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By Ariel Cohen
Last Friday, the United Arab Emirates acknowledged that [2] damage sustained by a Japanese supertanker on July 28, 2010, in the Persian Gulf, was the result of terrorism——not a “huge wave” as was announced earlier. The attack demonstrated the increasing danger of maritime terrorism against critical energy infrastructure. Prior to this , both UAE and Iran discounted the possibility of a terrorist attack.
By Ariel Cohen
During the past decade, the Arctic re-emerged as an area of vital U.S. interest. In addition to the oil and gas bonanza, two strategic maritime routes cross the region: the Northern Sea route along the northern coast of Eurasia and the Northwest Passage along the northern coast of Canada.
By Ariel Cohen
President Hugo Chavez recently announced that Venezuela will purchase dozens of Russian tanks and other arms, signaling growing military ties between the two countries -- and trouble ahead in the hemisphere.
The deal comes amid tensions with Colombia as Mr. Chavez continues to support the narco-terrorism of the Revolutionary Armed Forces of Colombia (FARC) and as he campaigns against the United States using Colombian facilities for anti-drug efforts in the Andes.
By Ariel Cohen
There are voices in the Obama Administration who believe that the Kremlin is able and willing to exert pressure on Iran to prevent it from acquiring nuclear weapons. However, perceived geopolitical and economic benefits in the unstable Persian Gulf, in which American influence is on the wane, outweigh Russia’s concerns about a nuclear-armed Iran.
By Ariel Cohen
While Azerbaijan had a bumper year in 2008, the Caucasus at large suffered a shock as Russian tanks rolled into Georiga. This was only one symptom of a deteriorating security situation in Eurasia and the Middle East. With the gas war and the Gaza clash, people shudder as to what else may be coming.
By Ariel Cohen
Despite feverish negotiations with participation of the European Union, Russia and Ukraine failed to agree on resolution of the gas dispute between them. Mutual disdain escalated haggling and acrimony between leaders in Moscow and Kiev to hysterical pitch.
By Ariel Cohen & Owen Graham
The global financial crisis has caused a massive slide in energy prices, down to $40-$50 a barrel of NYMEX light sweet crude from the July 2008 highs of $147. While oil prices, along with other commodities, are expected to continue their fall in the short term, over the medium to long term, economic recovery is likely to generate growth in demand, and oil prices are expected to recover as energy markets tighten.
By Ariel Cohen
The Arctic is quickly reemerging as a strategic area where vital U.S. interests are at stake. The geopolitical and geo-economic importance of the Arctic region is rising rapidly, and its mineral wealth will likely transform the region into a booming economic frontier in the 21st century.
By Ariel Cohen
Steadily and stealthily, a natural gas cartel has emerged over the last seven years. On October 21 in Tehran, the Gas Exporting Countries’ Forum (GECF) agreed to form a cartel. Russia, Iran, and Qatar announced that they intend to form a yet–unnamed group to "coordinate gas policy." The Group of Three (the "troika") will meet quarterly to coordinate and exercise control over close to two–thirds of the world’s gas reserves and a quarter of all gas production.
By Ariel Cohen
Lord George Robertson, deputy chairman of TNK-BP’s board and former secretary-general of Nato, has blasted BP’s Russian partners at a closed-doors luncheon meeting at the Nixon Center in Washington on Thursday, July 25.
By Ariel Cohen
Oil demand appears in unexpected places, where there was very little demand in the recent past. The oil thirst is mounting in the Persian Gulf, Russia, even in Africa, due to expanding wealth, booming construction projects, and growing populations. Government fuel subsidies, typical in energy exporting countries, are increasing demand for gasoline. No wonder that the oil prices are going up, up and away.
By Ariel Cohen
U.S. Secretary of the Treasury Henry (Hank) Paulson is heading to Saudi Arabia, Qatar, Kuwait and the United Arab Emirates, to ask the oil producers to pump more oil to get gasoline prices down. He will also ask their Sovereign Wealth Funds, the ships of the line and aircraft carriers of the 21st century geo-economics, to pump more cash into the ailing U.S. banking system, which is already suffering in the aftermath of the sub-prime crisis.
By Ariel Cohen
The announcement by Gazprom CEO Alexei Miller that his company is aiming for the largest market capitalization in the world is an unmistakable indicator how the global financial tectonic plates are shifting. Russian and Chinese energy and telecommunication companies are leading the global Fortune 100 list; India’s Tata and Mittal Steel have become true multinationals.
The Real World: Runaway Oil
05-23-2008
Many oil producing countries benefit greatly from the rising oil prices. Oil at $135 a barrel brings them windfall profits and allows social and economic development unlike anything people can remember.
By Ariel Cohen
Caspian gas producers will come under the increasing pressure from the troika of the founders of the natural gas cartel which has emerged stealthily and steadily over the last seven years. The governments inBaku, Ashgabat, Astana and Tashkent– the four smaller Eurasian gas exporters -- need to coordinate their policy to keep their sovereignty in the face of the growing clout by Moscow and Teheran.
By Ariel Cohen
As you go deeper into debt filling up your tank with $4 gas this weekend, look on the bright side - you’re helping to fund countries that hate you.
From Russia to Iran to Venezuela, America’s adversaries are splurging on oil windfalls, while programs directed against Uncle Sam and his allies are funded by petroleum revenues. Big bucks are allowing the oil sultans and dictators to intimidate US allies, buy politicians and academics, and purchase election outcomes.
By Ariel Cohen
Skyrocketing gasoline prices may be pushing the U.S. economy over the edge, but the oil-rich lords of the Organization of Petroleum Exporting Countries oil cartel don’t give a hoot.
Chakib Khelil, OPEC’s president and Algeria’s oil minister, has warned that oil may go to $120 a barrel. Khelil is an optimist – if one or more of the major oil producers, such as Iran or Venezuela, gets embroiled in a conflict or otherwise destabilizes, oil could go up beyond $130 a barrel.
Ariel Cohen
The world is on the eve of a new energy order, which is going to change the way the Middle Eastern suppliers and consumers world wide do their business. This is not the opinion of a radical environmentalist or even Al Gore.
Fatih Birol is Chief Economist of the International Energy Agency (IEA), the Organization of Economic Cooperation and Development-affiliated agency created after the oil shocks of the 1970s to coordinate the West’s reaction to energy crises. Birol, a former Organization of Petroleum Exporting Countries (OPEC) official, presented the findings of the new “World Energy Outlook 2007 (WEO): China and India Insights” this week to US Congress on Capitol Hill in Washington, Mr. Birol have highlighted several trends that will pose major challenges to advanced economies and developing nations alike.
The rise of demand in China, India, other developing countries and even oil and gas producing states, insufficient levels of available supply, and a woeful lack of investment driven by “resource nationalism”, are quickly transforming energy markets. This will have major implications to both Middle Eastern producers and consumers world wide.
OPEC Rules
The Persian Gulf is the richest and most important oil region in the world. In 2006, Persian Gulf countries produced 28 percent of the world’s oil and contained over half of the world’s oil reserves.
Birol stressed that the non-OPEC production is projected to fall by 2015, and most of increases in production must come from OPEC, primarily the Gulf. Saudi Arabia is they key oil producer that holds 25 percent of the world’s reserves and holds the title of the world’s only swing producer.
Saudi Arabia maintains the world’s largest crude oil production capacity, estimated to be around 11.3 million barrels a day (MMBD). The Kingdom plans to increase its oil production capacity to 12.5 MMBD by 2009. Saudi Arabia is seeking to stay ahead of the demand curve, with a policy that seeks to maintain excess capacity. However, its swing producer power is declining as it currently has only between 1-2 million barrels a day (mbd) of excess capacity.
In Birol’s opinion the are some serious issues with transparency of the Saudi reserves. In a revealing interview for the French daily Le Monde in July 2007, he effectively says that peak oil is just around the corner, and that without a drastic increase in Iraqi production the world will be in a crunch by 2015:
The Saudi government claims 230 billion barrels of reserves, and I have no official reason not to believe these numbers. Nevertheless, Saudi Arabia - as well as other producing countries and oil companies - should be more transparent in their numbers. Oil is a crucial good for all of us and we have the right to know how much oil, as per international standards, is left.
This is the closest an international civil servant can come to criticize the most powerful member of OPEC.
Most of the increases in production will have to come from OPEC areas and the national oil companies therein, IEA says. OPEC members outside the Persian Gulf (excluding Angola) are projected to increase their production capacity only moderately. This leaves the Persian Gulf and, specifically, Saudi Arabia, Iran and Iraq.
Factors that Limit Supply
While the Saudis at least are trying to contribute their share to supply increase, Iranian oil sector mismanagement is famous. Due to massive subsidization ?nd growing demand for gasoline, and shortage of gas for oil well injection, Iran might stop exporting natural gas by 2015. Iraqi political instability is effectively closing the door on their production increases, cutting the global supply and driving prices up.
Another important trend is resource nationalism. International Oil Companies (IOCs) no longer wield their historic power. It is the National Oil Companies that (NOCs) that will largely determine future oil supply.
The other trend taking place with net oil exporters: the negative feedback loop. The higher the price of oil, the more oil exporting economies boom, and therefore domestic demand is stimulated. This leads to falling net exports, and even higher prices. According to a recent report by Lehman Brothers Inc, OPEC countries combined will rival China in global oil demand growth through 2008 and beyond. It is this rising demand from oil exporting countries and major consuming countries that may offset the Saudi increases.[1]
China and India Driving Up Demand
As IEA report makes clear, much of China and India’s future oil imports will have to come from the Middle East. China and India are transforming global energy markets through their sheer size and pace of growth.
In the IEA’s WEO Reference scenario, (projections based on government policies and current economic growth rates) China is set to surpass the U.S. as the world’s top energy consumer in 2010. What is more, between now and 2030, China and India will account for 70 percent of new global oil demand, and 80 percent of global coal demand.
Together, the two countries will account for about 45 percent of the increase in global demand through 2030. This growth will not occur in a vacuum: during this period, the world’s energy needs are expected to be more than 50 percent higher in 2030 than current levels. It is unclear how this energy gap will be bridged and by which producers. Suffice it to say, the IEA is not optimistic.
Recently, when speaking about the rising demand from China and India and a host of pressing supply problems, Nobuo Tanaka, executive director of IEA, stated that between now and 2030, "a supply-side crunch in the period to 2015, involving an abrupt escalation in oil prices cannot be ruled out.”
Fatih Birol explained the numbers behind this potential crunch. According to Mr. Birol, an additional 37.5 million barrels per day (MMBD) will be required to meet demand by 2015, but only 25 MMBD are planned. Consumption is expected to rise from today’s 85 MMBD to 116.3 MMBD in 2030.
Huge Investment Needed
In order to meet this demand the world is going to need a lot more production capacity—more than may be available. A tremendous amount of investment will be necessary. In fact, the IEA report states that an incredible sum, $22 trillion of investment in new fields and supply infrastructure will be needed between 2006 and 2030!
Clearly, mobilizing these investments will be challenging. While there are a number of fields under development, new finds are expected to be of a more challenging kind geologically and geographically. The concern is that these fields will be expensive and whether brought to the market in time to satisfy demand.
While the peak energy demand may be good for Middle Eastern supplier, increasing geopolitical scrambling by global players and unstable domestic politics will remain a threat. At times, a boom is as difficult to manage as a bust.
Vigilance, economic liberalization, developing financial infrastructure and the rule of law, diversification away from crude exports – and away from oil and gas altogether—may mitigate future risks.
Developing astute domestic, diplomatic and security policies are the only prescriptions that may see the producers through these uncertain times.
-- Ariel Cohen, Ph.D., is a Senior Research Fellow at the Heritage Foundation. The views expressed here are author’s only. Owen Graham contributed to this research.
by Ariel Cohen
The cold shower Russian President Vladimir Putin unleashed on the United States at the international security conference in Munich should not have come as a surprise. After all, Mr. Putin himself and a host of other senior spokesmen, including his defense minister and one of the official heirs-apparent Sergey Ivanov and military Chief of Staff Gen. Yuri Baluevsky have said as much in the past.
The list of complaints Mr. Putin heaped against the United States is long. The main beef is that the American "hyperpower" is pursuing its unilateral foreign, defense, cultural and economic policy, disregarding international law and ignoring the U.N. (where Russia has a veto power). French President Jacques Chirac would be proud. However, Russia takes its opposition much further.
Mr. Putin accused the U.S. of expanding NATO to Russian borders and deploying "5,000 bayonets" each in forward bases in Romania and Bulgaria. He blasted the future U.S. missile defense bases in Central Europe, possibly in Poland or the Czech Republic. Mr. Putin said the missile defenses aim to neutralize Russian retaliatory nuclear strike capability -- a destabilizing factor in Russia"s nuclear playbook.
He further accused Washington of not meeting its obligations on nuclear disarmament treaties and trying to hide hundreds of nuclear weapons in warehouses, "under the blanket and under the pillow."
In a rhetorical overkill, Mr. Putin blamed U.S. policies for the failure of nuclear nonproliferation, implying justification for North Korean and Iranian efforts to acquire weapons of mass destruction.
Mr. Putin lambasted NATO members which refuse to ratify Conventional Forces Europe (CFE) Treaty; criticized the Organization for Security and Cooperation in Europe (OSCE) for democracy promotion and criticisms of Russia"s track records in human rights.
Many Russian and Western experts perceive Mr. Putin"s speech as a declaration of a new Cold War. The outburst has a number of domestic and international "drivers," which add up to a picture of Russia craving strategic parity with the United States and defining its national identity in opposition to the West.
Domestically, several years of increasingly loud anti-American and anti-Western propaganda in pro-government and nationalist media have nurtured a generation of Russians who are ethnocentric, and reject liberal values. Sixty percent in the recent poll supported the slogan "Russia for Russians." Sustained nationalist and anti-American brainwashing bridged the gap between the Soviet superpower chauvinism and the new Russian assertiveness.
