the region, Russia seems to divulge a devious strategy. It seems be to attract Western capital and technology to modernize the Azeri and Central Asian oil industry, but to some extent for her own benefit. To prove the point, Russia has put fairly blunt pressure on Kazakhstan to choose an oil transit route through Russia rather than Turkey and to get a share in the Azerbaijan oil consortium, apparently without payment.^[10]

Correspondingly, Russia has the means to foment troubles and put pressure on Georgia, through ethnic minorities and factional groups. Against this backdrop, the desire to control the pipeline for Azeri oil to the Black Sea may explain Russia’s ferocious fight against the Chechen secession. Because of oil, this war may not be over, in spite of the truce in force.

Furthermore, Russia has an interest in controlling Caspian and Central Asian oil and gas exports to improve her own bargaining position with Western oil investors. The stakes are access to capital and market power. The oil and gas export pipelines are the instruments giving Russia a political leverage.^[11] This is regardless of the fact that for the populations and political elites in Azerbaijan and Central Asia, nationalism is on the agenda, not any new subservience to Russia.^[12] Russia apparently also has the means to obstruct or disturb any oil or gas transit through Georgia and hence maybe in practice any transit route through Turkey. Russia’s connection with Armenia is important in this respect, but this is not Russia’s only means of pressure.

The United States as Russia’s chief contender in the region has less vital interests. The United States nevertheless as the world’s only superpower has universal interests. As the world’s leading oil importer harboring the major part of the world’s oil industry, the United States has a persistent interest in a stake in and preferably a control of the world’s major oil provinces, wherever they are. The United States has an interest in Caspian and Central Asian oil reaching the world market and in investment opportunities for U.S. oil companies. On this basis, the United States has an evident interest in getting an economic and political foothold in Azerbaijan and Central Asia.

So far, the U.S. policy has been to avoid any understanding between the region’s oil and gas exporters and Iran, to prevent the latter from serving as a transit point. Since the end of the Cold War the United States has viewed Iran as one of the major adversaries. Hence for years the U.S. policy towards Azerbaijan and Central Asia has apparently been aiming at isolating Iran, if needed complying with some of Russia’s interests. For example, in 1995, the United States government vetoed any Iranian participation in the Azerbaijan oil consortium, but accepted a Russian participation. With Russia asserting her interest in the region’s oil, the U.S. position will be under increasing pressure to change. The dilemma is that the United States seems to have an overriding concern to avoid the oil from Azerbaijan and Central Asia reaching the Gulf.

The interest of the United States is apparently also to get the Azeri and Central Asian oil to the Mediterranean. The reason seems to be partly to put a downward pressure on Atlantic crude prices, partly to reduce the overall supply and price risk in the world oil market due to the dependence on the Gulf.^[13] Insofar as the U.S. position in the Middle East and especially in the Gulf weakens because of the protracted breakdown in the peace process between Israel and Palestine, the U.S. interest in an alternative route to the Gulf is likely to strengthen.

The U.S. interest also seems to be to assist Turkey economically by getting transit revenues and eventually to help Israel getting secure oil supplies from a Turkish port nearby.^[14] The United States in any case has formidable means to play a role in Azerbaijan and Central Asia through its oil industry, technology, capital and trade opportunities. In this respect the U.S. oil companies in the region, such as for example Chevron and Unocal, are also political actors, with an increasingly important role in the region.^[15] The problem for the United States is that the partners chosen for the oil transit route, Georgia and Turkey, may be in a weak position to deliver.

Among the second-rank external actors, Iran has got fairly little attention, in spite of the recent success of the Turkmen gas transit. Iran’s interests are briefly to getting the Caspian and Central Asian oil to the Gulf and establish close political and economic ties with the region. First, Iran has a desperate need for foreign exchange and would benefit from oil and gas transit fees. Second, with oil and gas transit, Iran would be in a better position to develop trade with the region. Central Asia could eventually become an important market for Iranian manufactured goods. In turn the combination of oil and gas transit and trade could establish Iran as regional power in Central Asia. Third, with oil transiting from Central Asia to Iranian Gulf ports, Iran would strengthen its position in the Gulf, essentially in relation to Saudi-Arabia, potentially also in relation to Iraq. Emerging as a Central Asian power would also reinforce Iran’s position in relation to the Gulf neighbors.

Iran’s relations with Azerbaijan merit a special attention. The present republic of Azerbaijan was part of the Persian Empire until conquered by Czarist Russia between 1796 and 1828. It shares language and religion with the neighboring Iranian province of Azerbaijan. There is indeed roughly the same number of Azeri speakers on both sides of the border. Relations between Azerbaijan and Iran are nevertheless troubled.^[16] Iran has consistently supported Armenia in the war against Azerbaijan. Azerbaijan, in turn, in the early 1990s under a nationalist government, made fairly overt claims for a unification of the two parts of the Azeri speaking region, amounting indirectly to a territorial claim on Iran, although there is hardly any record of Azeri separatism in Iran. Finally, Azerbaijan in 1995 under pressure from the United States cancelled the Iranian participation in the Azeri oil consortium. Hence in the Iranian perspective, Azerbaijan appears at best as an unreliable partner, at worst as an adversary and a threat to Iran’s integrity. Potentially, an economic success in Azerbaijan could make the country a greater risk for Iran. Against this backdrop, controlling the flow of oil from Azerbaijan would help Iran.

Instead, Iran has sought to develop close relations with Turkmenistan. For Iran, Turkmenistan represents the bridgehead to Central Asia for trade and political links.

Iran’s means are favorable transit deals and trade. As already mentioned, transit routes through Iran offer the least costly world market access for Azeri and Central Asian crude. Hence by choosing an Iranian outlet, as opposed to the Georgia-Turkey route or any easterly route to China, India or Pakistan, Azerbaijan and the Central Asian oil exporters could thus keep more of the economic rent. This fact enhances Iran’s position. Turkmenistan has evidently realized it when signing the deal on the gas pipeline through Iran. For Azerbaijan and Central Asia, Iran also represents the outlet that is the most secure from Russian interference and pressure. Both Azerbaijan and Turkmenistan have a common border with Iran. Turkmenistan could eventually transit Kazakh and Uzbek oil and gas to Iran.

