CBS Weekly Review: Ukraine, Russia and the EU; Kazakhstan and Georgia; and Azerbaijani politics and Standard Bank

Politicians and investors in the CBS region remain focused on the fallout from the war in Georgia. In today’s note we look at diplomatic developments related to Ukraine, as well as the new and unavoidable strains in Kazakhstan’s relationship with Georgia. The final section deals with an unrelated topic: a fight within Azerbaijan’s political elite which ultimately could have some impact on the country’s leading private bank, Bank Standard.

Putin talks soft on Ukraine, but what will the EU have to say?

The past few days saw Russia engaging in a high-level public relations campaign to soften European opinion in advance of today’s special EU summit. Of particular relevance for Ukraine were comments made by Vladimir Putin during an 30 August interview given to the German television station ARD. During this interview Putin was asked whether Crimea and Sevastopol were "the next target" for Russia. After criticizing the premise of the question, Putin continued,

The Crimea is not a disputed territory, and in contrast to the conflict between South Ossetia and Georgia, there hasn’t been any sort of ethnic conflict in Crimea. Russia long ago recognized today’s Ukrainian borders, and we have basically concluded all our negotiations on borders; some talks continue about demarcation, but these are just technical issues. … Within the internal society of Crimea there are complicated processes, the question of the Crimean Tatars, the Ukrainian population, the Russian population – generally the Slavic population. But this is an internal political question for Ukraine. We have an agreement with Ukraine on the presence of our fleet there through 2017, and we will be guided by this agreement.

Putin’s mention of Crimea’s "complicated processes" can perhaps be read as having a slightly ominous undertone, but on the whole these remarks were intended to ease the tensions that have appeared in Russian-Ukrainian relations in the wake of the Georgian war and Ukrainian President Viktor Yushchenko’s strong support for Georgia in its wake. Putin in fact said nothing new as far as official Russian policy is concerned; but to restate Russia’s acceptance and recognition of Ukraine’s borders was reassuring in the present context. It is also notable that he avoided any aggressive language regarding the Black Sea Fleet.

One of Russia’s main diplomatic goals in the months ahead is to minimize the likelihood that NATO will invite Ukraine to begin a NATO Membership Action Plan (MAP) at its December summit. (We addressed the question of NATO membership for Ukraine in April 2008 in this piece.) Putin’s remarks suggest that Russia has decided – and in this is almost certainly correct – that the best way to reduce this risk is to avoid any threatening or tough language toward Ukraine for the time being. The implication is that we will hear more in the way of soothing remarks about Ukraine from Russian officials, which would help ease the high risk perceptions that have put downward pressure on Ukrainian debt and equity markets in recent weeks. (It would also be helpful and noteworthy if the Kremlin were to put a muzzle on Moscow mayor Yuri Luzhkov, who has frequently and aggressively challenged Ukraine’s sovereignty over Crimea.)

As we noted on 22 August, Russia can afford to play a longer game in Ukraine, given that the presidential elections scheduled for January 2010 seem very likely to replace Yushchenko with either a lukewarm supporter or outright opponent of NATO membership for Ukraine.

Meanwhile, an increasing number of commentators are starting to argue that the EU needs to make clear that Ukraine is considered a prospective member of the Union, and indeed to move toward granting it formal candidate status. Right now Ukraine is stuck in the mire of the EU’s Neighbourhood Program – meaning that it is not a formal candidate for membership – to a large extent for reasons that are internal to the EU (i.e., enlargement fatigue and the crisis over the Treaty of Lisbon).

The EU is not known for quick shifts in policy, and moving Ukraine toward formal candidate status would be a major change indeed. No major action in this area should be expected today, or from the EU-Ukraine summit scheduled to take place in Nice on 9 September. But any hints that Brussels may be considering a deeper level of engagement with Ukraine would be a major positive. This is less because it would boost the idea of Ukraine as an EU convergence play – a distant dream in any case – but because it would make the major European countries more comfortable in denying a NATO MAP for Ukraine. In the unlikely even that this step were taken in December 2008, it would certainly stimulate some kind of negative response from Moscow. In this circumstance Crimea's potential role as a source of instability for Ukraine – and implicit leverage for Russia – would be again highlighted.

Nazarbayev’s support for Russia: The implications for Georgia

One could read very different accounts from Russian and Western sources about the results of last week’s summit of the Shanghai Cooperation Organization in Dushanbe, Tajikistan. In Russia the meeting was portrayed as a strong endorsement of its actions in Georgia, while Western media described the summit as a diplomatic setback for Russia, citing the weak language of the final communique and the failure of any SCO member states to recognize Abkhazian or South Ossetian independence.

