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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?”
09-06-2006
by Stephen Johnson, Ariel Cohen, Ph.D., and William L. T. Schirano
Venezuelan President Hugo Chávez has embarked on a military buildup, to counter alleged U.S. plans to invade his country, and has recently visited Russia, Iran, China, Syria, and other countries to finalize purchases and lobby for a seat on the U.N. Security Council. Chavez’s aggressive policies could endanger U.S. allies in Latin America and a major source of U.S. oil imports.
Like Fidel Castro in 1961, Chávez is acquiring Russian assault rifles, combat aircraft, and possibly surface-to-air missiles, and he shares a hegemonic and anti-American international agenda with Iranian President Mahmoud Ahmadinejad. Unlike Castro, he is not dependent on a sponsor state and can finance his own adventures with booming state petroleum sales.
Because Chávez has no limits on acquiring or transferring arms, U.S. policymakers should strengthen regional alliances to prevent aggression, sanction Chávez in international forums, and press suppliers like Russia to withhold sales of offensive weapons systems.
The New Castro? Venezuela’s current arms buildup resembles events in the Caribbean in 1958, when Fidel Castro wrote a guerrilla companion that his destiny was to wage war against the United States. In 1960, Cuba began to receive Soviet weapons shipments, including light bombers, MiG jet fighters, SA-2 surface-to-air missiles, and finally nuclear-tipped SS-4 medium-range ballistic missiles, which provoked a U.S.–Soviet showdown in 1962.
In the 1970s and 1980s, when Cuba and the Soviet Union tried to establish satellite regimes in Africa and Central America, they armed, among others, Nicaragua’s Sandinista revolutionaries and El Salvador’s Farabundo Martí Liberation Front. The United States thwarted those plans by backing a Central American transition to democracy.
Mentored by Castro, Chávez is keenly aware of prior defeats and how to avoid them. Though freely elected, he has replaced Venezuela’s checks and balances with a crony congress, silenced critics with draconian media laws, and placed the state oil company under his thumb as head of the National Oil Council. Unbridled by popular will or economic sense, Chávez wants to block U.S. influence and become a power unto himself—picking up where Castro left off.
Courting Outside Partners. Soon after his election in 1998, Chávez began to curtail 50 years of U.S.–Venezuelan military cooperation. Finally, in 2004, his government asked the U.S. military mission to leave Venezuela’s armed forces headquarters in Caracas. Anti-drug operations and training of Venezuelan pilots in U.S.-supplied F-16 fighters ceased. Shortly thereafter, Venezuela began to seek arms from Russia. The Bush Administration suspended arms sales in May 2006, and Spain and Sweden are withholding weapons with U.S. components.
Chávez has signed contracts worth $3 billion for 24–30 military airplanes and more than 50 helicopters, has agreed to buy some 100,000 Kalashnikov assault rifles to arm a new reserve force, and reportedly is seeking short-range surface-to-air missiles. During the last week of July 2006, he was in Moscow to finalize the purchase of the Su-30 supersonic fighter-bombers and Mi-35 assault helicopters. He also signed an agreement to purchase a Kalashnikov weapons and munitions plant.
In Belarus, Chávez announced a strategic alliance with President Alexander Lukashenko to keep “hands at the ready on the sword” against imperialism. Iranian President Ahmadinejad awarded him a medal and promised collaboration on developing new oil fields. In China, Chávez pledged to shift more petroleum exports to Beijing. Meanwhile, ties with North Korean leader Kim Jong-Il could facilitate the acquisition of intermediate-range missiles.
Venezuela is replacing some military equipment that has fallen into disrepair, but setting up a Russian weapons plant and striking alliances with state sponsors of terrorism (Iran, Cuba, and North Korea) is alarming. Chávez already allows Colombian rebels to resupply in Venezuela and funds like-minded Bolivarian movements in neighboring countries. Venezuelan Kalashnikovs could help them go from street marches to armed attacks. The Su-30 will be Latin America’s most advanced attack aircraft. With North Korean ballistic missiles, Venezuela could threaten neighbors and the United States, and a gelling global oil alliance could limit U.S. imports at a critical moment.
Planning for the Worst. Latin America has only begun to turn the corner toward democratic governance, stable markets, and peaceful relations with neighbors. Chávez hopes to use guns and rhetoric to restore Castro’s revolutionary agenda. In response, U.S. leaders should:
Conclusion. By reaching out to Russia and Iran, Hugo Chávez threatens U.S. allies and vital interests. His new military muscle portends another decade of bloodshed, misery, and lost economic opportunity in Latin America. America and its allies need to be ready to confront those plans— probably sooner rather than later.
President Bush’s Agenda for the G-8 Meeting in St. Petersburg
06-30-2006
The G-8 meeting on July 15 and the Bush–Putin summit in St. Petersburg, Russia, may mark the most serious tests of U.S.–Russian and East–West relations since the collapse of the Soviet Union. Mutually amassed grievances have led some in Washington to question whether President George W. Bush should attend and whether Russia should remain in the G-8.
The United States has been highly critical of developments in Moscow’s domestic and foreign policy, such as increased restrictions on democratic freedoms within Russia and increasingly assertive interventions in the political and economic affairs of former Soviet republics.
Russia, for its part, opposes discussion of further NATO enlargement to include Georgia and Ukraine and fears that Western support for Russian pro-democracy nongovernmental organizations (NGOs) might one day provoke a “color” revolution in Moscow. Russia also blames the U.S. for blocking its accession to the World Trade Organization (WTO), despite Russia’s flagrant violations of intellectual property rights and severe limitations on foreign investment.
Mutual animosity notwithstanding, the U.S. and Russia have more to lose by antagonizing one another than by putting aside their differences on issues of utmost importance to both countries, especially the global war on terrorism, nonproliferation, and energy security.
At the summit, President Bush may ease the current atmosphere of tension between the two countries by focusing on the gains to be made through cooperation on these issues. Specifically, he should:
Focus on the Iranian issue by stressing the danger that a nuclear-armed Iran poses to Russia, especially in the Caucasus and Central Asia.
Emphasize the need for international firms to participate in large-scale Russian oil and gas projects.
Propose U.S. participation in confronting security threats emanating from the Caucasus and Central Asia.
Reassure President Vladimir Putin that U.S. support for political and media freedoms and human rights is not aimed at toppling the Putin regime, but that they are a sine qua non for further Russian participation in the G-8.
These actions may prove crucial in thawing the chill in the U.S.–Russian relationship, which threatens to do both sides more harm than good. Improved relations between Moscow and Washington may also help to justify Russia’s membership in the G-8 by confirming its dedication to cooperation on transnational issues.[1] Business cooperation, such as expanding sales of Russian uranium to the U.S. and U.S. civilian aircraft to Russia, and the lifting of U.S. objections to Russia’s storing of nuclear waste from third parties, such as Asian countries that operate American reactors, would contribute to improvement in relations.
Cooling U.S.–Russian Relations
On May 4, 2006, Vice President Richard Cheney gave a speech in Vilnius lambasting Russian policies that have dashed U.S. hopes for a democratic, market-oriented, post-communist Russia,[2] revealing that the political capital granted to Russia when it was invited to join the G-7 in 1997 is nearly exhausted.
After the collapse of the Soviet Union, both Russians and Americans believed that the introduction of democracy and capitalism would bring Russia closer to the West materially, politically, and spiritually.
Some Russian pundits have suggested that capitalism and democracy have failed to deliver the peace and prosperity that Russians desired, leading many to suggest that a Western society requires underlying Western values, not Russian ones. They have since advocated pursuit of a distinctly Russian “third way” that involves increased state intervention in the economy.[3] Pursuit of this third way has thus far coincided with economic growth, relative stability, and international prestige—developments that were assisted by the exorbitant rise in oil and gas prices, which have fueled prosperity since 2000. However, this has come at the price of the democratic freedoms and human rights that Americans hold dear.
As the U.S. and Russia have pursued their own, at times contradictory interests, they have clashed. The U.S. has pushed NATO’s borders uncomfortably close to Russia and is promoting NATO membership for Ukraine and Georgia, which Russia opposes. The U.S. has supported the Rose, Orange, and Tulip Revolutions in Georgia, Ukraine, and the Kyrgyz Republic, respectively, which ousted regimes loyal to Moscow and raised the specter of a similar upheaval in Russia. Washington has also sought closer ties with the strategically located and energy-rich states of Central Asia, much to the Kremlin’s chagrin.
On the other hand, Russia has irritated the U.S. by:
Refusing to cooperate on the Iranian nonproliferation issue and selling conventional arms to Iran;
The virtual absence of the rule of law, including politically motivated, heavy-handed interventions in business and financial markets;
Locking Western energy majors out of oil, gas, and pipeline projects in Russia and the former Soviet Union;
Continued efforts to monopolize the transportation of energy to Europe from energy-rich Central Asian states, such as Kazakhstan and Turkmenistan;
Using energy as a political and economic weapon to intimidate neighbors, such as Georgia and Ukraine;
Supporting secessionist regions in former Soviet republics (i.e., Abkhazia and South Ossetia in Georgia, Nagorno–Karabakh in Azerbaijan, and Transdniestr in Moldova);
Pressuring Kyrgyz and Uzbek officials to force the U.S. military to evacuate bases at Manas international airport and Karshi–Khanabad,[4] respectively;
Consolidation of Kremlin control over political parties, regional governments, television and print media, domestic and foreign NGOs, and “strategic assets” (e.g., oil, gas, telecommunications, and minerals).
Neither side’s actions are exclusively intended to provoke the other. The provocations are side effects of their pursuit of competing interests. Recognizing this fact and seeking common interests may be key to avoiding a Cold War–style rift between the two powers.
The Sources of Russian Foreign Policy Behavior
After World War II, with Stalin’s Red Army victorious in Middle Europe and Mao’s revolutionaries gaining the upper hand in China, the forces of capitalism and communism seemed evenly matched, and the ideological chasm seemed unbridgeable. Today, Russia’s position in the global hierarchy has different roots and therefore poses a whole new range of challenges to U.S. policymakers.
With the price of oil over $70 a barrel, Russia is flush with cash, and great revenues call for “great deeds.” These include funding new ballistic missiles, new nuclear submarines, and separatist militias in Transdniestr and Abkhazia, which threaten the stability of Moldova and Georgia and the wider Black Sea–Caucasus region.
Another obstacle to U.S.–Russian cooperation is the political culture among elites, which exhibits a KGB and militsia (police) ethos, mixed with some 1990s “wild East” Moscow capitalism. Neither these siloviki nor their oligarchic business partners favor “democrats” or Yankees who demand access to oil and gas patches—the “patrimony of the people”—that the Russian government controls.