Iran’s final trump card is closer relations with Russia, which remains a historical partner and a great regional power. Iran and Russia have together supported Armenia against Azerbaijan. They now share influence in Turkmenistan. Iran and Russia have a common interest in excluding outside powers from exercising a political influence in the Caspian Region and Central Asia. They could also have a common interest in preventing an alliance of the Turkic speaking countries of the region, eventually supported by Turkey.

Turkey’s interests are briefly political and economic ties with Central Asia as well as transit revenues and access to oil and gas. A major preoccupation for Turkey is to reduce the dependence upon Arab Middle Eastern oil.^[17] This is the reason why Turkey apparently buys any quantity of oil delivered to the Georgian port of Batumi. Turkey’s quickly rising energy needs also means that the country is a large and expanding market for gas from Central Asia. 

Turkey’s means are less favorable transit routes, trade and the support of the United States. As already pointed out, the transit route through Georgia and Turkey is both costly and politically vulnerable compared to an outlet through Iran.

Turkey evidently aims at developing the Caspian and Central Asian markets for her industrial goods and in the longer run to become a major investor in the region. Even if a certain religious and linguistic community undeniably favors economic and political links, Turkey is in some respects in an ambiguous position.

First, for Turkey trade with Russia and Ukraine is too important to be compromised by open attempts to cross Russian interests in remote and poor Central Asia.^[18]

Second, cultural links between Turkey and Turkic Central Asia are weak and may remain so because of Central Asian ambitions of a distinctive cultural and linguistic development. Likewise, in Azerbaijan, linguistic links with the Azeri minority in Iran have the priority over linguistic links with Turkey. In this part of the world, language is politics. Only nearby Azerbaijan has some real affinity with Turkey, but even this link is weakened by differences in religion and history. So far, Turkey has been unable to exert much influence in Central Asia.^[19]

Third, the Turkish transit of Caspian and Central Asian crude might perhaps be compromised by Turkey’s Kurdish problem. The proposed pipeline from Georgia through eastern Turkey to the Mediterranean will not only traverse difficult mountainous territory, it will also cross Kurdish land that might cause occasional problems. The south-eastern part of Turkey has been in a state of semi-insurrection for many years. Kurdish guerrilla fighters have on several occasions attacked pipelines carrying oil from Iraq, although so far never with a lasting damage.

Insofar as the Azerbaijan oil consortium backed by the U.S. government has its way, the oil pipeline through Georgia and Turkey is likely to be built, regardless of cost and political risks. Insofar as the United States pushes for a transit route through Georgia and Turkey for Caspian oil, it could provide ground for at least a tacit alliance between Iran and Russia. When Iran was excluded from the Azerbaijan oil consortium in 1995, there were signs of an understanding between Iran and Russia.^[20] Subsequently, Iran and Russia have co-operated in arms deals and trade between them is expanding. Turkmenistan has to some degree joined these projects. The recent gas pipeline deal with Iran is a sign that Turkmenistan for the moment does not refrain from closer ties with Iran, nor with Russia, which remains an important transit country for Turkmen gas.

Hence there is an evident risk of oil and gas transit politics splitting the region into two camps, one with Azerbaijan, Turkey and the United States, the other with Iran, Russia and Turkmenistan, possibly also Kazakhstan and Uzbekistan. Such a constellation would put Azerbaijan and the outlet of Azeri oil at great political risk.

There should be little doubt of Russia’s incentives and abilities to defend its interests in the region. Russia’s and Iran’s potential maneuvers for disturbing the flow of Caspian oil to the Mediterranean are legion, using proxies such as Armenia, Georgian dissidents or Kurdish guerrillas. In such a constellation, the internal political stability of Azerbaijan could also be at risk. If Russia could help unseat the preceding Azeri regime, it could eventually also make the position uncomfortable for the present one.

Central Asian Economic Policy and Internal Political Risk.
The Soviet background enhances the likelihood that when resources are available, the new Central Asian states will opt for a capital intensive economic strategy based on oil and gas, quite like most Middle Eastern and North African oil exporters. The eventual choice of a labor-intensive economic development, as in East Asia, would most likely be out of necessity, in spite of their relatively good human resources. The risk is that a capitalist development would imply the rise of a genuine private sector and a merchant class threatening the position of the present ex-Soviet rulers.

                      Indeed, for these countries, a development like in Iran under the shah or in Algeria may appear more likely than not, with the ensuing problems of unemployment, income distribution and political stability. It could also be in Russia's interest that the new Central Asian states make this choice, to avoid competition in labor intensive manufacturing.

                      Azeri oil politics work out in this context. Azerbaijan has large proven oil reserves, but no immediate outlets. The immediate object of Russia's attention is Azerbaijan. Here, the issue of pipeline outlet relates to Russia's influence and indirectly to the domestic political development. With a delicate ethnic balance due to a large number of resident Russians, Kazakhstan seems more prone to stay under Russian influence, eventually with an autocratic government supported by a semi-democratic Russia. Turkmenistan with more gas and fewer Russians already seems to be in this position, with an autocratic government seeking Russian support. In Uzbekistan, relations with Russia seem more strained, even with an autocratic government. Here, conditions may be the ripest for an Islamist development, meaning the emergence of a socially radical political movement referring to Islam.