An "America-as-the-enemy" construct bolsters legitimacy of the current regime, headed largely by former KGB officers, as the defender of Mother Russia. It rejects fully integrating Russia into the global economic and political community, as the other official "heir-apparent" Deputy Prime Minister Dmitry Medvedev suggested in his January 2007 speech at the Davos World Economic Forum.
Russia also plans to spend $189 billion in the next five years for a rapid military modernization. Defense Minister Sergei Ivanov has announced the program on Feb. 8, which includes new nuclear submarines; aircraft carriers; a fleet of supersonic strategic TU-160 bombers; and development of the fifth generation fighter jet. Clearly, such a program aims at balancing off the US military power, not fighting terrorists in the Caucasus Mountains. It needs U.S. as "glavny protivnik" the principal adversary.
Russia is also trying to corner weapons sales markets, especially those of rogue and semi-rogue states. Russia is the largest arms supplier to China and Iran; it signed a $3 billion arms deal with Hugo Chavez"s Venezuela over U.S. objections; and is courting Middle Eastern buyers.
Russia is happy to play into the Arab and Muslim street"s anti-Americanism and to signal that the U.S., which faces severe difficulties in Iraq, does not have exclusive strategic dominance in the Persian Gulf and in the Middle East. Moscow is back -- with vengeance -- in the most important energy depot of the world. It is no accident that the speech was delivered on the eve of Mr. Putin’s historic visit to Saudi Arabia, the first for any Russian or Soviet leader, and to Qatar and Jordan, America"s allies in the Middle East.
The timing of Mr. Putin’s speech couldn’t be worse from Washington"s perspective. With Iraq in limbo, and Iran remaining truculent, the chances for Russian cooperation in taming Tehran"s nuclear ambitions are dwindling. Russia was recalcitrant in providing necessary pressure on Iran during the December 2006 U.N. Security Council Resolution 1737 negotiations, and may refuse to do so when UNSC revisits the Iranian dossier in a few weeks.
Russia is putting not just a military might behind its rhetoric, but also an economic muscle: Mr. Putin publicly approved of the Iranian Supreme Leader Ayatollah Ali Khamenei"s idea of creating a natural gas OPEC-style cartel. Whether such a coalition materializes, and whether it may translate itself into a military alliance, remains to be seen.
The image of a new Cold War may be too simplistic to describe the emerging global world architecture. Clearly, the postcommunist honeymoon is over, dead and buried. A realistic reassessment of the relationship is in order.
The United States should avoid a rhetorical confrontation with Moscow. Deeds, not words, are necessary to send a message to the Kremlin that the U.S. and its allies will not by bullied but that Washington is not interested in a renewed hostility.
The United States should continue cooperation with Russia on issues and interests of mutual concern, such as energy, nonproliferation and space.
It is time to build bridges to potential Russian allies, to prevent the emergence of anti-American blocs. U.S. should also appeal to its traditional allies in Europe and elsewhere to recognize the changing geo-strategic balance in the Eastern hemisphere, to boost mutual defenses, to coordinate energy policy and cooperate on energy security among the consumers.
This is hardly the end of history, but rather continuation of an old and tasking game.
State of the Union 2007: Recognizing the Threat of Strategic Oil Dependency
01-24-2007
In the State of the Union address, President Bush called a spade a shovel. Building on his earlier statement that America is “addicted to oil”, he said:
For too long, our Nation has been dependent on oil. America’s dependence leaves more vulnerable to hostile regimes and to terrorists, who could cause huge disruptions of oil shipments, raise the price of oil, and do great harm to our economy.
The President called on Congress to double the capacity of the strategic petroleum reserve and for America to provide global leadership to encourage our friends and allies to consider policies to enhance their energy security. To improve the global energy balance, America’s friends and allies should increase their production of oil, natural gas, and substitute fuels; diversify their supplies as much as possible away from unstable regions; make fuel consumption more efficient through technological innovation; and increase their Strategic Petroleum Reserves (SPRs).
The United States, said the President, must oppose “foreign actions that undermine free, open and competitive markets for trade and investment in energy supply”—a not-so-veiled reference to the policies of Organization of Petroleum Exporting Countries (OPEC) and its individual member states.
A Strategic Threat
The United States is the largest oil importer in the world, importing 13.5 million barrels per day (mbd), which accounts for 63.5 percent of total U.S. daily consumption. Oil from the Middle East—specifically, the Persian Gulf—accounts for 17 percent of U.S. oil imports, and this dependence is growing.
The U.S. government predicts that by 2025, the country will import 68 percent of its oil.The measures of the Energy Policy Act of 2005 will slow the growth rate of U.S. dependence only slightly. Recognizing the threat of strategic oil dependency, President Bush has suggested a number of measures, including increasing domestic drilling.
The President is right about this threat. Today, the U.S. faces a dire geopolitical challenge. Two-thirds of the world’s oil reserves are concentrated in the increasingly unstable Middle East. The Persian Gulf will remain the largest and most important oil producer on the planet. Today, the leadership of the Islamic Republic of Iran is launching a bid to acquire both conventional and nuclear capabilities that will threaten its oil-producing neighbors, as well as America’s allies, such as Egypt, Turkey, and Israel. Iranian dominance of the oil fields of the Gulf countries, some of which are populated by Shi’a Muslims, is an escalating strategic threat.
So are the virulently anti-American policies of the Venezuelan President Hugo Chavez, who embarked on Marxist-style nationalization of foreign-owned energy assets, including those of Chevron, Conoco, Exxon Mobil, BP, Norway’s Statoil Arlington, and American Energy Systems. Chavez, a self-proclaimed Marxist and Trotskyite, has called President Bush the “devil” at the U.N. General Assembly and told Yankees to “go to hell.” He recently rolled out the red carpet for Iranian president Mahmoud Ahmadinejad, a long-term friend and ally. Vladimir Putin’s Russia is selling billions of dollars of arms to both Iran and Venezuela.
Russia, the main Eurasian oil exporter, at 4 million barrels per day, is increasingly nationalistic. Western energy companies in the giant Sakhalin-2 project were given the boot. Chevron is restricted from expanding the vital Caspian Pipeline Consortium route to export more Kazakhstani oil, and Gazprom reneged on its promise to admit American and European companies to develop the giant Shtokman field in the Barents Sea of the North Atlantic.
Nigeria, another major producer, faces chronic corruption and ethnic violence, while Angola, another fast-growing African exporter, is joining the the quasi-monopolistic Organization of Petroleum Exporting Countries (OPEC) cartel.
Not a single oil producing province is stable and at peace. It is only a matter of time until a major conflagration in the Middle East or simultaneous crises in two or more secondary energy producing regions will lead to a massive spike in oil prices, possibly triggering a global recession.
Monopolistic Price Controls
Since its creation in 1960, OPEC, which is dominated by Persian Gulf producers, has successfully restricted its member states’ petroleum production, artificially distorting the world’s oil supply to line its members’ pockets. Over the years, OPEC has been quick to cut supply and slow to increase production, bringing oil prices to today’s high levels.
Most OPEC member countries and other oil producers have high levels of government economic regulation and corruption, as documented in the Index of Economic Freedom, published by The Heritage Foundation and The Wall Street Journal. Thus consumers are effectively paying two premiums on oil: one for security and one for its suppliers’ economic inefficiency and monopolistic behavior.
Several times, OPEC’s supply-fixing strategy has brought devastation to the U.S. and global economies:
The 1973-74 Arab oil embargo resulted in a worldwide economic recession, lasting from 1974 to 1980.
OPEC’s 1980 failure to increase production in the face of the Iranian revolution resulted in historically high oil prices of $81 per barrel in 2005 dollars.
OPEC’s refusal in 1990 to increase production sufficiently to keep prices stable when Saddam Hussein occupied Kuwait caused another spike.
OPEC’s resistance since 2004 to add productive capacity has sent oil prices to over $70 a barrel, once again endangering the world’s economic growth.
Transferring Wealth, Enabling Terrorism
The only serious challenge to the organization came in 1978 when a U.S. non-profit labor association, the International Association of Machinists and Aerospace Workers (IAM), sued OPEC under the Sherman Antitrust Act, in IAM v. OPEC. The case was rejected in 1981 by the U.S. Court of Appeals for the Ninth Circuit. OPEC, the court ruled, could not be prosecuted under the Sherman Act due to the foreign sovereign immunity protection it claimed for its member states.
That decision was wrong. Government-owned companies that engage in purely business activities do not warrant sovereign immunity protection, according to prevailing legal doctrines.
High oil prices, which OPEC facilitates, serve to transfer wealth from Western consumers to petroleum producers. This wealth transfer, among other things, funds terrorism through individual oil wealth and government-controlled foundations. It also permits hundreds of millions of dollars to be spent on radical Islamist education in madrassahs (Islamic religious academies).
Furthermore, the oil-cash glut in the Gulf states and elsewhere blocks much-needed economic reform in oil-producing countries. State subsidies for everything from health care to industry to bloated bureaucracy continue unabated, funded by Western consumers.
Congress Gets Into Action
Growing concerns over energy prices have at last prompted the 109th Congress to examine the legal hurdles that prevent the United States from defending its economic and national security interests. In the early part of 2005, a group of senators introduced the “No Oil Producing and Exporting Cartels Act” (S. 555), known as NOPEC, to amend the Sherman Act to make oil-producing and exporting cartels illegal. This amendment would modify sections of the Sherman Act to allow the U.S. Department of Justice or the Federal Trade Commission to bring suits against OPEC for its monopolistic practices.
Recommendations for Congress
Building on President Bush’s initiatives the U.S. Congress should:
Defend American businesses and consumers. Congress should send a strong and long-overdue signal to OPEC oil barons that they must stop limiting production and investment access. Any legislation should allow private suits against OPEC. If OPEC is to be reined in, individuals and companies that it has damaged must also be allowed to bring suits against the cartel. As the IAM v. OPEC decision made clear, it is up to Congress to amend the Sherman Act rather than rely upon the courts.
Remove tariffs on imported ethanol. Making fuel-flexible cars viable will require lifting the U.S. tariff on imported ethanol (currently 54 cents per gallon). The U.S. ethanol industry relies on corn and grain sorghum, which yields much less ethanol per pound than the sugar cane that is used abroad.
Call on major energy consumers to expand energy policy coordination. While European countries have a joint petroleum reserve and national petroleum reserves that can withstand up to 12 weeks of a major oil market disruption, Asian countries" SPRs (with the exception of Japan"s) have insufficient capacity. Congress and the Bush Administration should call on Asian countries to cooperate in building a system of SPRs to supply major consumers, including China, India, and Japan. The Administration should encourage the European Union countries to coordinate their energy policy, especially vis-à-vis Russia and the Middle East, on which they are woefully dependent. The U.S. should also initiate a global effort to coordinate the energy policies of major energy consumers, including China and India. This can be done under the aegis of International Energy Agency (IEA).
Conclusion
President Bush sounded a clarion call to promote U.S. energy security, which, due to America’s growing dependence on imported oil, is inseparable from increasing instability of the oil markets. Congress and the Administration should work together to reduce dependence on foreign oil; to allow import of a cheap alternative fuels, such as sugar cane ethanol; and address, with US allies, threats to oil supplies at home and abroad.
On November 19, 2006, America and Russia signed a bilateral market access agreement that details U.S. requirements for Russia"s accession to the World Trade Organization (WTO). Russia will now work to combine the bilateral accession agreements into a formal multilateral draft Protocol of Accession that the WTO General Council must approve before Russia can become a member of the WTO. As part of this process, Russia will likely face calls for additional commitments to bring its trade regime into compliance with WTO rules, including the elimination of domestic subsidies, improved customs and regulatory transparency, privatization of state-owned enterprises, and stronger intellectual property rights (IPR) protection. The final multilateral accession agreement should both integrate Russia into the global, rules-based trading system and help lock in the reforms needed to improve Russia"s long-term economic potential.
In order for the U.S. to share the benefits of Russia"s eventual accession to the WTO, Congress must vote to ratify Permanent Normal Trading Relations (PNTR) with Russia. America"s businesses, farmers, and households stand to gain from Russia joining the WTO, but, without PNTR, they will be at a disadvantage competing with their foreign counterparts in the Russian market. The successful approval of such legislation is also an important step in strengthening the U.S.–Russia economic relationship and maintaining open channels for discussions to advance issues of concern to the United States, such as access to hydrocarbons and other natural resources.
The Case for PNTR
As a member of the WTO, the United States is generally obligated to provide reciprocal, unconditioned most-favored-nation (MFN) treatment to the goods of all other WTO members. As such, the U.S. must either extend PNTR to Russia or invoke the non-application provision of Article XIII of the WTO agreement. The non-application provision allows member countries to exclude other members from MFN benefits at the risk of reciprocal treatment. If the U.S. opts to invoke the provision, Russia would have the right to deny the U.S. equal treatment under the WTO agreement. Thus, the U.S. would be left to watch other countries reap the benefits of Russia"s accession. These benefits include:
Even before these new commitments to liberalize trade were made, U.S. companies, such as Boeing, ConocoPhillips, Johnson & Johnson, General Motors, and Ford, have enjoyed unprecedented profits in Russian markets. Russia has enjoyed unprecedented economic growth, averaging around 7 percent a year, which has been bolstered by high oil prices since 1999. This growth has also helped expand the bilateral trade relationship between the U.S. and the Russian Federation, with total two-way trade growing an average of 15 percent per year between 2000 and 2005 and valuing over $19 billion in 2005.[5] With Russia"s new accession commitments, this relationship should only become stronger and more important to the two economies.
No trade agreement alone, no matter how comprehensive, can solve all of the economic policy and structural issues a country faces. But, trade agreements can help maintain the momentum for economic reform and put additional pressure on foreign governments to enforce the rule of law. The growing Russian market is an opportunity that American businesses cannot and should not miss. The provisions of the U.S.—Russian bilateral accession agreement go far toward insuring that the final protocol pulls Russia into a world trade regime that promotes fairness and opportunity for Russia and other WTO members.
