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09-10-2003
Geopolitical tectonic plates have shifted as the de-facto ruler of Saudi Arabia, Crown Prince Abullah completed his visit to Russia last week. Oil-exporting Caspian states should watch with concern how the two largest energy producers are beginning their elephantine dance. In the process, smaller oil exporters on Russia’s periphery, such as Kazakhstan and Azerbaijan, may suffer if collusion between the major players results in pressure to limit oil production in order to keep global supply down.
BACKGROUND: The apparent rapprochement between Russia and Saudi Arabia during Crown Prince Abdullah’s visit to Moscow is likely to have large implications for global energy markets, and especially for Caspian producers. There are significant forces which push Saudi Arabia and Russia into each other’s embrace. Oil, weapons and geopolitics drive their newly found common agenda. Moscow, on its part, is driven towards a partnership with Saudi Arabia for a combination of geopolitical and geo-economic reasons. It is looking to compensate itself for the loss of influence in the Gulf with the demise of Saddam Hussein, the old Soviet client. Russian companies connected to Moscow high-flying insiders used to do brisk business – up to $1 billion a year -- in Iraqi oil under the U.N.-sponsored oil-for-food programs. Most importantly, though, Moscow believes that Saudis and other rich Gulf states keep the keys to the 9-year-old war in Chechnya.
One of the most radical and audacious Islamist commanders in Chechnya, known by Nom de guerre Khattab, was a Saudi. The Russian special forces killed him after a long hunt. Another top commander, Shamil Basaev, on the U.S. Department of State terrorism list, is known to have military and financial support from the Gulf, as well as a number of foreign Jihadi recruits.
Moscow has consistently blamed Saudi Arabia for sponsoring extremism and terrorism in Chechnya and, thereby, keeping the conflict alive. During the horrific hostage taking in October of last year, the Russian security services alleged in the media that the Chechen suicide bombers who took 1,000 people hostage in a Moscow theater made phone calls to the Gulf. The Kremlin was livid. In the last summit with President Bush in St. Petersburg in June, President Putin stressed that 15 out of 19 hijackers were Saudi. President Bush nodded in agreement. This was an intentional jab to signal to Saudi Arabia that Russia is willing to join forces with the United States in prosecuting the war against terrorism if the Saudis don’t reign the radical Chechens in.
Al Qaeda’s terrorist attacks in Riyadh, in which over 30 Saudis died, seemed to have change the tone in the desert kingdom. Now Saudi leaders claim that they view Chechen separatism as an internal Russian affair, and that their assistance was always exclusively humanitarian. While nobody in Moscow believes that, the Putin Administration, which is facing parliamentary elections in December and presidential elections in March 2004, is hoping for drying up of financing to the Chechen rebels, and thereby achieve a significant decrease in hostilities.
Putin also wants Saudi Arabia to assist Russia to join Organization of Islamic Conference (OIC), as an observer. The OIC is an assembly of such Muslim stalwarts as Iran, Indonesia, and Saudi Arabia, and the Russian foreign policy establishment believes that an open channel of communication to these countries after 9/11 is in Russia’s national interest.
Saudi Arabia, meanwhile, recognizes that Russia, as the largest producer of oil, the second largest exporter of oil, as well the largest producer of natural gas outside of the Organization of Petroleum Exporting Countries (OPEC), packs a lot of punch in the global energy markets.
While the U.S. is interested in diversifying its energy supply to include Russia, Kazakhstan and Azerbaijan, Saudi Arabia wants its own direct energy dialogue with Moscow. And, as this author’s experience with Gulf oil industry experts demonstrates, Gulf States traditionally viewed the Caspian states, with their ample oil reserves and free of restraints of the Organization of Petroleum Exporter Countries (OPEC), as potential competitors to their cheap, but politically unstable, oil.
Russian oil exports have grown at a rate of 8-10 percent a year since the financial crisis of 1998. Its increasing oil market share has in recent years begun to worry the Saudi monarchy, which saw signs of Moscow emerging as a rival on the horizon. Riyadh has traditionally considered itself the market-maker of energy and wants others to follow – and wants to keep it that way.
IMPLICATIONS: The five-year oil-and-gas cooperation agreement signed in Moscow by the two energy ministers, Igor Yusufov and Ali al Naimi, will allow the two fuel giants to coordinate the supply of oil to the global markets. This will doubtless help them keep the oil price at a level desirable to both. But in addition to obvious mutual interests in the energy sector, there are reasons beyond influence in energy markets, which drive the Russo-Saudi relations.
No longer sure of its prior close relationship with Washington, the Saudi monarchy is reaching out to the former empire it helped America to defeat in Afghanistan only 15 years ago. In the aftermath of the Iraq war, Riyadh is looking to balance U.S. influence in the Persian Gulf. It also hopes to diversify its sources of weapons, and signals to Washington that it keeps all geopolitical options open.
Russia, the world’s third largest weapons exporter after the U.S. and Great Britain, leads the word in the number of large weapons systems, like tanks and aircraft, sold. Its military sales topped $6 billion in 2002, according to the Stockholm-based International Peace Research Institute. In the 1990s, Russia sold $4 billion worth of state-of-the-art multi-layer air defense systems to the United Arab Emirates, and would like to open the large and lucrative Saudi weapons market to its rusting, but once-formidable arms industry.
CONCLUSIONS: Russia’s improved ties with Saudi Arabia and other Islamic states will give Moscow ever-increasing freedom of maneuver in the Caucasus and Central Asia. If the Islamic world mutes its criticism of Moscow’s policy in Chechnya, some in the Kremlin may interpret it as an implicit green light to neo-imperial behavior in the former imperial space. Dr. Sergey Karaganov, the Chairman of the Russian Council on Foreign and Defense Policy, and a consultant to the Russian government, was instrumental in bringing Prince Abdullah to Moscow. Karaganov says that the visit was “very productive”. This means Saudi-Russian cooperation both on energy and on Chechnya.
Karaganov, however, is known as an advocate of a more robust Russian policies toward Georgia and Azerbaijan. His buoyancy on the Saudi-Russian ties may indicate a “new thinking” in the Kremlin: to make Russia indispensable to the U.S., Iran, as well as to Saudi Arabia, and in turn demanding their acquiescence to Russia’s assertive policies in the “near abroad.”
07-14-2003
The September 11 terrorist attack taught the United States government a painful lesson — it must be alert to emerging threats, including terrorism against its military assets, citizens and allies. Some of these emerging threats, combined with the actions of terrorist Jihadi organizations, such as al Qaeda, may also generate political instability in key geographic areas and threaten pro-American regimes, such as in Central Asia.
U.S. government should be taking a close look at Hizb ut-Tahrir al-Islami (Islamic Party of Liberation). A clandestine, cadre-operated, global radical Sunni political organization that operates in 40 countries around the world, with headquarters apparently in London, Hizb was in the headlines recently, when Germany banned its activities and Russian Federal Security Service (FSB) arrested 55 alleged members and over 60 "supporters."
Is Hizb ut-Tahrir an emerging threat to American interests in Central and South Asia and the Middle East? Analysts note the increasingly militant rhetoric, participation of Hizb fighters in the coups in the Arab world and on the side of the Taliban in Afghanistan, and explosives and weapons found when Hizb members are arrested.
Hizb’s proclaimed goal is Jihad against America and the overthrow of existing political regimes and their replacement with a Califate (Khilafah in Arabic), a theocratic dictatorship based on the Sharia (religious Islamic law). The model for Hizb is the "righteous" Califate, an Islamic state that existed in the seventh and eighth centuries under the Prophet Mohammed and his first four successors, known as the "righteous Califs."
Hizbut-Tahrir’s spread around the globe over the last five decades, in Western Europe and often in authoritarian states with strong secret police organizations, is an impressive feat of beating security. It could only be accomplished by applying 20th century totalitarian political "technology" melded with Islamic notions of the seventh and eighth centuries, as interpreted by medieval Islamic scholars. Only a cell commander knows the next level of leadership, ensuring operational security. "Representatives" in Great Britain and Pakistan claim to speak for the organization, but have no official address or legal office. Its leadership for large regions (e.g., the former Soviet Union), countries, and local areas is kept secret. The achievement of Hizb founder Tariquddin an-Nabhani was marrying Orthodox Islamist ideology to Leninist strategy and tactics.
Hizb ut-Tahrir is a totalitarian organization, akin to a disciplined, Marxist-Leninist party, in which internal dissent is neither encouraged nor tolerated. Because its goal is global revolution, Hizb is similar to the Trotskyite wing of the international communist movement. Its candidate members become well-versed in party literature during a two-year indoctrination course in a study circle, supervised by a party member. Women are organized in cells supervised by a woman cadre or a male relative. When a critical mass of cells is achieved, according to its doctrine, Hizb may move to take over a country to establish the Califate. Such a takeover would likely be bloody and violent. Moreover, its strategy and tactics show that, while the party is currently circumspect in preaching violence, it is already justifying its use — just as Lenin and the Bolsheviks did — when "circumstances" dictate that.
Hizb’s platform and action fits in with "Islamist globalization" — an alternative mode of globalization based on radical Islam. This ideology poses a direct challenge to the Western model of a secular, market-driven, tolerant, multicultural globalization. Where radicalization has taken hold in the Islamic world, Hizb gains new supporters in droves.
Hizb’s primary characteristics include the fiery rhetoric of Jihad, the murky funding sources, rejection of existing political regimes, and shared outlook and goals with al Qaeda and other organizations of the global jihadi movement.
Hizb has called for a Jihad against the U.S., its allies, and moderate Muslim states. Hizb claimed that the U.S. accused Osama bin Laden of being responsible for the September 11 attacks "without any evidence or proof." The party attempted to use its influence by calling upon all Muslim governments to reject the U.S. appeal for cooperation in the war against terrorism.
To prevent Hizb ut-Tahrir from destabilizing Central Asia and other areas, the Bush administration may pursue a number of policy options. U.S. is considering expanding intelligence collection on the organization. This is likely to be done both in Western Europe and in outlying areas, such as Central Asia, Pakistan and Indonesia. A recent visit to Washington of the German Interior Minister Otto Schile may be a step in this direction.
Washington is also getting irritated with the glacial pace of economic reform in Central Asia, particularly in Uzbekistan. U.S. may condition security assistance to Central Asia on economic reform. Hizb is growing in Central Asia due to the "revolution of diminishing expectations," increasing despair, and the lack of secular political space and economic opportunity in the region.
To jump-start economic development, the Bush administration may condition security assistance provided by the Pentagon on the adoption of free market policies, strengthening property rights and the rule of law, encouraging transparency, and fighting corruption.
U.S. will further encourage democracy and popular participation. The scarcity of secular and moderate Islamic democratic politics and credible nongovernmental organization (NGO) activities and the lack of freedom of expression may be driving thousands of young recruits to join Hizb in Central Asia.
U.S. will expand cooperation with moderate and secular governments in the Muslim world to discredit radicals and encourage moderates. The U.S. should encourage local governments to not only crack down on radical Islam (as they already do), but also encourage alternatives.
The United States has important national security interests at stake in Central Asia, Indonesia and Pakistan, including access to the military bases used to support operations in Afghanistan, preventing the proliferation of weapons of mass destruction and technologies for their production, and securing access to natural resources, including oil and gas. A Hizb takeover of any key state could provide the global radical Islamist movement with a geographic base and access to the expertise and technology to manufacture weapons of mass destruction. The U.S. and its allies will do everything possible to avoid such an outcome.
07-02-2003
In the aftermath of the Iraqi war, leaders and countries in the Caspian littoral are competing to obtain maximum geopolitical and economic advantage by attracting investors through lower bureaucratic barriers and reduced political risk. The Iraq war has generated rethinking on the part of regional governments, who now have to adapt to a more competitive situation. Iran’s stance is still ambiguous with contradicting hard and soft lines, while some Balkan operators are beginning to involve in the pipeline discussion.
BACKGROUND: The Iraq war has raised concerns regarding the political environment and profitability of Caspian oil, with some arguing that it fundamentally changes the situation there. Fear are that large multinational companies will shift resources for Iraqi exploration, thus slowing down Caspian development and transit projects, and delaying the flow of the Caspian oil to the international markets. Question that arise are what role the U.S. is planning to play in the region in view of continuing instability in Iraq, while the Iranian regime is pursuing development of weapons of mass destruction and may be coming under increasing U.S. pressure to stop its nuclear program? These concerns, among other, reverberated through a number of conferences which took place in Turkey recently.
On the one hand, Iran’s stance is, at least outwardly, moderating. Mehdi Safari, Iranian Deputy Minister of Foreign Affairs, expressed a relatively moderate position on the Caspian boundary delineation issue, putting his country’s claims in the context of international law. While Iranians have in the past demanded an equal share of all Caspian oil, today their claims are being scaled down. Iranian representatives also made a pitch to become a transit country for abundant Kazakhstani oil through a proposed North-South oil pipeline – a suggestion supported by a number of participants, from the French TotalFinaElf, to a small Georgian company which currently specializes in rail transport of Kazakh oil to Iran. However, in less official settings Iranian contradict their message with accusations and claims against the U.S. The Iranian rhetoric, articulated among other by senior officials of the Energy Ministry, stick out as a sore thumb in a generally cooperative atmosphere, justifying suicide bombers and claiming that U.S. policy is ruled by a two percent minority of the population, which includes the international Zionist conspiracy and arms manufacturers. Iranian officials’ statements that Bin Laden is a tool of American intelligence agencies have not helped, either. French and Russian sympathy for the Iranian views are also a problematic element.
Meanwhile, Kazakhstan is stepping up efforts to work with TotalFinaElf, Phillips and ENI to develop a pipeline which will allow the export of oil from the giant Kashagan field to the CPC pipeline, as noted by Uzakbay Karabalin, president of the government-owned KazMunaiGaz. A trunk to Baku-Tbilisi-Ceyhan (BTC) is also under consideration. Kazakhs representatives have, however, warned that a decline in Western investments could force Kazakhstan to “turn to the East”, giving a priority to a pipeline to China. It may also increase oil swaps with Iran, already underway.
While BP is moving aggressively to finalize the construction plans for BTC pipeline, the Balkan countries and Ukraine are only beginning to lay down the framework for transit pipelines which will bypass the congested Bosphorus straits. Presentations of the Burgas-Vlore (Albania) pipeline by Albanian-Macedonian-Bulgarian (AMBO) corporation, which claimed to offer at some future point a considerably cheaper transit price due to the ability of the deep water port in Vlore to accommodate large tankers, have caused some interest. So has a Romanian scheme called Constanta-Pancevo-Omisalj-Trieste to build a pipeline via Romania, Yugoslavia and Croatia, presented by Andrei Razvan Grigorescu, Romanian Secretary of State.