                      The comparison with the Middle East and North Africa is useful. The governments of the Central Asian republics in the mid 1990s seem to correspond to the earlier stages of the FLN government in Algeria or of the shah government in Iran. At the time of post-Soviet independence, the Central Asian states had no merchant class. Hence they will have to create one, essentially from the old communist nomenklatura, that is public sector technocrats and party bureaucrats. This will necessarily mean an increasing inequality of wealth and income and redistribution from the poor to the new rich. This has been evident in Russia for a number of years. In a context of a relatively high level of education and Islamic resurgence, filling the ideological void after the collapse of Communism could be politically unsettling. To the extent that the economic hopes from independence lead to disappointment, economic policy will become even more difficult.

                      After independence, all Central Asian republics suffer from high and rising unemployment and declining living standards^[21]. The extensive damage to the environment causes serious health hazards for the population. Social conditions are deteriorating quickly. Privatization has barely begun. Where it has proceeded, as in Uzbekistan, it has essentially benefited the ex-Soviet nomenklatura. Practically all enterprises are still owned and operated by the state or the old nomenklatura disguised as private owners or managers. A new merchant class is yet to rise. Hence private initiative is still under severe restrictions from the old ruling class, which is transforming itself into a new class on the model of the Middle East and North Africa.

                      None of the new states has even started to tackle land ownership.^[22] The old state and collective farms are still essentially intact. As investment has virtually ceased since the late 1980s, the equipment deteriorates and output is falling. The result is recurrent food shortages. The effort to move away from the traditional cotton monoculture has barely begun. It will require both massive investment and a redistribution of land. Hence the move away from cotton has important political connotations.

                      In Central Asia, the traditions of the bazaar economy represent a potential economic asset.^[23] Throughout the Soviet period, Central Asia had a large underground economy. This was the major reason for recurrent economic scandals and political reshuffles. By bringing these trading circuits into the official economy, the new Central Asian states could make an important step toward economic stabilization. Such a move is politically difficult, because giving more freedom to the bazaar economy would mean encouraging the rise of a merchant class. It would compete for resources and influence with the established technocrats and bureaucrats. It could also foster the rise of Islam.

The Potential Role of Islam.
In most Central Asian republics, independence was the occasion for the local Soviet nomenklatura to take power. Essentially, political power was transferred from Moscow to local autocratic rulers. There is little popular participation in the political processes.^[24] At the same time, Islam has an increasing audience in the region. Furthermore, Islam also represents a common cultural denominator, across the artificial state borders and divisions.^[25] Insofar as the autocratic rulers are identified with the Soviet past and with Russia, they could provide Islam with a chance to represent both social grievances and the assertion of national identity. Eventually, Islam could be a force working in the direction of Central Asian unity. This is especially relevant for Sunni Central Asia.^[26] For example, more militant Uzbek Islamist movements could aspire to influence the neighboring republics.

                      Central Asia and parts of neighboring Transcaucasus are generally Sunni Muslim, speaking Turkic languages. One exception is Azerbaijan which is Shia Muslim, but Turkic. The other exception is Tajikistan which is Persian speaking, but Sunni. Hence Azerbaijan has stronger religious links with neighboring Shia Iran than with Sunni Turkey. Likewise, Tajikistan has closer religious links with the Sunni Turkic neighbors than with Shia Iran. These facts have a cultural and political significance.

                      Throughout the region, Islam is either an already active factor in politics or is latently present. One country, Tajikistan has fought a civil war where Islam was an important issue. Uzbekistan, the region's most populous country, has an active Islamist opposition. Indeed, the Uzbek regime apparently chose to intervene in the Tajikistan civil war on the side of the ex-Soviet rulers against a coalition of nationalists, democrats and Islamists out of fear that such a coalition might also be politically successful in Uzbekistan itself. In this process, the Uzbek regime managed to convince the Russian military to participate in crushing the new Tajik Islamist regime. In the other states there is a potential for social unrest and political discontent finding an outlet in Islamism.

                      The new states of the Caspian Region and Central Asia risk political instability because of their ethnic balance. Soviet authorities under Stalin drew their borders in a way that made each state contain a number of different ethnic groups. Immigration of Russians and other Europeans as well as deportations subsequently compounded the ethnic diversity. The present outcome is ethnically divided political entities. This was a way for the Soviet masters to divide and rule. They split the republics by ethnic cleavages, as they split each nationality on several republics. The purpose was to prevent any ethnic group from having its exclusive political and administrative entity. Stalin's objective was to divide the nationalities to promote the Soviet notion of progress.^[27] For example, there are substantial Uzbek minorities in Kyrgyzstan, Tajikistan and Turkmenistan. In at least one case, Kyrgyzstan, the new nation received its official identity and language from the Soviet masters in the 1920s. The motive was a Soviet attempt at dividing the Kazakh nation^[28].

                      Insofar as the post-Soviet regimes of the Caspian Region and Central Asia do not deliver an economic success, rising living standards and improved social conditions, their legitimacy will suffer. Insofar as they continue their autocratic ways of government, there is an apparent risk that political opposition will be driven underground and to some extent into the mosque. Just like in the Middle East and North Africa, Islam could also in the Caspian Region and Central Asia appear as a useful reference in a struggle for social justice and the assertion of a post-colonial national identity. Even if Islam evidently means different things to different people in different situations, it could under certain circumstances serve as a common denominator for a broad specter of opposition to the ex-Soviet rulers.

Insofar as such circumstances should coincide in several Caspian and Central Asian countries, there could perhaps be a common ground for some kind of political association across present Soviet-made borders, even if that today seems a remote possibility. In any case, such an entity would eventually have a huge territory and considerable human and natural resources. This raises the specter of a new, powerful political entity in the region that eventually could fend off both Iranian and Russian attempts at gaining influence. Uzbekistan would be the place to watch in this respect because of size of the population, the urban tradition, the strength of Islam and the presence of sizeable Uzbek minorities in the neighboring countries. Even without an Islamist revival, Uzbekistan has the potential to play an increasingly powerful role in Central Asia.