Conclusion
The U.S.–Russia bilateral agreement is especially effective in insuring that Russia"s accession will result in greater opportunity for all WTO countries. Farmers, manufacturers, and service exporters will gain new, meaningful market access to Russian markets. Russia must reduce or dismantle tariffs and non-tariff barriers to trade, and Russia will have to operate according to international rules of trade or be subject to action by the WTO dispute settlement process. And, the agreement will strengthen intellectual property rights protection. Importantly, U.S. ability to raise important issues in the WTO framework, such as providing a level playing field to all companies in the natural resources sectors, will also be strengthened. Russian economic reformers" capacity to push forward with domestic economic reform will also be enhanced.
Congressional approval of Permanent Normal Trade Relations with Russia will successfully conclude a process that began 13 years ago with the establishment of the Working Party on the Accession of the Russian Federation to the WTO. America would benefit from Russia, an increasingly important global trader, joining the WTO"s rules-based trade regime.
Daniella Markheim is Jay Van Andel Senior Analyst in Trade Policy in the Center for International Trade and Economics, and Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.
[1] Office of the United States Trade Representative, “Trade Facts: Results of Bilateral Negotiations on Russia’s Accession to the World Trade Organization (WTO) – Non-agricultural Goods Market Access,” November 19, 2006, athttp://www.ustr.gov/assets/Document_Library/Fact_Sheets/2006/asset_upload_
file693_9979.pdf (November 27, 2006).
[2] Ibid.
[3] Office of the United States Trade Representative, “Trade Facts: Results of Bilateral Negotiations on Russia’s Accession to the World Trade Organization (WTO) – Agricultural Goods Market Access,” November 19, 2006, athttp://www.ustr.gov/assets/Document_Library/Fact_Sheets/2006/asset_upload_
file346_9977.pdf (November 27, 2006.
[4] Office of the United States Trade Representative, “Trade Facts: Results of Bilateral Negotiations on Russia’s Accession to the World Trade Organization (WTO) – Action on Critical IPR Issues,” November 19, 2006, athttp://www.ustr.gov/assets/Document_Library/Fact_Sheets/2006/asset_upload_
file151_9980.pdf (November 27, 2006).
[5] U.S. Department of Commerce, International Trade Administration, “National Trade Data,” at http://tse.export.gov/ (November 29, 2006).
On November 19, President George Bush and Russian President Vladimir Putin will discuss dominant global security issues—the Middle East, including Iran and Iraq, North Korea, and Georgia—at a summit in Hanoi, Vietnam. ?his meeting will take place alongside the meeting of the Asia Pacific Economic Cooperation Organization (APEC). Both presidents, along with U.S. Trade Representative Susan Schwab and the Russian Economics Minister German Gref, are also expected to preside over the signing ceremony of a bilateral protocol on Russia’s accession to the World Trade Organization (WTO).
Despite a troubled relationship between the U.S. and Russia in the last three years, the U.S. has an interest in Russian membership in rules-based organizations, such as the WTO. Furthermore, expansion of U.S. and Western trade and investment ties with Russia integrates Russia with the outside world and hopefully will prevent Russian isolationism and aggression. If President Bush receives assurances from Putin on two key issues—Iran and foreign access to Russian oil and gas reserves—the U.S. should sign the bilateral protocol.
Iran: The Key Issue
Russia has been insufficiently cooperating with the U.S. on the key international security issue—Iran—by stalling and backtracking on the earlier, agreed-upon U.N. Security Council (UNSC) draft resolution sponsored by Great Britain, France, and Germany. That document calls for sanctions against Iran’s nuclear, missile, and military programs.
Moreover, Russian Foreign Minister Sergey Lavrov recently downplayed the International Atomic Energy Agency’s (IAEA) discovery that Iran has concealed highly enriched uranium and plutonium—even as President Mahmud Ahmadinejad promised to make Iran a nuclear power by March 2007 and announced the launch of a 3,000-strong centrifuge cascade capable of enriching weapons-grade fissile material. Ahmadinejad also threatened to expand the cascade to 60,000 centrifuges, which would eventually give Iran a powerful nuclear weapons-producing capability.
Moscow is concerned that support of tough UNSC sanctions may diminish its leverage in Teheran and the Middle East as compared with Washington and European capitals. The Kremlin may also be concerned that sanctions could jeopardize its Bushehr nuclear reactor deal and the sale of TOR M-1 mobile anti-aircraft system worth $700 million. Proposed sanctions could affect many other transactions of weapons and technology: For example, Russia supports technology transfer to the Iranian space program, a precursor to the intercontinental ballistic missile (ICBM) production capacity. Earlier this week U.S. Ambassador to the U.N. John Bolton rejected Russia’s alternative, and toothless, sanctions resolution draft.
Promises on Trade
President Bush has promised Putin repeatedly to abolish the Jackson-Vanick Amendment. The amendment, passed in 1974, denied the USSR the Most Favored Nation (MFN) status in trade. He also promised Putin to facilitate the passage of Permanent Normal Trade Relations (PNTR) through Congress. So far, neither has been accomplished, and the new Democratic majority in Congress is likely to stall ?n these issues, citing concerns about trade, insufficient protection of intellectual property rights, democracy shortcomings, and harsh treatment of Russia’s neighbors, such as Georgia.
The U.S. business community supports liberalizing trade with Russia and has lobbied for Russian accession to WTO. Boeing, Shell, Ford, Microsoft, and a number of agribusinesses have market access issues to address and businesses to expand in what is one of the most dynamic economies on the planet. Russia has been growing at about 6.5 percent of GDP a year since 2000.
The WTO agreement does have clear achievements, such as Russia’s recognition of 100 percent foreign owned banks, broker-dealers, and investment companies. The agreement also provides for some liberalization of the insurance sector.
Russia has also softened its stance on major agricultural dispute resolution issues regarding U.S. exports of meat and poultry. President Putin had to override the intransigent and allegedly corrupt Russian Agricultural Ministry and the meat-and-poultry lobby to do this.
Energy Access
A major concern remains unanswered: foreign company access to the Russian mineral resources fields and deposits, including hydrocarbons, and private ownership of oil and gas pipelines. Russia promised and then denied Western companies partnership in development of the giant Shtokman gas field in the Barents Sea. Russia is also facing difficulties in the Sakhalin Island oil projects. Additionally, the Russian pipeline monopoly Transneft is increasing tariffs for transit through the Caspian Pipeline Consortium (CPS) pipeline from Kazakhstan to the Black Sea. The tariff increase is a major bottleneck in development of exportable Russian energy resources, and the U.S. should achieve progress before granting Russia PNTR.
Georgia on Moscow’s Mind
Russia rejects any official mediation of the Georgian conflict, which it deems within its “sphere of influence.” Moscow is threatening to recognize independence of Abkhazia and South Ossetia, both parts of Georgia, following the model of Kosovo. The U.S. rejection of the South Ossetia’s November 12 independence referendum complicates the issue. Moscow must conclude a bilateral WTO accession agreement with Tbilisi, but this will not be easy, as Russia severed trade, financial, and transportation ties with Georgia and banned the two Georgian key exports to Russia: wine and mineral water.
Danger and Opportunity
Moscow and Washington are facing the lowest point in the bilateral relations since the end of the Cold War, with Russia providing arms and diplomatic cover to Iran, the main anti-status quo power in the Middle East and the world. Moscow, at the same time, strives to join the developed nations as a respected power and a key supplier of energy, raw materials, and, increasingly, machine tools, industrial goods, and services. It cannot achieve such status while challenging the U.S. on vital security issues. Signing the WTO protocol is a step away from confrontation and, hopefully, toward cooperation on the two issues of great importance to the U.S.—Iran, and access to oil and gas.
At the Hanoi summit, President Bush should strive to receive guarantees from President Putin that Russia will end its fence-sitting on the Iranian nuclear program and will recognize the threat to world peace, including the threat to itself, from a missile-wielding, nuclear-armed Iran. Russia should support and be part of the U.S.-European policy on bringing sanctions against Iran and not ruling out the use of force if sanctions fail.
In exchange, President Bush should recommit to passing PNTR for Russian and abolishing the Jackson-Vanick Amendment in the lame duck session of Congress. However, Russia must agree to allow Western companies access to its natural resources and energy transportation infrastructure. Russia also needs to demonstrate that it is serious in protecting intellectual property rights.
Finally, the U.S. may consider offering its services in resolving the Russia-Georgia dispute, which should include lifting Russian economic and transportation sanctions in exchange for lifting Georgia’s objections to Russia’s WTO membership.
Conclusion
Presidents Bush and Putin, like their countries, have experienced ups and downs—and a lack of trust—in attempting, and often failing, to reconcile conflicting national interests for the greater part of the decade. Addressing U.S. concerns about Iran and energy and signing Russia’s WTO accession is a good place to start in turning a new page in this complicated relationship.
In the past five years, real and present dangers to U.S. national security, especially Islamist terrorism and threats to the energy supply, have affected U.S. policy in Central Asia. The region has great energy potential and is strategically important, but it is land-locked, which complicates U.S. access and involvement there.[1]
The United States has varied and at times competing interests in Central Asia. The region, which includes the five post-Soviet states of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, as well as Afghanistan and the Caspian basin, plays an important part in U.S. global strategy in view of its proximity to Russia, China, India, Pakistan, Iran, and other key regional actors. No less important are its ethno-religious composition and vast deposits of oil, gas, coal, and uranium.
U.S. interests in Central Asia can be summarized in three simple words: security, energy, and democracy. The United States is waging an enduring struggle to safeguard the West in general and America in particular, not only from terrorist threats emanating from Afghanistan, but also from overreliance on unstable sources of hydrocarbons in the Middle East. In that effort, it is essential that U.S. foreign policy not inflate the importance of one interest to the detriment of the others.
A key U.S. national security concern is the diversification of energy sources, and the Caspian region is a significant alternative source of fossil fuels. To put things in perspective, however, it must be noted that while the Caspian Sea’s production levels are considerable, with peak production comparable to that of Iraq and Kuwait combined, they are much smaller than total Organization of Petroleum Exporting Countries (OPEC) output.
Production levels are expected to reach 4 million barrels per day (bbl/d) in 2015, compared to 45 million bbl/d for the OPEC countries in that year.[2] Central Asia is neither the world’s largest source of oil and gas nor easily accessible; market access is hindered by political and geographic conditions, including continued Russian influence, limited access to waterways beyond the Caspian Sea, and limited export infrastructure.
However, the region is clearly important geopolitically and geoeconomically. Russia controls the majority of oil export routes from reserves in Central Asia and the Caspian.[3] Nevertheless, prior and continuing efforts by major Western oil companies, particularly the Baku–Tbilisi–Ceyhan (BTC) pipeline, as well as current and planned investments in the Central Asian oil sector by India and China, have yielded more options for non-Russian export routes and diversification of the customer base. These developments may help to break the Russian energy-transit monopoly, but they also open the region to intensified competition over energy resources on the part of other energy-hungry economies.
China is steadily increasing its involvement in the energy sector, as demonstrated by the purchase of the PetroKazakhstan oil company last year, acquisition of Canada-based Nations Energy by China Interntional Trust and Investment Corporation (CITIC) in the fall of 2006, and the signing of several significant pipeline agreements. Russia and China have been cooperating to reduce U.S. influence in the region and, as they accrue more Central Asian energy assets, will have more leverage with which to prevent U.S. encroachment into their alleged spheres of influence.
What is needed in Central Asia is a policy that allows the United States to continue to diversify its energy supplies, station its military forces close to the most immediate threats, and create a lasting and deep impact by promoting democratic and free-market values in an area that is still undergoing political and economic development.
Policymakers and lawmakers alike should assess how energy issues fit into wider U.S. strategic interests in the region and develop balanced, nuanced policies that allow the U.S. to stay engaged where necessary while distancing itself from the less savory aspects of these regimes. To achieve these ends, the U.S. should:
Policy Overview
The hydrocarbon reserves of Central Asia are concentrated in the Caspian region. Azerbaijan is therefore a principal actor, despite its location in the Caucasus. It has considerable oil and gas resources in its own right and is central to non-Russian energy transit from Central Asia to points west. The bulk of Central Asian–Caspian hydrocarbons is located in Kazakhstan, Azerbaijan, Uzbekistan, and Turkmenistan. Both Tajikistan and the Kyrgyz Republic have limited reserves of oil and gas in amounts that thus far have not warranted much attention from foreign investors.
Table 1, which shows proven and possible oil reserves by country, demonstrates that the region’s largest oil deposits as well as the three largest regional oil projects are located in Kazakhstan and Azerbaijan. These three projects are in the Tengiz and Karachaganak fields in Kazakhstan and the Azeri–Chirag–Guneshli (deep-water) field in Azerbaijan.[4] Each project includes Western oil majors as shareholders.
Potential offshore reserves of Turkmen oil in the Caspian Sea have yet to be explored or developed because of disputes between Turkmenistan, Azerbaijan, and Iran over border delineation in the southern portion of the sea.[6]
Oil Transit
Existing oil pipelines in Central Asia include the following:
It is estimated that the oil fields of Central Asia are capable of producing about 4 million barrels per day in 2015, roughly equivalent to the daily production levels of Iraq and Kuwait combined.[8] Possible future oil pipeline projects include the Central Asia Oil Pipeline (CAOP) and the Kazakhstan–China pipeline, construction of which is already underway.
Finally, in December 2002, the governments of Turkmenistan, Afghanistan, and Pakistan signed a Memorandum of Understanding to construct the Central Asia Oil Pipeline, which would bring Uzbek and Turkmen oil to Gwadar, Pakistan, on the Arabian Sea. However, this project has been delayed by continued instability in Afghanistan.
Natural Gas
The Central Asian countries with the largest reserves of natural gas are Turkmenistan and Uzbekistan, although there are considerable amounts of gas in Kazakhstan (particularly the Karachaganak field in western Kazakhstan) and Azerbaijan (Shah Deniz). (See Table 2.)
