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Journal of Eurasian Studies 5 (2014) 145–156

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Journal of Eurasian Studies

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Risky business: The political economy of Chinese investment in

Daniel C. O’Neill*

School of International Studies, University of the Pacific, 3601 Pacific Avenue, Stockton, CA 95211, USA

article info abstract

Article history: Kazakhstan lacks the democratic institutions that have been shown to protect foreign Received 22 December 2013 investors (Jensen, 2008; Li & Resnick, 2003). Nevertheless, as latecomers to globalization, Accepted 21 April 2014 ’s resource-seeking state-owned enterprises (SOEs) must go, not only where re- sources are, but also where they are available. These are often less than ideal investment Keywords: environments, such as Kazakhstan, where they are confronted by high corruption, weak Kazakhstan rule of law, and political risk. Focusing on investments by the China National China Corporation (CNPC), this study analyzes how Chinese foreign economic policies, such as FDI Corruption aid and loans, assist Chinese SOEs in securing protection for their investments. They do so Political risk by making key members of the Kazakh government stakeholders in the success of the Foreign aid investments. In addition, the study details how Chinese government strategy has evolved from one of simply buying off key members of the Kazakh government in order to gain approval for investments to one of making institutions in the Kazakh state, such as Kaz- MunaiGas, stakeholders in the long-term success of the investment in order to secure protection for investments in a climate of political uncertainty. Copyright Ó 2014, Asia-Pacific Research Center, Hanyang University. Production and hosting by Elsevier Ltd. All rights reserved.

1. Introduction establishing rule of law and constraining the actions of political leaders, protect foreign investors, thereby Scholars studying the politics of foreign direct invest- enhancing FDI inflows (Jensen, 2008; Li & Resnick, 2003). ment (FDI), investment seeking a long-term controlling Despite its status as a nominal democracy, democratic in- interest in a business enterprise in a foreign country, have stitutions in Kazakhstan are weak, as exemplified by the shown how democratic institutions, particularly those fact that the country’s leader, President Nursultan Naza- rbayev has been in office for more than two decades; the

* þ last leader of Soviet Kazakhstan has been the sole leader of Tel.: 1 (209) 946 2225. fl E-mail address: doneill@pacific.edu. independent Kazakhstan. Re ecting these weak demo- cratic institutions, Kazakhstan’s high corruption, weak rule Peer review under responsibility of Asia-Pacific Research Center, Hanyang of law, and political risk make it a less than ideal invest- University ment environment for foreign firms. Nevertheless, as shown in Fig. 1, Chinese foreign direct investment there has taken off over the past decade. Blank (2009) of the Strategic Studies Institute at the Production and hosting by Elsevier Army War College argues “China’s recent

http://dx.doi.org/10.1016/j.euras.2014.05.007 1879-3665/Copyright Ó 2014, Asia-Pacific Research Center, Hanyang University. Production and hosting by Elsevier Ltd. All rights reserved. 146 D.C. O’Neill / Journal of Eurasian Studies 5 (2014) 145–156