Communist ideology has been replaced with a revived Moscow-centric Russian Orthodox worldview. This quasi-religious geopolitical system of beliefs views Russia as the heir of Byzantium, the Third Rome, which is always apart from Europe and America.
This places Russia closer to the “East” (China and the Muslim world) than to the materialistic postmodern West, which is said to lack soul and spirit. Islam is hailed as an “authentic” religion of Russia, which recently has become an observer in the Organization of the Islamic Conference and the Arab League.[5] Russia has also pursued diplomatic cooperation with the Iranian ayatollahs and Hamas. This rapprochement with the Muslim world risks driving a wedge between allies in the global war on terrorism.
Russia’s truculent treatment of Georgia and Ukraine—interruptions in gas supplies and stoking of separatism—have further irked Washington. The orchestrated eviction of the U.S. military from the Karshi–Khanabad base in Uzbekistan, conducted in cooperation with China, marked the flowering of a “beautiful friendship” between Moscow and Beijing aimed at undermining Washington’s interests.[6]
Russia’s diplomatic ambivalence over the Iranian nuclear program, demonstrated by chumminess with Iranian President Ahmadinejad, whose presence at the July 2006 Shanghai Cooperation Organization summit was highly publicized, is exhausting the White House’s patience.[7] The suspicion is that the Kremlin, together with Beijing, is willing to provide Ahmadinejad with the same political cover that Saddam Hussein purchased with oil-for-food contracts—except that this time, Russia will be paid in multibillion-dollar nuclear reactor contracts, air defense missiles, submarine sales, and bribes.
Russian–Iranian plans to squeeze the U.S. out of the Persian Gulf are also a source of concern, not just in Washington, but in Europe, Japan, and the Gulf itself. As roughly two-fifths of the world’s oil passes through the Strait of Hormuz,[8] edging America’s military power out of the Gulf would leave European and East Asian energy security at the mercy of nuclear-armed Shi’a radicals in Tehran, supported by Moscow and Beijing.
Finally, the Kremlin has done little to assuage foreigners’ fears of investing in Russia. The YUKOS affair, in which politically motivated Russian officials targeted Russia’s most efficient energy company, communicated to investors that their property rights were not secure. More recently, in March 2006, Interior Ministry agents seized a shipment of 167,500 Motorola mobile phones worth an estimated $17 million. Roughly 50,000 were destroyed for being “hazardous to users’ health,” and the remaining 115,000 remain in legal limbo for unspecified reasons.[9] Arbitrary regulations, rampant corruption, and legal irregularities raise concerns about the reliability of Russian markets.
Furthermore, Russian officials have recently confirmed that foreign companies will be restricted to minority ownership in any deposits of oil and gas deemed “strategic”[10] and have repeatedly delayed a crucial decision regarding which U.S. companies will be allowed to participate in developing the Shtokman gas field. Some analysts suspect that the participation of U.S. companies in developing Shtokman and the sale of Boeing civilian jets to Russia will be contingent on Russian accession to the WTO.[11] Squeezing out Western companies from choice Russian energy developments and other investments only exacerbates investors’ fears, and politically motivated restrictions on market participation strengthen U.S. reservations about Russian WTO membership.
What the U.S. Should Do
In dealing with Russia, the U.S. needs to keep in mind some basic economic and geopolitical realities:
Russian leaders will continue to pursue optimization of their global power by leveraging energy resources.
The West remains Russia’s principal customer for its energy and raw materials.
Despite strained relations with the U.S., Russian officials understand that provoking an outright global confrontation with the U.S. and its allies is beyond the country’s economic capabilities and counter to its long-term interests.
Russia’s full economic integration into the world is in the U.S.’s strategic interest.
For the U.S., simultaneously taking on global terrorism, Iraq, Iran, Russia, and China may constitute a dangerous global overreach.
Armed with this understanding at the upcoming meeting with President Putin and the G-8 summit, President Bush should:
Focus on the Iranian threat by stressing that a nuclear-armed Iran may support anti-Russian and radical Islamic forces in the Caucasus and Central Asia. The President should also warn Putin that the continued flow of Russian technology and assistance to Iran’s nuclear and missile programs, along with insufficient Russian cooperation on restraining Iran’s nuclear efforts, is souring Russia’s relations with its Western partners and may lead to expanded sanctions against Russian companies that are involved in such transfers of technology.
Emphasize the need for international firms to participate in large-scale Russian oil and gas projects, including the Shtokman gas field in the Barents Sea. The massive investments, technology, and expertise required to develop Russia’s hard-to-reach oil and gas resources indicate that Russia would be wise to court foreign investors, not exclude them, while oil prices are high. Discrimination against foreign companies and businessmen may further delay Russia’s membership in the WTO.
Propose U.S. participation in confronting security threats emanating from the Caucasus and Central Asia, including the spread of radical Islamic terrorism; trafficking in drugs, weapons, and human beings; and proliferation of weapons-of-mass-destruction technology. The U.S. and Russia should launch a joint threat assessment and task the joint U.S.–Russian anti-terrorism task force chaired by Undersecretary of State Nicholas Burns and Russian Deputy Foreign Minister Sergei Kislyak with putting together a policy package to be implemented in this area.
Reassure President Putin that U.S. support for political and media freedoms and human rights is not aimed at toppling the Putin regime, but that they are a sine qua non for further Russian participation in the G-8.
Conclusion
At the G-8 and Bush–Putin summits, the U.S. should endeavor to pursue the diplomatic and strategic cooperation that characterized U.S.–Russian relations during the 1990s and after 9/11, but on a new level. This new paradigm should take into account Russia’s current role as an energy giant while recognizing U.S. interests vis-à-vis Iran, Iraq, and Eurasia.
However, the U.S. cannot wait forever. If no positive changes are in evidence, the U.S. may recommend expanding the G-8 to include China, India, and Brazil on the economic tier while returning to the G-7 format on the political tier.
—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] U.S. Department of State, Bureau of International Information Programs, “What Is the Group of 8,” at usinfo.state.gov/ei/economic_issues/group_of_8/what_is_the_g8.html (June 28, 2006).
[2] Richard Cheney, “Vice President Cheney’s Remarks at the 2006 Vilnius Conference,” Vilnius, Lithuania, May 4, 2006, at www.whitehouse.gov/news/releases/2006/05/20060504-1.html (June 28, 2006).
[3] MosNews, “Pro-Kremlin United Russia Sees Way of Growth in State Regulation of Economy,” November 26, 2005, at www.mosnews.com/news/2005/11/26/unitedrussia.shtml (June 19, 2006).
[4] Vladimir Socor, “Moscow’s Central Asian Friends Campaign Against U.S. Bases,” Eurasia Daily Monitor, August 11, 2005, at www.jamestown.org/edm/article.php?volume_id=407&issue_id=3434&article_id=2370142 (June 19, 2005).
[5] Yin Gang, “Russia, Sole Winner of the Iran Crisis,” Common Ground News Service, April 19, 2006, at www.commongroundnews.org/article.php?sid=1&id=1644 (June 19, 2006).
[6] Stuart D. Goldman, “Russia,” Congressional Research Service Report for Congress, May 8, 2006, www.fas.org/sgp/crs/row/RL33407.pdf (June 20, 2006), and Ariel Cohen, Ph.D., “Uzbekistan’s Eviction Notice: What Next?” Heritage Foundation Executive Memorandum No. 978, August 18, 2005, at www.heritage.org/Research/RussiaandEurasia/em978.cfm.
[7] Ariel Cohen, Ph.D., “Bear and Dragon Summit,” Heritage Foundation Commentary, June 14, 2006, at www.heritage.org/Press/Commentary/ed061406b.cfm (June 20, 2006).
[8] U.S. Department of Energy, Energy Information Administration, “Persian Gulf Oil and Gas Exports Fact Sheet,” Country Analysis Brief, September 2004, at www.eia.doe.gov/emeu/cabs/pgulf.html (June 19, 2006).
[9] Steven Lee Myers, “Phone Seizure Seen as Example of Russian Corruption,” The New York Times, June 14, 2006, p. A3, at www.nytimes.com/2006/06/14/world/europe/14russia.html?pagewanted=all (June 28, 2006; subscription required).
[10] Guy Chazan, “Russia to Tighten Access to Oil and Gas Reserves,” The Wall Street Journal, June 14, 2006, at online.wsj.com/article/SB115023865846579404.html?mod=todays_asia_economy_and_politics (June 28, 2006; subscription required).
[11] Stephen Boykewich, “Shotkman Gas Project Linked to WTO Fight,” The St. Petersburg Times, April 14, 2006, www.sptimes.ru/index.php?action_id=2&story_id=17321 (June 20, 2006).
06-13-2006
On June 15 members of the Shanghai Cooperation Organization (SCO) will gather for their annual meeting at the birthplace of this Eurasian bloc—Shanghai. Since its modest economic beginnings in 2001, when it facilitated China’s return into its Central Asian backyard for the first time in almost 1,000 years, the SCO has become a Eurasian powerhouse with an increasingly strong military component. The United States should watch for anti-American developments at the SCO while exploring ways to establish a dialogue with it.
Guest of Honor: Ahmadinejad
Washington pundits and policymakers have pooh-poohed the power of the SCO—to their own peril. At this year’s summit, the guest of honor is Iranian President Mahmoud Ahmadinejad, who will be pushing for the Islamic Republic’s full membership in the increasingly anti-American organization. Iran currently holds observer status, along with India, Pakistan, and Mongolia. Belarussian president Alexander Lukashenko is also knocking on the SCO’s doors to gain leverage against Russia, an SCO member.
Moscow sources are saying that full membership may not be in the cards for either the Slavic dictatorship or the Shi’a theocracy. Ahmadinejad, however, will be rewarded with one-on-one meetings with SCO heads of state, including Chairman Hu of China, Russian president Vladimir Putin, and Kazakhstani president Nursultan Nazarbaev.
The U.S. should keep a close watch on SCO-Iranian coziness, as it may indicate growing coordination between Moscow, Beijing and Teheran. This may prove especially salient if Iran rejects the latest incentive package and refuses to cease uranium enrichment and open its 18-year-old nuclear program for invasive inspections by the International Atomic Energy Agency (IAEA).
Giant Stakes for Russia and China
Considering the giant stakes for Russia and China in bilateral relations with Teheran, the U.S. may fail to convince Russia and China that embracing Iran may not be consistent with their long-term interests. Russia recently announced the sale to Iran of TOR-1-M surface-to-air missiles for defense of its Bushehr nuclear reactor and its sprawling nuclear industry from hypothetical American or Israeli air attacks. Moscow’s interest not only in conventional arms sales but also in expanding nuclear reactor sales, as well as Chinese deals to import natural gas to the tune of over 100 billion dollars over 30 years, is common knowledge.