Central Asian gas transit routes that are not controlled by Russia are scarce and are currently limited to the as yet unfinished Baku–Tbilisi–Erzerum pipeline, from Azerbaijan to Turkey, and Korpedzhe–Kurt-Kui, which is short, extending only from Turkmenistan to Iran. Future projects are hindered by heightened political risk and an unfriendly investment climate.
Other than Korpedzhe–Kurt-Kui, all Turkmen and Uzbek natural gas exports are controlled by Gazprom, and almost all Turkmen gas is exported to Russia via Uzbekistan or to Ukraine via Russia. Existing gas pipelines include:
Future gas transit projects include the Trans-Afghan Pipeline (TAP) and the South Caucasus (Baku–Tbilisi–Erzerum, or BTE) Pipeline. The TAP will bring gas from Turkmenistan through Afghanistan to Fazilka, a port on the Indian–Pakistani border. The governments of Turkmenistan, Afghanistan, and Pakistan signed a Memorandum of Understanding in February of 2006 for construction of the pipeline, and it also has strong backing from India. American officials are promoting the TAP, which will be renamed TAPI when India signs on, as an alternative to the Iran–Pakistan–India pipeline. However, instability in Afghanistan and questions surrounding the commercial viability of the project, which has a planned annual capacity of 1.1 bcf, have far delayed its implementation.
The BTE is currently under construction. It will run parallel to the BTC oil pipeline from the Shah Deniz gas fields in Azerbaijan to Greece and presumably will then be linked to Nabucco, a planned gas pipeline to bring Central Asian and Caspian gas through Greece, Italy, and Austria. The BTE’s planned initial capacity is 1.5 bcf/yr, to be increased to 3 bcf/yr by 2007. Major shareholders include BP, Statoil, SOCAR, LukAgip, Nico (Iran), and Total.
Further Investment
Western investments have made some inroads into the Central Asian oil industry, but the same is not true of the gas sector. The leaders of the biggest gas-producing countries—Turkmenistan and Uzbekistan—are not friendly with the U.S., and their investment climates are similarly unwelcoming.
Overall, in most of Central Asia, local economies are characterized by excessive government intervention, corruption, weak corporate governance, insufficient legislative frameworks, and incompetent, corrupt court systems. They exhibit a systemic failure to protect property rights.
Furthermore, they generally lack transport infrastructure that is not controlled by Russia. Yet Russia is doing its best to prevent foreign firms either from accessing its vast gas pipeline network or from building competing pipeline networks. If multiple gas pipelines connecting Central Asia to outside markets are built, competitive bidding by companies from energy-consuming countries along with increases in both production and demand could drive up prices for Central Asian gas. Both investors in and consumers of Central Asian and Caspian oil and gas would derive great benefit from the increases in exploration, development, extraction, and production that have resulted from increased foreign direct investment in the region.
These benefits have yet to be seen, however, because the Central Asian natural gas sector has received very little outside investment until recently. Russia, through Gazprom, continues to profit from its position as the largest recipient of gas exports from Central Asia. Gazprom buys Central Asian gas at prices as low as one-quarter to one-third of market prices in Europe and then resells gas at market rates. In 2003, Turkmenistan signed an agreement to sell almost all of its gas to Russia starting in 2009.[9]
Recently, however, China also has expressed interest in Turkmen gas. On April 3, 2006, the leaders of the two countries signed a deal whereby an export pipeline will be built from Turkmenistan to China and China will buy 30 billion cubic meters (bcm) of Turkmen gas every year for 30 years beginning in 2009.[10] On the surface, this Chinese–Turkmen deal seems to bode well for the foreign investment climate in Central Asia; however, suspicions abound that Turkmenistan may be overestimating its reserves of natural gas.[11] Thus, there is speculation that Turkmenistan, in making its deal with China, may have oversold its reserves.[12]This very feasible possibility highlights the lack of transparency in Central Asia’s oil and gas markets.
The same difficulties abound in Uzbekistan. Although foreign firms have expressed an interest in Uzbekistan, its natural gas sector remains largely closed to all comers except for Russia. Uzbekneftegaz had a production-sharing agreement with the British firm Trinity Energy, but Uzbekneftegaz broke the deal in 2005, alleging that the subsidiary company created to carry out the deal had not lived up to its end of the agreement.
Since then, Uzbekistan has been working more closely with Gazprom, signing a deal to provide Russia with up to 350 bcf annually, giving Gazprom access to gas fields in the Ustyurt region, and updating dilapidated gas pipelines.[13] In January 2006, Gazprom CEO Aleksei Miller signed a deal with Uzbek President Islam Karimov to transfer three of Uzbekistan’s largest gas fields—Urga, Kuanysh, and Akchalak—to Gazprom, in effect giving the firm a monopoly over the export of Uzbek gas. Some analysts suggest that Karimov is courting Russian favor in exchange for Russian assistance with regime security.[14]
Turkmenistan and Uzbekistan are not prime targets for most foreign investors. Neither country has yet implemented any substantial economic reforms, and both can be described as abysmal in terms of transparency and rule of law. The U.S. Department of State warns that “The government of Turkmenistan has a history of capricious and arbitrary expropriation of property of local businesses and individuals, including foreign investors….”[15] Furthermore, poor relations between Uzbekistan and the West, and with the United States in particular, preclude most opportunities for investment by Western firms.[16]
Investment Magnets: Kazakhstan and Azerbaijan
By contrast, U.S. involvement with Kazakhstan and Azerbaijan has been successful. In both countries, Western investment has been not only allowed, but facilitated by local governments, with a commensurate increase in per capita GDP and overall standards of living. Both countries are also now economically competitive in energy sectors on an international level.
Since independence, Kazakhstan has received higher levels of foreign direct investment per capita than any other Commonwealth of Independent States (CIS) country.[17] Investment in Azerbaijan rose by more than 30 percent between 2003 and 2004.[18] Both countries benefit from healthy levels of growth and foreign direct investment and have greater access to hydrocarbon export routes that do not go through and are not controlled by Russia. Although both countries have a long way to go to be considered mature democracies, their potential is undeniable, as can be seen with their more positive attitudes toward democracy, civil society, and the West compared to prevailing attitudes in Turkmenistan and Uzbekistan.
The two countries’ success in attracting foreign direct investment in their oil and gas sectors is due to privatization and reform efforts, as well as openness to Western oil majors,[19] although certain regulations, such as quotas on foreign employees and domestic content requirements, continue to deter investment.[20]Courting investment from a wider range of interested parties and enhancing competitiveness in their energy markets, both countries serve as an effective counterweight against pressure from Russia and China, and both have used this counterweight to their economic advantage.
The Allure of Central Asia
There are many political risks to doing business in Central Asia. As previously mentioned, property rights, transparency, and law enforcement are still in the process of development in these countries. Corruption is endemic, as are human rights violations. None of these issues deters Russian or Chinese investments, making competition in the area more difficult for Western firms that seek investment guarantees. Furthermore, Russia is making every effort to keep Western investments out of its former sphere of influence.
Security, particularly in terms of Islamist terrorism and radicalism (the Islamic Movement of Turkestan, the global Hizb’ut Tahrir, Akramiyya of Uzbekistan, and other organizations), is a pressing issue for all of Central Asia’s governments and may pose serious risks for potential investors in energy and vulnerable energy infrastructure.
Despite these political vulnerabilities, investors and governments in the U.S., the United Kingdom, France, Italy, Russia, China, and the Middle East still seem eager to lay claim to the hydrocarbon resources of Central Asia. One of the most attractive features of Central Asian oil and gas is that there are deposits that have yet to be explored or developed, and the national governments are reliant on foreign investors to provide the capital to undertake such costly projects.
Geopolitical considerations are another key concern as Central Asia continues to evolve as a highly important strategic area, especially for the U.S., Russia, China, Iran, and India. Political instability in other major oil- and gas-producing locations—the Middle East, Venezuela, and Nigeria—and increasing economic nationalism in Russia are also fueling the drive to claim a share of Central Asian resources.
Gazprom Dominance
Russia’s access to Central Asian (specifically Turkmen) natural gas is key to its domination of the European natural gas market,[21] primarily because of concerns, both within and outside of Russia, that Gazprom’s production levels will not be sufficient to uphold its end of gas export deals. At present, it appears that Gazprom’s natural gas export obligations cannot be met by Russian production alone, and future gas obligations, including a deal to provide China with 80 bcm of gas annually, will also require that Russia have access to the bulk of Turkmenistan’s and Uzbekistan’s production. As noted, this may be particularly problematic in light of Turkmenistan’s recent deal with China, which seemingly involves selling twice as much of the same gas supply.
A recent study of the Russian gas industry gives the following annual projections: Russian annual gas production will be 665 bcm, domestic demand will be roughly 479 bcm, exports to the European Union (EU) will be around 161 bcm, exports to the CIS are projected at 80 bcm, and exports to Asia are projected at 24 bcm. To meet its export obligations, Russia will have to import 79 bcm from producers in Central Asia.[22] Russia therefore has an incentive to maintain its close political and trade ties with Kazakhstan, Turkmenistan, and Uzbekistan in the years to come.
However, Kazakhstan has been and will likely continue to be open to a diverse range of investors, while Turkmenistan has already begun increasing the price of its natural gas. As export opportunities for the Central Asian states increase, not only will gas prices go up, but supply may be redirected to countries other than Russia that may not demand the same discounted prices that Russia does. In 2005, Russia was paying $44 per 1,000 cubic meters of Turkmen natural gas—five times below European gas market prices, which hovered around $220–$250.[23]
U.S.Role and Policy in Central Asia: Energy and Beyond
The U.S. is unlikely to become a single dominant power in Central Asia, nor is there any reason why it should attempt to achieve such a status. Realistic goals—energy security; proximity to the main theaters of operation in the war on terrorism, Afghanistan and Pakistan; combating the traffic in drugs, weapons, and weapons of mass destruction technology; and encouraging participatory and transparent social and economic development—require a sustainable engagement. This is especially the case as the U.S. focuses its resources and attention elsewhere, primarily in the Middle East.
The strategic location of the region and the intense global competition over its energy reserves will, to a certain extent, keep the U.S. involved. U.S. engagement is particularly constricted by uneasy relations with current Central Asian regimes, whose authoritarian tendencies are of no consequence to Russia, China, Iran, or even India.
Even if the U.S. had the capacity to limit the presence of other large powers in the region, to do so would be unwise. First of all, the primary U.S. goals in the region are energy security and proximity to terrorist threats, not outright control. Limiting other powers in the region is unnecessary and would be a grave mistake, just as it was an error for the U.S. to support an oil and steel embargo on Japan in the 1930s, triggering Japanese expansion in the Pacific.[24] The U.S. and other great powers share the goals of stability, economic development, and preventing religious radicalization and terrorism. Rather than openly antagonizing China, Russia, or India over their involvement in Central Asia, the U.S. should pursue the benefits to be derived from regional cooperation.
Despite the unappealing nature of the region’s authoritarian regimes, Chinese and Russian backing of these governments contributes to their short-term stability, staving off political crises. Political disintegration in any of these countries would have severe consequences for regional security, because they are for the most part impoverished, dissatisfied, largely Muslim, and thus susceptible to recruitment by fundamentalist Islamic groups. Furthermore, heroin trafficking is a serious problem in all of Central Asia, particularly Afghanistan and Tajikistan, and the collapse of any of the states would allow for even more prolific smuggling in narcotics, people, and possibly even nuclear weapons components. Overriding strategic imperatives suggest that it might be best to tread lightly until the region finds a measure of stability that allows for change without chaos.
One way for the U.S. to play a more influential role in the region is through the use of partners, such as India. As India is a U.S. strategic partner, a stable democracy, and a growing economic power, a greater Indian presence in the region may be beneficial for U.S. interests. India is refurbishing a former Soviet air base in Tajikistan (Ayni), which is intended as part of an effort to contribute to stability in Afghanistan and to battle Islamist terrorism in Central Asia.[25] Both goals are shared by the United States.
India can also lend its support to increasing export options for Central Asian oil and natural gas. In addition to helping to break up the Russian natural gas transit monopoly, this would contribute to economic growth, stability, and improved relations between the pipeline transit countries of India, Pakistan, and Afghanistan, which is in U.S. interests.
It is vital that the U.S. maintain and expand a multifaceted presence in Central Asia. The benefits of U.S. involvement accrue to both sides: The U.S. can protect its security, military, and geopolitical interests and its energy access while helping to promote the development of democracy and civil society in Central Asia. The developing nations of Eurasia can gain access to much-needed U.S. investment, security assistance, and global integration above and beyond what they are offered by Russia, China, India, and Iran.
Challenges to U.S. Energy Interests
A real challenge in promoting U.S. energy interests worldwide, including in Central Asia, is the high level of corruption in the state-run energy sectors. A recent report by the London-based Global Witness on the Turkmen–Ukraine gas trade “poses a difficult question for the EU and its neighbours: can they meet their energy needs without feeding corruption and undermining good governance in the countries that supply or transport this energy?”[26] This question could refer to other regions as well, including the Middle East.
The answer to that question, in Central Asia as well as in the Middle East, is a qualified “no.” This applies to both corruption and human rights abuses. Some argue that it would be unwise to sacrifice U.S. energy and security interests because of difficulty in dealing with regimes that do not share U.S. values. After all, such regimes are the majority among oil producers. This is a real challenge to U.S. policymakers.
The recent U.S. experience with criticism of President Islam Karimov of Uzbekistan over the Andijon massacre, in which the Uzbek military opened fire on armed Islamists as well as civilian protestors, is a case in point. This criticism provoked a harsh Uzbek response that resulted in the loss of both a strategic relationship and U.S. access to the Karshi–Khanabad air base. This incident can be seen as a valuable learning opportunity for U.S. policymakers. Intransigence on the issue of democracy development to the exclusion of other U.S. national interests and priorities has not served the U.S. well in Uzbekistan and has led to an overreliance on the Manas International Airport air base in Kyrgyzstan, which comes with an annual price tag in the $150 million range.