Fig. 1. Chinese FDI in Kazakhstan. global investment activities show that China uses its eco- the political and legal institutions that protect foreign in- nomic power to lend money to distressed governments vestors from predatory behavior by governments. and/or firms and then uses that economic power and the Where “China” (more specifically, Chinese firms assisted dependency it generates to secure political influence with by the Chinese state) invests is partially driven by the those states”. This raises the question of what China is ability to acquire resources and markets in these states for gaining by securing this political influence. I maintain that the Chinese Communist Party’s ambitious development China is using its economic power in order to secure the goals at home. As relative latecomers to globalization, “global investment activities” that Blank believes China is Chinese firms go where resources are and where they are using to enhance its political influence. The Kazakhstan available; therefore, Kazakhstan has become an important case supports my view: the greatest benefit reaped by destination for efforts by China’s state-owned enterprises Chinese investment policies in Kazakhstan is securing the in the petroleum sector to secure oil for the Chinese mar- approval for and maintenance of natural resource in- ket. The following study, which focuses on the China Na- vestments there by China’s state-owned enterprises. It is tional Petroleum Corporation’s investments in Kazakhstan, high levels of corruption, weak checks on the executive shows that Chinese foreign economic policies are key to branch, and low levels of transparency in Kazakhstan that mitigating the risk faced by China’s state-owned enter- provide the avenues through which Chinese policies, prises investing there. The Chinese government and its particularly foreign aid and loans, secure these goals. In state-owned firms do so through the provision of aid and addition, these goals are facilitated by the flexibility China’s loans to the Kazakh leadership. With such funding, China is non-democratic regime has in dealing with the often non- able to secure the support of the Kazakh leadership for democratic governments of resource-rich states, which investments by Chinese state-owned enterprises. The case have similar flexibility. Fewer democratic constraints and a study of China National Petroleum Corporation (CNPC) in lack of transparency mean that deals among elites can be Kazakhstan, below, will detail how the Chinese govern- made that might be unacceptable to the general public in ment strategy for investing in Kazakhstan has evolved from both the FDI receiving (host) and sending (home) states. one of simply buying off key members of the Kazakh gov- Kazakhstan has what China and many other states seek: ernment in order to gain approval for investments to one of natural resources. Perhaps ideally from the Chinese making institutions in the Kazakh state stakeholders in the perspective, Kazakhstan is landlocked and borders China to long-term success of the investment. the West. This means that Kazakh resources can be im- ported to China without being transported through sea 2. Chinese foreign direct investment in Kazakhstan lanes or external land routes that could be cut off quickly by a foreign state in the event of future conflict (Strecker Chinese investment in Kazakhstan is a relatively recent Downs, 2000). Geography is also advantageous from the phenomenon, as it is in many developing countries. Ac- Kazakh perspective; China offers a major export market cording to the National Bank of Kazakhstan, through 1999, that does not require transport through a third country, Chinese FDI in Kazakhstan totaled less than US $500 diversifying the Kazakh economy away from its historical million; however, in 2008 alone, Chinese investment dependence on . This win–win geoeconomic situa- reached nearly $700 million, despite a global slump in FDI tion means that Chinese investment in Kazakhstan is in the flows, and surpassed that figure in 2009. China’s $1.62 interest of both countries; nevertheless, to be successful billion invested in 2011 was topped only by and the such investments also must be in the interest of political . From 2000 to 2011, accumulated Chinese FDI leaders. It is this self-interest that motivates the policies of in Kazakhstan exceeded $9 billion. These figures may both governments and it is these policies that secure and grossly underestimate Chinese investment in Kazakhstan; protect Chinese investments in Kazakhstan, which lacks the 2006 purchase of Nations Energy by CITIC, the Chinese D.C. O’Neill / Journal of Eurasian Studies 5 (2014) 145–156 147 state-owned investment group, was, alone, $1.91 billion, a secure resources for its domestic economy.1 It is the means year in which official Kazakh figures show just $362.9 used by China to secure the approval and protection of the million invested by Chinese firms in Kazakhstan, and Chi- Kazakh government for these Chinese investments that nese figures show just $46 million (Statistical bulletin, makes it an interesting case. The “host” (investment 2007). receiving) state side of the equation also makes it so. Chinese investment in Kazakhstan is nearly all by state- Kazakh leaders have their own reasons for wanting to owned enterprises. There are two reasons for this lack of diversify Kazakhstan’s economy and foreign relations, and investment by private Chinese firms. First, SOEs dominate China offers them opportunities to reap tremendous China’s natural resource sector, and resources are what benefits. Kazakhstan has to offer foreign investors. Second, private From the standpoint of political theory, investments by Chinese firms do not have the advantages SOEs do, Chinese SOE’s in Kazakhstan and the Chinese government described in detail next, needed to overcome Kazakhstan’s finance supporting these investments expand the re- poor investment environment. Unlike many destinations of sources available for the Kazakh political leadership, rising Chinese investment in Asia, such as Cambodia, namely President Nazarbayev, his family and closest asso- facilitated by links with the local ethnic Chinese commu- ciates, to gain the support of the country’s “winning coa- nity, in Kazakhstan, cultural and linguistic dissimilarities lition”, those whose support is needed to maintain power exacerbate difficulties faced by Chinese firms (Anonymous (Bueno de Mesquita, Smith, Siverson, & Morrow, 2003). The A, personal interview, , Kazakhstan, June 2009). In desire of the Kazakh leadership to obtain current and po- addition, Kazakhstan’s low population makes it a relatively tential future inflows of capital make it in their self-interest small market, while its isolation from sea routes makes it a to approve Chinese investments and to protect them from poor export platform. For these reasons, Chinese private policy changes that would threaten the success of these firms, by and large, do not invest there. investments. While the bulk of Chinese investment in Kazakhstan is China provides not only revenues for the Kazakh gov- by state-owned enterprises, many competing foreign firms ernment, including foreign aid and loans, but also rents for are privately owned. State ownership, especially Chinese those in position to capture them. Co-ownership by the state ownership, gives these enterprises specific advan- Kazakh state-owned oil company, KazMunaiGas, of many tages in competing against foreign firms as well as in major Chinese investments in the petroleum sector provide investing successfully in Kazakhstan over the long-run. One additional resources. Morrison (2009), expanding on the U.S. official noted that is difficult for private companies to literature explaining how oil revenues help leaders to compete with the “terms and complexities” of Chinese in- maintain power, shows that increases in non-tax revenues, vestment packages, which not only provide loans to the including foreign aid, foreign borrowing and income Kazakh government and its firms but also involve deals in generated by state-owned enterprises, lead to greater sta- other areas, such as pipelines and investment in other bility in both democracies and autocracies. He suggests that natural resources (Anonymous B, personal interview, state ownership of oil companies may be the key factor Astana, Kazakhstan, July 2009). China can put together linking oil resource income and regime stability (see also: package deals that private firms cannot offer. While the U.S. Jensen & Wantchekon, 2004; Smith, 2004). Thus, Chinese government does have several programs that promote in- willingness both to allow the Kazakh state oil company a vestments by U.S. firms overseas, democratic accountability majority share of Chinese investments in Kazakh oil and gas places constraints on the depth of the private–public sector and to fund the purchase of this Kazakh share in some