However, longer-term problems with a radical Iran should occupy the attention of the SCO leaders in Shanghai. Specifically, a nuclear-armed, religiously aggressive and truculent Iran may well challenge Russia’s support for the authoritarian and secular post-Soviet rulers in the Caucasus and Central Asia. Iran was behind a Sunni Islamist opposition in the Tajik civil war in the early 1990s and is making inroads into Azerbaijan.
Geopolitical Setbacks for U.S.
At the Shanghai summit, the U.S. should watch for other anti-American developments. Last year the SCO, encouraged by Russia and China, passed a resolution demanding U.S. withdrawal from an air base in Karshi Khanabad, Uzbekistan. U.S. refusal to finalize payments for the base and its harsh denunciation of President Islam Karimov for civilian casualties in suppressing an Islamist rebellion in Andijan in May 2005 also contributed to the Uzbek decision to expel U.S. forces.
This year, Russia has dictated to the Kyrgyz Republic terms and conditions for hosting the only remaining major U.S. air base in Central Asia, at the Manas airport in the capital Bishkek. Moscow has demanded ceasing all reconnaissance flights and limiting use of the base to resupply missions in Afghanistan. It has also encouraged Kyrgyz President Kurmanbek Bakiev to demand $100 million dollars in aid and to increase rent for the base sixfold.
Kazakhstan: The Pivot of U.S. policy in the Region
There is good news regarding the SCO. The U.S. is expanding ties with Kazakhstan, major oil producer with the region’s most liberal economic policy. It is also the nation most open to the West in the region. During his May visit to the country, Vice President Dick Cheney praised President Nursultan Nazarbaev, who runs this state sandwiched between two giants with imperialist histories, Russia and China.
Central Asian SCO members and observers—Afghanistan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan—are in dire need of political modernization and economic development, and Kazakhstan can act as a role model. Kazakhstan plans to move away from energy and raw material foundations to machine building, construction and services. Almaty, the business capital, is in the midst of a construction boom and is now dotted with glittering shopping malls and shiny new cars. High oil prices have more than quadrupled Kazakhstan’s per capita income over the last decade, and oil production is scheduled to reach 3.5 million barrels a day by 2012.
Mr. Nazarbaev is engaged in a balancing act among Russia, China and the U.S. He is expanding an oil pipeline to the Russian port of Novorossiysk and has built an oil pipeline to China. He has announced an agreement to supply oil to the Baku-Ceyhan pipeline consortium led by British Petroleum. He has also been responsive to U.S. demands not to build a pipeline to Iran. Recently, Nazarbaev sent a letter to President Ahmadinejad, calling him to abandon the Iranian military nuclear program, just as Kazakhstan gave up its nuclear arsenal after the collapse of the Soviet Union.
Unfortunately, the majority of the states in Central Asia has taken a different course and remains largely under the influence of China and Russia. There is no doubt as to China and Russia’s intentions in Central Asia—to gain control of natural resources and check U.S. influence in the region. The growing power and influence of the SCO indicate that they may be succeeding.
U.S. Policy Challenges
The U.S. can counter the rise of the SCO. First, Washington should recognize that China and Russia have a history, a present, and a future in this strategic area. They are extremely sensitive to U.S. proclaimed interests and do not welcome “the new kid on the block.” Washington’s diplomatic messages to these two powers and all SCO members and observers should remain tactful and nuanced.
The U.S. can demonstrate to Beijing that Russia is dragging it into an anti-American bloc, which is counter to China’s long-term interests. Russia is a high cost oil producer, and Middle Eastern instability keeps its oil prices high and its budget revenues higher. ?senior Putin foreign policy advisor told me that Russia will quietly cheer more Middle East instability as oil prices may climb to $90 a barrel or higher. China, on the other hand, is an energy-starved economic powerhouse dependent on cheap Middle East oil. China has an interest in seeking peace in the Gulf to ensure the security of its growing energy investments. If not restrained and contained, Iran is likely to drive world oil prices higher as it pursues its aggressive, terror-enhancing policy, supporting jihadi Islamists and challenging moderate Sunni regimes from the Gulf to Morocco.
Washington should focus Moscow’s attention on the geopolitical repercussions of a radical, nuclear-armed Iran, which is likely to throw its weight around Russia’s southern “soft underbelly”.
The U.S. should develop its relationship with Kazakhstan and warmly greet President Nazarbaev when he visits in September. The U.S. should also encourage democratization, property rights protection, and free market economic policies in Kazakhstan and, as much as possible, in other SCO countries, especially Kyrgyzstan and Tajikistan. Regional wealth creation will go a long way to stem the rise of radical Islam. A dose of modern secular education and the encouragement of more peaceful variants of Islam, such mystical Sufism, would also help.
Conclusion
During its long war on Islamist terrorism and the political ideology that breeds it, America can ill-afford a conflict with Russia and China in Eurasia. Thus, Washington must explore ways to establish a dialogue with the SCO on its fifth anniversary. It may otherwise risk yet another humiliation at the hands of Moscow and Beijing.
The Real Culprit Behind Price-Gouging: OPEC
05-31-2006
by Ariel Cohen and William L T Schirano
With the summer driving season now upon us, no one expects a break in the price of gas at the pump. The realities of supply and demand, however, have not stopped some in Congress from seeking a quick fix to the complex problem of high fuel prices.
Recently, in a rare display of bipartisan cooperation, members of Congress pinned the rise of gas prices on “big oil” price-gouging, blaming American oil companies. Yet, a recent investigation by the Federal Trade Commission (FTC) found that claims of price-gouging had less to do with “Big Oil” than they did with “regional or local market trends.”[1]
While Congress spends its time chasing this “white whale,” state-owned oil companies that make up the Organization of Petroleum Exporting Countries (OPEC), and control 80 percent of the world’s oil reserves, continue to gouge the American consumer through a series of monopolistic practices. This week, OPEC is expected to announce that it will maintain its current output level—a decision that will do little to ease oil prices that have reached more than $70 a barrel.[2] If Congress is serious about alleviating the price-gouging that contributes to high gas prices, it ought to begin by allowing the federal government to sue OPEC.
At a time when oil prices are climbing to ever-higher levels, this measure would be a welcome first step towards reestablishing the free market in this strategically important sector. Indeed, this move is long overdue and points the way to a second, more important step: allowing private antitrust suits against OPEC.
The Intolerable Status Quo
Since its inception 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. Member states’ production quotas are determined at semi-annual meetings of members’ petroleum ministers and are at times changed through telephone consultations. Several times, this supply-fixing strategy has devastated the U.S. and global economies:
In 1973, OPEC’s actions in response to U.S. support for Israel, which was attacked in the Yom Kippur War, resulted in a worldwide economic recession that lasted from 1974 to 1980.
In 1980, OPEC’s failure to increase production in the face of the Iranian revolution resulted in historically high oil prices of $81 per barrel (in 2005 dollars).
In 1990, OPEC refused to increase production sufficiently to keep prices stable as Saddam Hussein occupied Kuwait.
Lately, OPEC’s resistance to add productive capacity has sent oil prices to $75 a barrel, once again endangering U.S., and worldwide, economic growth.
The cartel’s operations ensure that its members’ oil and gas economies remain insulated from foreign investment flows. Members of OPEC have not worked to enhance the rule of law and property rights and have imposed severe restrictions to prevent foreign investors from owning upstream production assets, such as oil fields and pipelines. This is a testament to the cartel’s de facto monopoly over the petroleum market—a strategy that has resulted in higher oil prices for American consumers.
Indeed, 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 U.S. Court of Appeals for the Ninth Circuit rejected the case in 1981. OPEC, the court affirmed, could not be prosecuted under the Sherman Act due to the foreign sovereign immunity protection it claimed for its member states. Prevailing legal doctrines, however, suggest that government-owned companies that engage in purely business activities do not warrant sovereign immunity protection.[3]
High oil prices, which OPEC facilitates, serve to transfer wealth from Western consumers to petroleum producers. This wealth transfer funds terrorism through individual oil wealth and government-controlled “non-profit” 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 empowers resistance to much-needed economic reform in oil-producing countries. Western consumers fund state subsidies for everything from health care to industry to bloated bureaucracy.
Getting Serious About OPEC’s Price-Gouging
Growing concerns over energy prices prompted Congress last year 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 led by Sen. Mike DeWine (R-OH) introduced the “No Oil Producing and Exporting Cartels Act” (S. 555), known as NOPEC, to amend the Sherman Act. This bill would make oil-producing and exporting cartels illegal. The measure remains in the limbo of the Senate Legislative Calendar under General Orders.
On June 21st, DeWine, with the support of Sen. Herb Kohl (D-WI), added an amendment based on NOPEC to the Energy Policy Act of 2005. Like NOPEC, this amendment would have modified sections of the Sherman Act to allow the U.S. Department of Justice (DOJ) or the FTC to bring suits against OPEC for its monopolistic practices. The amendment did not make it into the final energy bill.
In April of 2006, Senator Arlen Specter introduced the “Oil and Gas Antitrust Act of 2006” (S. 2557), another bill that takes aim at the Sherman Act. That bill has also been placed on Senate Legislative Calendar under General Orders.
If Congress is serious about the issue of price-gouging, it must allow federal 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, Congress cannot rely on the courts when it comes to amending the Sherman Act.
Conclusion
It is time for OPEC to cease its monopolistic practices. Otherwise, the American people can expect more of the same from this cartel—higher gas prices and shrinking wallets.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security, William L T Schirano is a Research Assistant, in the Sarah and Douglas Allison Center for Foreign Policy Studies of the Kathryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation.
Reducing U.S. Dependence on Middle Eastern Oil
05-07-2006
The United States is the largest oil importer in the world, bringing in 13.5 million barrels per day (mbd), which accounts for 63.5 percent of total U.S. daily consumption (20.6 mbd). [1] Oil from the Middle East (specifically, the Persian Gulf) accounts for 17 percent of U.S. oil imports, and this dependence is growing.
There is a broad consensus in America, from the President to the man on the street, that this situation is detrimental to the country’s economic health. In his 2006 State of the Union address, President George W. Bush said, “[W]e have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world.” [2] While recognizing the problem is laudable, however, little has been done to solve it.
Limiting the hold of Middle Eastern oil on the U.S. economy will require creativity and genuine effort. Specifically, the Administration should:
Prepare for contingencies in which oil-rich countries become destabilized;
Assist friendly Persian Gulf states in enhancing the security of their oil facilities; and
Diversify U.S. energy sources and oil imports to reduce dependence on Persian Gulf oil.