Given the high cost of human rights priorities, a more relevant question in this climate of energy insecurity and tight energy markets would be: “How can the U.S. successfully balance its security, energy, and human rights priorities in a way that maximizes U.S. interests?” The U.S. needs to stay engaged with the leaders of most states and with elites, political parties, and the people in Central Asia. Only through this sort of engagement will the U.S. begin to rebuild its former status as friend and model to these countries, as opposed to an external superpower determined to topple regimes in the region.
Policy Goals
By staying engaged and persistent, the U.S. may be able to make serious progress on achieving its objectives in Central Asia, which include:
What Should Be Done
To achieve these goals, the National Security Council should coordinate activities by the U.S. State Department, Department of Defense, Department of Energy, and other departments to pursue the following policies:
Conclusion
U.S. and Central Asian political, economic, and security interests are not mutually exclusive and may be better achieved through cooperation than through confrontation. Development and security of supply and transit is one such common interest that needs to be cultivated.
Not seeing eye-to-eye on every issue should not prevent states from working together to attain shared goals. Even if relations between the U.S. and Central Asian states or Russia are at a post-Soviet low point, common interests such as energy development, fighting terrorism, and limiting nuclear non-proliferation should be pursued and cultivated.
U.S. involvement and assistance contribute to the economic, political, social, and security development of the states of Central Asia. The United States should remain as engaged as possible in the region. Given recent tensions concerning values, preferred economic models, and political systems, such engagement will be complex. Continuous dialogue with regional actors, as well as with Russia, China, the European Union and its key members, Japan, and India, is required to coordinate policies and prevent crises.
This will demand give-and-take on both sides, and the U.S. may find that getting concessions requires making concessions. As the greater and more influential power, however, the U.S. may find it necessary at times to make the first move.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation. The author wishes to thankConway Irwin for help in researching and preparing this paper.
[1] For a detailed discussion of U.S. interests in Central Asia, see Ariel Cohen, Ph.D., ed., Eurasia in Balance: The US and the Regional Power Shift, U.S. Foreign Policy and Conflict in the Islamic World Series (London: Ashgate, 2005), esp. Chapter 3, pp. 69–101.
[2] U.S. Department of Energy, Energy Information Administration, “Country Analysis Briefs: Caspian Sea Region,” September 2005, at www.eia.doe.gov/emeu/cabs/Caspian/Oil.html (August 2, 2006).
[3] For a detailed discussion of U.S.–Russian competition in Eurasia, see Ariel Cohen, Ph.D., “Competition over Eurasia: Are the U.S. and Russia on a Collision Course?” Heritage Foundation Lecture No. 901, October 24, 2005, at www.heritage.org/Research/RussiaandEurasia/hl901.cfm.
[4] U.S. Department of Energy, Energy Information Administration, “Country Analysis Briefs: Caspian Sea Region,” September 2005.
[5] Tamam Bayatly, “BP Current Developments,” Azerbaijan International, Vol. 10, No. 1 (Spring 2002), atwww.azer.com/aiweb/categories/magazine/ai101_folder/101_
articles/101_petroleum_bp.html.
[6] U.S. Department of Energy, Energy Information Administration, “Country Analysis Briefs: Central Asia,” September 2005.
[7] The Consortium includes the government of Russia (24 percent); the government of Kazakhstan (19 percent); the government of Oman (7 percent); Chevron Caspian Pipeline Consortium Co. (15 percent); LUKARCO B.V. (12.5 percent); Mobil Caspian Pipeline Co. (7.5 percent); Rosneft–Shell Caspian Ventures Ltd. (7.5 percent); Agip International (N.A.) N.V. (2 percent); Oryx Caspian Pipeline LLC (1.75 percent); BG Overseas Holdings Ltd. (2 percent); and Kazakhstan Pipeline Ventures LLC (1.75 percent). See Caspian Pipeline Consortium Web site at www.cpc.ru.
[8] U.S. Department of Energy, Energy Information Administration, “Oil: Country Analysis Brief: Caspian Sea,” September 2005, at www.eia.doe.gov/emeu/cabs/Caspian/Oil.html; “Oil: Country Analysis Brief: Iraq,” June 2006, at www.eia.doe.gov/cabs/Iraq/Oil.html; “Country Analysis Brief: Kuwait,” June 2005, atwww.eia.doe.gov/emeu/cabs/kuwait.html (October 30, 2006).
[9] Vladimir Socor, “Central Asia Gas Update,” Eurasia Daily Monitor, February 1, 2005, atwww.jamestown.org/edm/article.php?article_id=2369177 (August 2, 2006).
[10] Daniel Kimmage, “Central Asia: Turkmenistan–China Pipeline Project Has Far-Reaching Implications,” Radio Free Europe/Radio Liberty, April 10, 2006, at www.rferl.org/featuresarticle/2006/04/55f9574d-407a-4777-9724-94
4e6c2ecd7b.html (August 2, 2006).
[11] S. Frederick Starr and Svante E. Cornell, “The Politics of Pipelines,” Johns Hopkins University, School of Advanced International Studies, at www.sais-
jhu.edu/pubaffairs/publications/saisphere/winter05/starr-cornell.html (October 30, 2006).
[12] Vladimir Socor, “Turkmenistan–China Gas Agreement Unrealistically Ambitious,” Eurasia Daily Monitor, April 10, 2006, at www.jamestown.org/edm/article.php?article_id=2370964 (October 30, 2006).
[13] U.S. Department of Energy, Energy Information Administration, “Country Analysis Briefs: Central Asia,” September 2005.
[14] “Business: Gazprom will see to stability of the Uzbek Regime,” Ferghana.ru, January 19, 2006, athttp://enews.ferghana.ru/detail.php?id=392328559837.
44,557,4847695.
[15] U.S. Department of State, “2005 Investment Climate Statement—Turkmenistan,” atwww.state.gov/e/eb/ifd/2005/42192.htm.
[16] Marat Yermukanov, “Kazakh–Uzbek Relations Show Signs of Improvement,” Eurasia Daily Monitor, March 22, 2006, at http://jamestown.org/edm/article.php?article_id=2370897.
[17] European Commission, “External Relations: The EU’s Relations with Kazakhstan,” June 2006, athttp://ec.europa.eu/comm/external_relations/kazakhstan/
intro/index.htm (October 30, 2006).
[18] European Commission, “External Relations: The EU’s Relations with Azerbaijan,” January 2006, athttp://ec.europa.eu/comm/external_relations/azerbaidjan/
intro/index.htm (October 30, 2006).
[19] Clinton R. Shiells, “FDI and the Investment Climate in the CIS Countries,” International Monetary Fund, 2003, pp. 9–10.
[20] Ibid., p. 18.
[21] Ariel Cohen, Ph.D., “The North European Gas Pipeline Threatens Europe’s Energy Security,” Heritage Foundation Backgrounder No. 1980, October 26, 2006, at www.heritage.org/research/Europe/bg1980.cfm.
[22] Roman Kupchinsky, “Russia: Gas Export Plans Dependent on Central Asia,” Radio Free Europe/Radio Liberty, March 28, 2006, at www.rferl.org/featuresarticle/2006/03/320159b4-
42de-41b1-bce5-4a5b51161edc.html (August 3, 2006).
[23] “Stalemate in Russia–Turkmenistan Gas Price Talks,” NewsCentralAsia.com, December 12, 2005, atwww.newscentralasia.com/modules.php?name=News&file=article
&sid=1638 (October 30, 2006).
[24] “Sino–Japanese War (1937–1945)—Major Invasion of Eastern China by Japan,” Japan-101 Information Resource, at www.japan-101.com/history/sino1.htm.
[25] Stephen Blank, “India: The New Central Asian Player,” Eurasianet.org, June 26, 2006, atwww.eurasianet.org/departments/insight/articles/eav062606a.shtml (August 3, 2006).
[26]Global Witness, It’s a Gas—Funny Business in the Turkmen–Ukraine Gas Trade, April 2006, p. 4, atwww.globalwitness.org/reports/show.php/en.00088.html (November 10, 2006).
In recent years, Russia has regained some of its former status, primarily through becoming a global energy and raw materials supplier and boasting a sustained economic growth rate of over 6 percent a year since 2000. Along with its elevated status, Russia has also begun to display some of its former Soviet-era hostility toward the West in general and the United States in particular, which may lead to unnecessary frictions and confrontations in the future. The moderator and the expert panelists assessed what the outcomes of the G-8 summit reveal about U.S.–Russian relations, as well as the future challenges and the opportunities for cooperation between the two countries. Although each speaker had distinct ideas as to the nature of U.S.–Russia relations, all four seemed in agreement that the best option for the U.S. and Russia is a pragmatic and realistic relationship based on the cooperative pursuit of common interests.
Russia Cannot Be Isolated
David Kramer
There has been a loud debate for months about U.S.–Russian policy on concerns of democracy backsliding, the problems encountered by NGOs, worrying internal trends, and Russian policy towards its neighbors. These concerns are balanced with Russia’s potential as a partner with the United States and Europe, as well as Asia, in dealing with a whole host of challenges from Iran to the Middle East to North Korea.
The promise of strategic partnership post-9/11 has not been fulfilled, but important work has been accomplished between our two countries and our two governments.
We feel that Russia cannot be ignored or isolated or treated as an adversary. On the contrary, we seek to work with Russia on the many areas where we share common interests and to push back, strongly if necessary, on issues where we disagree. What we have with the Russians is a realistic partnership and relationship.
President Bush has stressed the importance he places on keeping lines of communication open with President Putin, and went to St. Petersburg a day early last week so he could spend more time with President Putin, both formally and informally, in advance of the full G-8 program. The President used those opportunities to promote our interests and express our concerns, including over the trajectory of Russian democracy and civil society and its relations with its neighbors. The President also discussed ways we can work together on many problems that require our cooperation.
We feel we made significant progress on some areas but of course less than hoped for in other areas, and in particular on the WTO bilateral negotiations. In addition to the various G-8 agreements on energy security, health, and education, President Bush and President Putin announced the extremely important Global Initiatives to Combat Nuclear Terrorism, an important step in our counter-terrorism cooperation with Russia that has been a pillar of our relationship since 9/11.
Through this initiative, we join together to prevent terrorists and dangerous regimes from threatening us with the world’s most deadly weapons. Our cooperation will include the physical protection of nuclear materials, suppressing illicit trafficking of those materials, responding and mitigating the consequences of any acts of nuclear terrorism, and cooperating on the development of the technical means to combat nuclear terrorism, denying safe haven to terrorists, and strengthening our national legal frameworks to ensure the prosecution of such terrorists and their supporters.
The two presidents also announced new initiatives on the peaceful uses of nuclear energy and countering nuclear proliferation, expanding on initiatives that were already underway and which will include other nations.
There are areas where our two presidents don’t see eye to eye, including on Russia’s democratic development. President Bush has a regular dialogue with President Putin on the internal dynamics in Russia. Promoting civil society in Russia is key and will over the long run help transform Russia into a country where our values converge, which will make it easier and more productive for us to work together.
We know that nations that share values also share interests. A Russia that embraces pluralistic political institutions, personal liberty, and a transparent, empowering economic approach would be a Russia that shares European and American—and I believe universal—values.
Yet, to many Russians, democracy is a discredited concept because it unfortunately is associated with the chaos and weakness of the 1990s. The collapse of the state in the 1990s under Yeltsin and now the reemergence of the state under President Putin reflect the Kremlin’s tendency toward a pendulum approach in the way it exercises control.
Because promoting democracy is central to the foreign policy of the Bush Administration, the President has raised it with President Putin in private meetings, which we believe is the most effective approach. Where necessary, we speak out publicly on this issue, but we do so as a friend who raises concerns in a way designed to steer development in Russia in a positive direction.
The President underscored our concern by meeting with a diverse, outspoken group of Russian civil society activists representing the democracy, human rights, environmental, and health communities in Russia. The President’s meeting came after a meeting that was called “Other Russia” in Moscow that Assistant Secretaries Daniel Fried and Barry Lowenkron attended for the U.S. government.
A vibrant civil society also requires a vibrant entrepreneurial sector rooted in the rule of law, which can contribute to the modernization of the Russian economy. And to support one of the underpinnings of democracy—a strong and independent middle class—the President announced our intention to create the “U.S.–Russia Foundation for Economic Advancement and the Rule of Law,” which stands as a successor to the successful U.S.–Russia Investment Fund, known as TUSRIF, which was established in 1995 to promote the growth of the Russian independent entrepreneurship and improve the climate for private investment.
But I won’t pretend that we achieved all that we could. Concluding a bilateral WTO accession agreement was a high priority for President Bush. U.S. Trade Representative Susan Schwab and her team negotiated around the clock last week in an attempt to close on such an agreement. They were not successful, but only because they insisted on an agreement that would be commercially viable and pass muster with Congress. We will continue to work toward the goal of completing bilateral negotiations with the Russians and hope to do so in the coming months.
Now that the G-8 leaders have departed St. Petersburg, Russia will focus its attention on upcoming elections for the Duma and for the new President in 2007 and 2008, respectively. Democracies, of course, consist of more than just good elections, but the run-up to these elections—including the state of independent media and equal access for all parties and candidates to the press, as well as a level playing field and the help of civil society during that period—all of this will be a telling gauge by which we can measure Russia’s democratic progress.
We will continue to encourage Russia to take the steps necessary to become a strong, democratic, and prosperous member of the international community, and we will press for healthy, constructive relations between Russia and Russia’s neighbors.
Working with Russia is not always easy, but it requires a long-term approach. Through increased engagement including expanded people-to-people exchanges, we can build a foundation for better understanding for the years ahead, which will pay dividends for our broader, long-term relations.
We hope that Russia will define its role in the world in a way that allows us the possibility of genuine partnership, and not retreat into a world view defined by balance of power strategies and checking U.S. moves wherever possible. The U.S. is not Russia’s problem, and a democratic West and democratic neighbors are not a threat.