relationship. For example, during our interview, the head of cases, is in China’s self-interest; it enhances political sta- Commercial Services for the U.S. Department of Commerce bility in Kazakhstan. Stability is important for all foreign in Kazakhstan noted that his efforts were mainly aimed at investors, but it is specifically the maintenance of the cur- expanding trade ties between U.S. firms and Kazakhstan, as rent political system that, I show, protects Chinese the U.S. government offered little support for American FDI investments. in Kazakhstan because Congress viewed it as “shipping jobs Ross (2001) finds support for several hypothesized links overseas” (Anonymous C, personal interview, Almaty, between oil wealth and autocracy, including a “rentier ef- Kazakhstan, June 2009). fect”, or the ability of resource-rich countries to spend at high rates and tax at low ones; a “repression effect”, or the 3. Theory: resources, revenues and rents use of repressive domestic security forces; and a “modernization effect”, which does not occur if resource While there is much about Kazakhstan that is anathema extraction rather than industrial and service jobs dominate to foreign investors, such factors are outweighed by the fact the economy. By providing the resources that undergrid that Kazakhstan is resource rich and many of these re- these effects, Chinese aid, loans and partnerships with sources are yet to be exploited. Add to this its proximity to Kazakh oil companies enhance the Kazakh leadership’s China, and Kazakhstan is a rather obvious destination for ability to stay in power. This also suggests that given resource-seeking Chinese investors. While China has geopolitical interests in Kazakhstan, agreements concluded to date indicate that China’s main interest in its neighbor is 1 China’s geopolitical interests in the region include controlling ethnic as a stable and nearby source of natural resources to fuel separatism, particularly among the Uighur population which extends ’ China s economic growth. Kazakhstan is a rather clear-cut from China’s Xinjiang province into Kazakhstan; regional political sta- case of China using its foreign economic policy tools to bility; and balancing against US power in . 148 D.C. O’Neill / Journal of Eurasian Studies 5 (2014) 145–156 declines due to both falling sales and decreased lending investing in Kazakhstan and similarly hazardous invest- during the recent global economic crisis, Chinese resources ment environments. were particularly crucial for Kazakh leaders to maintain stability and their rule in that period. 4. All in the family: President There are two important advantages for many Chinese and his clan firms investing in Kazakhstan: the nature of firm owner- ship and the funding supporting these investments. As Since breaking away from the former , mentioned above, nearly all major investments by Chinese Kazakhstan has held fairly regular elections for parliament firms in Kazakhstan are by state-owned enterprises. Large and the presidency. Nevertheless, as noted above, the fact state-owned firms should be at an advantage in corrupt and that Nursultan Nazarbayev has been Kazakhstan’s only risky investment environments. The size of the investment president is an indication of the non-democratic nature of and the ownership type both indicate the involvement in the country’s political institutions, as is the fact that in the investment agreement of political elites on both sides. 2010, there were no opposition party members in the lower Because such investments are as much a part of bilateral house of parliament. In April 2011, Nazarbayev won political relations as they are economic ties, both govern- reelection for the fourth time, with 95.5% of the vote. The ments have a stake in their success. A government should Polity Project gives Kazakhstan an overall score of 6on be less likely to enact policies harmful to a foreign firm if Polity’s 10 to 10 continuum (from hereditary monarchy to that firm is based in a country with which it desires good consolidated democracy) and claims, “Democratic in- bilateral relations. This effect is amplified if the foreign firm stitutions are weak and there are severe limitations on the is state owned. peoples’ right to change their government” (Marshall & The protection offered by state ownership of the Jaggers, 2011). investing firm is important, as Vernon’s(1971)obsolescing As my theory builds on the work of Jensen (2008), bargaining theory illuminates how foreign investing firms which shows that constraints on the executive of the gov- are at a disadvantage once their assets are in place. Prior to ernment lower political risk for foreign investors, the most investing, foreign firms have bargaining advantages, as the relevant component of Polity’s score is the XCONST (exec- potential host state government seeks to attract the foreign utive constraints) measure. Polity gives Kazakhstan a 2 on a investment. After the investment is in place, however, the 1–7 scale on the XCONST measure, with 1 representing the bargaining advantage switches to the host government, as fewest constraints, indicating there are only “slight limi- the firm will now incur significant costs if it wishes to tations” on the behavior of those at the helm of Kazakh- relocate its foreign investment. These costs are much stan’s executive branch. According to Polity’s most recent greater for immobile investments, such as those in natural report, “the National Assembly generally serves as a rubber resources, which require substantial expenditures by the stamp body . thus, the power of President Nazarbayev firm in infrastructure and heavy machinery which is diffi- goes largely unchecked” (Marshall & Jaggers, 2011). Simi- cult or impossible to remove. It is only in the long-run that larly, the Global Integrity Report (2008), grades Kazakhstan the firm can hope to recoup these costs and earn profits. “weak” for executive accountability. The logic of the obsolescing bargain assumes that in- When I questioned Peter Svoik, the Deputy Chairman of vestment is a one-shot game. However, foreign in- the opposition party, Azat, as to whether Kazakhstan was a vestments by state-owned firms become an iterated game democracy, he stated, “It is the projection of democracy. All (Axelrod, 1984); any defection by the host government (political) power is concentrated in the hands of one per- against a foreign state-owned enterprise jeopardizes future son” and added that control of the economy is also in the investments from that state’s SOEs, as well as bilateral re- hands of that person. Interestingly, like nearly all those I lations. State ownership of the firm investing abroad, interviewed, he never mentioned President Nazarbayev by therefore, deters defection by the host country government name. Svoik also made the insightful comment that the on investment agreements. most important factor in Kazakh politics is that President The second key advantage for Chinese state-owned Nazarbayev has to delegate power in order to distribute firms investing abroad is financial support from the Chi- resources to those around him (personal interview, Almaty, nese government. It is a characteristic of this funding that Kazakhstan, June 2009). Delegation of power presents makes it so potent as a foreign economic policy tool: unlike principal-agent risks; it will be shown that Nazarbayev much ‘Western’ financial assistance, Chinese aid and loans partially overcomes these risks by relying on family ties. come without strings attached for political or economic President Nazarbayev’s relatively unchecked power is reform; they thus enhance rather than threaten the polit- particularly problematic for foreign investors, who in more ical survival of the leadership in the receiving state. In order democratic contexts rely on institutional protections for not to jeopardize future inflows of such resources, the their investments. On the other hand, a lack of executive foreign leadership should approve and protect Chinese constraints means that Nazarbayev and his confidants can investments. While corruption in the FDI receiving state approve and protect foreign investments, with fewer con- usually deters foreign investors, it is a corrupt and non- straints on their decisions and actions, if they see those transparent environment that provides a means by which investments as in their self-interest. Having the executive the Chinese government and state-owned enterprises can branch as an ally is key for the success of major investments pursue this investment protection strategy. With these in Kazakhstan; what is crucial is giving those at the top a ownership and funding advantages, Chinese firms are able stake in the success of the investment. As Vitaly Voronov, to overcome the difficulties inherent to successfully Chairman of Transparency Kazakhstan, who worked for D.C. O’Neill / Journal of Eurasian Studies 5 (2014) 145–156 149