Beyond these general guidelines, it is crucial that the U.S. follow through with these specific measures:
Boost efforts to roll back Iran’s subversive ideological, terrorist, and military threats;
Expand military contingency plans and prepare a rapid reaction force;
Diversify the energy basket by expanding domestic production of oil and gas and by lifting the bureaucratic barriers that prevent greater use of nuclear energy;
Encourage expanded methanol and ethanol production and imports; and
Expand the Strategic Petroleum Reserve.
Table1
Source: U.S. Department of Energy, Energy Information Administration.
Growing Dependence on Imported Oil: A National Security Threat
The U.S. government predicts that by 2025, the country will import 68 percent of its oil.[3] At best, the measures in the Energy Policy Act of 2005[4] will slow the growth rate of U.S. dependence only slightly.[5]
Many have suggested, quite correctly, drilling for oil in the Alaska National Wildlife Refuge (ANWR), a small part of Alaska’s remote Arctic slope. However, even opening ANWR would add only 1 mbd to U.S. production—barely 5 percent of America’s growing oil consumption, which currently stands at 20.6 mbd.[6] Table 1 lists the world’s largest oil producers and consumers in 2004. Map 1 illustrates the sources of U.S. oil imports.
Map1
Sources: U.S. Department of Energy, Energy Information Administration, “International Petroleum (Oil) Imports
and Exports,” at http://www.eia.doe.gov/emeu/international/oiltrade.html (March 21, 2006). Map based on R. I. Gibson,
“Some Interesting Oil Industry Statistics,” Gibson Consulting, at http://www.gravmag.com/oil.html#imports (March 21, 2006).
However, there is a more pressing problem. Two-thirds of the world’s oil reserves are concentrated in the increasingly unstable Middle East and are controlled by members of the quasi-monopolistic Organization of Petroleum Exporting Countries (OPEC).[7] Over the years, OPEC has been quick to cut supply and slow to increase production, bringing oil prices to today’s high levels.[8] 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.[9] Thus, consumers are effectively paying two premiums on oil: one for security and one for suppliers’ economic inefficiency and monopolistic behavior.
The countries listed in Table 2 and Table 3 produce about 61 mbd, or about 73.5 percent of world production. OPEC countries account for about 33 mbd, or 40 percent of world production.
Table2
Source: U.S. Department of Energy, Energy Information Administration.
Table3
Source: U.S. Department of Energy, Energy Information Administration.
Global fuel consumption is projected to increase by 100 percent to 150 percent over the next 20 years, driven largely by the rapidly growing Chinese and Indian economies, and this increased demand will force prices even higher. The supply of conventional light sweet crude oil is likely to dwindle, opening the door to expanded market shares for heavy oil and oil with high sulfur content, as well as oil extracted from oil sands and alternative fuels.[10]
Threats to Key Suppliers
The oil market operates today without cushions of additional production capacity or significant strategic petroleum reserves beyond the U.S. reserves. For example, al-Qaeda’s February 24, 2005, attack on the Aramco facility in Abqaiq, Saudi Arabia, sent shock waves through the world’s financial markets. On the same day, the price of oil on international markets jumped nearly $2, despite the attack’s complete failure. (The terrorists and two security guards were killed.)[11]
Most analysts agree that this attack and an averted attempt on March 28 were merely trial runs in a much longer campaign designed to disrupt the global economy, particularly the oil and gas industry.[12] As the September 2001 World Trade Center attacks demonstrated, al-Qaeda tends to return to the scene of the crime, so another strike on Abqaiq and other oil targets is likely.
Both Osama bin Laden and Ayman al-Zawahiri have repeatedly called for attacks on key Western economic targets, especially energy sources.[13] In a tape aired by Al Jazeera, Zawahiri said:
I call on the mujahideen to concentrate their attacks on Muslims’ stolen oil, most of the revenues of which go to the enemies of Islam while most of what they leave is seized by the thieves who rule our countries.[14]
The unfortunate reality is that the Middle East remains the strategic center of gravity of the global oil market—a position that is not likely to change in the medium term. As long as radical Islam, China, India, and Europe continue the struggle for the world’s limited oil supply in the Middle East, the region will remain unstable. If the U.S. is to protect itself from these economic and political threats, it must reduce its dependence on Middle Eastern oil as quickly and efficiently as possible.
Oil as a Weapon
Many Arab leaders understand the dynamic of this dependence. For example, as early as 1990, the late Yassir Arafat said:
When the North Sea oil dries up in 1991, the United States will want to buy Arab petroleum. And when the American oil fields themselves run dry and oil consumption in the United States increases, the American need for the Arabs will grow greater and greater.[15]
This observation has not been lost on the current generation of politicians and terrorist leaders. However, bin Laden and Zawahiri are not satisfied with the unwieldy weapons of oil boycotts, threats of boycotts, and buying political influence in the West. Instead, they are clearly zeroing in on the oil-rich kingdoms of Saudi Arabia and the Gulf as their principal targets. They also appear increasingly interested in attacking the entire global oil industry, from wells to wheels.
The failed February strike and the prevented March attack on Abqaiq were not the first times that al-Qaeda has targeted energy assets in the region. In October 2002, al-Qaeda attacked the Limbourg, a French oil tanker, off the coast of Yemen with a suicide boat filled with explosives. In 2002, American and Saudi intelligence agencies uncovered a plot by al-Qaeda sympathizers inside Saudi Aramco to destroy key Saudi oil facilities. In 2003–2004, al-Qaeda attacked the Saudi port of Yanbu and murdered five Western engineers working there.[16]
Indeed, terrorist attacks against energy infrastructure are not the exception, but the rule, as an examination of the three primary regional challenges to energy security in Iraq, Iran, and Saudi Arabia illustrates.
Iraq. While the removal of Saddam’s regime may have been a positive factor for energy security because it freed Iraq from the U.N. sanctions that restricted oil exports, the postwar turmoil in Iraq is hindering the foreign investment that could help to expand Iraqi oil exports. This makes building a politically stable and peaceful Iraq all the more important.
Meanwhile, pipeline sabotage by foreign and domestic insurgents has crippled Iraqi oil production. Today, Iraq produces 800,000 to 1.3 million barrels per day less than it produced before Operation Iraqi Freedom in 2003.[17] According to the Iraqi oil ministry, the 186 insurgent attacks on the oil industry cost the country $6.25 billion in lost revenue during 2005 and claimed the lives of 47 engineers and 91 police and security guards.[18]
Poor U.S. postwar planning, coupled with Iraqi corruption, mismanagement, lack of investment, and inept technological exploitation of the existing fields, has clearly had a detrimental effect on production. However, terrorism, sabotage, and sectarian violence are at the heart of Iraq’s reduced oil production.
Oil export routes are hampered as well. With both the Saudi–Iraq pipeline to the south and the Syrian pipeline to the west off-line,[19] Iraq is vitally dependent on two pipelines: one from Kirkuk to the Mediterranean port of Ceyhan in the northwest and the Basra pipeline in the south.
Escalating violence is further impeding oil production and cash flow for the central government in Baghdad. The fear that the situation may deteriorate further has fueled speculation that the Kurdish region in northern Iraq may decide to pursue independence—a development that might invite both Turkish and Syrian military involvement. If this were to happen, Iraq’s oil fields in the north (the largest in the country) and the strategic Kirkuk–Ceyhan pipeline would likely remain under a security threat for the foreseeable future.
Iran. Despite Iranian President Mahmoud Ahmadinejad’s earnest and ongoing attempt to project the image of an irrational leader of what international relations theorists have called a “crazy state,” many analysts have yet to recognize fully the dire ramifications of Iran’s professed intention to develop a nuclear weapons program.
If diplomacy fails, Iran’s pursuit of nuclear weapons will leave the U.S. and its allies with few choices, similar to the options that President John Kennedy faced 40 years ago during the Cuban missile crisis.
On one hand, the U.S. and its allies could choose the military option, deciding that a nuclear-armed Iran that sponsors global terrorist organizations like Hezbollah, Hamas, and Palestinian Islamic Jihad is incompatible with the post-9/11 world.
Yet, the economic consequences of a military strike on Iran’s nuclear facilities to the world energy market would likely be significant, if not disastrous. Immediately following military action, uncertainty about Iran’s ability to sustain oil production at the current level of 4.05 mbd could drive oil prices above $80 per barrel.[20] If Iran retaliated and escalated by shutting down the Strait of Hormuz, which would merely require placing anti-ship mines in the strait,[21] the temporary loss of more that 15 million barrels of oil to the international market could drive oil prices above $83 per barrel, the historic height of the 1970s (adjusted for inflation).[22]
On the other hand, Iran’s aspirations in the region are far-reaching. Allowing Iran to join the nuclear club introduces the possibility of Iranian interference throughout the Middle East, especially given Iran’s location near so many of the world’s largest oil fields. (See Table 4.) The large Iranian military, amply supplied by Russia and China, would be in a position to dominate the Persian Gulf under a nuclear umbrella, with U.S. ground forces pinned down in Iraq.
Currently, Iran enjoys the support of some Shi’a in Iraq, especially Muqtada Sadr’s Mahdi Army, and in the Shi’ite-populated Ash Sharqiyah (Eastern) Province of Saudi Arabia. This appeal could facilitate the takeover of some of the largest oil fields in the world. In a worst case scenario, a nuclear Iran could threaten the United Arab Emirates and Kuwait. If this were to happen, the Islamic republic could quickly secure a sizable part of the world’s oil supply, bringing the nuclear-armed militant Shi’ite Muslim state close to a virtual monopoly over the world’s energy market.
Saudi Arabia.Saudi Arabia not only is the world’s largest exporter of oil, but also has the biggest share of unused oil production capacity, which is crucial for cushioning oil markets from supply disruptions elsewhere. Thus, the political stability and future of Saudi Arabia’s oil industry remain paramount to forecasting trends in the oil economy of the Middle East in the next 15 to 20 years.
If Saudi Arabia remains stable or even increases production, the world has a couple of decades to make the transition to new fuels, probably a combination of hydrocarbons and non-hydrocarbons. This transition needs to be manageable and not too disruptive so that industries can adjust and raise the capital necessary to create new technologies and distribution networks. However, a combination of security factors and economic policies is making this kind of “soft landing” less likely than an escalating energy shortage, rife with international security and economic crises. A successful attack on the Saudi oil facilities could cut Saudi supply and neutralize Saudi Arabia’s 1.5–2 mbd surplus oil producing capacity, which in turn would destabilize world oil markets, undermining international energy security.