The Western account was in a sense closer to the truth: the summit communique was indeed weak and ambiguous. But this was due largely to Chinese diplomatic caution; furthermore, the fact that deeply conservative Central Asian states with their own ethnic minorities and disputed borders did not come out in favour of separatism should not have been a surprise to anyone. But at the same time the non-Chinese members of the SCO – Kazakhstan, Uzbekistan, Tajikistan and Kyrgyzstan – have been to varying extents happy to voice their strong backing for Russia’s actions in Georgia.

Kazakhstan’s President Nursultan Nazarbayev has been particularly strong in his statements of support for Russia’s actions in Georgia, both in the first days of the crisis and then again in Dushanbe, where he made the following remarks in his press conference with Dmitri Medvedev:

I am amazed that the West simply ignored the fact that Georgian armed forces attacked the peaceful city of Tskhinvali. Therefore my assessment is as follows: I think that it originally started with this. And Russia’s response could either be to keep silent, or to protect their people and so on. I believe that all subsequent steps taken by Russia have been designed to stop the bloodshed of ordinary residents of this long-suffering city.

Nazarbayev’s position should not surprise anyone. Although Kazakhstan has often been described as having a "multi-vector" foreign policy, Nazarbayev has been careful never to challenge Russia’s core interests and has always seen his country’s partnership with Russia as taking precedence over its other relationships.

But for Georgia, Kazakhstan’s position has indeed been an unpleasant surprise. Since 2005 Kazakhstan and Georgia have built up a close economic relationship, based on Nazarbayev’s pledge that Kazakh companies would invest US $1 billion in Georgia. These were not just idle words on Nazarbayev’s part: state companies received encouragement from the highest level to invest in Georgia, and some private Kazakh companies – first of all BTA Bank – at least acted as if they had received the same instructions.

Kazakh foreign direct investment in Georgia to date has fallen perhaps 50 per cent short of the US $1 billion target. But the picture going forward is now highly questionable. Investments with a strong strategic logic – such as the acquisition by state oil company KMG of Batumi Oil Terminal and Batumi Sea Port earlier this year – will be maintained. But others will not: It has already been reported that KMG’s Kaztransgaz subsidiary is in discussions to sell Tbilisi’s gas distribution company Tbilgas, and it can be assumed that BTA Bank’s grand plans for property development in Georgia will be scaled back. Generally the absence of a political driver for Kazakh investment in Georgia will make it that much more difficult for the Georgian economy to bounce back from the current crisis.

Azerbaijan: Political infighting could hit Bank Standard

In contrast to Kazakhstan, to which it has some strong (albeit partly superficial) similarities, Azerbaijan has no companies listed abroad. One private firm called Azpetrol was plausibly heading for a London listing in 2005 when it was effectively expropriated by the state. Azpetrol fell victim to a political fight between its main shareholder, Farhad Aliyev, at that time economy minister, and the powerful customs chief Kamaladdin Heydarov. Farhad Aliyev, who for some time was a powerful figure in Azerbaijani politics as well as business, remains in jail along with his brother Rafik, Azpetrol's former CEO.

Three years later this history is today again relevant because it may be repeating itself, at least in part. In the place of Farhad Aliyev is his successor as economy minister, Heydar Babayev. For months businesses associated with Babayev have been subjected to various audits and checks, some by agencies under the control of Heydarov, who now runs the sprawling Ministry of Emergency Situations, which despite its modest name is in fact a superministry reflective of Heydarov's enormous economic and political clout. On 7 August, the next shoe dropped: the head of the antimonopoly committee within Babayev's ministry was arrested on charges of corruption along with several members of his team.

These arrests were the clearest signal so far that Heydarov has won the battle, and that Babayev's days in office may therefore be numbered. It is likely that Babayev is now on a path toward dismissal, perhaps in a cabinet reshuffle to take place in the weeks preceding or following the 15 October re-election of President Ilham Aliyev.

For a variety of reasons it is unlikely that Babayev will share his predecessor's fate of an jail sentence. But if Babayev leaves office, the future ownership of Bank Standard, Azerbaijan’s leading privately-owned bank and number two bank overall, may come under some question. The details of Bank Standard’s ownership are not entirely clear but the bank acknowledges that a large interest is held by Babayev and his family.

It would be an exaggeration to say that international capital markets will be paying a great deal of attention to Bank Standard’s fate. Its equity is not traded and it has no more than US $40 million of outstanding bonds. However, as the leading private bank in a country whose banking sector is increasingly attracting interest, a repeat of what happened to Azpetrol three years ago would be yet another sign that Azerbaijan – even as its economy booms on the strength of growing oil and gas exports – is some distance away from giving rise to a private sector that is significantly engaged with global capital markets.

Best regards,
Laurent Ruseckas
Director, Eurasia Research
Trusted Sources

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