The Salient Cases.
In the ethnically most homogeneous state, Azerbaijan, the dominant nationality, Azeris, make up 83 per cent of the population. By contrast, Kazakhs in Kazakhstan only represent 40 per cent of the total. Here, half the population is Russian and other European, including Ukrainians and Germans. Indeed, for the whole region, they make up the second largest ethnic group, outnumbered only by Uzbeks. About two thirds of the Russians and other Europeans are, however, in Kazakhstan, mostly in areas contiguous with Russia. In all the new states, there is, anyway, a large number of Russians and other Europeans. They are economically important because they are generally more skilled than the indigenous Central Asians. Hence all the new states have substantial minorities of both Russians and neighboring nationalities.

The political significance is a high likelihood of ethnic tension within each of the new states and between them. The dominant nationality will in each case be tempted to assert its power of the new institutions and the reorganized economy. This would be at the expense of both Russians and other minorities. Ethnic tension with the republics is likely to lead to tensions between them. Governments are likely to come under pressure to defend the interests of their nationalities in the neighboring states. This could be a recipe for regional conflict and political instability. It could also strengthen Russia's position in the region.

                      Political instability would compromise economic reform and growth. To start with, prospects are not good for economic reform aiming at a market economy. The generally ex-Soviet leaders of the new states have shown a preference for maintaining their positions rather than introducing reforms that could decentralizes power.

                      In hindsight, the Caspian Region and Central Asia suffered economically from the Russian and later the Soviet occupation through its distorted development. The Czarist regime built railways and started developing the local cotton industry. In Azerbaijan it developed a huge oil industry, measured by the standards of the times. Indeed, because of oil, Azerbaijan embarked on a different path of economic development from the Sunni Central Asia across the Caspian Sea. In both cases the Czarist regime imposed unequal exchange relations and economic monoculture. In Azerbaijan the oil industry soon dominated economic life. In the rest of Central Asia, cotton became the dominant crop and cash earner. After serfdom was abolished in Russia, millions of Russians moved to Central Asia, but much less to the Caspian Region.

                      During and after the Second World War there was also a huge migration of Russians and other Soviet Europeans to Central Asia. This happened concurrently with the industrialization of the region. After 1945 living standards improved markedly throughout Central Asia, even if they on several accounts lagged behind those of the European parts of the Soviet Union. Health and education also improved markedly, but both lagged behind the European republics.

                      The persistently high birth rates and declining mortality rates among the Central Asian Muslims caused their share of the population rise again. This was a significant trend in the 1980s, the last decade of the Soviet Union. The changing ethnic balance in some cases caused the number of locals who claimed to speak good Russian stagnated or even declined during the 1980s.^[29] This is a sign that the education of Russian in schools was slipping behind and of a rising unwillingness to use Russian. It has relevance for intergenerational relations. In the 1990s, after independence, the use of Russian is receding quickly throughout Central Asia, as in Azerbaijan.

                      Generational politics in the Caspian Region and Central Asia is complex because of the Soviet past. Generally, the older generation of politicians rose to prominence and power under Brezhnev. They were essentially Soviet politicians with local roots, born before 1935. Their formative political experiences were the Soviet victory in 1945, Stalin's death in 1953 and especially Khrushchev's speech in 1956. His destitution in 1964 was another important event. Under Brezhnev they became the executors of increasing incompetence and hypocrisy, building up frustrations, tensions and even hatred.^[30]    

                      In all republics there is a numerous middle generation that has witnessed the decay of the Soviet Union and sees independence as an opportunity to achieve power. They were born between 1935 and 1965. Their major formative political experiences were Khrushchev's fall in 1964, for the older ones, the Soviet invasion of Afghanistan in 1979 and in the late 1980s Gorbachev's liberalization. The Soviet Union's Afghan war was especially important for this generation. Throughout the region there is also a young generation, born after 1965. Their major formative political experience was independence after the dissolution of the Soviet Union in 1991. In most cases, the present leaders of the new states have strong Soviet roots. Their entourage also to a large extent belongs to the former Soviet nomenklatura.

                      Azerbaijan is historically Russia's and the Soviet Union's first oil province. The development of its oil industry caused huge investment, but the republic also had other assets. The development of the oil industry caused large-scale investment in infrastructure and education. By the time of the collapse of the Soviet Union, Azerbaijan enjoyed a high level of education, especially in science and technology.^[31]

                      After independence Azerbaijan at first in 1992 elected a nationalist democrat, Abulfaz Elchibey, as president. Born in 1939, Elchibey for practical purposes belonged to the middle generation. He had no Soviet political background, but close links with Turkey.^[32] He had been active in the Popular Front, the democratic and nationalist opposition of the late 1980s. Azerbaijan's independence was from the outset compromised the war with Armenia. As the war dragged on and the economic and political situation of Azerbaijan deteriorated, rebel military forces made Elchibey leave in June of 1993. His replacement was Heidar Aliyev, an older and erstwhile prominent Soviet politician and member of the Politburo under Brezhnev. The change at first seemed to serve Russian interests and represented a setback for Turkey. One reason why Elchibey had to leave was Russian military assistance to Armenia, assuring a de facto military defeat for Azerbaijan.

                      Rigged elections in November of 1995 indicate that Azerbaijan is stepping back from the road to democracy. Hence the country has a considerable potential for intergenerational strife with both social and nationalist accents. Indeed, the secular and authoritarian Aliyev regime is an easy target for criticism that it represents the corrupt and despotic Soviet past, present Russian interests and the interests of the surviving Soviet-Azeri nomenklatura.^[33] Corruption is reportedly rampant, press censorship heavy and human rights groups report a large number of political prisoners. Unemployment is widespread and living standards have fallen significantly. This is likely to alienate the middle generation with nationalist aspirations and the younger generation with limited memories of Soviet rule. Islam represents a tempting alternative. The Shia clergy offers a hierarchical structure opposing the ex-Soviet nomenklatura. Hence it also represents a tempting alternative to the middle and younger generation.