Dr. Mejid Kerimov, Minister of energy of Azerbaijan, in the concluding keynote speech focused on expanding natural gas exports to already gas-inundated Turkey, which currently receives gas from Russia and Iran. The Shah-Deniz giant field, one of the largest in Eurasia, is planned to supply 6.6 billion cubic meters. A Shah Deniz-Erzurum pipeline with its 14 wells will be constructed with financing of $3.2 billion, good part of it coming from the European Bank for Reconstruction and Development.
IMPLICATIONS: Policy makers and oil companies in the region are concerned that the opening of Iraq to new oil and gas development will make the investment climate and geopolitical reality for pipeline transit more competitive, possibly taking a bite at profitability and available financing. U.S. policy is grounded on the goal of helping the Caspian countries use their oil resources to develop their economies and societies; that is a long-term strategy that will not change because of Iraq. A senior U.S. diplomat, however, has recently called on Caspian countries to liberalize their economies and fight corruption, warning that unless that takes place, the flow of Western investment may diminish.
Private investors and financing institutions face political risks, such as a potential flare-up of Nagorno-Karabakh or other local conflicts, but they clearly have sufficient comfort that projects such as the Baku-Ceyhan pipeline will not be disturbed. On the other hand, there is no question that Iraq will compete with the Caspian for western financial resources. The U.S. policy is likely to increasingly focus on encouraging Caspian governments to develop a more favorable investment climate. But oil companies view projects such as AIOC and BTC as designed with a long time horizon, which includes price scenarios far below the current levels.
Financing for the BTC pipeline has been delayed by about three months. According to some observers, this is time well spent as it has been used by the developers to ensure that the project meets the most stringent environmental and social standards. International Financial Institutions now seem more than comfortable with these aspects of the project.
CONCLUSIONS: The Iraq war and its aftermath is changing the geopolitical and geo-economic outlook in Iran, Turkey, Russia and the Caspian states. Interviews with officials and experts from the region indicated that policy adjustments are taking place across the region to integrate into the new reality. The new post-war environment is characterized by the need for greater competitiveness for oil and gas projects in terms of both profitability and available financing. Another elements is the need to make both green field extraction projects and pipelines more attractive for foreign investors through deregulation and lower tariff and taxation regimes. Most importantly, however, there has been a change in the regional thinking on U.S. policy. In fact, an understanding that American power is here to stay in the region for the foreseeable future has developed into a consensus in recent months.
06-23-2003
While student demonstrations continue growing in Iran, Tehran is relentless in defiance of the Great Satan -- America. The mullahs are betting on a blend of nationalism and military technology that will secure the regime’s survival. Nuclear weapons and missiles technology from Russia, North Korea, and Pakistan are supposed to shore up the 24 year old Shari’a rule and protect it from a U.S.-led regime-change operation. However, Tehran is coming under geopolitical pressure from the increased U.S. presence in the Persian Gulf and Iraq. As such, the hard-liners may be miscalculating: American technological superiority in military and intelligence fields, and the spread of global communications may be the trends that will overpower the Islamic regime in the near future.
In a recent conversation at an energy conference in Istanbul, Turkey, a senior Iranian official offered this author no excuses for the Iranian support of Hizbollah, the Lebanon-based radical Muslim movement. Moreover, the Iranian claimed that U.S. has supported Al Qaeda, and that Usama bin Laden is a tool of American intelligence services. "The U.S.", the Iranian official said, "went to war in Iraq for oil... America is run by a small, two percent minority of arms merchants and Zionists," the official claimed. Ironically, two representatives of TotalFinaElf, a French oil company, and a Russian journalist, also present, mostly agreed with the Iranian.
Despite this, the tone of official Iranian statements has been changing. U.S. technological superiority and proliferation of satellite TV and radio broadcasts beamed into Iran are scaring decision-makers in Tehran. In an interview to the national news agency IRNA on May 1, Foreign Minister Kamal Kharrazi announced that Teheran wants to promote a regional defense system in the Caucasus, to include all three Caucasian countries, as well as Iran, Russia and Turkey. Kharrazi further declared that "the Caucasus is an integral part of Iran’s national interests."
On Saturday, May 10, M. Javad Zarif, Iranian Ambassador to the United Nations, in an op-ed in The New York Times ("A Neighbor’s Vision of the New Iraq") revived the mid-1980s idea of a regional security and cooperation framework for the Gulf. The idea, later endorsed by the U.N. Security Council resolution brought the 1980-1988 Iran-Iraq war to the end, but the regional security provisions foundered. If implemented, Zarif argued, the region would be spared the Iraqi invasion of Kuwait, a decade of sanctions, and the second Gulf War.
What is this newly found Iranian penchant for regional security? It is a part of a new defensive strategy most comprehensively outlined in a recent interview by the Iranian Defense Minister Ali Shamkhani to the conservative Iranian newspaper Siaset-e Rouz.
The Iranian Defense Minister called the current period a "turning point" in the Middle East. After the 1979 victory of the Islamic revolution, Iran came under a broad spectrum of threats, including espionage, terrorism, low intensity conflict, and outright conventional attack by Iraq. Some threats, Shamkhani said, had domestic roots, such as left-wing movements which came to oppose the Islamic Republic, while others had "regional" causes, such as Iraqi and Saudi hostility. Iran views the U.S., which supported Saddam Hussein in his attack against Iran, as the main hostile superpower over the last two decades.
The strategic answer of Iran to this array of threats was to create a "deterrent defense", which does not mean Iran will take offensive measures, Shamkhani said, in a language eerily reminding of mutually assured destruction rhetoric of the 1950s Cold War between the U.S. and the Soviet Union. "We are in struggle to sustain the enemy’s first strike. The first strike will not lead to surrender, but it should be seen as a warning… If there is the capability to sustain a first strike, there is a basis for Iranian second strike against the threats. Thus, Iran’s objectives are of a defensive nature… Defensive deterrence causes the enemy to relinquish the threats. Because under such circumstances every country must take into consideration the risk it runs if it takes offensive measures against Iran," Shamkhani said. The Defense Minister’s rhetoric indicates that Iran already possesses or is close to obtaining nuclear weapons and it is betting its future on building and maintaining a nuclear arsenal.
Shamkhani was proud of the Iranian policy of self-reliance, which boosted conventional military-industrial capabilities. Today Iran is manufacturing helicopters, submarines, warships and Shihab missiles. The Iranian Defense Minister, however, did not expand on the nuclear program the Bush administration believes Tehran is pursuing.
Secretary of Energy Spencer Abraham stated in Moscow on August 1, 2002, that Iran is aggressively pursuing nuclear weapons as well as other weapons of mass destruction. On February 9, 2003, Iranian President Mohammad Khatami announced that Iran was mining its own uranium and would process its own spent fuel, raising concerns of a robust Iranian nuclear weapons program.
Last December 13, CNN published commercial satellite imagery of two secret Iranian uranium enrichment installations in Arak and Natanz. State Department spokesman Richard Boucher stated that "Iran is actively working to develop nuclear weapons capability" and declared, in the CNN interview on December 13, that Iran’s energy needs do not justify these nuclear facilities. Moreover, Boucher said that Iran flares more natural gas annually than the equivalent energy its future reactor could produce. Thus, the alleged power-generation applications of the$800-million Bushehr nuclear plant and the two follow-up nuclear reactors seem neither economically justified nor truthful.
According to U.S. intelligence and defense officials quoted in The New York Times on December 16, Iran is actively working on a nuclear weapons program -- with Russian help -- and like North Korea, Iran seems to be pursuing both enriched uranium and plutonium options for its nuclear weapons.
In an interview with CNN’s Christiane Amanpour, International Atomic Energy Agency (IAEA) Chairman Mohammed ElBaradei said late last year that the alleged uranium enrichment plant could produce highly enriched uranium for nuclear bombs and the heavy water plant could be used in the production of weapons-grade plutonium. Most recently, ElBaradei said that Iran has violated the IAEA regime by hiding Chinese-supplied uranium. Moreover, Iranians paid for lessons from North Korean experts on how to hide from international inspectors, Korean newspapers reported.
Henry Sokolski, former Deputy for Nonproliferation Policy at the Department of Defense during the first Bush administration, suggested at an American Enterprise Institute panel that IAEA safety measures are not sufficient to prevent Iran from building nuclear weapons.
Iranian rhetoric about collective security while apparently building nuclear weapons and a ballistic missile arsenal indicates that the supreme leadership in Tehran has analyzed "correlation of forces" and understands futility of frontal confrontation with Washington. Tehran is also trying to split Europe and the United States by promising Europeans lucrative energy deals.
Unlike North Korea, which is escalating both rhetoric and posture, Iran is playing for time while keeping a low profile. Its trump card is operational nuclear weapons deployed on ballistic missiles. Washington, however, understands that a combination of military, intelligence and mass communication technological superiority may bring the Iranian regime down. If not, a nuclear-armed, terrorism-exporting Iran may drop collective security rhetoric overnight.
05-23-2003
Al Qaeda’s recent attacks in Riyadh, Saudi Arabia, and the closure of the U.S. Embassy there, have exposed the weaknesses of the kingdom’s security apparatus. These developments also further one of Osama bin Laden’s goals — to drive the "infidels" from the "Land of the Two Mosques" and topple the monarchy.
Clearly, the global economy and the United States are at risk. If the Saudi regime falters, if the kingdom’s vast oil infrastructure is damaged, or if a prolonged civil war erupts, oil prices are likely to skyrocket.
A deep economic recession would be triggered by the high cost of energy, with devastating consequences, particularly in an election season. The United States must draw the obvious conclusions and take precautions, and it has to act now.
Thus far, Saudi security cooperation has been unimpressive. The FBI investigation of the 1996 Khobar Towers attack by Iranian-sponsored Hezbollah, which killed 19 U.S. servicemen, was stalled by the Saudi Interior Ministry, requiring multiple interventions by then-FBI Director Louis Freeh and phone calls from President George H.W. Bush to Crown Prince Abdallah. This time, U.S Deputy National Security Adviser Stephen J. Hadley’s and U.S. Ambassador Robert W. Jordan’s desperate pleas for extra security went unheeded, as was reported in the media. This must change.
Oil is a highly emotional and political issue in the Middle East. In many monarchies, state budgets are opaque, and the population often has no idea how the petrodollars are spent. The opulent — and sometimes distinctly "un-Islamic" — lifestyles of the rulers are becoming increasingly unsustainable as the populations explode. It is not just the welfare economics of the Middle Eastern oil-producing states, but their demographics, corruption, incompetence and democratic deficit that are undermining the regimes’ legitimacy. And there is more.
The oil bonanza funded the worldwide export of radical Wahhabi Islam, the ideological breeding ground of al Qaeda and the Taliban, over the last three decades. Government-sponsored foundations, supervised by members of the Saudi royal family, fueled Jihad from New York to Kabul, and from Miami to Manila, by funding brainwashing for violence in Wahhabi academies (madrassahs), and terrorism training under the guise of charity.
Hamas and Yasser Arafat’s Al Aqsa Martyrs Brigades, which undermined the Oslo process and now are busily blowing the roadmap to bits with their weapon of choice — brainwashed Palestinian suicide bombers — are partially funded through Saudi telethons and hailed by preachers in Saudi government-supported mosques worldwide.
The "root cause" of violence against the United States is not the Arab-Israeli conflict, but the ideology of jihad against the West, which exhorts the "faithful" to shed the blood of "infidels." Israel is just a target of opportunity, a substitute for the Great Satan. For Islamist radicals, born and bred in Arabia, however, it is also quite permissible to murder "apostate" rulers, including the Saudi royal family. Hence the attacks in Riyadh. The jihad chickens have come home to roost.
Bin Laden understands both economics and the politics of terrorism. He has proclaimed that if he takes over his native land, he will drive oil to $125 a barrel, while his deputy, Ayman al Zawahiri, stated that U.S. economic targets are high on al Qaeda’s hit list. In October 2002, the Limbourg, a French super-tanker, was hit by a suicide Zodiac boat in the Persian Gulf — just as the USS Cole was in 2000. And bin Laden’s engineering and managerial skills can conceivably suffice to stage a super-attack on the kingdom’s oil infrastructure, one that could neutralize Saudi Arabia’s 2 million barrel a day surplus oil producing capacity, vital for price stability.
The sand in the hourglass is running out for U.S. energy security in the Persian Gulf. Bin Laden is riding high, claiming successes in striking at the heart of the "infidels" in the United States; taking credit for the announced withdrawal of U.S. troops from Saudi bases; and now, shutting down the embassy. His allies are striking almost daily from Morocco to Jerusalem. It is only a matter of time before a blow comes against the oil fields — or their Saudi royal guardians.
As Saudi oil is endangered, the United States needs to prepare comprehensive military and energy responses. It is important to diversify the U.S. supply, bringing more oil from such sources as West Africa and Eurasia. The energy basket must be more diverse, and should include more domestic oil and gas, coal, liquid natural gas and renewables.
It is vital to "get Iraq right." Iraq has reserves second only to those of Saudi Arabia — and a great need to rebuild after Saddam’s misrule and three wars. It needs law and order, and rapid economic reform, including privatization and attraction of foreign investment. Securing Iraq must also include deterring Iran from destabilizing it.
The U.S. military must have contingency plans to rapidly secure the Persian Gulf oil infrastructure if al Qaeda attempts to severely disrupt it. Top U.S. policy-makers must ensure that the intelligence community and law enforcement agencies receive full cooperation from their Saudi colleagues in tracking down terrorist organizations, their financiers and supporters.
Saudi Arabia must become a force for peace in the Middle East, cutting funding to any and all jihad organizations around the world. Most importantly, the kingdom must dismantle its homegrown jihad infrastructure, with its anti-American clergy, anti-Western academies and hostile state-run media. This apparatus breeds terror, a terror that today threatens not just the United States and the West, but the very survival of the Saudi regime and its very blood — oil. President Bush said that Saudi Arabia is a friend. Friends don’t let friends commit suicide through terrorism.