Internally, the Saudi leadership has spent much of its recent existence on the knife’s edge. The balancing act between supplying the United States with oil on one hand and financing radical Islamists on the other was always a tremendously risky feat for the monarchy. The attack on Abqaiq demonstrates the potentially disastrous consequences of a misstep.
The attacks on Abqaiq most probably signal an escalation of a low-intensity terrorist war between the oil-rich Saudi monarchy and the jihadis in which oil fields, pipelines, pumping stations, ports, and terminals are soft targets, vulnerable to the types of asymmetric attacks that are already the bloody hallmark of al-Qaeda. According to Newsweek, a successful strike on Abqaiq could have cut Saudi output by more than 4 mbd for two months or more, with disastrous consequences for the global economy.[23]
Even more frightening is the prospect of jihadis mounting an outright takeover of the country. Under such a scenario, radical Islamists dedicated to overthrowing the Al Saud regime would slowly build up their forces until they could exploit a revolutionary situation created by a succession struggle, a political assassination, or some other circumstantial trigger.
Uprisings, if not checked, could lead to the regime’s overthrow and political turmoil, which would deeply affect oil production capacity and immediately and directly threaten Western experts and workers in Saudi Arabia. Osama bin Laden has stated his belief that oil should cost $145–$200 per barrel.[24] If radical Wahhabis succeeded in taking over Saudi Arabia, they would likely drastically reduce production. The radical regime’s anti-Western policies, including the pursuit of nuclear weapons, could trigger Western economic sanctions, which would likely include limits on investment and spare parts for the oil industry or even an outright trade boycott. Furthermore, if the survival of the world’s economy is threatened, military action to remove an al-Qaeda–type regime could not be ruled out.
Table4
Source: : U.S. Department of Energy, Energy Information Administration.
Implementing a Three-Pronged Strategy
The United States and its allies need to pursue a three-pronged strategy by preparing for contingencies in which the oil-rich regimes become destabilized, assisting friendly Persian Gulf states in enhancing security of their oil facilities, and diversifying U.S. energy sources and oil imports to reduce dependence on Persian Gulf oil. Specifically, the United States should:
Boost efforts to roll back Iran’s subversive ideological, terrorist, and military threats to Iraq and other Arab states of the Persian Gulf through close cooperation with those governments. It is crucial that the United States deter, contain, or disarm Iran through cooperation with its allies, particularly those oil-producing states that are most directly threatened by Iran. The U.S. defense and intelligence community should build capacity in Iraq, Turkey, and other border states. The U.S. should ascertain that these countries are staffing their intelligence and internal security agencies with reliable personnel.
Expand military contingency plans and prepare a rapid reaction forcein cooperation with U.S. allies in the region to secure and protect the Persian Gulf oil infrastructures if terrorists attempt to seize or destroy them. Such a force should be fully interoperable with the Gulf Cooperation Council militaries. U.S. military and intelligence agencies should support countries and companies in the region in efforts to increase their defenses against terrorist attacks on oil facilities.
The Administration should also ensure that U.S. intelligence and law enforcement agencies receive full cooperation from the Persian Gulf states, particularly Saudi Arabia, in the war against terrorism. An integrated and computerized real-time operations center is needed to integrate intelligence and operations to protect oil and gas infrastructure in the Gulf. The U.S. should pressure Persian Gulf states to intercept and disrupt all financial support for al-Qaeda and similar organizations around the world. These efforts should include using financial controls and improved banking transparency to cut funding for virulently anti-American/anti-Western clergy, radical Islamic academies (madrassahs), and those elements of private or state-run media that incite terrorism.
Diversify the sources of U.S. energy importsaway from the Persian Gulf, importing more oil from other sources such as West Africa and Eurasia, more natural gas from Canada and Mexico, and more liquid natural gas (LNG) from Russia and Africa. The Bush Administration should direct the Departments of State and Energy to provide economic aid incentives and technical assistance to non–Middle Eastern oil-producing countries to simplify regulations and speed up the licensing process for expanding and building new pipelines and refiners.
Diversify the U.S. energy basketby expanding domestic production of oil and gas and by lifting the bureaucratic barriers to greater use of nuclear energy. The White House and Department of Energy should actively lobby Congress to expand domestic petroleum and gas production, such as in ANWR; to allow states to override the federal limitations on continental shelf exploration and exploitation; and to speed up licensing and construction of LNG terminals.[25]
Encourage expanded production and imports of methanol and ethanol.Congress should work with the U.S. Department of Commerce to lift import tariffs on foreign ethanol produced from sugar cane.[26] The U.S. should also encourage research and development of market-based alternatives and enhanced technologies to help meet the nation’s future needs without dependence on foreign oil.
Expand the Strategic Petroleum Reserve(SPR) and create a U.S. Strategic Gasoline Reserve. Currently, the U.S. SPR is sufficient for only 90 days. It needs to be expanded gradually to 180–250 days. The U.S. Department of Energy should cooperate with the European Union, China, India, and Japan to encourage all oil-importing countries to build up their strategic reserves to at least six months.
Conclusion
It is only a matter of time until America’s energy security, including its economic health and defense capabilities, will be jeopardized by the growing political instability, terrorism, and potential warfare in the Middle East. Over time, the U.S. needs to limit its dependence on foreign oil, especially from the Middle East, shifting to other sources of supply and eventually to new types of energy sources. Limiting U.S. dependence on Middle Eastern oil will be a major strategic challenge for the U.S. in the coming decades.
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 thank research assistant William Schirano for assistance in preparing this paper.
[1]U.S. Department of Energy, International Energy Administration, “U.S. Weekly Petroleum Products Product Supplied,” at http://tonto.eia.doe.gov/dnav/pet/hist/wrpupus2w.htm (March 31, 2006).
[2]George W. Bush, “State of the Union Address by the President,” January 31, 2006, at http://www.whitehouse.gov/stateoftheunion/2006 (March 5, 2006).
[3]Justin Blum, “Bill Wouldn’t Wean U.S. Off Oil Imports, Analysts Say,” The Washington Post, July 26, 2005, p. A1, at http://www.washingtonpost.com/wpdyn/content/article/
2005/07/25/AR2005072501707.html (March 29, 2006).
[4]Public Law 109–58.
[5]Blum, “Bill Wouldn’t Wean U.S. Off Oil Imports.”
[6]U.S. Department of Energy, “U.S. Weekly Petroleum Products Product Supplied.”
[7]The 11 OPEC members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.
[8]Àriel Cohen, Ph.D., and William Schirano, “Congress Should Lift OPEC’s Immunity,” Heritage Foundation WebMemo No. 777, June 27, 2005, at http://www.heritage.org/Research/Energyand
Environment/wm777.cfm.
[9]For example, in terms of economic freedom, Iran, Venezuela, and Nigeria were ranked 156th, 152nd, and 146th out of 157 countries, respectively. See Marc A. Miles, Kim R. Holmes, and Mary Anastasia O’Grady, 2006 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2006), at http://www.heritage.org/index.
[10]“Supply and Demand: World Oil Markets Under Pressure,” CBC News, April 28, 2005, at http://www.cbc.ca/news/background/oil/supply_demand.html (March 6, 2006).
[11]Aljazeera.net, “Al-Qaida Says It Hit Saudi Oil Facility,” February 25, 2006, at http://english.aljazeera.net/NR/exeres/A429E32C-D484-424E-9C58-D9E287580817.htm (March 6, 2006).
[12]Stratfor, “Saudi Arabia: Abqaiq Attack Thwarted,” March 29, 2006, at http://www.stratfor.com/products/premium/read_article.php?selected=Situation%20Reports&sitrep=1&id=264105 (March 31, 2006). See also “Saudi Arabia Nabs 40 Terror Suspects,” Kuwait Times, March 31, 2006, at http://www.kuwaittimes.net/Navariednews.asp?dismode=article&artid=829180313 (March 31, 2006).
[13]“‘Bin Laden’ Tape Urges Oil Attack,” BBC News, at http://news.bbc.co.uk/2/hi/middle_east/4101021.stm (March 29, 2006). See also Agence France-Presse, “Bin Laden Threat Drives Oil to Four-Month High,” The Taipei Times, January 21, 2006, p. 12, at http://www.taipeitimes.com/News/worldbiz/archives/
2006/01/21/2003290110 (March 5, 2006).
[14]“Bin Laden War on West Just Starting: Deputy,” The Age (Melbourne, Australia), December 8, 2005, at http://www.theage.com.au/news/world/bin-laden-war-on-west-just-starting-deputy/2005/12/07/1133829660913.html (March 29, 2006).
[15]Al-Musawwar, January 19, 1990, cited in Mitchell G. Bard, “Middle East Policy and Oil,” Jewish Virtual Library, at http://www.jewishvirtuallibrary.org/jsource/US-Israel/usoil.html (March 29, 2006).
[16]Saudi–US Relations Information Service, “Gunmen Attack in Yanbu,” Special Report No. 3, May 3, 2004, at http://www.saudi-us-relations.org/newsletter2004/saudi-relations-interest-05-03.html (March 5, 2006).
[17]U.S. Department of Energy, “Iraq: Oil,” Energy Information Administration Country Analysis Briefs, December 2005, at http://www.eia.doe.gov/emeu/cabs/Iraq/Oil.html (March 6, 2006).
[18]“Oil Attacks Costing Iraq $6.25 billion,” iexpode, February 19, 2006, at http://iexplode.blogspot.com/2006/02/oil-attacks-costing-iraq-625bn.html (March 5, 2006).
[19]Ibid.
[20]Anadolu News Agency, “Iran Warns of Excessive Oil Prices,” Zaman (Istanbul), February 14, 2006, at http://www.zaman.com/?bl=hotnews&alt=&trh=20060214&hn=29790 (March 6, 2006).
[21]Kenneth R. Timmerman, “Iran Readies Plan to Close Strait of Hormuz,” Newsmax.com, March 1, 2006, at http://www.newsmax.com/archives/articles/2006/2/28/181730.shtml?s=lh (March 6, 2006).
[22]Hong Kong Trade Development Council, “Reassessing the Impacts of Higher Oil Prices,” tdctrade.com, August 1, 2005, at http://www.tdctrade.com/econforum/boc/boc050801.htm (March 6, 2006).
[23]Christopher Dickey, “Saudi Storms,” Newsweek, October 3, 2005, athttp://www.msnbc.msn.com/id/9468701/site/newsweek (March 6, 2006).
[24]Randeep Ramesh, “Blood and Oil,” Guardian Unlimited, October 17, 2002, at http://www.guardian.co.uk/oil/story/ 0,11319,813965,00.html (March 6, 2006).