President Nazarbayev’soffice during the post-Soviet tran- embassy in Astana refers to Timur Kulibayev, the husband sition, told me: “The most protected business in of Nazarbayev’s daughter Kulibayeva Dinara Nursulta- Kazakhstan is one with a powerful and influential partner. novna, as one of the “four most powerful gate-keepers You make this partner a stakeholder . Give them 20 or 30%” around President Nursultan Nazarbayev” and “the ulti- (personal interview, Almaty, Kazakhstan, June 2009). mate controller of 90% of the economy of Kazakhstan” and These partners are often members of President Naza- notes his “avarice for large bribes” (Kazakhstan: money and rbayev’s family. Two of the most powerful have been power, 2010). Nazarbayev’s sons-in-law, Rakhat Aliyev and Timur Kuli- Below I will show how the support of Timur Kulibayev bayev. As one Central Asia expert wrote in 2007, “Both has been crucial to gaining approval and protection for Aliyev and Kulibayev head the most influential financial major investments in this sector. groups in Kazakhstan, controlling the country’s key eco- Several interviewees, including some with first-hand nomic sectors” (Marat, 2007). Aliyev, currently out of favor, knowledge of the inner workings of the powerful execu- is the former husband of , the presi- tive branch of the Kazakh government, suggested that the dent’s eldest daughter and potential successor since her beneficiaries of Chinese investment and Chinese govern- divorce from Aliyev, who had been Nazarbayev’s heir ment policies in support of that investment are Kazakh apparent. While together, Dariga and Aliyev controlled “financial groups” with close, often familial ties to Presi- much of the print and television media in Kazakhstan. Prior dent Nazarbayev. Nazarbayev has been independent to his downfall, Aliyev admitted to owning half of Kahbar, Kazakhstan’s only executive leader because he has been the 50% state-owned TV channel, KTK a private channel, successful in dividing resources among key power bases and both Karavan Weekly and Kazakhstan Today newspa- (the “winning coalition”) while simultaneously preventing pers (Auyezov, 2007). the rise of an opposition strong enough to threaten his Aliyev is the former deputy foreign minister and leadership. A 2005 report by the Eurasian Center for Po- ambassador to , where he was sent after making it litical Research and the Epicenter Agency for Social Tech- known that he wished to run for the presidency at the end nologies identified five “influence groups” which assert of Nazarbayev’s term ending in 2012. He lost Nazarbayev’s their interests by vying for leverage over Kazakh politicians. support, was accused of kidnapping and extortion, and Four “top-level” groups struggle for influence on Naza- kicked out of the family (Barnes, 2007). He was also rbayev’s group, which sits atop the influence group pyra- accused in the murders of three top managers of Nurbank, mid. The first group was that of Nazarbayev’s eldest of which he owned 50%. In 2008, he was found guilty of daughter, Dariga Nazarbayeva and (previously) her former kidnapping and a coup attempt and given a 20 year sen- husband, Rakhat Aliev, now superceded by the second, that tence in abstentia. Austria refused to extradite him due to of Timur Kulibayev and his wife, Nazarbayev’s second concerns he could not receive a fair trial in Kazakhstan daughter, Dinara. The third is that of Nurzhan Sub- (Kazakh exile, 2009). khanberdin, chair of Kazkommertsbank, the largest private Timur Kulibayev, another Nazarbayev son-in-law, ap- bank in Kazakhstan. The fourth is the “Eurasian group”, pears to have replaced Aliyev as most likely successor (Silk made up of ethnic-Russian involved in the metals Road Intelligencer, 2008). According to Forbes (2013), sector. It is worth noting that Dinara Kulibayeva, Timur Kulibayev and his wife Dinara, Nazarbayev’s second Kulibayev, Nurzhan Subkhanberdin, plus the three heads of daughter, are worth more than $2 billion. He has controlled the Eurasian group are among the very few Kazakhs who much of Kazakhstan’s resource wealth through chairman- have made the Forbes (2007, 2013) list of billionaires. Forbes ship of major state-owned resource companies KazMu- (2007) notes that Subkhanberdin is tied politically to Timur naiGas (KMG), the Kazakh state run oil and gas company, Kulibayev. When I questioned a former government advisor and Kazatomprom, the state company, and, until on China as to who benefits from Chinese investment in recently, as chairman of Samruk-Kazyna, a recently estab- Kazakhstan, he initially replied, “Kazakhstan benefits”.He lished state holding company given the task of managing then quickly, and without prodding, amended his state- the country’s resource wealth.2 According to Levine (2007), ment, “really, the financial groups benefit” (Anonymous A, author of The Oil and the Glory: personal interview, Almaty, Kazakhstan, June 2009). Keeping Kazakh political succession in the family would In Almaty, the most important fact for those wishing to be to China’s benefit. The less the change at the executive conduct oil business is that nothing substantial can be level, the greater the stability in Sino-Kazakh relations. The done without a nod from Timur Kulibayev, the husband weakness in China’s strategy is its reliance on the current of Nazarbayev’s second daughter-in-law, Dinara. Kuli- leadership for protection of its investments. Familial suc- bayev owns shares in oil fields, and those he does not cession, however, is a continuation of the current leader- own he holds sway over through his influence in the ship. It is foolhardy to predict the policies of a successor, state oil company, KazMunaiGas. even if that successor is a blood relative. However, it is clear In Kazakhstan, “state run” is somewhat synonymous that the Kazakh leadership, especially several Nazarbayev with “owned by the family”. A leaked cable from the U.S. family members, gain personally from Sino-Kazakh re- lations. They benefit from the status quo and would, therefore, be less likely to change it. Nevertheless, as will be shown below, China now engages the support of not only 2 Kulibayev was removed by Nazarbayev from this position following violent worker riots in the energy industry but he maintains his other key top government leaders but also, with an eye toward more positions. distant time horizons, the relevant government 150 D.C. O’Neill / Journal of Eurasian Studies 5 (2014) 145–156 institutions, most importantly KazMunaiGas, the Kazakh enormous financial stakes, corruption is particularly prob- national oil company. lematic for those investing in natural resources. According to the Global Advice Network (2010): “There are massive 5. The Kazakhstan investment environment: risk, possibilities for corruption on a grand scale in Kazakhstan’s corruption and weak rule of law environment of intra-elite allocation of benefits connected to oil production. Corruption in Kazakhstan is systemic, As Chinese firms seek resources for their domestic even within the country’s anti-corruption agency, and no market, Kazakhstan’s small population and lack of sea public office is free from executive interference” (emphasis routes are not a deterrent to Chinese state investors. In the added). As a U.S. Department of Commerce diplomat in terms common in the FDI literature, these are resource- Almaty put it, “Corruption is the cost of doing business in seeking, not market-seeking or efficiency-seeking foreign Kazakhstan” (Anonymous C, personal interview, Almaty, investors (Caves, 1974). However, Chinese firms still must Kazakhstan, June 2009). secure approval for investments and overcome an institu- However, executive interference also can benefit foreign tional environment that could jeopardize their success. investors. While corruption has been found to deter foreign Kazakhstan has enacted several laws to encourage and investment (Li & Resnick, 2003; Wei, 2000), ironically, it is protect foreign investment. These include the Law on In- corruption and a lack of transparency that provide the vestment (2003), the Law on Government Procurement vehicle used by the Chinese to secure approval and pro- (1997), and the Customs Code (2003). These are designed, tection of Chinese investments in Kazakhstan, at least when according to Political Risk Services (PRS), to “provide for those investments are large and by state-owned Chinese firms. non-expropriation; currency convertibility; guarantees