                      In the ideological void after the Soviet and Marxist collapse, there is a revival of Islam in Azerbaijan^[34]. Insofar as the Aliyev regime suppresses political opposition and the regime becomes more repressive, chances are that the mosque becomes the center of discontent. This is a serious issue insofar as the secular government that pursues unpopular policies is seen as linked to Russia. Hence in Shia Azerbaijan the clergy potentially represents a powerful political force in spite of the country’s essentially secular tradition. In the future this could serve the interests of Shia Iran rather than those of Sunni Turkey, especially if Iran moderates its political course. Historically, the religious ties with Iran through Shia Islam have been more important in shaping Azeri mentality and behavior than have the linguistic ties with Turkey.^[35] Today, by contrast, links with Turkey are more important than are those with Iran.

                      The development is likely to affect Azeri oil politics. Control of Azeri oil was evidently an important motive for Russia to unsettle the Elchibey government. By 1995, under the Aliyev government, Russia had got a stake in the Azeri oil. Foreign intervention enhances the political risk of Azerbaijan. It could become another case where oil indirectly forces the political opposition into the mosque.

                      Oil is at the same time Azerbaijan's promise and menace. The oil and gas resources represent potentially high future export revenues. The oil development could bring resources that would help raise living standards, improve social services and moderate ethnic strife with the Armenian minority. Hence oil revenues could even help stabilize the political situation and favor democracy. Such a path of development would require a political leadership committed to income distribution and respectful of democratic rules. The survival of the present regime seems to depend essentially on the flow of foreign investment in the oil industry, but it does not appear highly committed to democracy.

                      The alternative is that oil development brings resources that disproportionately favor a minority of public sector technocrats, including the military, and a parasite merchant class. Hence there is a risk that oil revenues could exacerbate economic differences and social tensions. The outcome could be further political unrest provoking more repression. The condition is a government not respectful of democratic rules and that is bent on filling its own pockets rather than improving the overall economic and social situation.

                      Against this backdrop, Azerbaijan seems to have the qualities required for developing into a classical rentier state. The non-oil related sectors of the economy suffer. The merchant class is not independent. The military has already played a key role in replacing Elchibey by Aliyev. The potential role of Islam as a force of opposition makes an important parallel with the rentier states of the Middle East and North Africa.

                      The other part of the menace is that oil will attract foreign intervention, interfering with Azerbaijan's ability to develop according to its own interests and needs. Russian interference in the country has long traditions.

                      Turkmenistan also has much oil and gas, but its politics are different. The country's dictator, Saparmurad Niyazov, born in 1940, belongs to the middle generation. He took power in 1985, the same year as Michael Gorbachev took over in Moscow, but Niyazov has proved more authoritarian and more lasting. His entourage also mostly represents the middle generation. In spite of a severe economic and social crisis in the late 1980s, the divided opposition was unable to unseat Niyazov.^[36]

                      Under Niyazov's leadership Turkmenistan declared its independence in two stages, in August of 1990 and in October of 1991, after the failed Moscow coup. Since independence, the Niyazov government has systematically silenced all opposition. The press censorship also applies to matters printed abroad. Hence Niyazov represents a secular and highly authoritarian regime, based on the younger parts of the former Soviet nomenklatura.^[37] The Soviet regime was fairly successful in eradicating Islam in Turkmenistan. The Niyazov regime actively controls an official version of Islam. It has outlawed Islamic movements that could represent an opposition.^[38]

                      Turkmenistan should have economic resources to buy off popular discontent.^[39] Nevertheless, failed economic policies have caused declining living standards and considerable hardship. Riots against shortages have been suppressed.^[40] In the longer run, the younger generation could represent a source of dangerous discontent. The condition is that their economic and social situation deteriorates or that in the future a higher level of education makes an authoritarian regime less acceptable. So far, religious propaganda from neighboring Shia Iran has had a limited impact on the nominally largely Sunni population. In practice it is fairly secular. The Uzbek minority could represent a potential source of trouble, but it is not indispensable to the Turkmen economy. So far, Turkmenistan seems to indicate that oil and gas do not necessarily lead to an Islamist revival.

                      Turkmenistan already has developed into a classical rentier state. The government is a distributor of favors rather than a tax collector and redistributor. The small merchant class has a parasite life. Here oil and gas are substitutes for a democratic development. Insofar as oil and gas revenues are ample and benefit large parts of the population, prospects for an Islamist opposition do not seem promising.

                      Neighboring Uzbekistan represents yet a different case, with so far less proven reserves of oil and gas, but much more religious activity. It is also the most populous of the new states. Historically, Uzbekistan is the direct successor of the Muslim states of Bukhara and Khiva. Hence Uzbekistan has stronger Islamic roots than most other Central Asian states, with the possible exception of Tajikistan. The state has a Tajik minority, which in the past has played an important cultural role as a carrier of Islamic tradition. The Samanid dynasty founded an Islamic state in Bukhara already in 874.^[41] Bukhara subsequently developed into one of the leading centers of learning in the Islamic world. The city kept this position for centuries, well into Russian Czarist rule^[42].

                      After the revolution the Soviet authorities were fairly successful in reducing religious activity. Already in the 1920s, the Soviet government launched a vigorous campaign against Islam and local cultural traditions. Many Uzbek intellectuals were arrested and later perished in Stalin's camps. The new government closed 99 per cent of the mosques.^[43] During the Second World War the Soviet government wanted to enlist the support of Central Asian Muslims against the German invasion. Hence the Soviet government relaxed restrictions on religious activity.

                      After the war, there was at first little religious activity in Uzbekistan. In the late 1960s a new generation of Uzbeks emerged. Without the personal experience of Stalin's purges, they felt more confident to assert an Uzbek identity.^[44] Hence religious life in Uzbekistan had a gradual revival, but it was mostly limited to intellectuals.