04-01-2003
The Bush Administration has accused Moscow of selling sensitive military equipment to Saddam Hussein in violation of U.N. Security Council sanctions. During a March 24th telephone conversation, President George W. Bush discussed the sales of night vision goggles, anti-tank Kornet missiles, and Global Positioning System (GPS) jamming equipment with Russian President Vladimir Putin. All information regarding Russian sales was based on U.S. intelligence reports.
Putin not only denied sales to Iraq, but also went on to accuse the U.S. of selling deadly military equipment to countries that may support international terrorism. The Associated Press and other media reports described the exchange as “tense.” These accusations are just a symptom of the state of U.S.-Russian relations, which have been deteriorating since Moscow sided with Paris in the U.N. Security Council, opposing a resolution that would have authorized use of force to disarm Saddam.
Secretary of State Colin Powell and his Russian counterpart, Igor Ivanov, also exchanged tough words, but stated that both countries have a broader agenda to pursue. Before the matter became public, U.S. officials repeatedly raised the issue with their Russian colleagues, who typically stonewalled, often with the most ridiculous explanations. In some cases, they claimed that the company in question did not exist.
There was little new in the fact that Russian companies were accused of selling high tech equipment to Iraq. FOX News reports, coming as early as January 2003, indicated that Russia had sold GPS jammers, and that Saddam would use the civilian casualties, which could mount as a result of stray bombs or missiles, for his own propaganda purposes. And, according to Paul J. Saunders and Nikolas K. Gvosdev, writing In the National Interest, a Kuwaiti newspaper disclosed a sale of this type by the Russian military equipment company Aviakonversiya as far back as 2000. Night goggles, which are readily available for sale in Russia, are even more dangerous, as they give the Iraqi military the ability to operate at night.
U.S. officials are careful to point out that they do not view the sales under dispute as officially authorized by the Russian government. The question is, did the Kremlin give the sale a wink and a nod, or just shut its eyes and look elsewhere?
As the U.S. provided the Russian authorities with names, addresses, telephone numbers and even shipping details, and went to a great lengths to declassify its intelligence information in a good-faith effort to gain Russian cooperation to stop the sales, the Kremlin cannot feign surprise.
The dispute highlights the bag of tricks military hardware companies and the Iraqi government use to acquire forbidden technology and circumvent the U.N. sanctions. According to the Los Angeles Times, by exporting “components” --not finished goods -- and their assembly in Iraq, Aviankonversia President Oleg Antonov claimed, his company circumvented both the U.N. sanctions and Russian government regulations. If this is the case with Iraq, what about Iran, North Korea, or even terrorist organizations, which may be interested in military systems from the former Soviet Union or even Western Europe?
The case demonstrates how a Russian company can be penny-wise (the whole transaction, which involved six GPS jammers was under $500,000) but the Russian state can become pound-foolish, losing the goodwill of the U.S. government, which could translate into in the loss of billions of dollars in Overseas Private Investment Corporation (OPIC) and Export-Import (ExIm) bank credits.
This flap over arms sales demonstrates how fragile the relationship between Moscow and Washington has really become after Moscow sided with Paris, Berlin, and most of the Arab world, in opposition to the war against Saddam. Three small and shady arms deals are threatening a broad, multi-faceted matrix of ties, repeatedly termed “strategic” by Presidents Bush and Putin. Numerous security, diplomatic, and business relationships, from multibillion dollar Cooperative Threat Reduction programs, which deal with non-proliferation of weapons of mass destruction, to abrogation of the Jackson-Vanick Amendment, which denied Normal Permanent Trade Relations (NPTR), currently under consideration by the U.S. Congress, to billions of energy investment dollars may be jeopardized if U.S.-Russian relations go south.
It is in the interest of both countries to stop acrimony over Iraq and focus on the future. To achieve this, the Putin Administration must “clean house” and take the culprits who sold banned weapons to Saddam to task. Moscow should expand cooperation with the United States on prevention of sales of dual-use and military technologies to countries on the U.S. State Department terrorism watch list.
Moscow should also reflect on how breaching the U.N. Security Council sanctions banning weapons sales to Iraq make its own accusations of violating “international law,” heaped on the United States by the Russian Foreign Ministry, ring hollow.
Most importantly, the two countries should not lose sight of the strategic imperative of fighting global radical Islamist terrorist networks. In that struggle, the survival of tens of thousands of Russians and Americans is at stake.
03-25-2003
The future of Iraq depends not only on the ouster of the repressive regime of Saddam Hussein but also on the ability of the new Iraqi leaders to develop policies that will spur real economic growth and reverse the damage to the economy caused by 40 years of gross mismanagement.
The Bush Administration should help Iraqi opposition leaders to develop an economic reform package for their country. A double strategy of ensuring security and enabling economic growth will need international support.
For the Iraqi people, structural economic reform and comprehensive privatization of government assets is necessary to stimulate recovery and provide stability. The winning strategy of structural reform and privatization would also benefit the industrial world, the United States and its allies, countries of the Middle East, and the developing world.
Iraq’s return to global markets would allow for a more abundant and stable energy supply, a higher cash flow for the Iraqi people, and numerous business opportunities for the region and the world. Iraq’s restructuring and privatization of its oil and gas sector could become a model for oil industry privatizations in other OPEC states as well, weakening the cartel’s influence over global energy markets.
What the New Iraqi Government Should Do
Specifically, the new post-Saddam Iraqi government should:
Develop a modern legal system that recognizes property rights and is conducive to privatization;
Create a public information campaign that prepares the people for structural reform and privatization;
Hire expatriates and Western-educated Arabic speakers with financial, legal, and business expertise for key economic positions;
Deregulate prices, including prices in the utility and energy sectors;
Prepare state assets in the utility, transportation, pipeline, energy, and other sectors for privatization;
Keep the budget balanced and inflation, taxes and tariffs low;
Liberalize and expand trade and initiate an effort to join the World Trade Organization.
How the United States Can Help
The Bush Administration should provide leadership and guidance.
U.S. political commitment will be needed to motivate international organizations to provide appropriate expertise and technical assistance. Inter alia, these organizations could include international financial institutions, such as the International Monetary Fund and the World Bank, and would likely encompass such diverse non-governmental organizations such as the National Endowment for Democracy, the Center for International Private Enterprise, the American Bar Association, and the AFL-CIO. Such groups should begin to advise the future leaders of Iraq’s three primary ethnic groups to establish policies that will lead to a thriving, modern economy.
In particular, the Bush Administration should convince the future federal government of Iraq to come to an agreement on how oil revenues will be taxed and proceeds will be distributed to the country’s three ethnic regions—Shiite Arabs, the Kurds, and the Sunni Arabs. Successfully privatizing the country’s oil fields, refining capacity, and pipeline infrastructure will mean greater efficiency and higher tax revenues in the oil sector.
Though the costs of rebuilding the country will be high, if proper structural economic reforms are undertaken, Iraq’s vast oil reserves are more than ample to provide the funds needed to rebuild and boost economic growth.
Outlook for Iraq and World Energy Markets
Following the demise of Saddam Hussein, it is unlikely that the Saudi kingdom would transfer a fraction of its production quota under the Organization of Petroleum Exporting Countries (OPEC) regime to Iraq to compensate for lost profits and facilitate its rebuilding. Iraq will need to ensure cash flow for reconstruction regardless of OPEC supply limitations. Combined with the potential privatization of the oil industry, such measures could provide incentive for Iraq to leave the OPEC cartel in the future, which would have long-term, positive implications for global oil supply.
An Iraq outside of OPEC would find available from its oil trade an ample cash flow for the country’s rehabilitation. Its reserves currently stand at 112 billion barrels, but according to the U.S. Energy Information Administration, it may have as much as 200 billion barrels in reserve. Estimates by Iraqi oil officials are even higher: According to Oil Minister Amir Muhammad Rashad and Senior Deputy Oil Minister Taha Hmud, the reserves could be as high as 270 billion to 300 billion barrels, making them equal to Saudi Arabia’s.
Iraq’s 1990 output prior to the beginning of the Gulf War stood at 3.5 million barrels a day, while oil discovery rates on a few new projects in the 1990s were among the highest in the world: between 50 percent and 75 percent. Given Iraq’s own output projections, it may be capable of pumping as much as 6 million barrels (by 2010) to 7 million barrels (by 2020) a day, more than doubling current production levels.
Such a surge in production may be opposed by OPEC countries, which would like to keep its quota around the current 2.8 million barrels per day, while historic market share is taken by the Kingdom of Saudi Arabia, which currently is pumping close to 8 million barrels per day. Depending on the dynamics of global economic growth and world oil output, Iraq’s increase in oil production capacity could bring lower oil prices in the long term.
An unencumbered flow of Iraqi oil would be likely to provide a more constant supply of oil to the global market, which would dampen price fluctuations, ensuring stable oil prices in the world market in a price range lower than the current $25 to $30 a barrel. Eventually, this will be a win--win game: Iraq will emerge with a more viable oil industry, while the world will benefit from a more stable and abundant oil supply.
This WebMemo is excerpted from the authors’ Backgrounder: The Road to Economic Prosperity for a Post-Saddam Iraq, full footnotes and analysis are available there.
03-19-2003
The resignation of Charlotte Beers, undersecretary of state for public diplomacy, calls for a reexamination of how the U.S. is waging a war of ideas against Islamist terrorism. Beers’s resignation comes as the State Department is facing increasing difficulty marshalling international public opinion in support of the coming war against Iraq. The battle for hearts and minds is not a short-term campaign but a protracted conflict that will last decades, if not generations. It should be guided by an integrated strategy of public diplomacy and political covert action, something that the United States has not attempted for half a century, since the early stages of the Cold War.
The concept of the war of ideas should not be confused with psychological operations (psyops), which are a tactical instrument deployed on the battlefield specifically to undermine the morale of an enemy fighting force. Plenty of psyops will be launched against Saddam’s troops.
The campaign in the information and media battlefields is another story; it will be fought not so much against another superpower (as was the case with the USSR), as against an array of radical organizations and the governments that support them.
Since 9/11, the U.S. has found itself engaged in an ideological war against those who wish to destroy American society and its core values. Terrorism has deep roots in the modern radical - indeed totalitarian - interpretations of Islam that gave birth to al Qaeda and other Islamist terrorist organizations.
Secular regimes, such as Iraq, Syria, and Libya, also create terrorist groups and use them to further their political ends. Totalitarian ideologies of terrorism - both the Islamist and secular varieties - have to be discredited and eventually destroyed. This is one war that our country cannot afford to lose.
The nature of the enemy, the spectrum of the threats, and the environment in which the conflict is waged makes the battle overt where possible, and covert where necessary. Al Qaeda and other terrorist organizations operate by stealth. So do funders who subsidize radical Islamic brainwashing in the guise of religious "education." Persian Gulf moneybags, Iranian ayatollahs, and jihadi fundraisers from mosques in Brooklyn, N.Y. to Finsbury Park, London, and from Florida to the Philippines, have poured hundreds of millions of dollars into this war.
Today, most Westerners are not allowed into religious seminaries in Pakistan and the Gulf. Thus, penetration by U.S. and friendly agents is required. And, regimes in Iran, Iraq, Libya, and Syria do not welcome U.S. foreign service officers on public-diplomacy missions. Thus, the Central Intelligence Agency’s political-action capabilities, eviscerated in the 1970s, need to be rebuilt.
The key to victory in the battle of ideas will be leadership from the top - clear policy guidance and perseverance from the White House, as well as support from the American people.
The main American weapon in the battle of ideas should be the truth - truth about the societies, their rulers, and terrorist leaders. The truth should be disseminated through open channels where possible, and covertly where necessary, but the promotion of individual freedom and respect for others’ life, faith, and property must remain at the heart of any strategy. Other countries want to join the U.S.-led effort, as participants in a conference organized with U.S. support at the parliament of Finland have recently declared. Their participation should be welcomed: In the Cold War, U.S., British, and German international broadcasters coordinated their activities. A similar cooperation should be developed today.
The mixed successes, and in some cases the outright failure, of recent attempts to engage in the battle of ideas - such as State’s international media initiatives, featuring religious tolerance and a sunny attitude towards Islam in America; the Pentagon’s short-lived Office of Strategic Influence; and the newly-launched Radio Farda in Farsi and Radio Sawa in Arabic - demonstrate how difficult it is to regain massive public-diplomacy capabilities in a new theater only twelve years after the end of the Cold War. These efforts will require humility, patience, and realism: Changing the way people think is hard.
Victory in the war of ideas will require developing and mobilizing cultural, geographic, and linguistic expertise, all of which in turn require a long-term commitment of resources and stamina. This is a battle in which it is necessary to understand audiences and engage them, including women, youth, the business community, artists, academics, intellectuals, and ethnic minorities.
To win, Washington and its allies should pursue the following policies:
Initiate diplomatic action against the state-supported incitement to violence prevalent in mosques, education systems, and Islamist media. Develop and maintain databases tracking violent preachers and madrassa principals. Monitor school and university curricula, demanding reform of countries’ educational systems where necessary. Radical mosques and madrassas have become, in some places, little more than Jihad factories indoctrinating hundreds of thousands of potential terrorists. Often, weapons training is provided alongside the Koranic studies.
Expand the capability for political covert action at the CIA, not just against terrorist cells, but also against the mass movements and political parties that spawn them, and regimes that support them.
Identify and recruit talent for the new war of ideas. Utilize the talents of people from the Islamic world residing in the U.S., Europe, and Asia. This war can and should be fought primarily for Muslims, by Muslims.
Prepare managers and experts to administer public information operations. The best Cold War-era operations, such as Radio Liberty-Radio Free Europe, and today’s global broadcasting, demonstrate that mixing teams of Westerners and locals has proven most effective.
Reform and reexamine funding for Middle Eastern studies programs at Western universities, some of which are hijacked by the Left, as Michael Kramer’s recent book, Ivory Towers on Sand: The Failure of Middle Eastern Studies in America, amply demonstrates. Some Middle Eastern academics busy themselves with "explaining," if not outright justifying, the "root causes" of terrorism. Politically mobilized sympathizers and fellow travelers often claim expertise in the area, and oppose a robust effort against international terrorism.
Pursue inter- and intra-confessional religious dialogue. It is necessary to identify and support moderate Islamic clergy and lay leaders - to initiate and encourage debate within Islam about the corroding and dangerous role of terror and fostering or harboring terrorists.
Further develop Radio Farda and Radio Sawa as surrogate broadcasting, similar to Radio Liberty-Radio Free Europe; carefully monitor feedback from their target audiences. Begin a feasibility study for Western satellite TV channels in Arabic, Pashtu, and Farsi.