[25]Ben Lieberman, “State of the Union 2006: Dusting Off the Old Energy Policy,” Heritage Foundation WebMemo No. 979, January 31, 2006, at http://www.heritage.org/Research/Energyand
Environment/wm979.cfm.
[26]Ariel Cohen, Ph.D., “Increasing the Global Transportation Fuel Supply,” Heritage Foundation Executive Memorandum No. 986, October 25, 2005, at http://www.heritage.org/Research/EnergyandEnvironment
/em986.cfm.
01-09-2006
Seventeen years since the fall of the Berlin Wall is sufficient time to reflect upon the amazing transformation of NATO and its frontiers. From bringing the Central European states back into their European home, whole and free, to extending membership to the former captive nations of Estonia, Latvia, and Lithuania, NATO has done very well indeed.
New Challenges
NATO today is a player in a world which has fundamentally changed from the organization’s beginnings in 1949. Gone are Joseph Stalin and his double-headed monster of repressive secret police and the Red Army. Gone are the Soviet Union and its global empire. Western Europe is safe from a conventional attack directed by Moscow. The bipolar, rigid world of two ideologically opposing blocs and military machines is a part of 20th century history.
However, many Europeans and Americans have died of terrorist violence in the last five years. The source of the violence is another hateful, totalitarian ideology— radical Islam. And the sources of that ideology, its training and recruiting grounds, as well as its sources of funding are in the Greater Middle East, including the Mediterranean basin, through the Fertile Crescent, and into the remote valleys and gorges of the Caucasus and Pakistan, the deserts of Central Asia, the plateaus of Afghanistan.
This is no longer a conventional threat of panzer divisions in the Fulda Gap, or intercontinental ballistic missiles launched from Totsk or Balakovo in Russia. Today’s suicide bombers may be indoctrinated by Gulf-based mullahs, trained in camps in the Northwestern province in Pakistan or in the battlefields of Iraq, funded by an illegal charity “front” in London, and execute their gruesome work in Madrid or Paris. Most important, they have the freedom to replicate their hateful views in Paris and London and on the Internet with little to nothing done to shut them down.
But there are additional threats. Russia is slowly drifting away from the common Euro-Atlantic system of values and shared net threat assessments. It is pursuing a policy to exclude NATO and the United States from Central Asia and keep the “frozen conflicts” in Moldova, Abkhazia, South Ossetia, and Karabakh on ice.
While Russia participates in joint exercises with NATO, such as Operation Active Endeavor, which will include two Black Sea Fleet ships taking part in counter-proliferation activities in the Mediterranean, Moscow is threatening Ukraine not to pursue membership in the Alliance. Russia wants other post-Soviet countries to conduct all contacts with NATO through the Collective Security Treaty Organization—a new version of the old CIS Warsaw Pact that the Ministry of Defense and the Kremlin control.
Political instability and state failure in the Caucasus and Central Asia, as well as in the Muslim states of the Southern and Eastern Mediterranean and the Greater Middle East, is another long-term systemic threat, which may endanger Europe and North America.
Failed leaders produce failed policies. Failed policies generate failed states. Those, like Afghanistan under the Taliban, spawn safe havens for terrorists. It is happening in Somalia and other parts of Africa, and in the Northwestern province of Pakistan. It is happening in southern Afghanistan, where thankfully NATO is expanding its operations. And it may happen in Gaza, the Northern Caucasus, the Ferghana Valley, and in the highlands of Tajikistan and Kyrgyzstan.
To be an effective provider of security, NATO is concerned today with the entire spectrum of problems and potential problems—from the Iranian nuclear and missile program, which will threaten Europe, to emerging networks of terrorist organizations which spawn cells capable of massive urban terrorist attacks in Europe.
At the same time, many politicians and analysts say that NATO cannot be everywhere and do everything. When you look on the map and see NATO in Darfur and Pakistan, you realize that even NATO, with its vast capabilities, is limited—and must limit itself—in its geographic scope and ambition.
Implementing Existing Commitments
NATO still needs to fully implement commitments it took upon itself in Prague, Berlin, and Istanbul.
At their 2002 meeting in Prague, NATO heads of state and government opened a new chapter in the Alliance’s history by inviting seven countries, including the three Baltic States, to accession talks and committing themselves to equip NATO with new capabilities to meet the security threats of the 21st century.
The two-day “transformation summit,” which took place on November 21–22, 2002, ended with the adoption of far-reaching decisions on the Alliance’s future roles and tasks. These included the creation of a cutting-edge NATO Response Force, a commitment to enhance the Alliance’s military capabilities, and a statement on Iraq. Specifically, members agreed to the following:
U.S.–European Union cooperation should be continuously based on the March 17, 2003, Berlin Plus agreement, which was designed to definitively resolve questions of compatibility between the EU and NATO. Berlin Plus has four elements:
In the 2004 Istanbul Declaration, members decided to address NATO’s Mediterranean and Greater Middle East dimensions. Specifically they agreed to:
This ambitious agenda cannot be implemented with today’s level of military and security expenditure. NATO countries which dedicate only 1.1 percent–1.5 percent of their GDP to the overall effort are not pulling their weight. The current allocations are not sufficient to fully fund the Prague and Berlin Plus commitments, the war on terrorism, and out-of-area deployments, including peacekeeping missions. To survive, NATO needs to find financial resources to fund its vital missions. Otherwise, as Ben Franklin said, “Those who would sacrifice liberty for security deserve neither.”
Fighting Terrorism
Since 9/11, the NATO leaders have reaffirmed many times that terrorism and proliferation are the current threats to the Euro-Atlantic community. Fighting in and rebuilding Afghanistan, as well as training Iraqi forces, are principal commitments that NATO is pursuing in that realm. However, even after the attacks in Madrid and London, one gets the impression that NATO does not have sufficient capabilities to fight the global war on terrorism.
While engagements in Afghanistan, Iraq, Kosovo, and Darfur are contributing to providing security and training the forces, NATO can play a greater role in fighting terrorism and building new relationships and alliances in the Mediterranean, the Greater Middle East, and Eurasia—alliances that are vital to success in the new war.
The national interest in opposing the 21st century networked, borderless, jihadi movements with their terrorist organizations is not clearly articulated. Often, notions of political correctness cloud the threat assessment, the rhetoric, and the judgment of what is really at stake, which is, simply put, the survival of Western civilization.
Western institutions need to evolve to respond to jihadi threats. Today’s national armies, courts, law enforcement, security services, legal systems, and international organizations were designed in the 19th and 20th centuries to fight a different enemy: other nation-states or coalitions thereof. These were times of conventional, colonial, or ideological warfare, not terrorism empowered by weapons of mass destruction.
Those institutions were created in a different time to address different challenges. Police pursued known local criminals, who grew up in local communities. Courts applied laws and evidence rules drafted in the quaint times of the 19th century. Spies penetrated each other’s organizations, deciphered aerial or satellite photography, or collected information in diplomatic cocktail parties.
Industrial-era militaries consist of units which fight along massive front lines. They include ballistic missile regiments, fleets, tank divisions, and air armies. All this is often of little use in fighting globally networked terrorist cells.
Western societies and NATO need to evolve to answer these new challenges. The new enemy requires a new knowledge base and new skill sets. Languages, history, religion, and geography about which we once knew very little all need to be a part of the modern decision-maker’s and officer’s discourse and at the fingertips of contemporary law enforcement and intelligence officials. While millions of Arabic, Farsi, and Pashtu speakers live in Europe and the U.S., there is a shortage of operatives and translators who are fully conversant in these languages and cultures. We have not begun fighting a war of ideas. We have a hard time integrating immigrants. National court systems, especially in Europe, are slow and cumbersome in response to agile terrorist threats, as tragedies in Madrid and London demonstrated.
This evolution to adjust and win the new conflict is the greatest challenge the West is facing, and NATO, as its pre-eminent military alliance, is facing it as well.
Reaching Out to the Greater
Middle East
Part of the new orientation of NATO is the Mediterranean Initiative and the Istanbul commitment to the Greater Middle East. In engaging Arab and Muslim decision-makers and militaries, using the experience of the Partnership for Peace is necessary but will be more difficult than in the former Soviet Bloc. Chris Donnelly, godfather of the Partnership for Peace, has pointed out that the cultural gap between NATO and Greater Middle East polities today is much wider than between Western and Eastern Europe in the early 1990s.
However, we cannot lose time. We are living today in an era when Arab nationalism, most of all symbolized by the military regimes of Egypt, Syria, and Iraq, has collapsed. Liberalism, unfortunately, is still weak. Radical Islam, from its Muslim Brotherhood brand to the al-Qaeda variety, is a dangerous ideology which threatens the well-being of Muslim societies from Marrakesh to Bangladesh. And it is surely capable of deadly attacks against the West.
The Southern Mediterranean political systems are desperately in need of fresh air. Decision-makers need to be exposed to new ideas in the realms of security. Militaries need to come under stricter civilian control and assume a role in fighting terrorism. Bringing missions from the Greater Middle East to Brussels, exposing them to NATO’s ways, expanding dialogue and cooperation will go a long way toward familiarizing these future allies with NATO’s norms and Western culture. This is likely to be a long-haul fight—much longer and slower than the European expansion and Partnership for Peace.
However, there is a threat of “mainstreaming” Islamist movements and terrorist organizations. Just as we would not suggest legalizing al-Qaeda or the Taliban, we should rule out legalization and inclusion of Hizballah, Islamic Jihad, Hizb ut-Tahrir al-Islami, Hamas, and the Muslim Brotherhood. These are totalitarian movements which advocate genocidal violence and the subjugation of women, deny full rights to people of different religions and ethnic groups, and are completely intolerant of practices of Islam different from their own. They should not be embraced. Those who embrace them do so at their own peril.
The War of Ideas
Another vital dimension of fighting the war on terrorism is the battle of ideas. Only if the West and moderate Muslims offer the masses in the Greater Middle East a future which is more attractive and realizable than the “glorious sacrifice” of jihad do we have a chance to win this war.
So far, we have failed to mobilize for a war of ideas the way we did in the Cold War against communism. Partially, this is because many still think that radical Islam is a religion rather than a hateful political ideology. Partially, it is because we have lost the touch, the institutional memory and tools we used to keep in the toolbox.
Those who remember the United States Information Agency, who have known Radio Liberty–Radio Free Europe at its prime, and who know how the West supported Soviet and Eastern European dissidents know exactly what I am talking about. Just as we helped Alexander Solzhenitsyn, Andrei Sakharov, Vaclav Havel, and Lech Walesa to become the alternative leadership for their societies, we need to do it again for the Muslim world.