                      The turning point for Uzbek Islam was the year 1979, which saw both the Iranian revolution and the Soviet invasion of Afghanistan. The new government in Iran stepped up religious propaganda aimed at the neighboring Central Asia. It met a positive welcome in parts of the Uzbek population, wary of Russian dominance. The war in Afghanistan caused Soviet military activity to increase in Uzbekistan. The Soviet military command even sent a considerable number of Uzbek troops into the battlefield.^[45] The effect was political and ideological unrest. Some Uzbek troops deserted and joined the Afghan Islamic side. Muslim religious activity intensified. It provoked a vigorous government effort to fight Islam, describing it as a reactionary religion. The government propaganda soon backfired.

                      In Uzbekistan this coincided with a large-scale corruption scandal that further compromised the moral authority of the local Soviet rulers. The scandal concerned, bribery, nepotism and the embezzlement of receipts from the sale of cotton. It caused a thorough reshuffle of the leading state and party organs. In the process, Uzbeks lost their traditional majority to Russians. Hence the campaign against Islam coincided with an apparent Russian take-over of the levers of power. This was sufficient to stimulate a combined religious and nationalist revival.

                      In the late 1980s Moscow viewed the religious activity in Uzbekistan with apprehension. The religious activists were often much younger than the Soviet-Uzbek leadership.^[46] The cautious liberalization of the Soviet economy in the late 1980s caused the re-emergence of Uzbek traders and merchants. They soon supported religious charities, proving again the link between the bazaar and the mosque.^[47] By the late 1980s, as the Soviet Union went towards its disintegration, Uzbekistan had become a hotbed of religious activity. It had distinctive political and nationalist accents. At this time, the economic and social situation was quickly deteriorating. Unemployment was rising and the population suffered from serious supply problems.

                      In 1989 the opposition founded a broad nationalist movement, Birlik. It soon became popular, especially among intellectuals. The Soviet response was a reshuffle of the Uzbek party, putting an Uzbek of the middle generation, Islam Karimov in power. In the last two years before independence, the opposition split and Karimov strengthened his power.

                      Independence in 1991 led to strong inflation, rapidly declining living standards and broad political protests. Because the government needed international recognition, it had to give the opposition considerable freedom of expression and organization. The rapidly deteriorating social conditions and the civil war in neighboring Tajikistan stimulated the Islamic opposition. The Karimov government in 1992 intervened militarily in the Tajik civil war to help the secular government, issued from the ex-Soviet nomenklatura, against its Islamist contenders. At the same time, the Uzbek government restricted the activities of the opposition, especially the Birlik movement, which it accused of Islamist tendencies.

                      In the late 1990s Uzbek society is under tight political control.^[48] The local leadership has origins in the Soviet nomenklatura. The new leadership is overwhelmingly Uzbek. Russians and other Europeans have left the political and administrative structures.^[49] In principle, Uzbekistan is a democracy with strongly centralized rule by the president. In practice it is a dictatorship run by Islam Karimov and his close associates.^[50] The parliament is as obedient as it was under Stalin and Brezhnev. Freedom of expression and assembly is deficient. Censorship is strictly practiced. The secret police is everywhere.  

                      The opposition is split between secular and religious groups. There is an equally important division between groups with semi-legal activities, which are suspended, and those that the government has outlawed.^[51] Even if Uzbek law forbids political-religious organizations, many do exist. Like in Egypt, Islamist welfare organizations are actively supplementing the deficient public services. Since independence, Uzbekistan has become a chief target for Saudi religious influence. Saudi Arabia has funded mosques and religious schools, madrasas. It is also spreading the Wahhabi version of Islam and thus contributes to religious sectarianism.^[52] Inadvertently, as in other places, Saudi Arabia could foster the growth of Islamist groups in Uzbekistan.    

                      Since independence, Uzbeks have replaced Russians at the levers of power with remarkable speed. Hence the Karimov government can reasonably well claim to defend national interests against Russia, even if Karimov at first supported the Kremlin coup in 1991. Uzbekistan quickly managed to renew the links with its indigenous Muslim cultural traditions.^[53] New legislation explicitly recognizes the social role of religious organizations. This is evident in arts as in religious activity. The surge in cultural and religious activity leads to a upsurge of Islamic and Islamist groups. Their diversity is remarkable.^[54] Some of these groups are moderate. Others are more extreme and potentially violent.^[55] In the religiously active Uzbek population, these groups find a fertile ground. Insofar as the economy does not improve, they could find more fertile ground. The risk is evidently that the dictatorship channels discontent and opposition underground and into the mosque into Islamist organizations. This could lead to political polarization and unsettle the regime. So far, thus risk seems to be mitigated by a relative economic success. In Uzbekistan living standards seem to have declined less than in the rest of Central asia.

                      Karimov's model is evidently a secular state like Turkey. The question is whether the objective is false and the methods wrong. Uzbekistan is not Turkey. It is a different society with a distinctive history and culture. In Turkey, Atat�rk could impose a secular republic after the defeat of the Islamic Ottoman Empire. In Uzbekistan, Islam is part of the national revival after the collapse of the Soviet Empire. In this perspective, the Uzbek minorities in the neighboring states could also represent a political risk. Today Tashkent is the major metropolis in Central Asia. It plays a cultural role in Central Asia reminiscent of ancient Bukhara.

                      Because an economic recovery would help stabilizes the political situation, the Uzbek government would have all interest in developing quickly any oil and gas reserves. Then the monoculture of cotton would have a supplement in one of oil and gas. Hence the question of Uzbekistan developing into a rentier state depends less upon politics than upon geology. Without large oil and gas revenues, the Uzbek government would have to consider the interests of the merchant class. Political consequences include a political and religious liberalization. By contrast, with large oil and gas revenues, the government wopuld be more immune to the requests of the merchant class.

                      In this perspective oil and gas revenues could strengthen autocratic rule, like in the Middle East and North Africa. With a population of twenty million, Uzbekistan would have to find and develop much oil and gas for the government to be able to overlook the need to develop market capitalism and strengthen the merchant class. Insofar as the Karimov government fails to liberalize political life, a protracted dictatorship could strengthen the Islamist movements against the secular opposition.