Expand the publication of books, journals, and newspapers that promote views opposing radical Islam and provide the truth about America and the West. The Middle East is one of the most Internet-starved regions of the earth. Thus, the population has to have access to printed materials. State’s Bureau of Public Diplomacy should revive the book-translation program formerly run by the U.S. Information Agency.
Reevaluate and restructure cultural-exchange programs. It is necessary, but expensive, to expose a larger number of Middle Eastern and Islamic current and future leaders to the United States and the West.
Only twelve years after the end of the Cold War, the U.S., the West, and a large number of allies are facing a new threat to their ultimate survival. The military successes in the war in Afghanistan and the coming war against Saddam should not distract policymakers from the ideological nature of the conflict.
This is not a war against Islam, but against vicious militants who are trying to hijack Islam and topple moderate governments throughout the Islamic world. Ideas have consequences, and this battle has to be joined through words, symbols, and pictures, not just bullets and missiles. The creation of effective institutions and mechanisms, and the formulation of key messages to fight this war of ideas has become one of the greatest foreign policy challenges for the Bush administration.
As in wars against 20th-century totalitarians, this struggle must be fought as a war of ideas, not just a battle of military tactics and equipment. As many a world leader said, the swamp has to be drained.
03-17-2003
As the threat of the war in the Middle East is driving the oil prices up, and the demand for energy is growing due to the Asian economic recovery and a cold winter, Eurasia is flush with oil and gas revenue. However, absent active government policy, long term economic consequences of the Eurasian oil bonanza may lead to crowding out investment in the non-petroleum sectors and appreciation of currencies, known in the economic circles as the Dutch disease. Moreover, lack of the "trickle down effect" may lead to increase in poverty and underdevelopment, and, especially in the case of the poorest Eurasian states, such as Kyrgyzstan, Tajikistan, and possibly in Turkmenistan, result in political instability due to inflation of expectations. So far, governments in the region are doing little to prevent the Dutch disease, which strikes oil economies around the world with uncanny regularity.
Russia, the largest oil exporter, is less likely to become the hardest-hit victim due to its size and diversity of its economy. Russian companies are planning to export more oil in 2003, though the export volume will be limited by the current state-run pipeline throughput. According to the Interfax Oil and Gas Report, Russia will export 43 million tons of oil in the first quarter of this year, while Deputy Prime Minister Victor Khristenko promised further expansion of the Russian pipeline capability.
This may include the government decision in March whether to build the first pipeline in Eastern Siberia. The options include a 2, 247 km pipeline to China, which will export 20 million ton crude a year, or a more expensive and lengthy pipeline to the port of Nakhodka, which has attracted interest from Japan. That pipeline would export up to 50 million ton a year, would be 3, 884 km in length, and cost over $5 billion. The China option may be built by late 2005, while the Nakhodka pipeline will take until 2008 to complete.
Kazakhstan may be interested in working with the Italian state-owned ENI, the operator of Agip-led consortium in the Kazakh sector of Northern Caspian, and of the giant Karachanganak field, to export oil via Iran.
Oil revenues are projected to remain in record territory for 2003. LUKoil is planning that, for 2003, oil prices will be in the range of $21 a barrel; Sibneft is forecasting $16.5 a barrel, while TNK is envisaging $18.5 for Brent crude. Western estimates are higher: so far the prices floated in the $35-39 range for January-March, and Goldman-Sachs is forecasting oil prices in the $30 range for 2004. With prices this attractive, Russian companies are planning to increase production between 6.8 percent a year for the government-owned Rosneft, to 12-13 percent a year for aggressively growing private companies.
Other regional exporters, such as Kazakhstan, have boosted oil production by 16.6 percent in 2002, to 42 million tons, while Azerbaijan’s overall production grew more modestly - in single digits.
Natural gas production and downstream production will also grow: Kazakhstan has increased natural gas exports by 13.2 percent to 13. 136 cubic meters, and produced 30 percent more of gas condensate. Kazakhstan will be developing the Phase Three of the Karachaganak gas condensate field, which will require a $2 billion investment. The Amangeldy field in southern Kazakhstan will be expanded, and ChevronTexaco will open a polyethylene plant in April 2003.
Russian gas exports grew only by 2.4 percent in 2002, because Russian state-owned gas monopolist, GAZPROM, is subject to artificially low prices at home; suffers from opaque and politicized management; and is not effectively attracting Western investment in order to revamp its aging infrastructure.
The oil and gas revenue bonanza is the strategic window of opportunity to address four structural defects of energy-driven economies of Eurasia: the value-subtracting (money losing) nature of the non-natural resources sectors of the economy; corruption and capital flight; dysfunctional social safety net; and manpower inefficiencies.
First, it is time for Eurasian governments to bring internal energy prices, including natural gas and coal, to the world levels. High oil prices will allow to provide subsidies to retired or laid off workers, while closing down inefficient, energy-guzzling enterprises and hiking railroad tariffs. The energy, especially artificially cheap natural gas, which is used today by the state as a hidden subsidy, can be exported to increase revenue. Some of the workers in remote "company towns" can be relocated to more livable venues.
Second, corruption and capital flight may be the most difficult to resolve. Most often perpetrated or aided and abetted by the top government officials, it is a net loss to regional economies. Police measures by themselves are not efficient, while local economies remain too inhospitable - and bureaucracies too corrupt - to make investment in non-energy sector attractive. Governments need to crack down on organized crime and corruption which plague the economy, while prosecuting most odious "exporters" of capital, even if they are politically connected insiders.
Third, social sector reform is long overdue. While salaries are higher in the energy sector -- by a factor of two in Kazakhstan - most of the gigantic profits are not invested back home to create jobs outside of the oil and gas sector, nor tax proceeds are efficiently distributed to support the elderly, sick and poor. Governments can battle the Dutch disease by stimulating non-energy business development and job creation by simplifying registration for new business and reducing corporate taxes and employment payments for these newly created entities. Finally, as USAID and a number of NGOs repeatedly demonstrated around the world, micro-lending to boost entrepreneurship is yet another way to decrease unemployment and poverty.
Finally, regional cooperation is likely to alleviate some of the structural asymmetries and stimulate growth, as Johannes F. Linn, Vice President of the World Bank has suggested in his Situation and Outlook in Russia and Central Asia - a 2001 keynote address to the Berlin Financing Conference. Clearly, cooperation on water utilization, pipelines, transport, and commerce is the most logical. In addition, some of the structural unemployment (20 percent in Kazakhstan, even higher in energy-poor Kyrgyzstan and Tajikistan) can be alleviated by opening the doors of the oil and gas sectors to workers from the areas with particularly high unemployment. This can be achieved by loosening severe interior ministry residence registration rules, which are a hick-up of the old Soviet era "propiska" system, and by providing better living conditions in the company towns owned by the extracting industries.
A three tier structure of income distribution in Eurasia, with Russia close to $4,000 a year per person; Kazakhstan, with over $1,000 and Kyrgyzstan and Tajikistan with only $200-$300 per capita per annum, may lead to economic dislocation, social conflict, and uncontrolled migration. Government leaders and international financial institutions will do well if they address these challenges while the energy windfall lasts.
03-14-2003
With the winds of war blowing over the Middle East and Venezuela’s oil production down by over 30 percent due to labor protests against President Hugo Chбvez, the United States is considering diversifying its sources of oil away from politically unstable regions. To achieve this, the U.S. should support development of a privately owned oil pipeline from Western Siberia to Murmansk, Russia. The U.S. government should make this project a top priority in bilateral security, economic policy, and business frameworks.
A Top Priority
In their November 2002 Joint Statement on Development of U.S.-Russian Energy Dialogue, Presidents George W. Bush and Vladimir Putin designated energy cooperation as a major bilateral priority. They launched the Energy Dialogue--a forum run by energy industry leaders from the two countries with their respective governmental energy and trade counterparts--to "strengthen the overall relationship" between the U.S. and Russia and "enhance global energy security, international strategic stability, and regional cooperation." As part of this effort, President Putin has agreed in principle to supply the U.S. with Russian oil.
Russia, which produces over 7 million barrels of oil per day, could easily supply 10-13 percent of U.S. oil imports, approximately the amount imported from Saudi Arabia. However, Russian infrastructure, including ports and pipelines, must be upgraded and expanded. First, a private pipeline should be built from the oil fields in Western Siberia to Murmansk--an Arctic port that is ice-free year-round--along with a deepwater oil terminal in Murmansk capable of servicing tankers with deadweight capacities of 500,000 tons. Through the Murmansk terminal alone, Russia could export 1-2 million barrels per day. Russia could also export oil to the U.S. through several Baltic Sea terminals or from Sakhalin Island (near Japan) via Nakhodka, a port on the Pacific Ocean.
A private consortium could build a Siberia-Murmansk pipeline and oil terminal faster--within three to four years--and would serve U.S. and Russian interests better than pipelines developed by the government. The pipeline would also be far from hot spots of ethnic and religious conflict, and the ocean route from Murmansk to Houston is half the length of the route from the Persian Gulf, making transport less expensive.
Industry Leaders Threatened by the State
In an unprecedented display of unity, four private Russian oil companies--LUKoil, Yukos, Sibneft, and TNK-Sidanko (half of which was acquired by British Petroleum-Amoco in December 2002)--have agreed to form a consortium to build a private Siberia-Murmansk pipeline. However, to maintain government control of the lucrative oil infrastructure, the Russian Cabinet, including Prime Minister Mikhail Kasyanov and the powerful state bureaucracy, have opposed private ownership of the pipeline. The state-owned Transneft pipeline monopoly will likely interfere--as it has with the pipeline from the Tengiz oil field in Kazakhstan to the Russian port of Novorossiysk, owned and operated by the private Caspian Pipeline Consortium, which includes Chevron-Texaco and LUKoil--by attempting to impose harsh regulations and tariffs. Transneft has also attempted to repudiate contracts signed before the Tengiz-Novorossiysk pipeline became operational.
The U.S. has a strategic interest in maintaining a robust Russian private sector, especially in energy. The private sector both disperses political power and drives economic growth. Private oil companies represent the most dynamic sector of Russia’s economy, with annual growth rates of 7-12 percent for the past four years. They enjoy high capitalization growth and have infused Russia with state-of-the-art technology and imported Western expertise. The post-communist state ownership and management is incapable of providing the necessary investment and growth rates in capital-intensive sectors, such as the energy infrastructure.
There are broader strategic implications as well: If Russia successfully implements a large, privately driven pipeline project, it will demonstrate yet again that the OPEC model of state-owned oil production is anachronistic and should be replaced by private ownership.
U.S. Energy Policy and a Russian Oil Pipeline
As President Bush declared in his State of the Union address, the U.S. government has an interest in increasing energy independence. This includes diversifying sources of oil and securing the oil supply. Top U.S. and Russian trade and energy officials and bilateral business councils should cooperate with the Russian oil company consortium to secure government authorization and expedite construction of the pipeline. Specifically, they should:
Conclusion
Russia should become a major exporter of oil to the U.S. The political commitment is already in place. The best way to accomplish this goal is by harnessing private-sector expertise and financing to build the Siberia-Murmansk pipeline and the oil terminal in Murmansk.
02-20-2003
With the United States and Iraq moving closer to war, America is finding out who its friends really are.
Dozens of countries have lined up alongside the United States, including Great Britain, Spain and the Czech Republic. More can be expected to get on board if war breaks out.
The case of Russia is particularly fascinating. Recently, Russia’s been more a pain in the neck than a friend at the United Nations, opposing U.S. efforts to use force against Saddam Hussein. But our long-time Cold War enemy has the potential to be a great ally in a post-Saddam Middle East and the continuing global war on terror.
Mind you, Russia could be a great friend. Its recent track record of cooperation with the United States is mixed. On one hand, Russia sided with Germany and France to block military action against Iraq, continues to build a nuclear reactor in Iran and recently held talks with North Korean dictator Kim Jong Il.
On the other hand, it is allied with America in the war on terrorism. After the Sept. 11th attacks, Russian President Vladimir Putin supported the United States against al-Qaeda and the Taliban in Afghanistan. He overruled his defense minister and let the U.S. military deploy troops and fly over Russian territory. Russia also supplied and trained forces for the Northern Alliance, which overthrew the Taliban. Finally, it permitted the re-supply of U.S. forces in Afghanistan through its ports and railways, greatly cutting U.S. costs.
There are many reasons why Putin did this, but here’s the main one: Osama bin Laden’s taped remark that the attack on civilians at a Moscow theater last October was part of his jihad against the West. This proved Putin’s belief that Russia is also a terrorist target and is vulnerable to Sept. 11-style attack. And Putin, a former KGB chief, doesn’t like being vulnerable.
It’s true that Moscow and Washington differ fundamentally on Russia’s relations with Iraq, Iran and North Korea. In the debates over the U.N. Security Council resolution on weapons inspections in Iraq, for example, Russia opposed language that would have explicitly authorized the use of force.
But Moscow’s ties to rogue states are driven primarily by economic motives. Russia seeks to profit from multi-billion-dollar oil, gas and nuclear power deals -- and arms sales -- to pay off billions in Soviet-era Iraqi debt. As the resolution was being crafted, Baghdad disingenuously claimed that it might sign a $40 billion, 10-year trade agreement with Russia.
The Bush administration should work closely with Russia to develop alternative policies for dealing with rogue states -- policies that would threaten neither country’s security interests. As noted in The Heritage Foundation policy guidebook, (Agenda 2003) the United States should:
Russia and America were allies in World War II. Now, in this new world war against terrorism, we have an opportunity to be allies again, but with a twist -- friends not only because we have common enemies, but because we have basic, common democratic and economic values that include a world free of terrorism. To borrow a line from Hollywood, this could be the start of a beautiful friendship.
02-10-2003
In the wake of the wave of global instability generated by the U.S.-North Korean nuclear weapons disagreement, and beyond Iraq and the war on terrorism, a future crisis is looming which may derail U.S.-Russian relations and upset an uneasy geopolitical equilibrium in Eurasia between Russia, the U.S., Iran and Turkey. This is the Iranian nuclear weapons program, which will undoubtedly strain U.S.-Russian relations and may escalate friction in the Caucasus and Central Asia. In view of pending successions and state weakness in Georgia and Azerbaijan, and brittle regimes from Ashgabat to Bishkek, escalation of tensions between regional and international powers may be fraught with destabilizing consequences.