of Smaller private investors from China avoid Kazakhstan for stability in the legal regime; transparent government pro- fear that they will be “bled dry” by low level corruption, as curement; and incentives in certain priority sectors”. PRS one interviewee put it (Anonymous A, personal interview, concludes, however, “inconsistent implementation of these Almaty, Kazakhstan, June 2009). For these firms, motivated laws and reforms at all levels of government remains the solely by profits, the “cost of doing business” does not key obstacle to business in Kazakhstan” (2008 investment outweigh the benefits (Kaufmann & Wei, 1999). Some climate, 2009). foreign firms, however, can use corruption to their advan- Risk rating agencies and non-governmental organiza- tage (Huntington, 1968; Lui, 1985); corruption and a lack of tions agree that Kazakhstan is a relatively risky and corrupt transparency mean that aid and loans from China can be environment. Intelligence Unit (2010) gives used by President Nazarbayev and other top leaders to Kazakhstan a “D” rating for overall risk, with the same enhance their personal wealth and maintain the allegiance rating for political stability risk and an even lower rating of of key supporters. It is this corrupt and opaque environ- E (indicating highest risk) for “legal and regulatory risk”. ment, along with the unconditional and unconstrained The Belgian Export Credit Agency (Country risks summary, nature of Chinese foreign economic assistance, that make 2010) ranks Kazakhstan a 4 on a 1–7 scale (with 7 indi- the Kazakh and Chinese leaders such compatible bedfel- cating highest risk) for “risk of expropriation and govern- lows. As Voronov, the head of Transparency Kazakhstan, ment action”, a 5 for both “transfer risk” (related to noted, “a powerful and influential partner” is needed as a currency conversion) and medium/long-term political risk, “stakeholder” to protect foreign investments in and a grade of “C” or “high” for commercial risk, which Kazakhstan (Personal interview, Almaty, Kazakhstan, June includes risk posed by corruption. 2009). This was precisely the strategy successfully followed Corruption is endemic in Kazakhstan. Transparency In- initially by the China National Petroleum Corporation ternational’s2013Corruption Perceptions Index (2013) (CNPC). (CPI) ranks Kazakhstan 140th out of 175 countries, with a lower rank indicating higher corruption. Vitaly Voronov, 6. Chinese investments in Kazakh oil and gas Chairman of Transparency Kazakhstan, told me that nepotism is widespread in the Kazakh government and, 6.1. Securing approval and protection given the importance of tribalism historically, it is not viewed locally as corruption (Personal interview, Almaty, Support by the Chinese government for investments by Kazakhstan, June 2009). Among many Kazakhs I spoke China’s state-owned enterprises in Kazakhstan is a straight with, corruption, specifically bribery, was viewed as an forward example of the means by which foreign in- acceptable means to ends. As Jalilov (2008) of the Global vestments can be approved and secured, at least in the Integrity Network writes: “Corruption schemes are built short-term, where rule of law is weak and corruption is into the country’s psyche. People justify corruption as a way high: the protection of the key players can be bought. to build relationships or break through government-imposed Chinese oil companies engaging in bribery to secure barriers (emphasis added)”. approval of deals are not unique; they are playing a game Businesspeople interviewed for a 2003 report, “Per- whose rules were written by major Western oil companies ceptions of Corruption in Kazakhstan”, by the United Na- long ago. What is unique is the role of the Chinese gov- tions Development Program, suggested “the most typical ernment in providing massive financial support for its spheres of bribery are the customs, tax police, police at state-owned firms and in pushing these firms to secure not large, army, controlling bodies and the sectors connected only profits but also resources. It is these mixed motiva- with natural resources (emphasis added)” (Jandosova, tions as both profit seekers and arms of the government Baitugelova, Jansosova, & Kunitsa, 2003). Given the that give Chinese SOE’s greater options; their major D.C. O’Neill / Journal of Eurasian Studies 5 (2014) 145–156 151 shareholder is the Chinese government, whose main goal years, the company, with the help of the Chinese govern- may not be profits. This means that Chinese firms can ment, has greatly expanded its petroleum and gas conces- outbid those solely motivated by profit-seeking, and the sions in Kazakhstan and constructed the pipelines needed Chinese government can provide the funds that allow them to export their product to China. Strongly supporting the to do so. China makes no bones about offering aid and loans theory I advance, the Chinese government and CNPC have to Kazakhstan in order to secure approval for natural been explicit in giving the Kazakh government a direct resource investments. The agreement and announcement stake in Chinese investments, both by linking loans to the of the investment and loan deals are simultaneous and by Kazakh government with investment deals and by elites at the highest levels of both governments. providing the Kazakh national oil company, KazMunaiGas In addition to showing substantively how investment (KMG), partial ownership. Agreements are made at the top approval can be bought, the examples below offer support levels of both governments and dominate Sino-Kazakh for my theoretical claim that Chinese government support bilateral relations. secures protection for these investments. This protection is I analyze three cases of investments by the Chinese important given the logic of Vernon’s obsolescing bargai- National Petroleum Corporation in Kazakhstan. These cases ning theory, discussed above. While not citing Vernon, not only illustrate how approval for resource investments Weinthal and Luong’s (2001) findings nevertheless show can be bought in Kazakhstan but also show that the CNPC how this logic has played out precisely in Kazakhstan: and Chinese government strategy has evolved from one of direct bribery of relevant officials (perhaps how Western While in the short-term, it was easier for the foreign firms also gained a foothold in Kazakhstan) to one of investors in Kazakhstan to bargain with the central providing the Kazakh government with financial assistance government and receive a favorable tax regime, their (aid/loans) and KMG with a direct stake in the investments bargaining position has weakened over time as their in order to gain longer-term protection. assets have become fixed and their sunk costs have increased . with time, (the) tax code has become less stable as the government has consistently reneged on 6.3. AktobeMunaiGas their agreements with foreign investors (p. 222). CNPC’s first foray into Kazakhstan was in 1997, when Because of these ex-post bargaining disadvantages, with the active support of Chinese Premier Li Peng, it firms must find ways to reduce the risk that government purchased a 60% share in AktobeMunaiGas, the fourth actors will renege on the original investment agreement. largest oil and gas company in the country, beating out Chinese government policies do this by making continued several U.S., European and Russian firms (Pomfret, 2001). investments by Chinese firms in the interest of Kazakh According to Strecker Downs (2000, p.16) now at leaders. These policies offer the Kazakh leadership more Brookings Institution: than Western firms can (realistically and legally); large loans associated with these investments expand the pool of The key to CNPC’s success in beating out Texaco, Amoco, resources available to the Kazakh leadership for private and Russia’s Yujnimost for the tender were two offers the gain and for providing private goods for key supporters of other companies could not match. CNPC agreed to pay up- the government, as well as public goods for the general front a $320 million bonus to the cash-strapped Kazakh populace. In short, where rule of man trumps rule of law, government and to conduct a feasibility study on the that man must be given a stake in a foreign investment’s construction of an 1800-mile pipeline . to Western success in order to secure his support. Chinese policies give China estimated to cost $3.5 billion, which would the Kazakh leadership just such a stake.

