European Bank Pumps Money Into Kazakh Oil and Gas

20 June 2011, Transitions online

The EBRD talks of sustainable development and democratization, but the lender’s policies in Kazakhstan don’t seem to match its mission statement.

Some 2,000 people converged on Astana last month to commemorate the 20th birthday of a little-known but deep-pocketed international development organization, the European Bank for Reconstruction and Development.

The two-day event featured a long series of high-minded speeches and earnest panel discussions cheering the organization’s investments to help foster democracy and economic progress in the former communist-bloc nations of Eastern Europe and Central Asia. The tone was triumphant. Indeed, with backing from U.S. President Barack Obama, EBRD’s board of governors voted at the meeting to expand the organization’s development work into North Africa and the Middle East.

With 63 shareholders across 61 countries, including institutions like the European Commission and the European Investment Bank and some EU member states, the United States, Australia, and Russia, the EBRD currently operates in 29 countries. In its 20 years of activity, the EBRD has lent around $85 billion.

However, a closer look at EBRD’s investments in Kazakhstan and a recent visit to Atyrau, a city in western Kazakhstan’s Caspian region, reveal troubling signs that – as critics have long contended – the organization lacks both the motivation and the capacity to address the legitimate needs for sustainable development and real democracy in societies striving to emerge from totalitarian rule.

Over the past 20 years, EBRD has invested $5 billion in Kazakhstan, making this Central Asian nation one of the bank’s largest beneficiaries. Following the conference in Astana, EBRD President Thomas Mirow announced that the bank now plans to invest $1 billion in Kazakhstan every year.

Yet, for all the support the country has received from the bank, signs of democratic progress and sustainability in economic development in Kazakhstan are scarce.

Astana, the glittering capital, is a living monument to the nation’s longstanding head of state, President Nursultan Nazarbaev, who has enjoyed uninterrupted rule since the Soviet Union collapsed in 1991. The city is a wonderland of opulent high-rises and cavernous empty squares, decorated with countless banners noting “20 Years of Independence.” Approaching Nazerbaev’s palaces of independence, peace, and harmony, brings to mind Nicolae Ceausescu’s House of the People in Bucharest in its heyday.

A WORLD AWAY FROM ASTANA

In the days leading up to the Astana conference I spent three days in and around Atyrau as part of a fact-finding team from CEE Bankwatch, a non-governmental watchdog organization that monitors the activities of international financial institutions in Central and Eastern Europe. There, my colleagues and I visited a variety of EBRD-supported projects and other development initiatives.

As in Astana, Nazarbaev’s portrait was smiling from the walls in all the offices of the state institutions we visited in Atyrau – and from many billboards as well. Nazarbaev’s grandeur and eminence were comparable only to the imposing office towers occupied by international oil corporations in Atyrau’s downtown. Fenced residential areas and fancy apartment high-rises for foreign company employees contrasted to the neighborhoods with muddy streets and outhouses, where residents lack running water.

Atyrau lies on the dividing line between Europe and Asia, split into two parts by the Ural River – the same way the Bosphorus divides Istanbul. Atyrau is situated near the Caspian on the Ural Delta – a vast, internationally protected wetland. Navigation on the river is stopped for May and June for the sturgeon spawning season, when the region’s famous caviar is harvested. Although it was not migration season, the delta was buzzing during our visit with an astonishing abundance and diversity of birds.

Of course, we did not visit Atyrau as nature-watchers but rather to look into EBRD’s investments in Kazakhstan’s Caspian region, which we found considerably less pristine.

For instance, we studied an $8 million investment EBRD made in a new plant producing chemicals for the oil and gas industry. The public learned about the project from an EBRD press release – a year after the public hearings on the environmental impact assessment. Worse yet, the assessment covered only the construction of the plant, which the EBRD was financing, but not its ongoing operation, as if EBRD has no interest in or responsibility for the long-term impact of its investment.

The public hearings to debate the project included one person who claimed to represent a local NGO, but the head of Caspian Nature, a legitimate local environmental watchdog group, told us that he didn’t learn about the public hearing until a year later. In another indication of the bank’s attitude toward the project, we were told that the “stakeholder engagement plan” approved by EBRD included only state institutions and scientific institutes – no representatives of the local population, nor advocates for environmental or other causes. Clearly, at least for this project, EBRD’s stated dedication to transparency and public participation dissolved into empty words.