BACKGROUND: Last December, international media uncovered satellite imagery, which is interpreted to be two secret Iranian installations involved in uranium enrichment. According to senior U.S. State Department officials, Iran is actively working on a nuclear weapons program. State Department spokesman Richard Boucher stated that Iran’s energy needs do not justify the nuclear facilities in Arak and Natanz. International Atomic Energy Agency (IAEA) Chairman Mohammed El-Baradei said in an interview that the alleged uranium enrichment plant is likely to produce highly enriched uranium for nuclear bombs while the heavy water plant is likely to be used in a reactor to produce weapons grade plutonium. Moreover, Boucher said, Iran flares more natural gas annually than the equivalent energy its future reactor may produce. Iran indeed has more natural gas than it knows what to do with. Since the deal to sell natural gas to Turkey has not been particularly successful, Tehran is now planning to build a giant natural gas pipeline to Pakistan and possibly India. The gas pipeline project, however, will remain on a drawing board as long as relations between Islamabad and New Delhi will remain as tense as they are today. In addition, Turkmenistan has recently signed a memorandum for constructing a pipeline through Afghanistan and Pakistan. Such a project is more likely to be supported by the United States than an Iranian pipeline, U.S. officials said. Thus, the power generation applications of the Russian-built, $800 million Bushehr nuclear plant, and follow-up nuclear projects, do not seem either economically justified or truthful. Iranian spokesmen vehemently denied military applications of the secret nuclear facilities and claimed that the secret projects were declared to IAEA (after they were identified through satellite imagery). Iran claimed that IAEA representatives would be invited to visit the facilities in February. Gholamreza Aghazadeh, the chief of Iranian atomic energy program, told El-Baradei that the construction is for a 6,000-megawatt reactor. Mohammed Javad Zarif, Iran’s ambassador to the United Nations, parsed his words very carefully. He refused to explain what the large new facilities are, that experts have identified as having military applications, but claimed that the Nuclear Non-Proliferation Treaty (NPT) covers all Iranian nuclear activities. Russian nuclear industry minister Alexander Rumyantsev, who visited Iran in December of last year, found himself in the role of acting as Tehran’s mouthpiece, elaborating Iranian peaceful intentions to the media: "Iran is using nuclear energy exclusively for peaceful purposes...There are no programs to create nuclear weapons or develop sensitive nuclear technologies." Mr. Rumyantsev, however, failed to explain why Iran still did not sign an agreement to return used fuel to Russia for reprocessing. Perhaps, as American officials suggested, it is because Moscow already sold Iran uranium enrichment technology which has military applications.
IMPLICATIONS: The North Korean example demonstrates how quickly a country can pull out of the NPT and kick out international inspectors, leaving great powers to grasp for a solution. Intelligence experts have suggested for a long time that this may be a path that the Iranian leadership could choose to follow. This will not be the first time Russian and Western business people supply what Madeleine Albright used to call "states of concern" with technologies necessary to produce weapons of mass destruction - with a nod and a wink, while officials look the other way. This is clearly the case with Russia. While declaring its support for the United States in the war on terrorism, Moscow intends to pocket hundreds of millions of dollars in supplying nuclear weapons to Iran. The Bush Administration is not likely to stand idle while the regime in Tehran builds its nuclear arsenal, just as Washington did not acquiesce to Saddam Hussein’s buildup of Weapons of Mass Destruction. Russian-American cooperation in the war on terrorism, however, is likely to become a victim of the new confrontation. Another victim may be the current - and uneasy - geopolitical modus vivendi in the Caucasus. Today, Washington and Moscow are in agreement, at least outwardly, on fighting possibly Al Qaeda-related elements in the Pankisi gorge; Georgia’s sovereignty and territorial inviolability; peaceful development of Caspian oil; and NATO troop deployment in Central Asia. The U.S. and Russia also share their disgust with excesses of Turkmenbashi, and would like to limit radical movements in Central Asia, such as the Islamic Movement of Uzbekistan (IMU) and Hizb-ut Tahrir. A new spat over the Iranian nuclear program, however, is likely to bring Russia and Iran into a cooperative framework which is moreover anti-American. Moscow and Tehran are likely to boost Armenian intransigence in seeking a solution over Karabakh, and enhance Russian support of Abkhaz separatists in Georgia and Ajaria’s intransigence.
CONCLUSIONS: A new U.S.-Russian confrontation, if it occurs, will make a new, more aggressive Russian intervention in succession struggles in Georgia and Azerbaijan more likely. Moscow may attempt to place, with Iranian support, anti-American candidates after Eduard Shevardnadze and Heydar Aliyev leave the scene. It is necessary, therefore, for the United States to get the Korean cooperative crisis resolution model right, in order to tackle a far more difficult Iranian nuclear weapons dilemma in the future. Developing a productive relationship between Washington and Moscow over the North Korean crisis, however, may contribute to preventing a grave confrontation, which would be caused by Russian proliferation policies towards Iran.
01-07-2003
As China continues its impressive economic growth, access to natural resources and raw materials is becoming increasingly vital, and will feature more prominently on the policy agenda of the decision makers in Beijing. If China seeks to maintain its economic growth rate of 1985-2000, it will face a major raw materials shortage and will be forced to focus on Eurasia as a source of major energy resources, water and food. This is likely to lead to growing economic and political involvement in Russia and Central Asia.
BACKGROUND: The Chinese government has designated oil, grain and water as strategic commodities with maximum influence on economic development. While China is the world’s fifth largest oil producer, demand is outgrowing economic production. By 2020, China will not be able to supply itself with oil, iron, steel, aluminum, sulfur, and other minerals. Official Chinese statistics show China’s oil production growing at the rate of 1.7% a year, while demand is growing at 5.8%. China is a net importer of oil since 1993. The current deficit is about one third of its total consumption of 300 million tons a year. Imports totaled 30 million tons in 1999, growing to 65 million tons by 2001 and likely to continue growing. A third of imports will come from Russia, some from the Caspian and Central Asia, and the rest from the Middle East, Indonesia, Vietnam, and the South China Sea. Economic cooperation is already a high priority in the Sino-Russian partnership, and is increasingly important in Beijing’s relations with Central Asia. Neighboring Siberia boasts the large oil fields in Kovykta in the Irkutsk oblast; natural gas fields in Yakutia (Sakha); and coal basins and millions of acres of pristine forests. YUKOS, the fastest growing Russian oil company, has championed plans to build a gas pipeline to Daiqin in North-Eastern China. Kazakhstan, with 2.2 billion tons of oil and 1,8 trillion cubic meters of natural gas on land (not counting Kazakhstan’s Caspian reserves), is planning to produce 49 million tons of oil and 12 billion cubic meters of gas in 203. By 2010, its production of oil will double and its production of natural gas may triple. Already in 1997, the China National Petroleum Co. (CNPC) acquired development rights for two oil fields in Kazakhstan, outbidding European and U.S. competitors, and is conducting a feasibility study for a 3,000 km gas pipeline from Turkmenistan. From the purely economic point of view, these projects looked unviable in the late 1990s when oil was cheap, but calculations may change with oil remaining above $30 a barrel, especially if the full financial muscle of the Chinese government is put behind the projects. Looking even further into the future, these East-West pipelines may be connected with the pipeline grids of Russia and Iran, creating the "Pan Asian Global Energy Bridge."
IMPLICATIONS: Trade between China and its Eurasian neighbors is developing at a high pace, primarily involving Eurasian raw materials and Russian weapons in exchange for Chinese low-quality consumer goods and food. Some aspects of this trade are off the books and unregulated, as the illegal cutting of forests in Siberia. It is energy resources, however, which are going to dominate China’s trade with Eurasia in the foreseeable future. In May of last year, the Kazakhstani energy company Kazmunaigas and CNPC have started to develop a gas pipeline from Keniak to Atyrau, which may become a part of the future Kazakhstan-China main gas export pipeline. China itself is prospecting for oil and natural gas in the Tarim basin in Xinjiang, and constructing a 2,600 mile long East-West oil and gas pipeline which may cost as much as $18 billion. By 2005, these pipelines will supply up to 25 million tons of oil and 25 billion cubic meters of gas to Eastern China. Both the Tarim pipeline. A possible Central Asian follow-up will contribute to the viability of the gigantic project. CNPC has also acquired a 50-percent stake in the Salyan Oil operating company in Azerbaijan, previously owned by Delta-Hess company, which, in turn, was recently acquired by CNPC. Salyan, which is 50 percent owned by the State Oil Co. of Azerbaijan (SOCAR), is planning to invest $80 million into rehabilitation of old oil wells in the Kursangi-Qarabagli field. This is likely to be the first step in the expansion of Chinese oil interests in the Caspian area. CNPC’s plan of a major breakthrough into the Russian oil sector was blocked, at least temporarily, on December 28, 2002, when the Russian government declined a higher Chinese bid for the state-owned Slavneft company in favor of politically connected Sibneft. This appetite for natural resources will open doors for major capital projects aimed at supplying China, such as oil, gas and water pipelines. China and other Pacific industrial powers such as Japan and Korea, form the largest oil-consuming region in the world. It is likely to boost domestic prospecting, develop its own (particularly offshore) reserves, but will increasingly have to rely on imports. Chinese experts predict that Russia will be able to export annually 25 to 30 billion cubic meters of natural gas to China annually; 15 to 18 billion kilowatts of electricity from hydroelectric power stations in Siberia, and 25 to 30 million tons of oil from the Kovykta oil field in Eastern Siberia. In addition, Russia can pump oil produced in Kazakhstan to Irkutsk and then supply it to China. Furthermore, Russia is willing to build six nuclear reactors in China to generate up to 1.5 trillion kilowatts. In addition, there are numerous projects for developing free economic zones along the Chinese-Russian border, and an international port in the mouth of the Tuman river (Tumangan), where the Russian, Chinese, and Korean borders meet. That port has been on the drawing boards for 15 years, but renewed tensions over the North Korean nuclear weapons program are likely to delay it again.
CONCLUSIONS: Russia and China are planning to cooperate in developing a network of railroads and pipelines in Central Asia, building a pan-Asian transportation corridor (the Silk Road) from the Far East to Europe and the Middle East. Ambitious Chinese plans, however, to build the longest pipeline in the world - from Western Kazakhstan to China at a cost of $10 billion - are running into financing difficulties. Thus far, the target of $20 billion in trade established by Presidents Jiang Zemin and Yeltsin in 1997 has not been reached. For the foreseeable future, the West will remain China’s leading investment and manufactured goods trading partner - while Eurasia will become an important source of raw materials. The race for resources - and for capital investment to develop them - is also likely to put Chinese energy corporations and their Western allies into competition with their Japanese and Korean counterparts. The ability of Eurasian governments and transnational corporations to work cooperatively to develop resources and operate energy markets will greatly influence the pace of economic development in Asia in this century.
12-11-2002
As the U.N. Security Council is caught up in a chain of events that is likely to end up in removal of Saddam Hussein’s regime, the Bush administration should plan for the future of a post-Saddam Iraq. Economic issues will loom large. Iraq’s economy has been grossly mismanaged, and its people brutally repressed, for 40 years. Iraq desperately needs an alternative to the failed policies of its dictator. Sound economics are needed to help the Iraqi people rebuild their lives and their country after two decades of wars and four decades of repression under the current regime.
Saddam’s regime has succeeded in bankrupting the country even though it boasts the world’s second-largest oil reserves after Saudi Arabia. The oil sector provides more than 60 percent of the country’s gross domestic product (GDP) and 95 percent of its hard-currency earnings. Yet GDP for 2001, at the market-exchange rate, is estimated to be only about one-third what it was in 1989. Iraq also is hobbled by its $140 billion foreign debt. This devastation was wrought by such policies as the nationalization of the country’s chief export commodity, oil; extensive central planning of industry and trade; the 1982-1988 war against Iran; and the invasion of Kuwait, which precipitated the 1991 Gulf War.
According to the U.S. General Accounting Office and British intelligence sources, oil smuggling and illegal surcharges of 25 to 50 cents on a barrel of legal oil are providing the funds to bolster Saddam’s regime. Saddam’s unaccounted revenues are between $6.6 billion and $10 billion — money that he has been free to spend to develop WMD and support terrorism in spite of economic sanctions imposed by the United Nations on Iraq after the Persian Gulf War to force him to give up his WMD.
The road to economic prosperity in Iraq will not be easily paved, but the Bush administration can help the new Iraqi government achieve fundamental structural reform with massive, orderly, and transparent privatization of various sectors of the economy, including the oil industry. The U.S. should offer its guidance on establishing sound economic and trade policies to stimulate growth and recovery.
After Saddam’s brutal and repressive regime is ended, the new government established by the people of Iraq should represent all the major sub-national groups — the Shiite Arabs, the Sunni Arabs, and the Kurds. To succeed, Iraqi opposition leaders will need a political commitment from the United States and international organizations to furnishing the necessary expertise and technical assistance. To gain that commitment, Iraq will need to abandon statist policies of the past and become fully committed to the principles of a market economy.
Privatization efforts in other countries demonstrate that privately held infrastructure, oil, and oil service companies generate greater efficiency, improved production, and higher revenues than do centrally planned and state-owned industries. The same can be achieved in Iraq, whose oil industry cannot thrive without access to global capital markets.
In particular, the administration should work with opposition leaders in Iraq to convince them now that a future Iraqi federal government must develop mechanisms for privatizing these industries and taxing oil sales, and for sharing the proceeds equitably with the three major ethnic regions — the Shiite Arabs in the South, the Kurds in the North, and the Sunni Arabs in the central region.
The Bush administration, its allies, and international organizations should prepare, encourage, and support the future leaders of a post-Saddam Iraqi government in developing a comprehensive economic reform package. Specifically, the next Iraqi government must take steps to create a modern legal environment that recognizes property rights and is conducive to privatization. Furthermore, it should educate and prepare the Iraqi people for structural economic reform and privatization through a public-information campaign.
To bring modern economic expertise and management skills to Iraq, the government will have to hire Iraqi expatriates as well as other Western-educated Arabic speakers with financial, legal, and business backgrounds to fill key government positions on economic reform and privatization. To improve fuel efficiency of the Iraqi economy, the future regime will have to deregulate prices internally, including in the utilities and energy sector. Most importantly, it will have to prepare state assets, including industries, utilities, transportation, ports and airports, pipelines, and the energy sector, for privatization. It will have to keep the budget balanced and inflation, taxes, and tariffs low. Finally, it should liberalize and expand trade and launch an effort for Iraq to join the WTO.