And just as we developed political warfare tools which made rock music, modern art, and consumer goods hip and desirable for the socialist camp to the point of bankrupting Marxism–Leninism, we need to look for ideas, symbols, and people who can marginalize radical Islam. Half of the Muslim population is women. Well, this is a good place to start. There are repressed ethnic and religious minorities, the exploited business community, just sane people who understand that jihad is destructive for them and for us, who want compatibility and coexistence with the West. There, too, are good places to start.
No doubt, Muslims themselves can and need to fight this battle for themselves, but we need to help them to ensure our own survival. NATO needs to think how to make political warfare part of its doctrine and operations.
Russia and Eurasia
One area where secular Muslim societies and moderate Islam coexist and thrive with Christians and Jews is in the former Soviet areas. NATO should maintain and expand the Partnership for Peace with the Central Asian republics and Azerbaijan.
However, the recent developments in Uzbekistan cause concern. Russia to a large degree has been behind the hard line undertaken by Islam Karimov’s regime after the tragedy in Andizhan. Russian dezinformatsiya operations may be behind the paranoid belief in Tashkent that the U.S. was behind the Andizhan riots, and even that there are contacts between the U.S. and Tahir Yuldash, the head of the Islamic Movement of Turkestan, an al-Qaeda–affiliated terrorist group.
Russia wants to be an autonomous player in Eurasia. Its post-communist unreformed security and foreign policy elites feel more comfortable with Chinese communists and Iranian mullahs than with Western politicians and security planners. The Soviet-era mistrust of NATO and the U.S. is running high—and that mistrust is being encouraged in high places.
Stratospheric oil prices may allow Russia to continue this policy for a while. However, the difficult demographic, health, and social conditions at home sooner or later will force Moscow to reconsider its approach. For now, Russia fans the fears of “orange revolutions” in Central Asia and the Caucasus, calling for regimes there to use force against their own people.
After its departure from Uzbekistan, the U.S. needs to rely on the forward operations base (FOB) at the Manas airport in Bishkek, Kyrgyzstan, and negotiate for another one in Tajikistan. Russia is concerned that the U.S. may establish bases in Georgia, Azerbaijan, and even Turkmenistan (despite the fact that the latter is most likely impossible as long as Turkmenbashi rules the country with an iron fist). As NATO bases in Romania and Bulgaria are coming on-line, the chain of bases from the Black Sea through the Caspian and into Central Asia will be a great priority for the U.S. global military posture.
Russia has many other concerns. It is worried about Poland’s participation in the American missile defense program. In the latest meeting between the Ukrainian Defense Minister, Anatoliy Hrytsenko, and his Russian counterpart, Sergei Ivanov, the Russian side threatened to stop military industrial cooperation with Ukraine if Ukraine joins NATO.
Russia is also apprehensive about withdrawal of its military bases from Georgia and opposes deployment of NATO peacekeepers along the Azeri–Armenian line if and when the two countries sign a peace agreement. Of course, such a deployment would be predicated on the willingness of NATO members to deploy peacekeepers.
With that, it is important for NATO to continue to engage Russia. Thus, the Active Endeavor counter-proliferation naval exercises, in which Russia takes part, are important. So is Russia’s ability to take part in peacekeeping operations using its Fifteenth Brigade, along the lines of a successful Russian deployment in Bosnia in 1996–1999.
Most important, NATO should entice Russia to train its officers and civilian decision-makers to facilitate military reforms and bring the military under more enhanced civilian control. Recent hostilities in the Northern Caucasus demonstrate that today’s Russian Army and security forces do not possess the training, fortitude, and esprit de corps needed to stem the Islamist insurgency in the region. In view of this, expanding Russian commitments in Central Asia seem foolhardy at best.
Ukraine. The debate on Ukraine’s membership in NATO will depend on a number of factors, especially political development in Ukraine, such as the March 2006 parliamentary elections. Moscow, no doubt, will react with vitriol should Ukraine be invited to join. It tripled the prices of natural gas it supplies to Ukraine.
So far, according to public opinion polls, a minority of Ukrainians support their country joining NATO. Kyiv saw its first anti-NATO demonstration, reportedly 30,000 strong. Supporters and opponents of membership may push for a national referendum—this is what President Victor Yushchenko has promised. A victory for the pro-Russian forces who oppose Ukraine’s membership in the parliamentary elections could delay that issue for years to come.
Finally, it is membership in the European Union, with its attendant economic reforms and subsidies, which most Ukrainians covet. However, this is hardly in the cards after the failure of this year’s European Constitution referendum in France and the Netherlands.
The Caucasus. NATO so far has not deployed any meaningful contingent in the Caucasus. However, the “unfreezing” of conflicts in Abkhazia, South Ossetia, and, most important, in Nagorno–Karabakh may put new requirements on the Alliance.
Romualdas Razuks, NATO’s representative in the Caucasus, said that if both parties so request, NATO may deploy peacekeepers to the Azerbaijan– Armenia border. However, many members’ forces are under pressure, and it will not be easy to find sufficient troops. The same goes for Abkhazia.
Only when Russia is convinced by NATO to stop supporting separatists can the situation really change. Thus, encouraging members of the Partnership for Peace to follow their Individual Partnership Action Plans (IPAPs), which Georgia and Azerbaijan submitted in 2004 and Armenia submitted in the summer of 2005, is the best way to arrive upon regional cooperation by the three South Caucasus states under the NATO umbrella.
A similar situation applies to the Trans-Dniester conflict in Moldova. Russia is not interested in ending the conflict, believing that a pro-Moscow, communist exclave in the vicinity of the Southeastern NATO flank is to Russia’s strategic advantage. Thus, Western pressure to “unfreeze” the conflicts and find common ground with Russia must continue.
Conclusion
NATO has reached a new watershed in which it needs to seriously evaluate both its geographic scope and the spectrum of threats it is willing to address. The Alliance’s leaders need to view its capabilities with clarity and sobriety. NATO needs to approach future missions with realism, both military and economic.
The first order of the day is triage—agreeing on threat assessments and defining which missions are vital for NATO members’ interests. Clearly, integrating the Balkans and expanding ties with Ukraine are missions most members agree on. Beyond that, NATO needs to balance ambition and funding. It is difficult to have an ambitious deployment policy or far-reaching and expensive partnerships while budgets stagnate or decline.
Some experts caution that NATO should not attempt to grab every mission, thus dispersing and dissipating its strength. It needs to hold Article V sacrosanct, build strength from within, and remain a “political clubhouse” while following the path articulated in Berlin and Prague. Indeed, post-expansion integration and interoperability, combined with improving the doctrine, building airlift and high-tech capabilities, and evolving NATO’s personnel skill set to fit 21st century threats, are vital for the Alliance’s survival and war-fighting ability.
There are also visionary leaders, like former Spanish Prime Minister Jose Maria Aznar, who believe that NATO needs to focus on fighting terrorism at home and limit deployment in faraway lands. He calls for building global alliances with like-minded democracies, such as Israel, Australia, and Japan. As far as security in Central Asia is concerned, I would also suggest expanding cooperation with Turkey, a veteran NATO member; with India; and, in certain cases, with Pakistan.
One thing is clear: NATO members need to share their threat assessments and agree upon the best ways to fight these threats. Workable strategies in the Mediterranean and the Greater Middle East, including Iran, Iraq, and the war on tårrorism, need to be developed. NATO also may play a role in the future sanctions against Iran’s nuclear weapons program. This may be a serious challenge for which NATO needs to be ready.
NATO needs to build on the Istanbul Declaration, expand the Mediterranean Dialogue, and examine expansion of ties with the Gulf Cooperation Council. Having Arabs and Israelis under the same neutral roof of military cooperation may create an environment of building trust and understanding. Disseminating the Western notion of civilian control over the military and security forces may go a long way in modernizing Middle Eastern military and security establishments and spreading initial notions of democratic civil–military relations.
In Eurasia, NATO needs to develop ties with the three South Caucasus states and expand, to the degree possible, training and cooperation with Kazakhstan, Kyrgyzstan, and Tajikistan. NATO should be ready to resume ties with Uzbekistan and Turkmenistan when feasible.
Finally, the Alliance should expand ties with Russia beyond the NATO–Russia Council, to include peacekeeping exercises, officer training exchanges, and selective joint maneuvers. Above all, NATO has to assist Russia in enhancing civilian control over the military and enacting a military reform which makes Russia’s forces modern, compact, and defensive.
To conclude, NATO members need to provide leadership, develop policies, and find means— both financial and personnel—to deal adequately with the increasingly unstable environment along the Alliance’s frontiers. The stakes are too high: survival of our civilization. Failure is not an option.
Increasing the Global Transportation Fuel Supply
10-25-2005
Despite soaring oil prices, oil and gas producers worldwide have failed to expand either supply or investment levels, falling short of meeting the rapidly growing global demand. The key challenge is ensuring an adequate supply of transportation fuel for cars and airplanes--not electricity, which can be generated from coal and nuclear reactors.
The war on terrorism and operations in Iraq and Afghanistan, as well as high rates of economic growth in China and the United States have caused additional gasoline and jet fuel shortages that have led to higher prices. Fuel costs represent an indirect tax that may seriously affect the economy, possibly even causing a global recession. Furthermore, leading industry experts believe that the global oil well is running dry. Even if this is not the case, developing the remaining supply poses problems that continue to confound the industry.
Insufficient Infrastructure. Currently, supply is limited by insufficient transportation and refining capacity. No new refineries have been built in the U.S. in the past three decades. In addition, world spare tanker capacity, which is essential to transport oil from overseas, no longer exists, and excess refinery capacity is at an all-time low.
Overregulation. While many oil fields are headed for depletion, national oil companies control 58 percent of oil and natural gas reserves. Laws requiring the government to own and/or control significant shares in oil ventures are common in many oil-producing countries. Overregulation prevents oil companies from owning mineral rights, while weak rule of law and insufficient protection of property rights in many oil-rich regions makes multibillion-dollar investments too risky.
A Poor Investment Environment. In many oil-producing countries, arbitrary laws, failing and corrupt legal systems, selective taxation, conflicting legal codes, and government failure to enforce contracts have created a murky investment environment. Nationalization has a particularly chilling effect. Russia frightened many investors away by breaking up its major oil company, Yukos, and suing British Petroleum’s Russian partner for $790 million in back taxes. Saudi Arabia abandoned its much-touted privatization of natural gas production.
