Russia’s propensity and ability to disrupt the Caspian Pipeline Consortium (CPC) pipeline pose a risk to Kazakhstan’s ability to export oil and hence its key credit metrics, Fitch Rating says. The CPC runs from the Caspian coast in northwest Kazakhstan to Novorossiysk port on Russia’s Black Sea coast, and carries 80% Kazakh crude exports.

Fitch sees no viable alternatives to the CPC for Kazakhstan in the medium term. Transporting crude at any significant scale by alternative pipelines across the Caspian Sea is not an option given the costs, and enormous legal and technological challenges involved.

Transportation through oil tankers across the Caspian is a viable option but will not be at the volume currently transported through CPC. Kazakhstan’s critical reliance on Russia for its crude transport will thus remain extremely high over the medium term.

In our view, Russia’s motivation for maintaining a strong level of control over the CPC pipeline, of which it owns 24%, is to ensure Kazakhstan does not seek to forge stronger ties with the US and other western countries to an extent that close links with Russia are weakened. It also provides a lever for Russia to control oil supplies and prices on the global market.

Given that oil and other liquid hydrocarbons are the principal exports of Kazakhstan (57% of total goods exports in January-November 2022) and the sector makes up 17% of the economy (as of 2020), the cessation of the bulk of crude exports will be highly negative for export earnings and macroeconomic performance, at least in the short term. That said, for export revenues (and therefore the external balance sheet) to be seriously affected, a full closure of the CPC will probably need to last at least several weeks.

Kazakhstan’s policy response to a CPC closure and the duration of any such closure will both be critical determinants of the impact on the country’s credit rating.
Source: Fitch Ratings