6.2. The China National Petroleum Corporation (CNPC) in Table 1 Kazakhstan Chinese (CNPC) Oilfield development projects and investments in Kazakhstan.

Nearly all Chinese investment in Kazakhstan is in nat- Year Project (percentage ownership) Comments resource extraction and related industries dominated 1997 AktobeMunaiGas (60%) $325 million. by state-owned enterprises. There are three major Chinese Additional 25% purchased petroleum companies, but due to its historic role in North in 2003 and Western China, the China National Petroleum Corpo- 2003 North Buzachi Oilfield (50%) Lukoil is Russian national with Lukoil oil company ration (CNPC) has been the dominant player in Kazakhstan, 2004 Konys and Bektas Oilfield (25%) 75% now owned by ’ on China s Northwest border. Its listed subsidiary, Petro- ZhenHua Oil China, of which it owns 86%, became the most valuable 2005 AyDanMunai – Aryss and company in the world in 2010, according to the FT Global Blinov blocks (100%) 500 (2010), with a market value of $329 billion. CNPC has 2005 PetroKazakhstan (100%) $4.18 billion. Later transferred 33% of interests in 29 countries, including Iran, Sudan, Venezuela, shares to Kazakh national Myanmar, and the Central African Republic, suggesting it is oil company unconstrained as to where it invests. 2009 MangistauMunaiGas (50%) $2.6 billion CNPC entered Kazakhstan in 1997 and invested Reportedly previously owned by exiled Rakhat approximately $6.5 billion over the following decade. Aliyev Major investments are listed in Table 1. Over the past few 152 D.C. O’Neill / Journal of Eurasian Studies 5 (2014) 145–156