Unpredictable International Actors. Pipelines must often cross unstable regions and borders to reach markets, so elaborate international agreements are needed before pipelines can be built. Political and ethnic conflicts and terrorism in the Middle East, Africa, the Caspian region, and South America also create grave investment concerns. Some analysts warn that a carefully targeted terrorist attack on oil facilities in Saudi Arabia could reduce Saudi oil production to 4 million barrels per day or less for up to three months, which would have disastrous results for the global economy.
Weak Lending Institutions. In many countries, lending institutions are weak, and excessive taxation diverts oil revenues before appropriate investments for future development are made. This limits the funds available to develop new fields and tempers the profit motive to expand production. These anti-business barriers have hindered investors from expanding oil and natural gas supplies, even in the face of surging demand.
Steps to Be Taken. To help ensure energy security in the near future, the Administration should:
Develop a comprehensive strategy to change the oil investment climate. Such a strategy should involve the Departments of State, Energy, and Treasury and be coordinated by the National Security Council. Consumer countries, including the G-8 and major oil consumers, should use diplomatic and economic means to pressure OPEC and non-OPEC suppliers to liberalize their foreign investment laws, break up state monopolies, and phase out undue government intervention. Efforts to promote such policies through international financial organizations should be increased. Economic assistance should emphasize economic freedom in potential recipients, including a liberal investment climate similar to Millennium Challenge Account re-quirements. Arms and vital equipment sales should be conditioned on improving the investment climate in the energy sector. The U.S. should also condition accession to the World Trade Organization (WTO) on policy changes that facilitate foreign investment.
Build more tankers, pipelines, and refineries. The Departments of State and Energy should provide economic aid incentives and technical assistance to oil-producing and refining countries to simplify regulations and speed up the licensing process for the expansion of existing and building of new pipelines and refineries, especially in Mexico, Central America, and the Caribbean. Major shipbuilding companies should be encouraged to expand their tanker fleets. The U.S. Trade Representative should use the WTO, North American Free Trade Agreement, and Central American Free Trade Organization to reduce barriers to oil-sector investment and development.
Remove tariffs on imported ethanol. Since the 1973 Arab oil embargo, Brazil has reduced its dependence on foreign oil by more than half by developing "fuel-flexible" vehicles that run on any combination of gasoline and ethanol. Currently, 4 million such cars are on U.S. roads. Adding such a feature costs as little as $150 per car. The U.S. should follow Brazil’s example by turning ethanol into a fuel of choice. However, making fuel-flexible cars viable will require lifting the U.S. tariff on imported ethanol (currently 54 cents per gallon) because the U.S. ethanol industry relies on corn and grain sorghum, which yields much less ethanol per pound than sugar cane.
Conclusion. There is no silver bullet that will increase the supply of oil and natural gas or wean the United States from its dependence. The future may bring significantly higher energy prices, but an unabated and sharp hike in oil prices could cause a global recession, as has happened twice in the past. To avoid a massive crisis, the U.S. government, in cooperation with the private sector, needs to expand the transportation fuel supply before it is too late.
06-29-2005
In his speech before the men and women of the Airborne and Special Operations Forces at Fort Bragg, President George W. Bush clarified for the American people what is at stake in Iraq. He defined the enemy as Islamist totalitarians who are willing to kill innocent men, women and children—including fellow Muslims—for the sake of their ideology.
The President also defined the path forward: “As Iraqis stand up, we will stand down.” He established, however, that there would be no deadline or schedule for pulling out American troops.
Finally, the President thanked the men and women of U.S. armed services and their families for their sacrifices in the cause of freedom. He called for young people to volunteer for military careers—an important message in these days of declining enlistment rates and some schools closing their doors to military recruiters.
In all, President Bush presented a broad and honest strategy to the American people. Iraq is an important part of the long war on terror, and no matter how long it takes, we must prevail there.
Wartime Leadership
In the next few days it will become clear whether the American people heed the President’s message. Bush was reelected as a wartime leader. In November 2004, voters trusted him more than they did his opponent to plot the course to victory in Iraq and in the war on terror. Tuesday’s speech provided clarity that will help Americans to decide whether he is on the right track.
It is clear that Iraq cannot fully develop as a free nation when terrorists, both foreign and domestic, are killing thousands, including politicians, members of the judiciary, and the technocrat elite.
The Middle East cannot overcome the afflictions of radicalism, fundamentalism and terrorism without democratic reforms and alternative political models being allowed and promoted in key states, such as Saudi Arabia and Egypt. Achievements in Lebanon and the Palestinian Authority are baby steps in comparison with what must happen in the future for democracy to take root in the Middle East.
In World War II, the military defeats of Nazism and Japanese militarism were followed by de-Nazification and war crime trials. In the Middle East, things cannot go much differently if the cause of freedom is to prevail.
Challenges Ahead
In the months to come, Iraqis will finally hold trials for Saddam Hussein and his henchmen. This is a good start, but other challenges remain. As CENTCOM Commander General John Abizaid recently testified in a Senate hearing, more jihadi fighters are converging on Iraq today than six months ago. These are terrorists who come from all corners of the Muslim world to take part in jihad, or holy war, against the American “infidels” and their allies.
After using the fighting in Iraq to train, many of the battle-hardened survivors return to their countries of origin to prepare the next step of jihad. Terror generals from Osama bin Laden to Ayman al-Zawahiri want Iraq to become a major terrorist training ground, as Afghanistan was during the long battle against the Soviets in the 1990s. Defense Secretary Donald Rumsfeld recently testified that the U.S. engagement in Iraq could last years.
To sustain a struggle, the terrorists are dependent upon a global network of recruiters from London to Lahore. These recruiters are financed by hundreds of millions of dollars collected through Al Qaeda-owned businesses and by the donations of rich businessmen around the Persian Gulf. These donors are brainwashed in hundreds of mosques by radical imams and mullahs, who are often on government payroll.
The Islamist terrorist worldview is formed and reinforced by a network of well-financed anti-American and anti-Western media, also predominantly government-supported, such as Hizbollah’s Al Manar, which continue to broadcast with impunity. Education systems that are influenced by Wahhabi and Moslem Brotherhood clerics from kindergarten to graduate school reinforce radical Islam’s murderous views. Their curricula are imbued with anti-Western, anti-Christian, anti-Hindu, and anti-Semitic messages.
Beyond Iraq
The social pathologies of the Middle East, which have given birth to two failing ideologies—Nasser-style Arab nationalist socialism and extremist Islamism—will take time to address. They need be dealt with primarily by Middle Eastern societies themselves, drawing on American, Western, and global support and know-how. The world cannot afford to tolerate the spread of Islamist terrorism, especially when terrorists and terror-supporting regimes covet weapons of mass destruction.
A major improvement in U.S. intelligence and covert action is still needed to identify and neutralize the brainwashing, recruitment, and terrorist smuggling networks that enable the Iraqi jihad and other terrorist actions to continue.
The governments of Syria, Saudi Arabia, and Iran need stop the terrorist operations that are being conducted on their soil or on their payrolls. This will not happen until they come under heavier U.S. pressure. The Syrian-Iraqi border must be sealed, and the terrorist smugglers there deterred or eliminated. Bankrolling and harboring terrorists and terrorist organizations must stop.
Jihadi and anti-American propagandists must be rendered silent, be it in the mosque, the madrassah, or the TV station. Just as the U.S. and its allies did not tolerate Nazi propaganda in 1946, incitement to kill Americans and American allies should not be tolerated today.
It is also high time for major curriculum revision in the Middle East. Countries awash with oil cash can no longer afford to refuse to reform and modernize their education systems. Schools must be transformed from jihad factories into agents of change, institutions that actually educate tolerance and modernity.
Conclusion
To defeat Iraqi insurgents and global terrorists, the Bush Administration will need to win in Iraq and go beyond Iraq—diplomatically, economically, intelligence-wise, and perhaps even militarily. The United States needs to support moderate Islamic and secular forces in the Muslim world, not just to discredit Islamism, but to promote and instill new ideas of tolerance and freedom. It will be long and tough war, but defeat is not an option. President Bush made that patently clear last night.
Congress Should Lift OPEC’s Immunity
06-27-2005
On June 21, the Senate voted in support of an amendment to the Energy Bill that would allow the federal government to sue the Organization for Petroleum Exporting States (OPEC). At a time when oil prices are climbing to ever-higher levels, this measure is a welcome first step towards reestablishing the free market in this strategically important sector. The move is long overdue and points the way to a second step: allowing private antitrust suits against OPEC.
The Intolerable Status Quo
Since its inception 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. Member states’ production quotas are determined at semi-annual meetings of members’ petroleum ministers and are at times changed through telephone consultations. Several times, this supply-fixing strategy has brought devastation to the U.S. and global economies:
In 1973, OPEC’s actions in response to U.S. support for Israel, which was attacked in the Yom Kippur War, resulted in a worldwide economic recession that lasted from 1974 to 1980.
In 1980, OPEC’s failure to increase production in the face of the Iranian revolution resulted in historically high oil prices of $81 per barrel (in 2005 dollars).
In 1990, OPEC refused to increase production sufficiently to keep prices stable as Saddam Hussein occupied Kuwait.
Lately, OPEC’s resistance to add productive capacity has sent oil prices to $60 a barrel, once again endangering U.S.—and the world’s—economic growth.
The cartel’s operations ensure that its members’ oil and gas economies remain insulated from foreign investment flows. Members of OPEC have not worked to enhance the rule of law and property rights and have imposed severe restrictions to prevent foreign investors from owning upstream production assets (oil fields and pipelines). This is a testament to the cartel’s de facto monopoly over the petroleum market. Indeed, 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. But the case was rejected in 1981 by the U.S. Court of Appeals for the Ninth Circuit. OPEC, the court affirmed, 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.[1]
High oil prices, which OPEC facilitates, serve to transfer wealth from Western consumers to petroleum producers. This wealth transfer funds terrorism through individual oil wealth and government-controlled “non-profit” 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 empowers resistance to 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 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 led by Sen. Mike DeWine (R-OH) 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. The bill is currently on the Senate calendar.
On June 21st, DeWine, with the support of Sen. Herb Kohl (D-WI), was able to add (through voice vote) an amendment based on NOPEC to the Energy Policy Act of 2005. Like NOPEC, 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.
The House now has a unique opportunity to:
Join forces with the Senate in defending American businesses and consumers. The DeWine-Kohl Amendment would send a strong and long-overdue signal to OPEC oil barons that they must stop limiting production and investment access.
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. Reform should not and end with the DeWine-Kohl amendment.
Conclusion
The DeWine-Kohl amendment would place much needed pressure on OPEC. It is time for the cartel to cease its monopolistic practices. Otherwise, the American people can expect more of the same from OPEC—insufficient production and higher energy bills.
