The following guest analysis was written by the staff of Global Intelligence Report.
SITUATION: One indirect consequence of the Gulf of Mexico oil spill is the impact it may have on the financing of the many tourism projects that have sprouted along the Caspian Sea. Bordered clockwise from the North by Kazakhstan, Turkmenistan, Iran, Azerbaijan, and Russia, the Caspian Sea is one of the largest bodies of water and an object of strategic ambitions. Though the global financial crisis put many grandiose Caspian Sea tourism projects on hold, some of them are coming back to life, but investors should be alert to tourism trends, corruption, and unanswered questions about demand and potential profit.
ANALYSIS: The magnitude of the consequences of the Gulf of Mexico oil spill is still hard to assess, even more so as there is no consensus as to the exact quantity of oil left in the water: The government says 25% while other organizations, such as the University of Georgia, say 75%.
Tourism Industry Hit Hard: Beyond the ecological disaster and its long-term effects, the economic disaster is being felt by the tourism industry, which is seeing a drop in occupancy rates, though the data were temporarily distorted by the high level of emergency crews sent to the area to work on clean-up operations. President Obama swimming in the water of Panama City with his daughter to show that waters are safe is good marketing but will not suffice to erase the disturbing images of pollution seen for months by potential American and foreign tourists. His statement made a few days before the BP disaster that offshore drilling was safe will remain in cyberspace long enough to haunt him and any leader that approves such drillings.
Beyond the local consequences, there will be worldwide consequences with a strong focus on how safe offshore drillings can be and on how ready and capable any company or country is to deal with an accident. The fact that oil companies’ instruction manuals devote more pages to how to deal with the press than how to deal with an oil spill is telling. Of course, the situation is exacerbated by the fact that it was a deep-sea drilling operation, but in the end all that the public opinion will remember is the soiled shorelines and oil-coated dead wildlife.
The 2008 financial crisis did freeze and mothballed many grandiose projects to build tourist resorts but they are not buried forever. Some of them are coming back to life.
Kazakhstan, The Kenderli Beach Project: Kazakhstan has been engaged in an effort to identify promising economic clusters beyond natural resources to attract foreign investors, and tourism is one of them. Some of the selling arguments were, according to a presentation prepared in 2008 by the Mangistau Region, that the Kenderli Beach Project would close a market gap in the area by being the first resort of that type, be without competition in the Caspian Sea region, and respond to an “interest” in such a resort. The project would attract 300,000 tourists per year with 21,000 beds in 25 hotels of different categories and with 500 houses and luxury villas for private ownership. The $2.5 billion project would also include a theme park and a 36-hole golf course and be coupled with the building of an international airport and a Caspian Sea railway through Public-Private Partnerships (PPP). The collapse of the Kazakh banks, notably overexposed in the local real estate market, dried up both domestic and international funding for large infrastructure projects. However, in June 2010 the Syrian International Business Centre (SIBC) Group was looking for Malaysian companies to help jointly develop the entire project for $5.6 billion.
Turkmenistan, The Awaza National Tourist Zone: About 200 km south of the border with Kazakhstan, lie about 30 km of beach that are already partly used. In 2007, the government of Turkmenistan announced the creation of the Awaza National Tourist Zone to develop the tourism potential of the region. The Awaza area is envisioned to have about 60 hotels, health resorts, boarding houses and country houses, trading and business-centers spread over a 16-km stretch of prime beaches. The Turkmen government plans to invest roughly $1 billion into the development of the first phase project while foreign investors could bring an additional $4 billion.
• About nine miles off the coast of Azerbaijan’s capital Baku, Beyuk Zira Island, known as Nargin, is the focus of a project planning 300 villas, a golf course, hotels and entertainment facilities, and a beach on the one-square-kilometer island with a price tag of $6 billion.
• Iran has projects, too, but not of large scales due to the challenge in getting investments, and with a lesser focus on swimming and relaxing on the beach. Cultural activities and now ecotourism are considered.
• In Russia’s North Caucasus, Dagestan, in Soviet days, used to be a favored beach destination on the Caspian, but since civil unrest has curtailed the number of beachgoers, most of the attention, energy, and money are on preparing Sochi on the Black Sea for the Olympic Games of 2014.
Phuket on the Caspian: The desire to diversify the economy away from natural resources is laudable but it seems that a wide array of issues have not been taken into consideration before going to the drawing boards and presenting multi-billion-dollar resort projects to investors.
• Competition: The beaches of Kazakhstan, Turkmenistan, and Azerbaijan are not ranked among the top beaches in the collective mind, particularly among Western tourists who prefer Florida, Hawaii, the Mediterranean Sea, Thailand, or the Caribbean, which appear on the 20 list of beach destinations to visit in the next 10 years. There are a number of factors tourists consider before choosing a destination, among them: the ease and cost of reaching that destination, weather, safety, food, communication, and cultural attractions.
• Visa Issues: Getting a visa to the countries bordering the Caspian is not always easy. It also can be costly and very time consuming. Turkmenistan announced a simplified system for tourists going to the Awaza National Tourist Zone but a visa remains a visa.
• Travel Time and Cost: Charter jets are not overcrowding the skies leading to the Caspian. Between state and national airline monopolies and the lack of competition, flying to the Caspian is a major financial commitment. There are also no direct flights from major Western hubs to cities close to the beaches, and taking local carriers, some of which have archaic reservation systems and planes, would be a major deterrent.
• Pollution and Over Exploitation: Though the Caspian Sea has some nice waters and beautiful beaches, it is an environment at high risk. The Volga river, which provides 80% of the fresh water inflow, is quite polluted. More concerning is the increased oil and gas extraction coupled with a multiplication of underwater oil and gas pipelines. The Nargin project in Azerbaijan is only a few kilometers away from major oilrigs and Baku is not known for its pristine waters. Awaza is located less than 15 km away from the main port of Turkmenbashi. The risk of pollution further exacerbates existing problems such as the overfishing of endangered species. In March 2010, the International Union for the Conservation of Nature (IUCN) reclassified the beluga sturgeon in the Caspian Sea as “critically endangered” along with all of the other commercially important Caspian Sea species, which are the main producers of wild caviar.
• Corruption: With Kazakhstan being the least corrupt Caspian Sea country on Transparency International’s Corruption Perceptions Index 2009 and ranking #120 (out of a 180). The infrastructure sector is riddled with corruption, the domestic environmental agencies are severely underfunded, and government-endorsed projects are rarely challenged.
BOTTOM LINE: Despite the issues we identified, one should not underestimate the attraction these projects may have at a regional level, drawing the middle and upper class from neighboring countries and post-Soviet states. This could turn out to be true, even more so if facilities meeting international standards are put on the market. However, thinking that such large projects would attract large crowds to turn a profit may be over optimistic, even more so as the cannibalizing effect of having similar projects in close proximity does not seem to have been taken into consideration.
Dubai and its ability to build an entire city on sand and to become a major commercial and tourist hub has mesmerized decision-makers from all the countries bordering the Caspian Sea: they believe they could do the same, just like they believe they could replicate the economic model of Singapore that achieved economic success with a partly democratic system. However, the fact that Dubai almost went belly up for overspending if it was not for Abu Dhabi’s rescue package also does not seem to have been taken into consideration.
Whether there is sufficient demand for potential investors to turn a profit is a key question that does not seem to have been fully answered. Any of these projects may end up just being a showcase for the country as a tourist destination with some losing a lot of money.