Our two countries and the entire world are safer as a result of our working together, and we would welcome even more the cooperation with Russia with whom our shared values would open the way to a complete and fruitful strategic partnership.
—David Kramer is Deputy Assistant Secretary for European and Eurasian Affairs, U.S. Department of State, and former Associate Director for the Russian/ Eurasian Program at the Carnegie Endowment for International Peace.
Hezbollah Hijacked the G-8 Summit
Ariel Cohen, Ph.D.
The G-8 event overall went well. Russia handled the management and public communications aspects of the summit very professionally. It had high-level representation from the G-8 countries, as well as from India, Brazil, China, and Kazakhstan. It also had a “Youth G-8,” in which President Putin met with young Russians and foreigners to hear their concerns, and a “Civil G-8,” where representatives from Amnesty International, Oxfam, and other organizations engaged in a real dialogue with President Putin on public policy. This is the “Clintonization of Vladimir Putin.” He charmed the leaders of these NGOs into having tea with him in his dacha, held four press conferences in St. Petersburg, and the agenda that the Russia side formulated—energy security, education, infectious diseases—was front and center.
Unfortunately, for the second year in a row, the G-8 Summit was hijacked by terrorists. Last year, in Gleneagles, it was al-Qaeda; this year, it was Hezbollah. Realizing the sophistication of Hezbollah’s leadership and their tight coordination with the Iranian leadership—their founders, funders, trainers, and suppliers—I cannot exclude the possibility that they were well aware that killing and kidnapping Israeli soldiers would lead to retaliation and escalation, diverting attention from the G-8 agenda.
The G-8 rose to the occasion and published a joint statement on the Middle East which included the following:
The immediate crisis results from efforts by extremist forces to destabilize the region and to frustrate the aspirations of Palestinian, Israeli and Lebanese people for democracy and peace. In Gaza, elements of Hamas launched rocket attacks against Israeli territory and abducted an Israeli soldier. In Lebanon, Hezbollah, in violation of the “Blue Line,” attacked Israel from Lebanese territory, killed and captured Israeli soldiers, reversing the positive trends that began with the Syrian withdrawal in 2005 and undermined the democratically elected government of Prime Minister Fouad Seniora.
The G-8 leaders demanded:
The return of the Israeli soldiers in Gaza and Lebanon unharmed, the end of the shelling of Israeli territory, the end to Israeli military operations, and the early withdrawal of Israeli forces from Gaza after the soldier is released….
And they continued:
We extend to the government of Lebanon the full support in asserting sovereign authority over all its territory in fulfillment of UN SCR 1559.
United Nations Security Council Resolution 1559 is a resolution that demands the disarmament of Hezbollah and the deployment of Lebanese armed forces to all parts of the country, in particular the south, for the disarming of militias.
The flare-up in the Middle East derailed an agenda which had Iran front and center as a joint diplomatic effort of the State Department, the NSC (National Security Council), Russia, the E-3 (Great Britain, France, and Germany), the International Atomic Energy Agency, and the Security Council. The challenge for the U.S., Russia, the E-3, China, India, and the rest, is to make sure that the Middle Eastern crisis does not divert our attention from the real threat to the Middle East and the whole world today—the Iranian nuclear program.
During the escalation of hostilities, Saudi Arabia, Egypt, and Jordan came out, for the first time, squarely against Hezbollah and its Iranian sponsors. They recognize that a nuclear-armed Iran will threaten the very fabric of nation-states in the Middle East. Radical Islam, whether Sunni or Shi’a, does not recognize national borders. It seeks a Caliphate, a sectarian-based trans-border entity. We can see the effects of sectarian-based violence in Iraq today.
The Middle East is in a process that goes way beyond the Israel–Hezbollah confrontation. Radicalization by Sunni extremists, such as al-Qaeda, and Shi’a extremists, including those in the Iranian government, are polarizing the Middle East, threatening not just the state of Israel but the moderate regimes of Saudi Arabia, of the Gulf States, Jordan, and Egypt. The G-8 countries need to address this trend in the future, building coalitions with moderate Arab regimes and other nations, including Israel, India, and Turkey.
An unstable Middle East threatens our survival both economically, as the region produces more than 40 percent of the oil the world consumes, and geopolitically and geostrategically, with the potential for a nuclear arms race triggered by Iran. This is not a Middle East that is in our national interests, or the international interests of any of the G-8 countries, including Russia.
The summit ended with a sense of foreboding. For two years running, the G-8 Summit has been derailed by terrorist attacks. This indicates that the G-8 must turn its attention to fighting terrorism on a security level, an economic development level, and a level of ideas. It must engage the world, especially the Muslim world, in the realm of hearts and minds and public diplomacy.
The G-8 format today may not be sufficient, and may need to seek further engagement with India, China, Brazil, and perhaps South Africa or Nigeria. An expanded format for the G-8 may be the key to providing truly global solutions to truly global challenges. A solid and productive U.S.–Russian relationship is needed to underpin such an enlargement.
—Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.
“Vladimir the Lucky”
Andrew Kuchins, Ph.D.
The history of Russia and East Central Europe is replete with colorful figures with catchy titles like “Vladimir the Apostle,” “Sviatopolk the Accursed,” “Vlad the Impaler,” and “Ivan the Terrible.”
The current Vladimir in the Kremlin is neither terrible nor saintly, and we have no grounds to conclude that Vladimir Putin is accursed. On the contrary, he may be the luckiest guy in the world today, and I do hereby anoint him “Vladimir the Lucky.” Mr. Putin is lucky because he happened to become president of Russia when oil prices were rising and then skyrocketed, and this has been the main factor behind Russia’s macro-economic “miracle” and its resurgence as a great power.
Only eight years ago, in 1998, the ruble collapsed. Russia defaulted on much of its debt and was virtually bankrupt. With oil at less than $15.00 a barrel, Russia received less than $40 billion a year in revenue from oil and gas sales, the most important source of economic growth. By 2000, when Mr. Putin took office, the average crude price was about $28.00 a barrel and Russia brought in about $75 billion. This year the U.S. Energy Information Administration projects that crude will average $61.00 a barrel, and Russia’s revenue from oil and gas sales may exceed $200 billion. Furthermore, Russia has more than $250 billion in reserves and a stabilization fund projected to reach close to $100 billion by the end of the year.
Vladimir’s good fortune extends beyond his petro-luck. On the eve of the G-8 Summit, Russian’s enemy no. 1, Shamil Basayev, was blown up preparing for a terrorist attack that might have spoiled Vladimir’s party in St. Petersburg. It’s likely that Mr. Putin created some of this luck for himself when his colleagues in the secret police finally took out the elusive Mr. Basayev just in time to burnish his reputation as a partner in the war on terror. Accidents don’t really happen accidentally in that part of the world.
Nevertheless, Vlad’s luck continued when hostilities broke out in Lebanon, diverting attention from the question about Russia’s fitness to host the G-8. The Middle East crisis ensured that Putin would be less isolated from his other “summiteers” than if the Iranian nuclear program had dominated the agenda. On Iran, Vladimir finds himself at odds with the Americans and the Europeans, whereas on Lebanon, Mr. Putin’s position is closer to that of his European colleagues. Overall, the G-8 Summit went well for Vladimir Putin. I don’t think that he wanted it to ever end.
In the bilateral meetings between Presidents Bush and Putin, both men certainly wanted to smooth out some of the differences in the U.S.–Russian relationship, but tensions were nonetheless on display.
The positive results of these meetings included two nuclear agreements: one to negotiate for cooperation on civilian nuclear technology, and one to extend the Proliferation Security Initiative to establish a global initiative to combat nuclear terrorism. These are both areas where Russia has capabilities to bring to the table and where we can cooperate.
But there was failure on the WTO agreement, which both presidents definitely wanted and worked very hard to reach. This failure reflects several things. On the U.S. side, Russia will have to come up for PNTR (Permanent Normal Trade Relations) status and the Senate must approve whatever agreement is reached. It may have been calculated that with the current negative attitude toward Russia in Congress, it would be worse for Mr. Bush, Mr. Putin, and the U.S.–Russian relationship if the bilateral agreement on WTO were reached this past weekend and then got shot down in Congress. Failure to reach an agreement also may reflect President Bush’s lessened authority, even within his party.
On the Russian side, there may have been a miscalculation in negotiating strategy. The Russians may have expected that they would not have to make the kinds of concessions and agreements that they needed to on the core technical issues that were blocking the agreement, thinking that the U.S. really wanted this deal. They had advised the U.S. that the decision about the Shtokman gas field and the selection of partners for Shtokman were being held up by the WTO agreement and another large commercial transaction, the Boeing deal.
Right now, Russia has a very cynical attitude toward democracy and toward our efforts to promote democracy around the world. We do believe that democratic governments are more capable and more effective and, as I wrote in a letter to Mr. Putin that was published inKommersant last week, implementing the institutions of democracy will make Russia more sovereign, but that is not how the Russians see it for a variety of reasons, including the legacy of the 1990s and current oil prices. Petro-states don’t typically undertake democracy campaigns when oil prices are very high.
And on the democracy question, Mr. Cheney’s comments in Vilnius, combined with President Ilham Aliev’s visit from Azerbaijan to Washington the week before and Mr. Cheney’s subsequent trips to Kazakhstan to meet with President Nursultan Nazarbayev, where the issues of democracy, civil society, and human rights were not on the public agenda, gives Russians the impression that democracy promotion is just a fig leaf for expansion of American hegemony and regime change in favor of pro-American forces.
We too easily believe that countries that share values and are democracies are going to agree with us on major foreign policy issues. Two of the most mature democracies and two of our oldest allies, France and Germany, did not agree with us about Iraq. I am very skeptical that if Russia were a mature democracy today that it would reach much of a different conclusion about Iran.
The G-8 summit emphasized that we are in a moment of transition in international relations from a unipolar world to a multipolar world and an erosion of the era of Western predominance. Mr. Putin and the Russians are thinking this right now. It was very telling that Mr. Putin met with the Chinese and the Indians, among others, after the formal G-8 meeting, and he expressed his most open support for their joining the G-8 in the future.
I predict that within five years, the G-8 will either expand or cease to exist as it looks more and more like an anachronism. In the 1970s, when the G-7 was formed, those seven economies commanded over 60 percent of the world’s GDP. Today, including Russia, the G-8 commands less than 45 percent of world GDP, and that percentage will probably fall in the coming years as large emerging market economies grow faster than the G-8 economies.
—Andrew Kuchins, Ph.D., is Senior Associate and Director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace and former director of the Carnegie Endowment’s Moscow Center.
RussiaIs Back on the World Stage
Angela Stent, Ph.D.
I regard the G-8 as a success both for the United States and for Russia. Despite the crisis in the Middle East, it played out as expected. I would also agree that Russia achieved much of what it wanted to at the G-8. The stakes for Russia were quite high, and it showed that after 15 years of political turbulence and instability Russia is back on the world stage. It is a major player, a stable, influential country reaping the benefits of high energy prices. Its economy has enjoyed a 6.1 percent average GDP growth rate since 2001 and it has a booming consumer market in which Americans and Europeans want to invest. Moreover, President Putin enjoys a 79 percent approval rate that his other G-8 colleagues can only envy.
How should we characterize this newly self-confident Russia? Let me quote from Defense Minister Sergei Ivanov. In last Friday’s Izvestiia he referred to Russia as an “energy superpower” and this is how he defined it: Russia is “a reliable and predictable partner who efficiently carries out the obligations assumed, especially in Europe.” However, “energy superpower” is an elusive and imprecise concept. When Western commentators talk about Russia as an energy superpower, they imply that it uses energy supplies as a form of political leverage, that it seeks to achieve with oil and gas what it once sought to achieve with nuclear weapons, namely greater global influence. On the other hand we usually refer to energy as “soft” as opposed to “hard power,” further confusing the metaphors. The real issue is where you draw the line between politics and business in Russia in a system characterized by a symbiotic nexus between political and economic elites and presence of the heads of the major energy companies in the Kremlin.
Last January’s gas dispute between Ukraine and Russia illustrates the complexity of these issues. In addition to the political factors involved, there were also economic elements, particularly the price Ukrainians were paying. The other geographical fact of life is Russia’s control of the transit routes in Eurasia. 80 percent of Russian gas that goes to Europe passes through Ukraine.
Despite its new self-confidence, Russia faces major challenges including a shrinking population. In 20 years time, where will the people come from to man the armed forces, to provide the labor for the economy? Moreover, one day energy prices will fall, as they inevitably do and if Russia hasn’t diversified its economy and invested more in its oil and gas sector, it will not be able to fill the new Asian pipelines it plans to construct. Moreover, the failure to tackle problems of corruption will also have a corrosive effect on the economy and society.
What is the U.S.–Russian agenda beyond the G-8? We should continue our cooperation on counter-proliferation, counter-narcotics and counter-terrorism, the issues that have engaged us since 9/11. But we should be realistic about the limits of our common interests and of our influence. Public criticism of Russia’s domestic system has not produced the results that we would have liked to have seen and therefore the conversation about democracy is best pursued out of the public eye.
During the next two years, succession issues will have a major impact on our relationship. In the United States, we may not know who will succeed President Bush, but we know the rules of the game for a presidential election. In Russia, however, the succession process is not predictable. The Kremlin is still defining the rules of the game and this means that Russia may become a more inward-looking and challenging partner.
The other major challenge in the next two years, one that cries out for more intense dialogue between Washington and Moscow is Russia’s neighborhood. Russia views “colored” revolutions as a Western effort to interfere in its rightful sphere of influence and seeks to minimize our influence there as we have seen in Central Asia. We need to engage in a more direct discussion of what both sides view as their legitimate interests in Eurasia. We have to try to convince Moscow that it would be better off with stable, prosperous, independent states on its borders, even if they don’t share the same domestic system as Russia, and even if at some point they aspire to membership in the European Union or even NATO.