The Atyrau chemical plant is one of many investments that the EBRD is making in the oil and gas industry in Kazakhstan. To date, the bank’s support for Kazakh fossil fuels has dwarfed its loans for renewables and energy efficiency, raising doubts over the institution’s ability to promote sustainable development.

In March, the EBRD indeed announced it would make available about $65 million for a new initiative to support a renewable energy financial facility in the country. At the same time, in 2010 and 2011, the bank provided funding to three new projects in the oil and gas sector, putting the bank’s support for the hydrocarbon sector between 2006 and 2011 at $143 million. In the past, EBRD invested $60 million in the Bautino Atash port, from where Kazakh oil is transported to Baku and into the Baku-Tbilisi-Ceyhan pipeline. In the last two years EBRD approved loans of $8 million to RauanNalco for production of chemicals for the oil and gas industry, up to $65 million to Circlem Maritime Invest for icebreaker tugboats to service the Kashagan oil field, and $10 million to Zhanros Drilling to provided services to oil and gas companies.

Such loans continue the bank’s years-long practice of indirectly financing the enormous Kashagan offshore oil field in the north Caspian (one of the five largest oil fields in the world by some estimates), fraught with environmental risks and negative social impacts. The EBRD has not directly financed the oil field, but it has repeatedly financed support projects, contributing to the overall financial viability of the project, without directly bearing the responsibility for the activity at the field.

SUPPORTING THE WORLD’S BIGGEST STEEL PRODUCER

Apart from oil and gas, another major direction of investment for the EBRD in Kazakhstan has been support for the operations of steel giant ArcelorMittal in Temirtau, in the Karaganda region. The company’s Temirtau complex includes eight coal mines and one of the world’s largest integrated steel plants.

In 2006 ArcelorMittal completed a project supported by an EBRD and International Finance Corporation syndicated loan of $250 million. One of the project’s objectives was to improve the environmental and health and safety performance of ArcelorMittal Temirtau. Despite the EBRD’s claims that the project was implemented successfully, Temirtau remains one of the most polluted cities in Kazakhstan and there is no evidence of an improved environmental situation. In March 2010 the Karaganda Regional Prosecutor’s Office fined the company for excess air pollution and for poor documentation on the environmental effects of its operation.

In 2007 the EBRD approved a $100 million loan designed to support further improvements to health and safety practices at the company’s coal mines in Karaganda and bring them in line with international best practice.

In the following two years the company reported that new equipment had been installed in the Karaganda coal mines, both with the EBRD money and its own investments. However, ArcelorMittal has not released more detailed information that is crucial for a proper assessment of its performance, nor details of its health and safety investments, such as the schedule for implementing the EBRD-supported project. The environmental action plan required for the EBRD loan remains confidential despite the great public interest, the heavy pollution, and a history of collier deaths at Temirtau. More than 100 miners died in accidents at the company’s mines between 2004 and 2010.

SUPPORTING OR RETARDING TRANSITION?

Kazakhstan is a vast country, blessed with abundant natural resources – most notably the oil and gas reserves in the western part of the country. Yet we saw only some small glimmers of wealth in and around Atyrau. The lion’s share of the country’s bounty is concentrated in Astana and Almaty, the former capital and largest city.

Despite a stated commitment to sustainable and ecologically responsible development, the EBRD has targeted many of its investments in the country on the oil and gas industries.

According to research sponsored by the bank itself, some basic tools of democracy hold little interest for the Kazakhstani public. The latest Life in Transition Survey, conducted by the EBRD and the World Bank and released at the Astana conference, reports that 64 percent of Kazakhstani respondents said they would never sign a petition, 75 percent would never join a boycott, and 58 percent would never attend a peaceful demonstration. Such numbers underline the strong grip of the Nazarbaev regime on its citizens and that the EBRD, albeit pumping money into the country for years, cannot match in deeds its claim that support for the business sector will gradually lead to an increased degree of democratization. The situation is no better in other Central Asian and Caucasian countries where the EBRD is investing, such as Azerbaijan and Turkmenistan.

Combined with the troubling lack of openness in its development projects and the heavy support for polluting industries, this lack of progress toward democratization in Kazakhstan suggests that EBRD and its backers might want to hit the brakes, tone down the self-celebration, and take a good hard look in the mirror.

Rather than bulling forward with even heavier investments in Kazakhstan, and rather than entering new markets in North Africa and the Middle East, EBRD leaders and the governments who finance them should instead reassess the organization’s mission and re-orient its work to put democracy and sustainable development on equal grounds with market development and economic growth.