                      From an ethnic and geographical point of view, Kazakhstan is the most composite case in the region. Indeed, the country is a republic of minorities.^[56] More than with any other Central Asian republic, its borders were drawn arbitrarily by Stalin when considering ethnic groups. The ethnic diversity has since been strengthened by deportations and immigration of Russian, Ukrainians and Germans, as well as many other nationalities. The Kazakhs, after whom the republic is named, are a minority. One half of the population is Central Asian, the other one is European. There is an approximate balance between Kazakhs and Russians. The country covers a huge territory, but the northern and western parts, the major agricultural lands, which also contain much of the oil, have a solid Russian majority. They represent a risk of secession. Hence they also force any Kazakh government to carefully balance Kazakh and Russian interests. The most obvious sign of such ethnic policy considerations is the recent decision to move the capital city from Almaty to Akmola, closer to the Russian part of the population.

                      Kazakhstan is a recent entity on both cultural and political accounts. Islam arrived late among the Kazakhs. The Caliphs conquered southern Kazakhstan in the 8^th century, but it remained a peripheral part of the Caliphate. Conversions to the new religion were few and superficial. Many Kazakhs practiced Muslim rituals, but did not have any knowledge of the religion^[57]. The largely nomadic life-style prevented the full impact of an essentially urban religion. This represents a major contrast with neighboring Uzbekistan. Mass conversion to Islam only happened in the 19th century. The spread of Islam to some extent coincided with Russian rule. The new Czarist masters sponsored by conversion to Islam because they saw religion as a tool of governing the Kazakh masses.^[58] For this purpose, the Russian authorities encouraged the spread of practically any religion in the conquered Central Asian territories.

                      As a curiosity, a Russian governor general in the middle of the 19th century even tried to design a new religion for the Kazakhs. He wanted to use Judaism as its basis.^[59] The Czar Nicholas I cut short the attempt, remarking that religions unlike laws could not be designed^[60]. In the first decades of Russian rule, the government forbade the Russian-Orthodox church to conduct missionary work in Central Asia. By contrast, a number of Russified Kazakhs converted to Christianity to benefit from extended civil rights.

                      At the time of the Soviet revolution in 1917, the Kazakhs were still to a high degree nomadic. Their conversion to Islam was recent. Insofar as the Kazakhs were practicing Muslim rituals, Islam hardly had a profound grip on the people. Hence the anti-religious campaign of the Soviet government in the 1920s and 1930s was a fairly easy task compared to the neighboring republics. By the time of the German attack in 1941, Soviet authorities had closed or destroyed most mosques, burnt most holy books and imprisoned or killed most of the religious personnel.

                      In the 1940s religious life got gradually better terms from the Soviet government. The response was a timid resurgence of Muslim activity. A few mosques could open. The Kazakh Muslims had to await the comprehensive liberalization of cultural and political life under Gorbachev to expand their activities. In the late 1980s many more mosques and Koran schools, madrasas, could open. The more liberal political environment permitted a latent undercurrent of Kazakh nationalism and religious feeling to appear openly. There was a growing feeling that Islam was an important part of the Kazakh cultural heritage, which distinguished Kazakhs from Russians.^[61]

                      At this time Moscow managed to commit a serious political blunder with an ethnic significance, like in neighboring Uzbekistan. The erstwhile Kazakh party leader, Dinmuhammad Kunayev, was of the old generation and had been a friend of Brezhnev's. His attachment to the old policies caused a clash with Gorbachev. In December of 1986, Kunayev was replaced at the head of the Kazakh party by Gennadi Kolbin, a native Russian with no links with Kazakhstan.

                      The move sharpened tensions between Kazakhs and Russians even within the communist party. More seriously, it provoked large violent demonstrations, where especially young people denounced Russian interference in Kazakh affairs. In the following crack-down the communist youth league was the key victim of repression.^[62] This sharpened the political polarization as ethnic, religious and intergenerational cleavages increasingly coincided. For several years the political situation in Kazakhstan remained unstable. There were many riots, followed by repression. The deteriorating economy caused youth unemployment. Hence opposition to Moscow was increasing with a combination of economic, ethnic, religious and administrative grievances. Finally, in 1989, Moscow had to put a Kazakh in the leading party position in the republic. The choice fell on Nursultan Nazarbayev, a Kazakh engineer of the middle generation. His political origins were, of course, in the Soviet nomenklatura.

                      Nazarbayev immediately set out to assert Kazakh interests to pacify the opposition. He substantially enlarged the limits to political and religious activity. The response was rising opposition. When the government feared losing control, it started to crack down. Nevertheless, a number of nationalist, democratic and religious parties and groups had appeared on the political scene. The surge of Kazakh nationalism and Islamic activity also caused apprehension among the Russian population. Hence the increasing assertion of a Kazakh and Muslim identity could compromise the territorial integrity of the country. Kazakhstan in 1990 got its separate Islamic administration and no longer operated under the auspices of the Tashkent religious authorities. The new Kazakh religious administration is moderate. It has close links with the government.

                      Kazakhstan achieved independence in 1991 in the middle of mounting economic and social problems. Social unrest was rising, as was religious activity. Militant Islamist groups staged demonstrations against the moderate Islamic leadership, backed by the government. These groups claimed both respect for democratic rights, such as the freedom of the press, and the assertion of Kazakh culture and language.^[63]

                      Among the new states in Central Asia, Kazakhstan is, besides Kyrgyzstan, the one where Islam has the shortest traditions and the least impact on people's thinking and behavior^[64]. Many Kazakhs considers themselves Muslims, but in a superficial way, without knowing the reasons or the consequences. Even so, the Kazakh government fears the religious opposition, as it fears any opposition. Hence it tries to keep Islam under control and encourage the moderate faction. The administration of Islamic affairs is a government department, following the Russian and Soviet tradition. For the Kazakh government, the major risk is that deteriorating economic conditions increasingly will channel social and political discontent into non-official Islamist groups, that could challenge the official and bureaucratic version of Islam. In this respect, there are some important parallels with some Middle Eastern countries.