Over the next two years, we need to stay involved with Russia on every level—with civil society, with trying to promote the middle class, bringing more students and young politicians and young leaders here. The amount of anti-Americanism among the young in Russia is growing exponentially, and we have to try and do whatever we can to counter that. We have to work with civil society there, to the extent that we’re able to, given the NGO legislation—we have to take the long term view of this, we have to understand that this process of transformation in Russia is a matter of decades. We had an unrealistic timetable in the 1990s for how long it would take for Russia to democratize, so we have to be engaged for the long haul. If we do not take the long-term view, then we will face the prospect of the U.S. and Russian orbits moving further apart and I don’t think that’s in anyone’s interest.
—Angela Stent, Ph.D., is Professor and Director of the Center for Eurasian, Russian and East European Studies at Georgetown University and the former National Intelligence Officer for Russia and Eurasia.
—Co-editor Conway Irwin is a 2005 graduate of the School for Advanced International Studies of Johns Hopkins University in Washington, D.C.
The Dragon Looks West: China and the Shanghai Cooperation Organization
09-07-2006
In 1996, five countries—China, Russia, Tajikistan, Kyrgyzstan, and Kazakhstan—formed an organization, the Shanghai Five, to resolve border disputes among its members. With the addition of Uzbekistan in 2001, it became the Shanghai Cooperation Organization (SCO), a grouping of Russia, China, and a number of under-developed and developing nations with little to bind them together save geography. Five years later, it has grown not only in size, with the granting of observer status to India, Iran, Mongolia, and Pakistan, but also in influence. The group focuses primarily on the security issues of the Chinese trifecta of “terrorism, separatism and extremism.” SCO member states have conducted a number of joint military exercises, and in 2003 created a joint counter-terrorism center in Tashkent, Uzbekistan.[1]
The organization calls for greater economic cooperation among its members, and at a meeting on September 23, 2003, Wen Jiabao, the premier of the People’s Republic of China (PRC), proposed the establishment over the long term of an SCO-wide free trade area[2] designed to improve the flow of goods in the region by easing trade restrictions, such as tariffs. China has also placed a heavy emphasis on energy projects, including exploration of new hydrocarbon reserves, joint use of hydropower resources, and water works development.
The SCO’s security agenda is vast. The organization has been compared to the Warsaw Pact and referred to as the “NATO of the East.”[3] Its agenda is infused with Chinese and Russian suspicion of U.S. designs in Eurasia and a desire to reduce U.S. influence in Central Asia. This is evident in both a 2001 SCO declaration[4] and a 2005 bilateral Russo–Chinese declaration regarding “World Order in the 21st Century,” in which the two great powers emphasize the principles of “mutual respect of sovereignty, territorial integrity, mutual non-aggression and non-interference.”[5] Such statements target the United States’ campaigns in Afghanistan and Iraq as well as its efforts to promote democracy in authoritarian former Soviet Republics, efforts which both Russia and China see as destabilizing. Furthermore, the SCO has urged the U.S.-led coalition to announce a timetable for withdrawing from Afghanistan.
Although China and Russia both have an interest in reducing American military power and influence in Central Asia, each country has its own distinct agenda. Russia hopes to utilize the SCO to buttress its monopolistic power in gas transit, and to lesser degree oil transit, in Eurasia. China, on the other hand, would like to structure the SCO as a facilitator of regional trade and investment with Beijing as the dominant player. Despite being substantially larger than the North Atlantic Treaty Organization (NATO) or the European Union in terms of total population, land size, and natural resources, the SCO is not yet strong enough to counterbalance the United States in terms of economic strength and military power.[6] However, the SCO’s statements regarding “sovereignty” and “non-interference” reflected Russia’s and China’s commitment to oust the U.S. from the Karshi-Khanabad air force base in Uzbekistan in 2005 and to impose restrictions and high costs on the U.S. Air Force presence in Kyrgyzstan’s Manas International Airport. The United States should remain wary of the growing influence and power of the Russia–China axis.
China’s SCO Goals
Politically, China regards the SCO as a means of creating a new Eurasian order to reduce U.S. military power and limit America’s democracy promotion abroad. After 9/11, with the consent of both Russia and Central Asian host governments, the United States stationed troops in Central Asia to support the military campaign in Afghanistan. At this point, China began to feel strategically deterred by the U.S. from both east and west—Central Asia and the Asian Pacific.[7] China has since re-engaged with the SCO, and with Beijing and Moscow opposing the U.S. campaign in Iraq, and Central Asian states beginning to show concerns regarding the U.S. policy of democratization, China’s recent efforts to court its neighbors to the west have paid off. Beijing has placed a strong emphasis on exploration and development of natural resources and increased economic cooperation. It has also assisted the Central Asian states in anti-terrorist efforts and bolstered the Russo–Chinese strategic partnership.
A strategic partnership between Russia and China, the two most powerful and influential players in the SCO, may bode ill for U.S. involvement in Central Asia. Indications of the Russo-Chinese partnership systematically reducing U.S. influence are evident in the Uzbek demand that the U.S. leave the Karshi-Khanabad base in July 2005. Russia and China took advantage of the harsh U.S. reaction to the killing by Uzbek interior ministry forces of Islamist rebels in Andijan in May of that year, and managed to convince Uzbek president Islam Karimov that the U.S. somehow had supported the insurgents.[8] Efforts by Moscow and Beijing in Kyrgyzstan have also been successful; Kyrgyzstan has increased the U.S. rent at the Manas air base from an annual $2.7 million to $150–200 million, while the nearby Russian base is rent-free.[9] Peter Rodman, assistant secretary of defense for international security affairs, remarked, “The SCO is trying to ask us to leave the area in a hurry.”[10] His statements reflect the challenges that the U.S. faces as a result of the emergence of the SCO under Russian and Chinese leadership.
China is eager to expand its military influence in Central Asia as well. Beijing has contacted Kyrgyz officials to explore the possibility of Chinese military bases in Kyrgyzstan.[11] Increasing regional militarization and power rivalry in Central Asia raises the possibility that military means could be used in addressing regional issues, especially religious radicalism, terrorism, and narcotics trafficking.[12] Security issues remain a prime concern for China. Separatist movements in Xinjiang, led by the Uighur Muslim minority, have opposed the Chinese regime for decades. After the collapse of the Soviet Union, Beijing successfully garnered an agreement from Central Asian states not to support, protect, or train Xinjiang rebels. Since then, China and Central Asian states have signed agreements on combating separatism and terrorism, launching military and security cooperation in the border regions and beyond.
The People’s Liberation Army (PLA) has been involved in several joint exercises with troops from other SCO states, including the first-ever bilateral joint exercise with Russian forces in the summer of 2005. China and Russia kicked off Peace Mission 2005 with a ceremony in Vladivostok, just 30 miles from the North Korean border. The war games involved nearly 10,000 troops (including 1,800 Russian military personnel); scores of advanced aircraft (including Russian TU-95 and TU-22 heavy bombers, which can carry cruise missiles); and army, navy, air force, marine, airborne, and logistics units from both countries.[13]
Russia has given the Chinese the first demonstration of the supersonic “carrier-buster” cruise missile Moskit, one of the most advanced weapons in the Russian arsenal, and a weapon clearly designed to get the attention of the U.S. Navy.[14] Although Peace Mission 2005 was ostensibly held under the aegis of the SCO, the fact that it involved amphibious landings, sea blockades, and other operations that are totally irrelevant to the geography of landlocked, desert Central Asia suggests that the SCO is primarily a vehicle for a new Beijing–Moscow condominium in Asia, and is not intended as a true multilateral security framework for Central Asia.
Fueled by Oil and Gas. Oil and gas constitute the most essential economic and strategic reasons for China to engage with the Central Asian states. China’s increasing domestic demand for energy, especially the fossil fuel imports required to sustain its current economic growth rate of more than 9 percent[15] has compelled Chinese leaders to search for new energy suppliers. Ensuring control of Eurasian oil is a logical path, as some of these oil and gas resources can be piped into China, obviating the need for more expensive and less secure transportation by tanker.
Chinese interest in the SCO mainly hinges on widening access to Central Asian energy as a means to diversify China’s sources of imports. In the fall of 2005, China purchased Petrokazakhstan, a Canadian-registered oil company, for close to $4.5 billion.[16] In December 2005, China and Kazakhstan jointly opened the 998-kilometer Atasu–Alashankou pipeline, projected to deliver up to 200,000 barrels of oil per day by 2007.[17]
Taking advantage of the volatile political situation in Uzbekistan, China rushed to provide economic assistance in the form of a $600 million loan to start development of a gas pipeline to connect Uzbekistan’s considerable gas resources to the Kazakhstan–China gas pipeline which is currently under construction. A gas pipeline spur from Turkmenistan is under discussion as well.[18] China is also involved with less energy-rich Central Asian countries, but on a smaller scale. In 2005, China loaned Kyrgyzstan $5.7 million and Tajikistan $5 million to buy Chinese goods.[19] Chinese officials have even floated the idea of building a pipeline among member states. Such a proposal indicates the depth of Beijing’s interests in securing access to the region’s energy resources. Chinese investment may significantly improve the region’s infrastructure and commercial potential. However, as these states increasingly depend on China as source of both investment and security, the likelihood of China intervening in their domestic affairs will grow. Beijing’s generous economic assistance begs the question of whether the Chinese are attempting to create a “traditional ‘vassal’ relationship between China and the Central Asian states through investment, trade and military cooperation.”[20]
The Evolution of Chinese Foreign Policy
Official relations between China and other states have traditionally been governed by the principle of “li”, the “Confucian rules of propriety,” formulated in the Zhou Dynasty.[21] The principle regulated familial and social relations within China.[22] Traditional center-periphery relations, with China in the center, compelled China’s neighbors to recognize Chinese superiority by paying tribute to the Chinese emperor.
The Chinese empire attempted peaceful persuasion as a means of bringing non-Chinese into the empire without establishing direct control over their territories. The Chinese worldview was “Sino-centric,”[23] with China as the center of the only known civilization. They had no plans of formal expansion, as was evident in Ming’s foreign policy of isolationism in the 15th century. In the expedition by Admiral Zheng He to the Western Ocean, in the Ming dynasty, he did not establish Chinese colonies overseas. However, the growth of Chinese influence in Xinjiang continued in the 16th–17th centuries.
Beginning in the early 19th century, China was subject to foreign influence and colonization. After the Opium Wars in 1843, the Chinese territories were divided among Western powers. This provoked a nationalism powered by simultaneous feelings of humiliation and pride. Increasingly, China has stepped up its nationalist rhetoric, especially with regard to using force if necessary in order to solve the “Taiwan question.”[24] The passing of the Anti-Secession Law in 2005 by the National People’s Congress provided a legislative basis for China to invade Taiwan.
On several occasions, Chinese leaders have touted China’s leading role in the international community. Its Realpolitik philosophy is that the international system is characterized by a constant struggle for domination, and that China must engage in that battle, its main adversary being the United States. The signing of free trade agreements between Beijing and the Association of Southeast Asian Nations (ASEAN) serves to consolidate Chinese economic influence in Asia. Militarily, China has moved even further afield by dispatching peacekeepers to Haiti. China has departed from its traditional isolationist philosophy and sought to project its influence abroad. China is, at present, a regional power with global aspirations, and if it continues on the path of economic growth and projection of influence, its aspirations may be realized.
China and Central Asia
China’s relationships with the peoples of Central Asia have fluctuated throughout history. There have been times of peace, war, trade, isolation, deception, and cooperation. Traditionally, the Chinese empire has been perceived as an aspiring hegemon, if not outright aggressor in Central, Southeast, and Northeast Asia, and a significant portion of Central Asia was once an integrated part of the Chinese tributary system.[25] As early as 138 B.C., in the Han Dynasty, under the leadership of Zhang Qian, information about hitherto unknown states to the west generated much interest in the court. Increased contact gradually led to the creation of the Silk Road, which facilitated trade between the Chinese empire and Central Asian states. The importance of the Silk Road reached its height during the Tang dynasty, with relative internal stability in China after the divisions of the earlier dynasties. It was during this period that the Chinese traveler Xuan Zhang crossed the region and obtained Buddhist scriptures from India. In the 13th century, under the leadership of Genghis Khan, the builder of the Mongol empire, the whole of Central Asia from China to Persia was united. However, with the decline of the Mongol empire, the revival of Islam, and the isolationist policies of the Ming dynasty in the 17th century, China gradually lost interest in the region. Although the Chinese attempted to bring the Kazakhs into a vassal relationship in the 18th century,[26] the Chinese empire under the Qing dynasty was subjected to foreign colonialism, and China ended its land expansion. Russia, on the other hand revived its expansionist policies after losing the Crimean War in 1856 by gaining control of the Central Asian Turkestan.[27] It was not until the collapse of the Soviet Union in 1989 that China regained its interests in the region.
Since then Beijing has been actively seeking to exert military, political, and financial influences in the region. Chinese President Hu Jintao has even touted the region’s centrality to Chinese development, a sentiment which likely accounts for the recent joint military exercises, increased political cooperation, and increase in trade between China and Central Asia. China has replaced the United States as a significant source of trade, investment, and consumer goods to Central Asia. The Xinhua News Agency boasted that Chinese business supplied $500 million in investment to the region in 2003.[28] Railways and roads will provide the necessary transportation links that will connect China’s booming East with Central Asia. Some compare recent Chinese involvement there to modern vassal relations, in which China uses Central Asia as a buffer zone and an economically integrated entity that will help to advance the Chinese global agenda.
Beijing’s interests in the SCO can be separated into two different categories: economic and security. At least two institutional players are competing to set foreign policy and security agendas: the PLA and the Foreign Ministry. These two entities have often engaged in a struggle to determine Chinese foreign policies. Unsurprisingly, the military often favors hawkish policies, while diplomats prefer peaceful means. However, in the SCO, both the diplomats and the military have adopted forward strategies for China. Lieutenant General Li Qianyuan, head of the Chinese military delegation in the SCO, stated that the high-level joint military exercise exhibited the SCO states’ determination to fight terrorism, separatism, and extremism.[29] Following the proclaimed success of a Sino–Kyrgyzstan joint anti-terror exercise in 2002, the defense ministers from SCO states signed, at the summit held in Moscow in May 2002, a treaty on conducting this joint anti-terrorist military exercise.