Economic growth will be an important contribution to the stabilization of Iraq, allowing the United States and other forces stationed there to depart after assuring that Iraq’s WMD threat and repressive regime have ended. Structural reform and comprehensive privatization is a winning strategy for the people of Iraq, its future government, the region, and the United States.
Furthermore, such a strategy will prove beneficial for the industrial world, the countries of the Middle East, and the developing world. Iraq’s return to the global markets would allow a more abundant and stable energy supply and a greater revenue flow for the Iraqi economy, foster a higher living standard for the Iraqi people, and provide numerous business opportunities for the region and the world. If successful, Iraq’s privatizations of its oil sector, refining capacity, and pipeline infrastructure could serve as a model for privatizations by other OPEC members, thereby weakening the cartel’s domination of the energy markets.
11-15-2002
When President George Bush and Russian President Vladimir Putin meet for their historic summit later this month, the agenda should focus on the growing number of foreign policy and security challenges in which closer cooperation is necessary, if not crucial. These challenges include war against Iraq; the war on terrorism; North Korea’s nuclear and ballistic missile programs; Russia’s proliferation of weapons of mass destruction (WMD) and related technologies to countries like Iran; and energy security.
Relations Since September 11
Russia’s track record since the terrorist attacks on the United States has been mixed. On the one hand, Russia has cooperated with the United States in the war on terrorism. On the other, it worked diligently to water down the new U.N. Security Council resolution on Iraq and continues to build a nuclear reactor in Iran.
Putin supported the United States in the campaign against al-Qaeda and its state sponsor, the Taliban regime in Afghanistan. He overruled his senior officials to allow the United States to deploy troops and build infrastructure in Georgia and Central Asia--areas Russia influences through the Commonwealth of Independent States Mutual Defense Treaty. Today, the U.S. military uses Russian ports and railroads to re-supply expeditionary forces in Afghanistan.
Putin also muted Moscow’s objections to U.S. abrogation of the 1972 Anti-Ballistic Missile (ABM) Treaty and enlargement of the North Atlantic Treaty Organization (NATO). The latter, to take place next week in Prague, will bring the Baltic States and the former Warsaw Pact countries of Bulgaria, Romania, and Slovakia into the alliance. The May 2002 creation of the NATO-Russia Council effectively buried the legacy of the Cold War.
The Putin administration has framed the recent hostage crisis in Moscow involving radical Islamist terrorists from Chechnya in terms of the global war on terrorism. While some officials may have adopted such rhetoric to justify Russia’s military atrocities against innocent civilians in Chechnya, Osama bin Laden stated in a tape released this week that the attack in Moscow was part of his jihad against the West. Thus, Moscow correctly stressed that the same Persian Gulf terror masters who funded the theater attack are behind acts of terrorism in the United States, Bali, and elsewhere.
Moscow and Washington differ fundamentally, however, on Russia’s relations with Iraq, Iran, and North Korea. In addition to trying to keep language authorizing the use of force against Iraq out of the U.N. Security Council resolution on weapons inspections, according to the Iraqi Embassy in Moscow, Russia may sign a $40 billion, 10-year trade agreement with Saddam Hussein’s regime. Moscow announced plans to build five nuclear reactors in Iran in addition to the one under construction in Bushehr, even though Tehran made clear that it intends to acquire nuclear weapons and is building and testing ballistic missiles with increasingly longer ranges. North Korea and Russia are assisting Iran in this program. In August, Putin met with North Korean leader Kim Jong-il in Vladivostok to discuss economic cooperation. Such ties to these rogue states are driven primarily by economic motives, as Russia seeks to profit from oil and gas deals and arms sales and to recover billions of dollars in outstanding Soviet-era debt. Certain members of its political, military-industrial, and security establishment also support the ties because they still harbor Soviet-era anti-American sentiments.
Historic Opportunity
President Bush should stress to President Putin that both countries’ security interests lie in global stability, access to energy resources, and economic growth, not in supporting rogue regimes, and that the United States, not the European Union, best understands the threat that radical Islamic movements pose to Russian security. In pursuing a U.S.-Russian strategic partnership at the summit, President Bush should:
The U.S.-Russia summit provides President Bush and President Putin an historic opportunity to collaborate to make the world more secure. They should focus on policies that would allow the two countries to fight radical Islamic terrorism and limit the ability of dangerous regimes to obtain the world’s most dangerous weapons. Russia and the United States should also work to improve energy security while expanding Russia’s share of the world oil market.
10-30-2002
The antiwar movement is trying to stage a comeback. It may be back with a whimper rather than with a bang — but back it is.
Many in the media believe that the demonstrations held last Saturday in Washington, San Francisco, London, and other cities around the world are bona fide expressions of mainstream public sentiment. They are not. Many of the groups behind the demonstrations are the remnants of the Cold War-era radical Left. Others have connections with hostile regimes in the Middle East and North Korea. The administration, the media, and the intelligence community should be looking into them.
Among the demonstration supporters are groups ranging from the sinister to the hilarious (Dogs for Democracy/Paws for Peace) to the just plain silly (the Institute of Xenomorphosis). None, however, make any attempt to hide their shared hatred of capitalism and U.S. foreign policy. Participants include activists from the extreme Old and New Left — from Stalinists to Maoists — as well as such "blasts from the past" as the Revolutionary Communist Party (RCP) and the Trotskyite Socialist Workers Party. Other worthies include pro-Saddam mouthpieces; Palestinian propagandists; North Korean front organizations; and 1960s "flower children" who never grew up.
It’s hard to say which group takes the prize for weirdness. Funny — or funky — participating organizations include Hip Mama (which publishes articles on such subjects as "raising a draft dodger"); the Fruitarian Network; or the aptly named Neville Chamberlain Society. Mad Grandparents for Peace, Truth and Justice, and Dogs for Democracy/Paws for Peace rub shoulders (noses?) with the Mad Anarchist Bakers League of Brady Lake, Ohio, and the U.S. Raelians. Let a hundred flowers bloom, indeed.
Of course, it’s easy to dismiss the antiwar coalition. It’s clear that — with the exception of some trade-union locals — most of the participants in these protests hail from the far-out fringe. President Bush will be right to disregard them. But there are other players involved here who are far less innocuous.
A key player in organizing this weekend’s soiree is Ramsey Clark, former attorney general under Lyndon Johnson, who never met a dictator he didn’t like. Clark justified Ayatollah Khomeini’s hostage-taking in the U.S. embassy in Tehran. He hobnobbed with Libya’s Muammar Qaddafi after President Reagan bombed him in 1986. And he is connected with Lyndon LaRouche, the head of a radical, cult-like political movement which some consider to be pro-Nazi.
For over twelve years Clark has been affiliated with the Workers World Party (WWP), which also appears on the list of "Endorsers of the October 26th March on Washington." WWP splintered from the Trotskyite movement in the 1950s and became — of all things — Orthodox Stalinist. It supported China’s repression of Tibet, North Vietnam’s war against the South and the U.S., the Tiananmen Square massacre, and the coup against Gorbachev. Clark represented Radovan Karadzic, an indicted Bosnian Serb war criminal, and met with Slobodan Milosevic when he was a wanted man in Belgrade, calling him "brave, objective, and moral." In 1990, Clark led a WWP effort to prevent Bush I from going after Saddam. And he has never ceased advocating for the mustachioed dictator.
Also committed to the antiwar movement is the National Lawyers League, which founded by the Communist Party USA (CPUSA) in 1936. Its president, Pierre Cot, was awarded the Lenin Peace prize in 1953. Other Communist groups — from the Maoist Revolutionary Communist Party USA to the Young Communist League to the Trotskyites — are cooperating in the demonstration as well. And the Nicaragua Network and Nicaragua Solidarity Committee (a leading pro-Sandinista organization) are among the organizers, as is Jesse Jackson’s Rainbow/PUSH coalition.
Arab organizers are the easiest to figure out, of course: Their websites blast Israel as a "settler state," call for an economic boycott — just like that of White South Africa — and justify terrorist bombings. Many of these organizations are connected to radical Palestinian organizations and some Arab governments. And then there’s the Polish-American Public Relations Committee, which highlights an alleged secret memo entitled "The Power and Aims of International Jewry." The memo, dated 1919, discusses at length the authenticity of the Protocols of the Elders of Zion. Breaking news!
The antiwar movement’s ties to North Korea are also quite pronounced. Besides the Pyongyang-inspired Korea Truth Commission, there are also the Congress for Korean Reunification, Korean Immigrant Workers Association, and Nodutdol for Korean Community Development. Is the North Korean dictatorship providing political direction and material support to these organizations — just as their older Soviet brother did to similar groups for 70 years?
Moreover, just as in the Cold War (and especially during the Vietnam era), foreign governments may seek to manipulate and finance U.S. war protesters. Former KGB general Oleg Kalugin — who now lives in Washington, D.C. — used to smuggle bagfuls of greenbacks to finance full-page antiwar and disarmament ads in the New York Times. An entire KGB division was dedicated to running dezinformatsiya (disinformation) campaigns, and to recruiting and operating agents of influence. Efforts of this kind were staged against U.S. MX and Pershing missile deployments and in favor of a unilateral "nuclear freeze."
Herb Romerstein, for decades a congressional investigator of Soviet penetration of the United States, and author of Venona Secrets: Soviet Espionage and America’s Traitors, noticed the Iranian Fedaeen Organization among the participants. "They were trained by the Iraqis under Soviet supervision to topple the Shah. They participated in Khomeini’s revolution, but later were decimated by him," he says. The Soviets may be out of the strategic-influence intelligence-operations business, but others — among them Palestinians, Iraqis, Iranians, and North Koreans — are not.
When the Cold War ended, Soviet intelligence ceased their "influence" operations against the U.S. But some of their organizational and other assets were likely transferred from the Soviet KGB to other "friendly" intelligence agencies — possibly including Iraqi, Iranian, Cuban, and North Korean. The U.S.S.R. and Russia trained Iraqi and Iranian intelligence agencies for years.
Romerstein and Paul Joyal — the former director of security for the Senate Intelligence Committee — agree that the FBI is highly unlikely to investigate foreign penetration of the U.S. solely on the basis of a demonstration: "There are plenty of well-meaning people who are being enticed to demonstrate. [The FBI] needs to see who is footing the bill, and then investigate," Joyal says.
Just knowing that the bulk of these protesters come from the radical Left, old and new — and not from the U.S. mainstream — and having some sense of who may be behind the antiwar protesters is important. Romerstein believes that the U.S. counterintelligence capabilities in the area of "active measures" and influence operations have been weakened for years. This has to change. In the new war against rogue states and radical Islamic terrorism, this important aspect of warfare can no longer be neglected.
10-18-2002
The Europeans’ near-hysteria on Iraq is but one more symptom of a growing rift between America and its allies. That gap stems from increasingly divergent perceptions of the nature of the international framework, of security threats, and of desired outcomes. Even as the U.S. lays plans to make the world safe from Saddam’s menace, European analysts, academics, and diplomats are voicing shrill criticism of American values and President Bush’s policies.
Europe’s leftist elites — and some not-so-lefties as well — have articulated a number of guidelines for future European foreign-policy engagements which, if attempted, may put the future of Euro-Atlantic partnership in jeopardy. This strain of European thinking might be labeled "multilateral utopianism."
It boils down to differing perceptions of the foreign-policy tools necessary and permissible for dealing with security threats, including terrorism and weapons of mass destruction. Put broadly, the U.S. and Europe hold different views on the role of a nation state in the international system, and the necessity of using force for defense.
Most Europeans and some Canadians I encountered in a number of policy conferences last month have assailed President Bush’s strategy of regime change in Iraq. Their attack was four-pronged: First, they claim that it’s wrong to use force to change a regime, whatever its nature. This position was articulated both by a senior German policy planner working for the Green Foreign Minister Joschka Fischer, and by a Green member of the European parliament.
Second, multilateralists insist that it is plain wrong to take unilateral action. They are saying, in effect: "You cannot maintain peace (in Iraq and Afghanistan) on your own. So you cannot decide on regime change on your own… We demand the right of co-determination for the Middle East, because it is closer to us than to you."
Critics also claim that the timing of U.S. action is wrong: Saddam has been there for decades, after all, and he’s tried to develop WMD for years — why take him out now? German representatives further claimed that economic sanctions and containment work to defeat Saddam (they don’t).
Fourth, the reasons for the U.S. action on Iraq are alleged to be sinister: According to a Brussels-based think-tank chief, U.S. policy is dictated by "a combination of old Zionists, new Conservatives, and special interest groups," or "the Jewish Lobby." Former German defense minister Rudolf Scharping and a Canadian political-science professor voiced similar sentiments.
America was also criticized for "disregarding" the political and economic roots of 9/11. The attack came — it was said — because of what America does, not because of what it is. The critics used Zbigniew Brzezinski’s op-eds and interviews articulating this point to bolster their case. "A strong civic society is the answer to terrorism," one German participant claimed, suggesting the futility of any military action: "Al Qaeda are martyrs. We cannot stop martyrs."
Europeans have also recommended policy prescriptions to "improve" U.S. foreign and defense policy. They demand to be allowed to subject the U.S. to multilateral foreign and defense policy, on the grounds that nobody should be in the position of establishing world order unilaterally. Some Europeans equate the threat from al Qaeda (which is generally not perceived as a threat to Europe) with the threat from the United States. A senior Italian analyst quoted industrialists in his country who had said, "It is not our war." Others added that Afghanistan (and Iraq) "is not about fighting al Qaeda and Saddam Hussein. It is about establishing the U.S. as a ’hyper-power’ in a U.S.-dominated mono-polar world."
Germans diplomats are especially fond of characterizing the "multilateralization" of foreign policy as an unstoppable historic process — from the adoption of the U.N. Charter and Bretton Woods, to GATT, to the WTO, to the creation of the International Criminal Court (ICC). They hail NATO as a "denationalization of defense." They criticize the narrow-mindedness of those who don’t think about changing the international system in accordance with such issues as globalization and environmentalism.
But, in open contradiction of the multilateral approach, these diplomats and politicians also insisted that under no circumstances will Germany use force against Saddam, even if regime change is authorized by the U.N. They likewise rejected criticism of "war-by-committee" in the Balkans. "E.U. policy in the Balkans was a success," they insisted.
