The UK should broaden investment in the Caspian region

It is time for the UK to broaden its relationship with the Caspian region and invest in its non-oil and gas industries including the finance sector. That was the message from the British Government at the the recent Caspian Corridor Conference held at the London Stock Exchange.

Meanwhile South Asia and the Far East are the new emerging new markets for exports of oil and gas from Central Asia, as many countries such as China and India expect to see their energy demands soar in the next few decades.

Speaking at the Conference held in March 2014, Charles Hendry MP, the Prime Minister’s Trade Envoy to Kazakhstan, Azerbaijan and Turkmenistan, said the UK needed to “broaden its relationship” with the Caspian region and move into investment in other business areas beyond hydrocarbons – such as agriculture, IT, financial services and education.

Currently BP is the largest foreign investor in Azerbaijan.

However, apart from exporting oil and gas, thousands of students from Kazakhstan and Azerbaijan currently come to the UK to study. “We want British universities to go to the Caspian region and build up relationships in education there too,” Hendry added.

“Mining, retail, the creative industries, communications and education are the areas where the Caspian region could benefit from training. There are new opportunities for the UK in education and training and we can offer expertise in engineering and science,” said the Rt Hon Baroness Elizabeth Symons, Co-Chair of the Britain Azerbaijan Business Council.

The UK is currently the most popular destination for government-sponsored Azerbaijani students studying abroad and 41 British universities visited Baku four months ago.

“The UK plays a very significant role in Turkmenistan though the supply chain and the rest of our trade has grown because of that. In the last two years that trade has grown 193 per cent,” Symons said.

Former US Ambassador to Azerbaijan HE Matthew Bryza said: “Economic growth in non-oil and gas sectors in Azerbaijan is outpacing other sectors. The Azerbaijan Government understands it needs to diversify.  The State Oil Company of Azerbaijan Republic (SOCAR) is leading the way.” But he pointed out Azerbaijan was still a “top down” society and monopolisation was a problem.  “There need to be changes at the top to allow human capital to be developed,” he said.

Some of his views were echoed by Khagani Abdullayev, Deputy Chairman of the Central Bank of Azerbaijan, who said that by 2020, Azerbaijan’s economy would more than double thanks to diversification.

“Non-oil exports are now the main driver of economic growth. Twenty per cent of our non-oil products and services are exported but we have to double that. The Central Bank aims to support diversification,” he said adding they had already raised the minimum capital requirements for Basel III and were developing rural finance and microfinance. He said “good governance” was the reason for Azerbaijan’s success.

Good governance, transparency and disclosure of greenhouse gases all attracted Western investment, delegates were told.

Vugar Akhundov, Managing Director, Fireland Capital, said: “It’s very difficult to get funding for Russian projects because of recent events. But there is a lot of interest by the markets in Kazakhstan – it has become very competitive. Meanwhile Azerbaijan is untapped. One of its main advantages is that it has a stable government and economic policy and is rich in oil and gas.  The money has penetrated the population and created favourable macro- economic climate opportunities in consumer and agriculture – all are booming. Most of the businesses are in holding companies which could create monopolies but it gives scale and opportunities for holding companies to play on a global and regional levels. From an equity perspective Azerbaijan is lagging behind Kazakhstan and Ukraine but integration will come soon.”

But Andrey Vavilov, former Deputy Finance Minister of Russia, was concerned the West was not doing enough to help develop financial services in the Caspian Region as “financial services in oil producing countries and oil delivery are like the nervous system of those countries,” he said. “We need joint development not only in the energy sector but in the finance sector also. This is the main problem with energy and financial security in the region. The financial sector is very underdeveloped in countries like Russia.”

But John de Lange, ING’s Managing Director for Structured Metals and Energy Finance (SMEF), was more confident that Russian banks were becoming stronger and more competitive and would play an increasing role funding projects in Russia and Central Asia.

However despite ongoing diversification plans, the region still stands to benefit greatly from oil and gas production, especially since energy demands in Asia are expected to grow.

“Turkmenistan, Azerbaijan and Kazakhstan will drive an increase in gas production over the next quarter of a century,” said Natiq Aliyev, the Energy Minister of Azerbaijan.

He added:  “The role of Iran will increase in the future. It is a big country with tremendous resources, especially gas.” Iranian gas will be delivered to Turkey in bigger volumes, he said.

John Kemp, Senior Energy Market Analyst at Thomson Reuters said: “There is a rapidly growing demand for gas in East Asia so this is a unique opportunity for Caspian to supply East and West,” he said, comparing the Southern Gas Corridor to the modern Silk Road. “Ukraine has underscored the limitations and the need for the EU to focus on supply security and have more diverse sources, especially for gas,” he added.

Recent events in Crimea have indeed put the opening up of the Southern Gas Corridor, which will bring Caspian gas to Europe for the first time, into sharper focus as it will enable Europe to decrease its dependence on gas from Russia. The Rt Hon Lord David Howell said the US$ 45 billion project was the “dawn of globalisation of the world gas trade.” “It is happening right now,” he said referring to the three major pipeline projects involved. “This is creating a new competition context that has never been faced before.” He added: “The vast disparity of prices in gas will end. At the moment it costs US$ 3 in the US and US$ 19 in Japan and Europe is somewhere between. The potential for gas going through Latin America to Asia is also enormous.”

naomi.canton@asiahouse.co.uk

To see a slideshow and video clip of the Caspian Corridor Conference 2014 click beneath:-