provide Kazakhstan with a non-Russian export line firms to renegotiate the terms of earlier deals. Relevant to (emphasis added). the research here, Luong (2010, p. 2) notes, “Forced contract renegotiation is consistent with Raymond Vernon’s(1971) In 2003, CNPC purchased an additional 25% of theory of the obsolescing bargain” and adds “foreign oil AktobeMunaiGas. companies operating in the country have long complained Mukhtar Ablyazov, Kazakhstan’s exiled former Energy of the state’s tendency to renege on contractual terms”.In Minister, has accused Timur Kulibayev, President Naza- 2008, for example, KazMunaiGas (KMG) pressured Western rbayev’s son-in-law and possible successor, of having sold oil companies and the Russian state oil company, Lukoil, to the additional 25% share of AktobeMunaiGas to CNPC far double KMG’s share of the Kashagan fields and has been below market price (and half of the asking price). According pressing several Western firms to provide it a greater share to Ablyazov, the additional quarter stake was sold for only in the giant Karachaganak concession (Sharip, 2011). These $150 million in 2003, a year in which profits for the com- efforts by the Kazakh government to reassert control of pany were $244 million. Ablyazov claimed that in return for concessions formerly given to private Western oil com- approval of CNPC’s purchase of AktobeMunaiGas, Kulibayev panies illustrate the advantage of the Chinese strategy of directed CNPC to establish a company in the British Virgin securing long-term protection from policy change by giving Islands controlling , sell a 49% stake in this company the Kazakh national oil company a stake in its success. The to Darley Investment Services (a firm owned by Ablyazov’s cases of PetroKazakhstan and MangistauMunaiGas exem- business partner) for just $49, and then repurchase these plify this strategy. shares $165.9 million. Reports of the allegations were initially banned in Kazakhstan and newspapers printing 6.4. PetroKazakhstan them, seized (Chazan, 2010; Gizitdinov, 2010). Ablyazov’s claims of corruption could be viewed as a On October 27, 2005, the China National Petroleum contrived attempt to tarnish the reputation of the Kazakh Corporation (CNPC) purchased the Canadian-registered leadership following his ouster; however, documents he firm PetroKazakhstan (PK), whose oil and gas assets were released to Kazakh security officials, along with other docu- all in Kazakhstan, for $4.18 billion, the largest Chinese ments concerning these transactions, corroborate the $49 foreign investment in the world at that time. The CNPC ($1.00 for each of 49 shares) selling price to Darley, as well as a purchase was opposed by many in the Kazakh parliament, $140 million repurchase by a CNPC subsidiary, plus an addi- which had passed a law just two weeks earlier, to stave off tional repurchase of $25.9 million by another CNPC subsidi- the investment, giving the government the right to inter- ary, which sums to the $165.9 million suggested by Ablyazov. vene in foreign purchases of oil assets (Pitt, 2005a). According to its “Certificate of Incumbency”, dated Nevertheless, prior to the purchase, CNPC officials had September 21, 2005, CICL, the offshore company that Kuli- claimed that strong Sino-Kazakh relations would guarantee bayev allegedly instructed CNPC to create, was incorporated the success of its bid (Pitt, 2005b). According to the Chinese in the on April 23, 2003. Three di- government (China-embassy.org, 2005): rectors listed were Wu Dongshan, Wang Mingcia, and Zhao Upon acquisition, in the spirit of win–win and mutual Ying. Wu and Wang were high-level employees of CNPC and benefit, CNPC will choose to cooperate with KazMu- CNPC HK () International, respectively. Zhao was naiGaz, the state oil company of Kazakhstan to operate a high-level official from the China National Oil and Gas and manage the PK project . The two parties signed a Exploration and Development Corporation (CNODC), a memorandum of understanding on Oct. 15, according to CNPC subsidiary that manages overseas investments. Other which KazMunaiGas will obtain a certain amount of PK documents confirm these transactions and the end result of shares enough to have strategic control over the CNPC ownership of 100% of AktobeMunaiGas. development of the country’s mineral resources.. The means used by CNPC to purchase AktobeMunaiGas illustrates the crucial role of the Kazakh leadership, namely Less than a year later, on July 5, 2006, CNPC announced President Nazarbayev and his family, in approving major (CNPC in Kazakhstan, 2009): foreign investments in Kazakhstan. However, the Chinese According to an agreement with the Kazakh Ministry of strategy has evolved since the purchase of AktobeMunai- Energyand Mineral Resources, CNPC transferred 33% of its Gas. I contend that this is because, due to the nature of the shares ($1.37 billion) in PetroKazakhstan to KazMunaiGaz obsolescing bargain, it is not enough to gain approval for an . and retained the remaining 67% stake in the company. investment through bribery; it is necessary to also gain long-term protection for that investment. The new Chinese With that, CNPC gave the Kazakh national oil company a strategy of providing aid/loans for oil access gains both direct stake in its investment. Giving KMG a stake secures approval and protection; rather than buying just the long-term protection for the investment as well as the approval of current key figures, it gives the Kazakh national approval of Kulibayev, the former CEO of KazMunaiGas and oil company a long-term stake in the success of the in- Deputy CEO of Kazakhstan’s National Wellbeing Fund, vestment. This is necessary for two reasons. First, given the Samruk-Kazyna, which owns KazMunaiGas. lack of information regarding Nazarbayev’s likely successor, political risk in Kazakhstan is high. Therefore, securing the 6.5. MangistauMunaiGas support of a key government figure now may not secure protection for an investment in the long-run. Second, the The 2009 joint purchase of MangistauMunaiGas (MMG) Kazakh government has been pressuring foreign petroleum for $2.6 billion by CNPC and KMG is an illuminating display D.C. O’Neill / Journal of Eurasian Studies 5 (2014) 145–156 153 of the lengths to which the Chinese government will go to put into use on December 14, 2009 (CNPC in Kazakhstan, guarantee investments by its state-owned oil companies. 2010). CNPC loaned KMG $5 billion, $1.3 billion of which was to At the opening of the Atasu to Alashankou section of the allow the Kazakh state-owned oil company to secure 50% China Crude Oil Pipeline in Kazakhstan, CNCP Vice Presi- plus one share of MangistauMunaiGas (Personal in- dent Zhou Jinping described the pipeline as “The New Silk terviews, June and July, 2009). Simultaneously, a $5 billion Road” in reference to what for centuries was the key trade loan from the Chinese Export Import Bank to the route between China and the West (Pala, 2006). Perhaps Kazakhstan Development Bank was announced. In all, $10 “silk” in the autonym should be replaced by a petroleum- billion dollars was loaned by China (the state and one of its based fiber. CNPC has a 50–50 split with KMG in this oil companies) to Kazakhstan (the state and one of its oil Kazakhstan–China crude oil pipeline. By diversifying companies), partially to secure half of a $2.6 billion in- Kazakhstan’s export markets and China’s import sources, vestment. This is a clear-cut example of both the type of the pipeline creates another win–win situation: China gets “package deal” the Chinese government and its SOEs can a new source of petroleum from next door, while make with foreign governments, as well as of China’s giving Kazakhstan secures alternatives to transport through Kazakh political leaders and institutions a direct stake in Russia. The construction of this New Silk Road (Table 2)is the success of a Chinese investment. further evidence of China’s strategy of giving the Kazakh The examples of CNPC’s purchase of PetroKazakhstan government a stake in its investments. and MangistauMunaiGas support my hypothesis that China Investments by CNPC in Kazakhstan are the most visible uses foreign economic assistance to secure approval and Chinese activity there. However, China and its state-owned protection of investments by Chinese state companies enterprises have followed similar strategies in securing abroad. In Kazakhstan, the high level of corruption, lack of other major investments. The CITIC group, a state-owned transparency and one party – or perhaps more accurately, enterprise overseeing investments abroad, spent $1.9 one family – dominance of the political system mean that it billion to purchase the Kazakhstan assets of Nation’s En- is very likely a percentage of these financial inflows are ergy Company in 2006. In order to secure the approval of being used for the private gain of the leadership and the the Kazakh government, CITIC gave KazMuaniGas a one- provision of private goods to the leader’s supporters. As one year option to purchase 50% of the assets (CITIC buys, diplomat in Astana said about China’s $5 billion loan, “Who 2006). KMG exercised that option in 2007, at a cost of knows where that money is going?” (Anonymous B, per- $930 million. In April 2009, China Guangdong Nuclear sonal interview, July 2009). Power Co (CGNPC) announced the co-development of a Chinese policies create a win–win situation, an equi- Kazakh uranium mine together with Kazatomprom, the librium that protects Chinese investments. When ques- Kazakh state uranium company, then headed by Timur tioned about the logic behind China’s strategy of Kulibayev. The Moinak Hydro Power Station, majority purchasing oil companies and then providing shares to owned by the Kazakh state-owned KazKuat, was partially KMG, the Chinese Ambassador to Kazakhstan, Cheng financed through a $200 million extension of credit from Guoping, replied, “Yes, CNPC has done such deals. First it the China Development Bank. Terms of the agreement buys and then transfers a part of its shares to the Kazakh allowed for Chinese construction workers and equipment side. This is our general policy in Kazakhstan. Its purpose is purchases from Chinese companies (USA Trade Online, to provide development to both parties on the basis of 2010). Complicating Sino-Kazakh ties further, the China mutual benefit. We seek to provide a real benefittoboth Investment Corporation (CIC), a Chinese sovereign wealth sides from this cooperation” (Konyrova, 2009). fund of nearly $300 billion, purchased an 11% share in JSC KazMunaiGas Exploration Production, a London-listed arm 6.6. The New Silk Road of KazMunaiGas, the Kazakh state-owned oil and gas company (Duce, 2009). CITIC Capital, the investment sub- Crucial to Kazakhstan’s strategy of diversifying its sidiary of CITIC, has recently established a joint venture foreign economic relations is the creation of alternate with a subsidiary of Kazyna Sustainable Growth Fund, the export transit routes. Prior to the recent opening of pipe- lines to China, Kazakh oil had to be exported via pipelines through Russia (to the West or East), across the Table 2 CNPC pipelines from Kazakhstan to China. to or Azerbaijan, or by rail. New gas pipelines will also provide alternatives to the Russian transport monop- Northwest crude pipeline 49% 448 km-Long crude pipeline oly for Central Asian states, allowing Turkmen gas to be stake with KMG in the from Atyrau to Kenkiyak (operational in 2003) pumped through and Kazakhstan to China and China Crude Oil Pipeline 50% 962 km-long crude pipeline eventually will allow Kazakh gas from the Caspian Sea to be with KMG (operational 2006) from Atasu to Alashankou, transported directly to China. In a sign of its importance to China Kumkol-Kenkiyak the PRC, then Chinese President Hu Jintao opened the pipeline to be completed Kazakh portion of the Central Asia–China gas pipeline in this year Pan Central Asia Gas Pipeline Brings Turkmenistan gas mid-December 2009. This $6.7 billion gas pipeline was Construction began in 2008 / Uzbekistan / Kazakhstan funded primarily by the China Development Bank (China / China President, 2009). The Kazakhstan–China portion of the Eventually should extend to gas pipeline was completed on December 12, 2009, Kazakh gas fields in Caspian Alternative to Russian pipelines allowing the entire Central Asia–China Gas Pipeline to be 154 D.C. O’Neill / Journal of Eurasian Studies 5 (2014) 145–156