Moreover, Europeans are demanding that economic sanctions and diplomacy, not force, be used to pressure parties to conflicts. Some claim that, since ethnic conflicts erupted as a result of the dissolution of various empires (British, Soviet, etc.), the E.U. must now assume the role of peacemaker in their stead. Most aggressive multilateralists also recommend building zones of European influence along Europe’s periphery — an area to include the Black Sea, the Caucasus, Russia, Ukraine and Belarus, the Middle East, and North Africa — on the basis of multilateralism, cooperation, and the rule of law.
European advocates of multilateralism also tend to be anti-Israel. "Israel is wrong because it uses force," they claim. They would impose a settlement which will return Israel to 1967 borders, dividing Jerusalem, and would "address" the issue of Palestinian refugees in order to appease Arab criticism of the West. They boldly advocate pressuring Israel in spite of the ongoing terrorist violence; in spite of the pro-terrorist indoctrination being carried out in the mosques, the schools, and the Palestinian media; and in spite of the continued commitment of large segments of the Palestinian polity to the outright destruction of the Jewish state.
Fortunately, not everyone is buying this line. At least anecdotally, many of Europe non-elites are more sympathetic with Americans than are the Euro-pundits, academics, and diplomats. A detailed public-opinion survey may go a long way to clarify the segmentation of attitudes toward the U.S. and its policy.
To counter these corrosive trends, Europeans need to be more exposed to the mainstream U.S. views on these subjects. A broader range of contacts and media activities is necessary to define our differences and find areas for future cooperation — if the Euro-Atlantic partnership is to survive.
Since the end of the Cold War, a wide gap has developed between the U.S. and its Europeans allies on issues as basic as the right of a nation state to act unilaterally to protect itself. Indeed, we are now involved in a war of ideas not just with our radical Islamist foes, but also with our "enlightened" European allies.
10-11-2002
The start of construction on the Baku-Tbilisi-Ceyhan pipeline in September marked the conclusion of the latest round in the new Great Game over Caspian Basin energy resources. Less than a month later, the major competitors in the contest for regional economic and political influence are already jockeying for position in the next stage.
At a September conference off the coast of Greece sponsored by the Hellenic Foundation for European and Foreign Policy (ELIAMEP) the consensus among participants was that the Caspian Basin could probably only support one main export pipeline beyond the one that has begun construction, and that a second pipeline could complement a major natural gas pipeline to create a stable transport system for the region’s fossil fuels. The direction of such a pipeline remains in question, and thus holds the potential for fierce competition among regional and global powers.
Many experts rule out construction of a pipeline connecting the Caspian Basin with China’s Pacific Coast. John Roberts, an editor with the Platts Global Energy information service, said such a pipeline would need to extend to 5,500 kilometers and cost upwards of $8 billion. (The proposed Baku-Tbilisi-Ceyhan route runs 1,760 kilometers.) According to Roberts, available oil in Kazakhstan could pump 400,000 barrels of oil a day through such a pipeline, but it would take a million barrels a day to make the project enticing for investors. He calculates that Russia would have to participate to deliver this volume, necessitating a three-way pact among Russia, Kazakhstan and China. Such multilateral projects, Roberts says, are difficult to negotiate and implement.
Among potential north-south routes, it remains hard to see where feasible routes will arise. Roberts says that as long as the United States opposes France’s TotalFinaElf North-South pipeline from Kazakhstan via Turkmenistan to Iran, Kazakhstani oil can flow either North, to Russia, or West, to the Black Sea and the Mediterranean. Washington is not averse to pipelines via Russia: In the past, the United States strongly supported a Tengiz-Novorossiisk major pipeline, and a smaller Baku-Novorosiisk one (about 100,000 b/d or less). Yet, although the Russian state-owned pipeline operator Transneft has invested in capacity upgrades, unrest in Chechnya and elsewhere in Northern Caucasus make this pipeline limited.
At the Greek conference, Russia’s Caspian oil envoy Viktor Kalyuzhny said Russia wants to expand its transit options around the Caspian. Kalyuzhny endorsed the idea of constructing a pipeline from Burgas, Bulgaria to Alexandroupolis, Greece. Such a route would link the Black Sea with the Mediterranean and carry Russian and Kazakhstani oil (delivered by tanker from the source) to Western Europe. However, according to senior Bulgarian diplomats at the conference, there are no discernible sources of financing for such a pipeline. Kalyuzhny also talked up eastern and southern routes for both oil and gas, such as the oft-invoked route across Afghanistan, but many experts doubt Afghanistan or South Asia could offer investors assurances of political stability.
The cases of Afghanistan and Pakistan underscore a dilemma that dominates pipeline strategy: the need for transnational security. Roy Allison, a Russia expert and Senior Research Fellow at Oxford University’s Center for International Studies at University of Oxford, calls on international bodies to lead the way in conflict resolution. He offered the optimistic view at the September conference that Georgia could become more secure and tamp down some conflicts with breakaway provinces if it gets sustained help from the United Nations, Organization for Security and Cooperation in Europe, and the North Atlantic Treaty Organization. Allison noted that many players, including the fledgling GUAM group uniting Georgia, Ukraine, Azerbaijan and Moldova, had at least endorsed regional security cooperation since the terrorist attacks on the United States.
Many experts suspect that modifications of existing routes, like the established Druzhba system, may satisfy investors and importers. Russian pipeline monopoly Transneft has announced plans to begin merging the Druzhba system, which runs from Russia to Slovakia, with a pipeline called Adria that terminates in Croatia. Russian media quotes Transneft as promising to begin this project within a year. In the meantime, Kazakhstani oil may access the Druzhba system to facilities on the Baltic Sea, unless those terminals handle only Siberian supply. Another merger in the offing might link Kazakhstan’s and Turkmenistan’s fields to the Baku-Tbilisi-Ceyhan route and a gas pipeline from Baku to Erzurum, Georgia. Experts say Kazakhstan and Turkmenistan can fill the pipelines when Azerbaijani fields begin to show declines in output early in the next decade.
The market for natural gas, while growing, may be more complex than the one for oil. Turkey reportedly stopped importing gas from Iran in autumn 2002, responding to alleged price cuts in Russian supply. [For more background, see the Eurasia Insight archives] Moscow faces tougher challenges ahead, as future pipelines could carry Turkmen, Azerbaijani and conceivably Kazakhstani gas while leaving Gazprom, Russia’s enormous gas company, out of the action.
Finally, international strategists must place new pipelines in the context of an expanded European Union. The EU is taking steps towards expansion. Once this expansion is complete, the center of Europe will lie much closer to the Black Sea. That means that it will have to learn to manage regional conflict and poverty issues in the former Eastern bloc while figuring out a way to slake the thirst of its developed members for energy. This is no game, of course. But Europe and other players will probably take full advantage of available energy from the Caspian in whatever solutions they pursue.
10-10-2002
Senator Conrad Burns (R-MT), Representative Curt Weldon (R-PA), and other Members of Congress plan to introduce a concurrent resolution calling for further cooperation with the Russian Federation on energy development. They have a strong case. Among their concerns are over-dependence on oil from Saudi Arabia and imports from Iraq and other rogue states. Over 20 percent of America’s foreign oil comes from the highly unstable Persian Gulf. Even before September 11, the United States faced the untenable possibility that some of these imports could be, in Senator Burns’ words, "rogue oil"--that is, oil from countries that use the proceeds to support terrorism or to purchase or develop weapons of mass destruction.
U.S. consumers would be outraged to find out they could be financing al-Qaeda and other radical Islamist terrorist organizations every time they filled their gas tanks. U.S. oil imports should not in any way fund Islamic academies that provide pseudo-religious brainwashing and weapons training of youth for jihad (holy war) against Americans. Substantial supplies of oil are available from other countries and regions that do not sponsor terrorism, such as Russia, the Caspian Sea littoral states, Africa, and Latin America. The United States should gradually replace its oil imports from rogue regimes such as Iraq’s with oil from these areas. Doing so would have the additional beneficial effect of undermining the power of the Organization of Petroleum Exporting Countries (OPEC) to dictate supply and prices in the oil market.
Congress should fully support U.S.-Russian cooperation on energy development. Significantly, members of both houses of the Russian parliament--the Duma and the Council of the Federation--are willing to vote simultaneously with their American colleagues to show their support for the concurrent resolution.
Cooperation with Russia. Russian President Vladimir Putin has supported the United States in the war against the Taliban and al-Qaeda, even overruling his own senior officials to allow U.S. troop deployment and logistical infrastructure in Georgia and Central Asia. Moreover, after September 11, 2001, Putin muted his country’s objection to the U.S. abrogation of the 1972 Anti-Ballistic Missile (ABM) Treaty and NATO enlargement to include the former Soviet Baltic republics and the Warsaw Pact states of Bulgaria, Romania, and Slovakia. Such unprecedented actions have helped to bury the legacy of the Cold War.
Russia also has moved from a planned to a market economy. In the past decade, it has come a long way toward privatizing its economy in general and the energy sector in particular. Today, as its oil production and export levels grow, Russia is developing a capacity that would enable the United States to offset some of its Persian Gulf oil imports. Russian companies such as YUKOS and LUKoil have begun to sell their oil and gasoline to U.S. markets. However, Russia will need U.S. private-sector investment and government cooperation to develop its pipeline and port infrastructure to meet increased demands. In particular, Russia will seek U.S. private-sector and government assistance to:
Facilitating Energy Cooperation. On June 6, President George Bush granted market economy status to the Russian Federation, a step that will promote its adoption of market principles and assist in its integration into the world economy. But more needs to be done by the Administration and Congress. Any energy policy that the United States pursues vis-?-vis Russia should be in both countries’ interests. In particular, as the proposed concurrent resolution suggests, the United States should:
Conclusion. The war on terrorism has dictated a vital strategic re-orientation of U.S. oil imports away from "rogue oil." As an important first step on the road to U.S. energy security, Congress should support a concurrent resolution that calls for expanding energy cooperation with Russia.
The Road to Economic Prosperity for a Post-Saddam Iraq
09-25-2002
As the Bush Administration and Iraqi opposition groups plan the future of a post-Saddam Hussein Iraq without its menacing arsenal of weapons of mass destruction (WMD), economic issues loom large. Iraq’s economy has been grossly mismanaged for 40 years, and its people desperately need an alternative strategy to supplant the failed policies of its dictator. Sound economics are needed to help them rebuild their lives and their country after two decades of wars and four decades of repression under the current regime.
Saddam Hussein’s regime has succeeded in bankrupting the country even though it boasts the world’s second largest oil reserves after Saudi Arabia. Gross domestic product (GDP) for 2001, at the market exchange rate, is estimated to be only about one-third the level in 1989.1 Iraq also is hobbled by its $140 billion foreign debt.2 This devastation was wrought by such policies as the nationalization of the country’s chief export commodity, oil; extensive central planning of industry and trade; the 1982-1988 war against Iran; and the invasion of Kuwait, which precipitated the 1991 Gulf War. And Saddam still stubbornly refuses to meet the terms for lifting the economic sanctions that the United Nations has imposed on his regime.
Saddam also has succeeded in diverting at least $6.6 billion--primarily in revenues from smuggled oil and kickbacks--to his program to develop nuclear, chemical, and biological weapons and platforms for their delivery. He continues to support terrorist organizations, such as Hamas and the Popular Front for the Liberation of Palestine (PFLP), which the U.S. Department of State includes on its list of state sponsors of terrorism.3 Presumably, a post-war U.S. military presence in Iraq and Iraq’s future security forces will ensure that the new Iraqi government does not continue to develop WMD and support terrorism.
The future of Iraq depends not only on the ouster of the repressive regime, but also on the ability of the new Iraqi leaders to reverse the damage through policies that will spur real economic growth. The sooner the threat from Saddam’s WMD programs ends and the Iraqi economy recovers, the sooner the United States and the other security forces will be able to depart.
A double strategy of ensuring security and enabling economic growth will need international support. The Bush Administration should help Iraqi opposition leaders to develop an economic reform package for their country. The new post-Saddam federal government should develop a modern legal system that recognizes property rights and is conducive to privatization; create a public information campaign that prepares the people for structural reforms and privatization; hire expatriates and Western-educated Arabic speakers with financial, legal, and business expertise for key economic positions; deregulate prices, including prices in the utility and energy sectors; prepare state assets in the utility, transportation, pipeline, energy, and other sectors for privatization; keep the budget balanced and inflation, taxes, and tariffs low; liberalize and expand trade; and launch an effort to join the World Trade Organization (WTO).
The Tough economic Road Ahead
Iraq’s Lifeblood: Oil
As Chart 1 and Chart 2 show, the Iraqi economy is dominated by the oil sector, which provides more than 60 percent of Iraq’s GDP and 95 percent of its hard currency earnings.4 The economic sanctions imposed by the U.N. in the past decade to try to force Saddam to give up his weapons of mass destruction not only have not worked, but have helped to depress foreign trade.
According to the U.S. General Accounting Office (GAO), however, oil smuggling and illegal surcharges of 25 cents to 50 cents a barrel on legal oil purchases bolster Saddam’s regime. These illegal activities during 1996-2002 have provided unaccounted revenues of at least $6.6 billion,5 which Saddam has been free to spend to develop WMD and support terrorism.6 How much Saddam is actually spending on his deadly arsenal is hard to tell. The lack of information is so pervasive that the international financial institutions (IFIs), foreign government agencies, and private businesses that provide country economic analysis and data do not publish any official economic statistics or estimates for Iraq.7
This means that no recent data on Iraqi government consumption of GDP are available. In 1993, the most recent year for which data are available, government consumption amounted to 13.9 percent of GDP. According to the Economist Intelligence Unit,
Oil revenue has been the mainstay of government income since the 1950s. In 1968 the oil-based nature of the economy was reinforced by the introduction of a centralized socialist system, with the government regulating all aspects of economic life other than peripheral agriculture, personal services and trade.... Meanwhile, the state’s centrality to the economy has increased because the vast majority of imports and foreign exchange have been controlled by the government.8
The socialist Ba’ath government has demonstrated gross mismanagement of the oil sector. During the 1960s, exploration stopped and the sector was nationalized, which bred corruption and mismanagement. Oil production has barely increased since 1980. In 2001, oil production stood at approximately 2.8 million barrels a day. Today, Saddam’s regime controls oil exploration, extraction, refining, pipelines, ports, and all utilities, but oil export prices are set by the U.N. sanctions regime.
Taxing Imports, But Not Smugglers
The Economist Intelligence Unit notes that direct taxation has never been a preferred means of raising revenue in Iraq.9 As the International Monetary Fund (IMF) reports, "imports are restricted by [U.N.] sanctions. All imports subject to import duty are also subject to a customs surcharge.... Imports of commodities are normally handled by the public sector."10 Although the government of Iraq inspects and regulates all imports, a small private sector is involved in considerable smuggling and black market currency exchange activities.
