A new decree signed on May 23 by President Putin unveils the prospect of U.S. property seizures in tit-for-tat compensation for any annexation of frozen Russian assets by the United States.  The Russian decree is in response to U.S. asset forfeiture legislation targeting Russia that goes into effect on May 24.  While foreign investments in Russia have significantly declined in the time since Russia’s invasion of Ukraine, a number of substantial fixed assets owned by U.S. and foreign entities are now in jeopardy because of Putin’s new decree.  Among these is the Caspian Pipeline Consortium’s (CPC) pipeline which transfers more than 80% of Kazakhstan’s crude oil to Western markets.

While oil transiting the CPC was given a special exemption by the U.S. Office of Foreign Assets Control (OFAC) in 2022, the oil carrier could now be again at risk because of the Kremlin’s latest action.  The new decree states that the Russian Federation or Central Bank can seek restitution for the seizure of Russian assets through Russia’s court system.  A list of potential U.S. and foreign property and assets will be supplied by the Government Commission on Control over Foreign Investments in the Russian Federation established in 2008 and amended in 2022.  At risk are securities, fixed and movable property, as well as property rights inherent in U.S.-owned assets. 

Image source: cpc.ru

Any Russian action threatening the CPC is a direct threat to the economy of Kazakhstan.  The largest Central Asian country’s economy is dependent upon its hydrocarbon sector that “accounts for nearly 20% of GDP, more than 30% of general government revenue, and over half of exports.”  Over one million barrels of oil per day transit the CPC through Russia to Europe, with 90% of CPC-exported oil coming from companies operating in western Kazakhstan.  While Russian entities own a significant share of the CPC pipeline, political considerations in the Kremlin could cripple Kazakhstan’s economy as fallout.

The CPC pipeline is owned by a consortium of Russian (nearly 40%), Kazakhstani (about 28%), and Western (almost 32%) oil companies.  Western shareholders include Chevron, ExxonMobil, Shell, and Italy’s ENI.  The pipeline is the major conduit for transporting crude oil from Kazakhstan’s Tengiz, Kashagan, and Karachaganak fields to the Black Sea oil terminus at Novorossiysk in Russia.  It is the Western shares that Moscow could target in its apparent response to the U.S. Rebuilding Economic Prosperity and Opportunity for Ukrainians Act, which vests the U.S. president with the ability to “seize, confiscate, transfer” any sovereign Russian state asset in the United States.

In an effort to insulate Kazakhstan from Russian sanctions in 2022, OFAC carved out an exception for oil originating in Kazakhstan and transiting the CPC in its special questions section on its website:

1020: The CPC transports crude oil through the CPC pipeline that is predominantly of Kazakh origin and that is marketed and loaded with a certificate of origin verifying that the crude is of Kazakh origin.  Any crude oil that is primarily of Russian Federation origin is marketed and loaded separately and certified as Russian origin.

Confirming that Executive Order 14066 applies and sanctions only the import of oil of Russian Federation origin, the OFAC allowance excludes Kazakhstani crude as not of Russian origin, “even if such items transit through or depart from the Russian Federation.”

However, Russia has used the CPC pipeline in the past as a tool to express its displeasure with Kazakhstan, making a potential suspension or seizure of the oil conduit now within the realm of Russian reason.  There were repeated interruptions of CPC flows in 2022, as a Russian court suspended the pipeline ostensibly due to paperwork irregularities, and later the Russian operator ceased oil passage for maintenance, repair, and other reasons. Astana’s efforts to diversify its economy and alignment away from Moscow’s hegemony piqued relations between the two countries at the time, resulting in the pipeline’s repeated, temporary suspensions of operations.  The CPC accounts for and transits approximately one percent of global oil trade, with the 2022 suspensions having produced an immediate rise in global oil prices and a hit to Astana’s bottom line.  

Kazakhstan has already increased shipping oil via alternative routes, increasing exports to China, transiting oil by ship across the Caspian to the Baku-Tbilisi-Ceyhan pipeline, multi-modally by ship and rail to Georgian ports, and through pipelines to other Russian ports.  However, all other destinations cost comparatively more in transport costs and have limited surplus capacity for Kazakhstan’s oil.  As a result of these current limits, Astana remains tangled in the consequences of the war in Ukraine, efforts by Washington to curb Russia’s economy, and countermeasures that Moscow intends to impose. 

For Astana there are no easy or quick solutions.  Pipelines and infrastructure that made sense 30 years ago have less utility in a changing geopolitical environment.  Astana needs to continue its efforts to diversify away from its economic over-dependence on the hydrocarbon sector, as well as its reliance on a single conduit that runs through Russia for the vast majority of its oil exports.  Forging closer relations with neighboring Azerbaijan and China, Kazakhstan is working these solutions with a multi-sectoral policy approach that emphasizes a multiplicity of partners and conduits.  Emblematic of such new thinking includes the once unimaginable consideration of building its own trans-Caspian pipeline. 

With substantial new investments in shipping infrastructure for its oil, alongside the capitalization of a green energy transition for the country, Kazakhstan’s leaders are actively pursuing strategies to diversify the country’s growing economy.  However, for the time being, until alternatives viably reduce the country’s current dependences, Astana will need to rely on the CPC and robust foreign policy efforts with Moscow and Washington to safeguard its economy from Ukraine-related asset forfeitures.