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Where Russia retreats China steps in

Where Russia retreats China steps in published on

When in December last year President of Kyrgyzstan Almazbek Atambayev announced intention to cancel the deal with Russia to build two hydropower plants Kambarata-1 and Kambarata-2 and the upper Naryn cascade he also said that government would find another investor to complete the project. Experts without hesitation pointed out at China as a viable option and it looks like they were not mistaken. This week deputy Prime Minister Oleg Pankratov met with the representatives of China’s State Power Investment Corporation to discuss the construction of cascade in Kazarman and four hydropower stations: in Alabuga, Toguz-Toro and two in Kara-bulun with total capacity 1160MW. Chinese company expressed interest in projects and hope that all necessary documents will be produced soon.

It looks like Kyrgyzstan can become the next case of the former Soviet Republic where China replaces Russia in major infrastructure project. The deal with Russia was cancelled because of delays in construction progress. The Kyrgyz authorities came to conclusion, that due to economic crisis, Russia would not be willing to complete the costly project valued at over 2 bln usd. Kyrgyz government admitted that its own actions in the past, such as delays in land appropriation, also had contributed to delay but numerous technical issues reported by Russian contractors looked like a self-justification for delays. Russia’s representatives’ slow response to Kyrgyz demands and lack of official statement made impression that Putin wanted to hold the project in a limbo.

What made Atambayev convinced of Russia’s disengagement was the project’s financing issue. Kyrgyzstan expected that Russia would provide preferential loans to cover the construction costs but only the amount of 37 mln usd was disbursed by Russian contractors.. In 2015 special Kyrgyz Russian Development Fund (KRDF) was established to facilitate Kyrgyzstan’s accession to EEU but only slightly over 350 mln usd of 500 mln declared total contributions have been paid up so far by Russia.
Moreover only 50 mln usd have been distributed to small and medium size Kyrgyz enterprises while over 265 mln usd is being kept as deposits in Russian banks. Kyrgyzstan also has little to say over the fund management. Hopes that KRDF will be used as a financing vehicle for hydropower plants turned out to be illusive. Financing project with commercial loans will be economically inviable.

Kyrgyzstan’s sustainable development requires increase in energy supply. Country is rich in hydropower energy resources but harnessing the upper stream of rivers is not warmly welcomed by mighty neighbours, that depend on the water flowing from Kyrgyz mountains. Therefore ambitious plans of Kyrgyzstan’s government to develop hydropower plants and export energy to neighbouring countries were received with little enthusiasm in the region. Past agreements on sale of energy produced in Kyrgyzstan were not implemented mainly because of Uzbekistan’s resistance. . As project of new hydropower station by Russia stalled Kyrgyz authorities had little choice. Looking for China as partner in the project was natural choice for Bishkek.

The question however remains how the issue of project financing will be solved. Main reason for Russia’s withdrawal was Kremlin’s unwillingness to grant preferential loans or to finance the project from the special development fund. Kyrgyzstan authorities probably think that cash rich China, enthusiastically promoting strengthening of cooperation with Central Asia countries within the framework of the One Belt One Road initiative, will be more willing to provide financial support. The official statements revealed by the Kyrgyz authorities and representatives of Chinese company however do not include any information on the financial terms of the project.

While Pankratov in his statement used term “direct investment”, Chinese expressed only readiness to participate in the project. Term “direct investment” implies that Chinese company could take ownership of the hydropower complex or keep the full control over the project for a specific period of time e.g. basing on the BOT agreement. In case of direct investment State Power’s Kyrgyz subsidiary would sell electricity from hydropower stations to the national distributor at prices that are commercially viable and the investment would bring profits for the Chinese investor. It will be a good solution for Kyrgyzstan if prices in the future are set basing on the reasonable rules and with secured influence of the Kyrgyz government on the price level. Cash scrapped country would not need a penny to have its energy capacity significantly increased.

State Power has both money and will to invest in overseas projects. In December last year Chinese company acquired Australian Hydro Pacific for 3 bln usd including debt . It also also formed consortium with Sany Group to invest 4,8 bln usd in India and in January signed MoU with the Andhra Pradesh state government.. However it should be noted that ideas of “investment” and “financing” can be apprehended differently by the Chinese company and authorities in the host country. The best example is the recent dispute between China and Thailand concerning financing of the Thai – Chinese railway.

It also shall be noted that till the day of publishing this comment only few Chinese media and in very vague manner have published information concerning the Kazarman project. Two bln usd transaction even for leading Chinese SOE is quite significant deal. Other similar size investments attracted much wider coverage. It makes impression, that project is still in the preliminary stage and until the State Power signs agreement with Kyrgyz government and receives approval for investment from the relevant state authorities and blessing from the CCP officials everything can happen Financial terms of the deal can turn out to be very different from the reported in recent news.