Kazakh state development fund, until recently headed by enterprises. First, the sheer amount of funding that Chi- Kulibayev (Joint ventures, 2012). The Chinese strategy of nese firms and their government backers are able to offer giving the Kazakh government a stake in its investments foreign governments is greater even than that which the goes well beyond investments by CNPC. world’s largest private firms can offer. Second, the fact that Chinese SOEs are not solely motivated by profits but also 7. Conclusion by the goal of securing resources for China, means that Chinese SOEs can outbid private firms.3 This also means Sophie Richardson, in her book on China’s Five Princi- they may have longer time horizons than private firms. As ples of Peaceful Coexistence, writes: “Some argue that opposition party leader Peter Stoic told me, “the Chinese China’s aid gives it particularly good access to countries move slowly, step by step, in order to reach their aims” with energy resources, yet little persuasive work has been (Personal interview, Almaty, Kazakhstan, June 2009). done to suggest that without the aid packages China would These longer time horizons mean Chinese firms can focus be denied such benefits” (p. 3). I hope that I have made the more on long-term aims than short-term profits. Third, case for that argument persuasively. Loans and aid from the because continued Chinese investments and aid are in the Chinese government are a crucial part of offers the Kazakh interest of the Kazakh leadership, it is in their interest to government could not refuse. protect Chinese investments from lower level corruption The main hypothesis of the theory presented above is and adverse policy changes. In addition, agreements for that it is Chinese government policies in support of Chinese major investments by Chinese SOEs in Kazakhstan are firms investing abroad that allow these enterprises to made by the top leaders of both countries; therefore successfully invest in states with weak rule of law, high reneging on an agreement is harmful to bilateral relations. corruption and high political risk. The CNPC case offers As Chinese firms are state owned and supported by the support for this hypothesis, and the additional hypothesis top leaders of the Chinese government, agreements with that state-owned firms have advantages investing in such Chinese SOEs become, in simple game theory terms, an poor investment environments. Very few private Chinese iterated game. This iteration promotes cooperation be- companies invest in Kazakhstan, despite promises by the tween the two sides and makes defection by the Kazakh Chinese government to increase private investment there. leadership less likely (Axelrod, 1984). Whether the Chinese In an interview, a top Kazakh researcher on China cited an strategy actually protects Chinese firms from long-term unpublished Chinese government study suggesting that political risk awaits to be seen. However, as Stoic related, the Kazakh investment environment is not good for Chi- “Relations with China are too important for even the next nese firms. The reasons cited were that the Kazakh people leader to move against China’s assets” (Personal interview, are “anti-Chinese” and that police and others apply too Almaty, Kazakhstan, June 2009). much pressure on Chinese business owners, demanding This puts firms from other countries at a disadvantage. bribes, for example. This pressure is particularly problem- As the U.S. official in Astana noted, “Our deals are done atic given the business owners’ inability to speak Russian or between companies”; whereas, China is engaged in state to Kazakh, as well as the dramatic cultural differences state summits to secure oil deals. He added, “U.S. com- (Anonymous A, personal interview, Almaty, Kazakhstan, panies wouldn’t necessarily want us in the negotiating June 2009). room . Conoco Phillips didn’t even invite us to the signing Chinese state-owned enterprises, on the other hand, are ceremony”. He pithily continued, “Exxon can’t compete able to overcome these difficulties through the backing of with CNPC because they’re really competing with China, the Chinese state. The increasingly close relationship be- Inc”. Exxon officials say it is hard to compete with the tween the Chinese and Kazakh governments provides a Chinese, not only because of billions of dollars in loans but measure of protection for state-owned Chinese firms also the terms and complexities of these deals: “There’sa investing in Kazakhstan. As this same Kazakh expert on $5 billion cash transfer, $5 billion investment, plus a ura- China suggested, the energy sector is not as problematic for nium agreement . then there’s the pipelines . U.S. firms Chinese firms (major firms being state owned in this sector), can’t compete with these packages” (Anonymous B, per- who have “powerful friends” in the Kazakh government and sonal interview, Astana, Kazakhstan, July 2009). are supported at its highest levels (Anonymous A, personal Leila Maratovna Muzaparova at Kazakhstan Institute for interview, Almaty, Kazakhstan, June 2009). Strategic Studies, a think tank under the office of the This study shows how Chinese loans and aid gain the president, put the Kazakh government’sofficial view support of the Kazakh leadership for Chinese investments clearly: by creating a win–win status quo for the Chinese and China is a great power and a close neighbor. Kazakhstan Kazakh governments. The Chinese government secures should not try to make an enemy with such a country access to much needed resources and potential profits for but to get benefits from the close location . Kazakhstan Chinese state-owned firms. The Kazakh government re- must take into consideration the $10 billion loan during ceives financial resources from China that leaders can use to provide public goods for the people of Kazakhstan or private goods for key members of the government and their 3 families and supporters. A Western diplomat in Astana noted that because Chinese firms are SOEs they can outbid other firms for contracts and then simply pay the The Chinese investment strategy in risky, corrupt fines when they do not live up to the details, such as the number of states, such as Kazakhstan, advantages Chinese state- domestic workers required (Personal interview, anonymous interviewee owned enterprises over other states’ multinational B, Astana, Kazakhstan, July 2009). D.C. O’Neill / Journal of Eurasian Studies 5 (2014) 145–156 155

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