                      Because of the large Russian population, the Kazakh government faces a more delicate political balance than in any other Central Asian republic.^[65] The economy is dependent on skilled Russian personnel. With open ethnic and religious strife, there would be a risk of the Russians leaving, with considerable economic damage. The risk is further that the territories with a Russian majority would secede and join Russia, leaving an ethnically more homogeneous Kazakhstan, but which would be much poorer in economic terms. On the other hand, the government also has to take the Kazakh grievances into account and make sure that there is no Russian dominance of political life.

                      The ethnic diversity could in this perspective represent a political asset for Kazakhstan. Because no ethnic group dominates, politics has to seek compromise. No compromise is possible without a dialogue. Hence the need to balance different ethnic concerns could represent a certain preference for pluralism and democracy, because neither of the two major ethnic groups would accept a dictatorship of the other. Typically, the Nazarbayev government is authoritarian, but hardly a dictatorship. To his credit, Nazarbayev in 1991 opposed the Moscow coup.^[66] His rule pretends to above parties and ethnic groups. Even if elections have been rigged, there seems to be, so far, more freedom of expression and assembly than in most other Central Asian states. Hence the choice for Kazakhstan seems to be either a system of countervailing powers or a split. The major risk to the country's integrity could be a deteriorating economy, with increasing income differences between Kazakhs and Russians. Such a development could push young Kazakhs into the Islamist camp. Another issue is whether the Kazakhs, without much urban and commercial tradition, would be able to develop an indigenous merchant class to compete with the emerging Russian capitalists in the country.

                      Since independence, Kazakhstan desperately needs export earnings. The huge natural resources, including oil and gas, could provide revenues insofar as investment comes forth and outlets are available. On this condition, Kazakhstan seems to have the brightest economic prospects of all Central Asia.^[67] Hence the Kazakh government has an interest in developing quickly oil and gas reserves. A Kazakh rentier state would have resources to distribute on both major ethnic groups. Without large oil and gas revenues, the Kazakh government would have to consider the interests of the largely Russian merchant class. In this perspective, unlike in neighboring Uzbekistan, oil and gas revenues could paradoxically improve prospects for pluralism and democracy. The alternative could be the secession of the oil-rich and largely Russian populated north-western part of the country, eventually its inclusion in Russia, which would benefit in terms of both people and resources. Oil investors would then be dealing with the Russian government instead of the Kazakh one, most probably in a weaker bargaining position.

Political Risk and Cost.
The new version of the great game over Central Asia is likely to go on for years, possibly for decades, until a balance of power emerges that would secure oil and gas investment as well as transit routes. Insofar as the U.S. backed route from Azerbaijan through Georgia and Turkey proves to be an insufficient solution, due to high costs and political risks of disruption, the United States as Russia’s and Iran’s main antagonist in this game, will face a difficult choice, favoring either Iran or Russia.

By accepting a transit route through Iran, the United States would not only recognize Iran as a major power in international oil politics, in the Gulf and in Central Asia, but also renounce on its ambition to get the Azeri and Central Asian crude to the Mediterranean. Hence the position of the Gulf in the world oil market would be reinforced, also strengthening the supply and price risk. To sum up, for oil supplies and prices the United States would face an even more significant Gulf, but with a stronger Iran.

By accepting a stronger Russian stake, eventually the transit through Russia to Central and Western Europe, the United States would achieve its objective of diverting the Azeri and Central Asian crude from the Gulf. This would, however, also strengthen Russia’s position in the world energy markets and imply at least a tacit acceptance of the return of Russia as the dominant power in the Caspian Region and Central Asia. Russia’s position would be further strengthened by the combined control of the Caspian and Siberian oil resources. To sum up, for oil supplies and prices, the United States would face a more resourceful and more self-confident Russia.

In the meantime, until these issues are settled, the risk is that many oil investors will lose much money in the region. The geology indicates the potential for a handsome return on oil exploration and development in the Caspian Region and Central Asia, but this is hardly sufficient as long as safe and inexpensive outlets are not available. Hence participating in the oil game around the Caspian and in Central Asia seems best suited for a small number of oil companies. Only those with a solid capital base, the ability to bear losses for years, a diversified international upstream portfolio as well as a solid experience of operating in unusually complex and difficult political circumstances are likely to remain in the region. To hedge their bets, oil companies investing in the Caspian Region and in Central Asia might have an interest in improving their relations with both Iran and Russia, eventually through investment.

On the political level, the United States to some extent remains the arbiter of the situation, but with the uneasy choice between recognizing the constant of Russia’s dominance in the region or Iran’s position as a rising regional power. A protracted U.S. hesitation could even lay the ground a closer understanding between the two. By sharing the control of Caspian and Central Asian oil and gas, Iran would still be a stronger regional power and Russia would recover some of the position lost by the collapse of the Soviet Union.

          In the meantime, the West, first of all the United States and the oil industry, should be careful not to identify too closely with autocratic regimes whose economic success and political survival may be doubtful. The West, again essentially the United States and the oil industry, should realize that the present regimes are not necessarily the most stable partners. Indeed, the West could help its own cause by encouraging economic and political reform that would help stabilize the regimes. At the geopolitical level, the struggle for influence and investment in the Caspian Region and Central Asia does not have to be a zero-sum game. Indeed, any apparent victory for the West would be more durable insofar as Russia and eventually also Iran would be partners. Hence the issue should be less exclusive options than multiple ways for transporting Caspian and Central Asian oil and gas to the markets. Finally, it is also in the long-term interest of the Caspian and Central Asian oil and gas exporters to eventually balance close relations with the West with links with neighboring Iran and Russia.