Fighting separatism is a priority for Beijing. The separatist movements in Xinjiang constantly resist the Chinese regime. After the disintegration of the czarist empire, the Muslim minority in the province saw an opportunity to recreate the Muslim state of East Turkestan. There was a spike in separatism after the disintegration of the Soviet Union as well. Suspecting that other Central Asian states might protect separatists, Beijing warned that Chinese investment and trade in the region would be in jeopardy if the Central Asian states refused to comply with Chinese demands. Since the early 1990s, the PLA has maintained around 200,000 soldiers in Xinjiang who are tasked with monitoring the Muslim population.[30]
The Chinese government has claimed that the Taliban and Osama bin Laden have been harboring Uighur terrorists in Afghanistan.[31] However, the U.S. invasion of Afghanistan destroyed Uighur revolutionaries’ safe haven. In this respect, China and the U.S. share a common goal in combating nationalism and radical, political Islam. Though China has been uncomfortable with American military presence in Central Asia, Beijing has voiced qualified support of U.S. operations in Afghanistan against Muslim militants.[32] However, the extent of cooperation is limited, as the Chinese fear that the permanent stationing of American troops in the region will change the power balance. Both Russia and China hope to consolidate their influence in this region by diminishing the U.S. regional presence.
The Current and Potential Clashes of Interest between China and Russia
The SCO cannot be regarded as simply a monolithic entity. States’ interests inevitably conflict with each other. Sino–Russian current and future contradictions are the most obvious, but other conflicts abound. For instance, the Kyrgyz are unsatisfied with ceding a mountain range to China in the framework of a peace treaty. Specifically in the Asky riots in 2002, there was a protest against the Kyrgyz government ceding too much territory to China in land negotiations.[33] There have even been reports of Chinese diplomats being assassinated because of the Kyrgyzstani populace’s frustration towards Beijing. Similarly, the clash of interests between China and Russia is evident in military strategic and energy considerations. Since 2004, high-profile Russian officials have stressed Moscow’s opposition to a Chinese military presence in Central Asia.[34] Russia opposes a growing strategic role for China.
Conflicts of interest are most pronounced in the energy sector. In 2005, the Russian energy firm Gazprom and KazMunaiGaz, Kazakhstan’s main gas pipeline firm, agreed to increase gas transit of Turkmen and Uzbek gas via Kazakhstan to Russia for export to Gazprom’s European customers. This move may restrict China’s gas importing options in the region.[35] Furthermore, while China wanted the main Siberian oil pipeline to end in Daqing, in Heilongjiang province, Russia prefers a more expensive pipeline to Nahkhodka on the Pacific Coast with a spur to Daqing. Such a route will give Russia greater flexibility to export not only to China but also to Japan and Korea. Japan has even expressed willingness to subsidize the construction of the pipeline. Russia has remained cautious about the final decision on the direction and structure of the Siberian pipeline, which demonstrates that Russia does not want to become dependent on a single Chinese customer for its oil.
Russia, joined by U.S. energy companies, has attempted to obstruct Chinese efforts to buy energy holdings in the region, compelling the Chinese to search for other oil and gas options, such as cooperation with Iran. Iran’s ties with China (and Russia) are strengthening, and it sought to apply for full SCO membership. China currently imports around 13 percent of its oil from Iran. Pakistan is also interested in SCO membership, in exchange for which President Pervez Musharraf is offering China an “energy corridor” to Central Asia and the Middle East. Chinese interest in exploring a link to the long Turkmenistan–Afghanistan–Pakistan–India (TAPI) gas pipeline reflects the Chinese agenda of diversifying its sources of energy. However, Chinese and Russian officials have explicitly ruled out Iran becoming an SCO member, and have also ruled out any further expansion of the SCO membership in the near future. The Chinese Assistant Foreign Minister, Li Huio, stated that the SCO will not take in new members before its six members “make serious studies.”[36]
Implications for the United States
The United States is concerned that Beijing and Moscow are using their diplomatic alliance to limit America’s role in Central Asia. Both Russia and China would prefer that Central Asian countries’ contacts with the West be managed, or at least approved, by Moscow and Beijing. But the chief beneficiary from the SCO is China.[37] Beijing’s standing in the SCO and relatively good relations with the U.S. and Europe give China the opportunity to serve as an intermediary for the West.
Russia’s reluctance to construct an oil pipeline between Daqing and Siberia indicates Russian concerns about Chinese control over its natural resources. Moscow is also concerned about China’s military intentions, creating a sense of mistrust between the two powers. Despite Russia’s and China’s joint denunciation of the American military presence in Central Asia, Kyrgyzstan has allowed the United States to maintain its base at Manas, and Kazakhstan will even host NATO’s Steppe Eagle exercise in September. The SCO is not yet a cohesive entity in challenging the United States militarily or economically.
NATO may explore expanding relations with the SCO. Options for cooperative efforts may go beyond the existing NATO–Russia Council, and the Partnership for Peace, of which most Central Asian states are members. NATO members have a degree of cohesion and unity of values not yet present among SCO members and observer states, which often demonstrate considerable differences of approach and interest. Equally important, the SCO is a relatively small organization, still in its infancy, with an operating budget less than $30 million and a staff of a few dozen people. NATO, being larger, stronger, and more experienced in transnational security issues, can engage the SCO in discussions of strategic issues facing the region and develop paths for cooperation along the lines of the Partnership for Peace.
The United States should also seek bilateral agreements with the larger organization. Given that the SCO primarily serves as a geopolitical counterweight to the United States, American entrance into the organization is unlikely. The 2005 U.S. application to join the SCO was rejected.[38] Under such conditions, it is doubtful the United States and China can agree on terms for American membership without conceding their respective interests. However, the United States does not necessarily need membership in the organization to work closely with Central Asian states. It should renew its application to join as an observer and look to friendly states, such as Kazakhstan and Mongolia, for support. Whether or not the U.S. is able to attain observer status, it should use every diplomatic tool in its arsenal to oppose Iran’s intention to join as a full member.
Should Iran be permitted to enter the SCO, this will be a clear indication that Russia and China side with Iran on the issue of nuclear proliferation. Furthermore, inclusion of Iran would give the SCO significant influence over one of the world’s largest supplies of oil and gas reserves, in addition to potentially another nuclear arsenal. Russian President Vladimir Putin’s suggestion of forming a “natural gas OPEC” with Iran and Turkmenistan is of particular concern. These three countries are first, third, and fourth, respectively, in natural gas reserves, and will have the capacity to raise the global price of gas by regulating supply.
If the United States hopes to gain observer status in the SCO, it should engage the Central Asian states specifically by balancing democracy promotion and democratization with its other national interests, including security and energy. With the exception of Turkmenistan and Uzbekistan, most of the Central Asian states continue to maintain links with the United States to balance Russian and Chinese power. The U.S. should use what remaining contacts and leverage it has and continue to improve relations with friendly Central Asian states by providing economic, governance, and legislative reform assistance, and by enhancing military-to-military relationships. Working alongside these state governments in combating jihadists and terrorist organizations, the U.S. can appeal to common goals and secure American strategic and energy interests in the region.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies at the Heritage Foundation. This paper is based on his testimony before the U.S.–China Economic and Security Review Commission on August 3, 2006. The author thanks Heritage Foundation interns Thomas Chou and Conway Irwin for their assistance in preparing the testimony.
[1] U.S. Department of State, Office of the Coordinator for Counterterrorism, “Patterns of Global Terrorism—2003,” April 29, 2004, at http://hongkong.usconsulate.gov/uscn/state/2004/042901.htm (August 1, 2006).
[2] Meng Yan, “Free Trade Zone Proposed,” China Daily, September 24, 2003, at http://www.chinadaily.com.cn/chinagate/doc/2003-09/24
/content_267127.htm (July 27, 2006).
[3] Fredrick W. Stakelbeck Jr., “A New Bloc Emerges?” The American Thinker, August 5, 2005, at http://www.americanthinker.com/articles.php?article_id=4703 (July 26, 2006).
[4] Shanghai Cooperation Organization, “Declaration on Establishment of Shanghai Cooperation Organization,” June 15, 2001, at
http://www.sectsco.org/html/00088.html (August 1, 2006).
[5] Sergei Blagov, “Shanghai Cooperation Organization Summit Suggests New Russia-China Links,” Eurasia Daily Monitor, July 6, 2005, at http://www.jamestown.org/edm/article.php?article_id=2369975 (July 26, 2006).
[6] William Choong, “China and Russia: New ‘Axis’ in the Making?” The Straits Times, July 21, 2006, at http://straitstimes.asiaone.com/portal/site/STI/menuitem.c
2aef3d65baca16abb31f610
a06310a0/?vgnextoid=6fadbe120b93a010VgnVCM1000000a
35010aRCRD&vgnextfmt=vgnartid:258ec9dc32d8c010Vgn
VCM100000430a0a0aRCRD:vgnpdate:1153519140000 (August 1, 2006).
[7] Wu-ping Kwo and Shiau-shyang Liou, “Competition and Cooperation between Russia and China in Central Asia and “Shanghai Co-operation Organization: Analytical View from International Regime,” National Chengchi University, April 18, 2005, at http://iir.nccu.edu.tw/hjourn/is_c/is_c_9403.htm (July 27, 2006).
[8] Personal interviews with Uzbek officials who requested anonymity, Tashkent, October 2005.
[9] Kin-Ming Liu, “The Most Dangerous Unknown Pact,” The New York Sun, June 13, 2006, at http://www.nysun.com/article/3436 (July 26, 2006).
[10] Ibid.
[11] Stephen Blank, “China Joins the Great Central Asian Base Race,” EurasiaNet Daily, November 16, 2005, at http://www.eurasianet.org/departments/insight/
articles/eav111605.shtml (July 26, 2006).
[12] Ibid.
[13] Ariel Cohen, and John J. Tkacik, Jr., “Sino-Russian Military Maneuvers: A Threat to U.S. Interests in Eurasia,” Heritage Foundation Backgrounder No. 1883, September 30, 2005, at http://www.heritage.org/Research/RussiaandEurasia/bg1883.cfm
[14] Ibid.
[15] “Wildfire Chinese Growth Persists,” BBC News, April 20, 2005, at http://news.bbc.co.uk/2/hi/business/4464229.stm (July 30, 2006).
[16] Keith Bradsher, “Chinese Company to Buy Kazakh Oil Interest for $4 billion,” The New York Times, August 22, 2005, at http://www.nytimes.com/2005/08/22/business/worldbusiness/22cnd-oil.
html?ex=1282363200&en=cdbe608997c31770&ei=5090&partner=r
ssuserland&emc=rss (July 27, 2006).
[17] Stephen Blank, “China Make Makes Policy Shift, Aiming to Widen Access to Central Asian Energy,” Eurasianet.org, March 13, 2006, at http://www.eurasianet.org/departments/business/articles
/eav031306_pr.shtml (July 26, 2006).
[18] Ibid.
[19] Niklas Swanstrom, “China and Central Asia: A New Great Game or Traditional Vassal Relations?” Journal of Contemporary China (2005), 14 (45), p. 579.
[20] Ibid., p. 581.
[21] The Zhou Dynasty lasted from 1022 BC to 256 BC.
[22] Pan Yihong, “Traditional Chinese Theories of Foreign Relations and Tang Foreign Policy,” David C. Lam Institute for East-West Studies, 1998, at http://www.cic.sfu.ca/nacc/articles/panyihong/panyihong.html (July 30, 2006).
[23] Robert Ross, The Great Wall and the Empty Fortress: China’s Search for Security (New York: W.W. Norton & Company, 1997), p. 23.
[24] Wade Boese, “U.S.-Chinese Relations Strained Over Taiwan,” Arms Control Today, March 2000, at http://www.armscontrol.org/act/2000_03/chimr00.asp?print (July 30, 2006).
[25] Swanstrom, “China and Central Asia,” p. 569.
[26] Mark Dickens, “Major Events Relevant to Central Asian History, Part 2 (Since 1600),” Oxus Communications, at http://www.oxuscom.com/cahist2.htm (July 28, 2006).
[27] Library of Congress, Federal Research Division, “Russia: Foreign Affairs after the Crimean War,” at http://reference.allrefer.com/country-guide-study/russia/russia25.html
[28] Swanstrom, “China and Central Asia,” p.580.
[29] “SCO Begin Anti-terror Maneuvers in Kazakhstan,” People’s Daily (Beijing), August 6, 2003, at http://english.peopledaily.com.cn (July 27, 2006).
[30] Swanstrom, “China and Central Asia,” p.572.
[31] Ibid.
[32] “Statement by the Foreign Minister,” Chinese Ministry of Foreign Affairs, December 19, 2001.
[33] Matthew Oresman, “Assessing China’s Reaction to Kyrgyzstan’s “Tulip Revolution,” Central Asia-Caucasus Analyst, April 6, 2005, at http://www.cacianalyst.org/view_article.php?articleid=3195&SMSESSION=NO (July 30, 2006.)
[34] Stephen Blank, “China Joins the Great Central Asian Base Race.”
[35] Stephen Blank, “China Makes Policy Shift.”
[36] Dr. Maqsudul Hasan Nuri, “Pakistan and SCO,” The International News, March 11, 2006, at http://www.jang.com.pk/thenews/mar2006-daily/11-03-2006/oped/o4.htm (July 27, 2006).
[37] Howard W. French, “Shanghai Club, Once Obscure, Now Attracts Wide Interests,” The New York Times, June 16, 2006 (Lexis-Nexis, July 27, 2006).
[38] Stakelbeck, “A New Bloc Emerges?”