Tough Investment Environment
Even though Iraq has permitted some foreign investment in its oil industry and private sector, mainly to help it rebuild from the damage of the Gulf War, it discourages most capital inflows. The legal system does not guarantee contracts. Inflation in Iraq remains high. From 1994 to 2001, Iraq’s weighted average annual rate of inflation was 80.4 percent; for 2001-2002, the rate has ranged from 60 percent to 70 percent.11
The government controls almost all prices, and rationing is the norm for items like food. The regime continues to distribute imported goods in what is essentially a highly centralized command economy structure, although it does retain the ability to skew the distribution of food and other items as a way to favor cronies.
There is no application of modern property rights protected by legislation and enforced through the courts. The Revolutionary Command Council (RCC) of Iraq holds all executive, legislative, and judicial authority. The RCC’s chairman, Saddam Hussein, appoints a council of ministers who are theoretically vested with executive authority, but in fact they are able only to rubber-stamp the decisions of the RCC and its chairman. The judiciary is not independent; consequently, there is no check on Saddam’s power to override any court decision.
AFTER Saddam: The outlook for Iraq and World Energy Markets
One thing is clear: Saddam’s regime, obsessed with control and coercion, is destroying the wealth of the Iraqi people. After liberation from this regime, it will be important for the Iraqi people to rebuild their economy, especially the oil sector, increase GDP and improve the standard of living, attract foreign investment, and improve government services through privatization.
The Cost of Rebuilding
The cost of rebuilding the country will be high. If Operation Desert Storm reconstruction costs are used as the basis for estimation, the cost of rebuilding Iraq after Saddam’s regime falls will be in the $50 billion to $100 billion range.12 Together with repaying the Iraqi foreign debt, the more realistic figure is $200 billion.13 However, as long as structural economic reforms are undertaken, Iraq’s vast oil reserves are more than ample to provide the funds needed to rebuild and boost economic growth.
The United States, through its executive directors at such IFIs as the IMF and World Bank, and other international governmental and non-governmental organizations, should begin to advise the future leaders of Iraq’s three primary ethnic groups to establish policies that will lead to a thriving modern economy. These policies should be based on "best practices" developed around the world in the 1990s, when the largest government privatizations in history occurred.
During the Iran-Iraq War and the post-Gulf War sanctions period, Iraqi petroleum production declined significantly. Saudi Arabia filled the void, generating a net profit of $100 billion. The funds it generated represent monies that should have benefited the Iraqi people.14 (See Chart 3.)
Following the demise of Saddam Hussein, it is unlikely that the Saudi kingdom would transfer a fraction of its production quota under the Organisation of Petroleum Exporting Countries (OPEC) regime to Iraq to compensate for those lost profits and facilitate its rebuilding. Iraq will need to ensure cash flow for reconstruction regardless of OPEC supply limitations. Combined with the potential privatization of the oil industry, such measures could provide incentive for Iraq to leave the OPEC cartel down the road, which would have long-term, positive implications for global oil supply.
Potential Benefits of Leaving the OPEC Regime
An Iraq outside of OPEC would find available from its oil trade an ample cash flow for the country’s rehabilitation. Its reserves currently stand at 112 billion barrels, but according to the U.S. Energy Information Administration, it may have as much as 200 billion barrels in reserve.15 Iraqi officials estimate even more: According to oil minister Amir Muhammad Rashad16 and Iraqi Senior Deputy Oil Minister Taha Hmud, the reserves can be as high as 270 billion to 300 billion barrels, making them equal to Saudi Arabia’s.17
Iraq’s 1990 output prior to the beginning of the Gulf War stood at 3.5 million barrels a day, while oil discovery rates on a few new projects in the 1990s were among the highest in the world: between 50 percent and 75 percent. Given Iraq’s own output projections, it may be capable of pumping as much as 6 million barrels (by 2010) to 7 million barrels (by 2020) a day, more than doubling current production levels.18 (See Chart 4.)
Depending on the dynamics of global economic growth and world oil output, Iraq’s increase in oil production capacity could bring lower oil prices in the long term. An unencumbered flow of Iraqi oil would be likely to provide a more constant supply of oil to the global market, which would dampen price fluctuations, ensuring stable oil prices in the world market in a price range lower than the current $25 to $30 a barrel. Eventually, this will be a win-win game: Iraq will emerge with a more viable oil industry while the world will benefit from a more stable and abundant oil supply.
PRIVATIZATION:
Learning from the past
Boosting oil exports and oil industry privatization by itself still may not be sufficient for growth over the long haul. To rehabilitate and modernize its economy, a post-Saddam government will need to move simultaneously on a number of economic policy fronts, utilizing the experience of privatization campaigns and structural reforms in other countries to develop a comprehensive policy package.
Several lessons from other countries’ privatization experiences are particularly relevant to Iraq’s situation. Specifically:
LESSON #1: Privatization works everywhere
Between 1988 and 1993, 2,700 state-owned businesses in 95 countries were sold to private investors.19 In 1991 alone, $48 billion in state assets were privatized worldwide.20 Privatizations led to higher productivity, faster growth, increased capacity, and cheaper services for consumers.
In one study, the World Bank reviewed 41 firms privatized by public offerings in 15 countries. This review demonstrates that privatization will increase the return on sales, assets, and equity. As privatized firms grow, they often increase their workforces. In another study, the World Bank reviewed 12 privatization efforts in four countries, and its findings also demonstrate why privatization is good for the economy as a whole, no matter where it is implemented.21
LESSON #2: Privatization works best when it is part of a larger structural reform program
Privatization needs to be accompanied by reforms to open markets, removal of price and exchange rate distortions, reductions in barriers to entry, and elimination of monopoly powers. In addition to these policies, governments should enact legislation that protects consumer welfare.22 Such successful structural reform and privatization programs were implemented in the 1990s in Poland, Hungary, the Czech Republic, and the three Baltic States, particularly Estonia.
LESSON #3: Privatization of large enterprises requires preparation
Successful privatizations of large enterprises may necessitate such advance actions as breaking them into smaller competitive units, recruiting experienced private-sector managers, adopting Generally Accepted Accounting Principles (GAAPs), settling past liabilities, and shedding excess labor.23
LESSON #4: Transparency and the rule of law are critical
Opaque privatization and allegations of corruption and cronyism provide political ammunition to the opponents of market-based policies. To eliminate those problems and be successful in its privatization efforts, the government must adopt competitive bidding procedures, objective criteria for selecting bids, and protocols for hiring independent privatization management firms, and establish a privatization authority with minimal bureaucracy to monitor the overall program.24
LESSON #5: A minimal safety net is necessary to support laid-off workers and prevent social unrest
Buyouts of the state-owned enterprise’s management and labor force, as well as distribution of some of the privatized firm’s shares to its management and labor force, can go a long way toward alleviating social tensions that might undermine public support for privatization.
LESSON #6: Privatization is taking place in the Middle East
Privatization is no longer an affair of affluent or middle-income countries. From Margaret Thatcher’s Great Britain, privatizations of state-owned assets and structural reform policies spread to many countries in Africa, Asia, and Latin America, including the Philippines, Malaysia, Jamaica, and Sri Lanka. An internal study of World Bank managers in the Middle East and North African department found that many were enthusiastic in supporting privatization efforts in their regions.25 A number of Middle Eastern states, including Iraq’s neighbors Turkey26 and Kuwait,27 are pursuing privatization of their telecommunications, transportation, utilities, and oil sectors and services, while others, such as Iran and Saudi Arabia, have declared their intentions to privatize assets and are in the policy discussion stage.28
Lessons from Oil and Gas Privatizations
Oil privatization remains a politically painful issue in many countries. Economic nationalists claim oil is a "national patrimony,"29 whereas socialists and radical Islamists call private and foreign ownership of natural resources "imperialist" and other such pejoratives. Such rhetoric has one goal: to keep a precious and profitable resource in the hands of the ruling elite, be it a communist party politburo, a dictator, or a group of mullahs.
In fact, oil is a commodity and should be managed according to the laws of economics and best business practices. Even a country as fiercely nationalist as Russia recognizes this and is undertaking the largest oil sector privatization in history. The lessons from past experience in oil privatizations are also positive. Specifically:
ENERGY SECTOR LESSON #1: First "entitize," then privatize
The Conservative government of Margaret Thatcher successfully privatized some British oil assets in the 1980s. In the early 1990s, Russia carved up its state-run oil ministry into regional monopolies. It created joint stock companies, later selling stock to the Russians, first, and then to foreigners. The Ministry of Privatization distributed some stocks to managers and workers in order to smooth the path to privatization. Since privatization, many of these stocks, such as in LUKoil, Tyumen Oil Co. (TNK), and Yukos, have risen in price considerably.
The Russian government did not go all the way, however. For example, it did not privatize Transneft, a company that controls its pipeline infrastructure, or fully privatize some oil companies, such as Slavneft and Zarubezhneft and GAZPROM, the giant natural gas monopoly that boasts the world’s largest natural gas reserves and controls a 90,000 km pipeline network.30 The partial privatization effort has led to friction between state-controlled entities and the privatized-publicly held companies over pipeline access.
ENERGY SECTOR LESSON #2: Oil privatization generates high economic efficiency and market capitalization
The results of Russian oil privatization are fascinating: While the privatized Russian oil companies significantly expanded their production and exports and significantly increased market capitalization, GAZPROM did not. The government-controlled pipeline operator also has had difficulty providing adequate pipeline capacity to the quickly developing oil sector.
Meanwhile, privatized Russian companies not only have attracted Western portfolio investment, but also have been more successful than GAZPROM in attracting capital for foreign direct investment. Several leading Russian publicly traded oil companies also transformed their antiquated, Soviet-era accounting practices to the GAAP standard, hired Western managers, and became centers for dissemination of Western management and accounting skills across Russia’s industrial sectors. Moreover, Russia’s largest oil companies, such as LUKoil and Yukos, are fast becoming major global oil players. LUKoil recently purchased 1,300 Getty gas stations in the United States, and LUKoil and Yukos are selling American Depository Receipts (ADRs) on the New York Stock Exchange.
ENERGY SECTOR LESSON #3: Keep it clean, and keep it profitable
The major problem with the Russian oil privatization effort has been its relative opacity, especially in the early 1990s. Scandals included the oil-for-shares debacle in which Boris Yeltsin’s government took loans from banks in exchange for shares of the oil companies. The government never repaid the loans, and the companies became the property of politically connected banks.31 The insider dealing provoked a political row that discredited privatization in the public’s eyes.
Other problems in Russia have been privatization through vouchers and the denial of access to foreigners in early privatization stages in order to assuage nationalists in the parliament. These policies resulted in much lower revenues (by as much as a factor of 10) than the government could have received for the privatized assets.
AN ECONOMIC REFORM PLAN FOR POST-SADDAM IRAQ
The Bush Administration should provide leadership and guidance for the future Iraqi government to undertake fundamental structural economic reform. This process should include a massive, orderly, and transparent privatization of state-owned enterprises, especially the restructuring and privatization of the oil sector. These steps would greatly enhance needed access to global capital markets.
U.S. political commitment will be needed to motivate international organizations to provide appropriate expertise and technical assistance. Inter alia, these organizations could include IFIs such as the International Monetary Fund and the World Bank, and would likely encompass such diverse non-governmental organizations (NGOs) as the National Endowment for Democracy, the Center for International Private Enterprise, the American Bar Association, and the AFL-CIO.
In particular, the Bush Administration should convince the future federal government of Iraq to come to an agreement on how oil revenues are taxed and proceeds are distributed to the country’s three distinct ethnic regions--Shiite Arabs, the Kurds, and the Sunni Arabs. Successfully privatizing the country’s oil fields, refining capacity, and pipeline infrastructure will mean higher efficiencies and higher tax revenues in the oil sector.
What a New Iraqi Government Must Do
The Administration, the IFIs, and other economic decisionmakers should prepare and provide support for a future federal Iraqi government to:
Develop a modern legal environment that recognizes property rights and is conducive to privatization. Protection and enforcement of property rights and access to successful alternative dispute resolution mechanisms are vital policies for fostering economic growth and foreign investment. Iraq also will need to build modern and well-functioning regulatory and supervisory frameworks and institutions in the oil and gas, banking, securities, and financial services areas. Such a legal and business environment should be equitable and non-discriminatory, and it should not distinguish between Iraqi-Arab nationals and foreigners.
The U.S. government, its allies, and international organizations should be ready to provide technical assistance in the legal, economic policy, and public administration areas. Working cooperatively with the United States, the European Union, and the IFIs, the post-Saddam government of Iraq will need to boost the court system and the rule of law. It will need to provide legislation to allow the use of broad alternative dispute resolution mechanisms outside of Iraq, as the local laws may change too quickly (and the local court system too slowly) for local judges to be able to follow and apply new legislation. Education for judges about the latest legal developments in the economic area will also be important. The courts will have to boost the enforcement of court rulings independent of the executive branch. The central government will need to pay judges and court employees adequate salaries to keep corruption in check.
Educate and prepare the Iraqi population for structural reform and privatization through a public information campaign.
Only when the public, including key stakeholders, elites, and the population at large, understand the goals of economic reform will they become more receptive to change and less likely to succumb to the anti-Western demagoguery that undoubtedly will emanate from the remnants of the discredited Ba’ath establishment and Islamic fundamentalists. The new Iraqi government will need to use the media and the educational system to explain the benefits of privatization and the changes to come in order to ensure broad public support.
Hire Iraqi expatriates, as well as other Western-educated Arabic speakers with financial, legal and business backgrounds, for key positions in government.
Examples of this approach in Eastern Europe demonstrate that Western-educated experts can implement economic reforms better than a former socialist bureaucracy can. Younger, well-educated technocrats have an advantage in their ability to communicate effectively with both locals and Westerners, including international providers of technical assistance. In implementing structural reform, the best results are achieved by teams of local and Western experts working together.
Deregulate prices in Iraq, including prices in the utilities and energy sector.
Quick price deregulation will be key to ensuring an adequate supply of goods for consumers and ending rationing. It will contribute to increased exports of oil and gas, which in turn will provide additional earnings and tax revenues for the government to share among the regional and local governments.32
Prepare to privatize assets in the industrial, utility, telecommunications, banking, transportation, port and airport, and pipeline and energy sectors.
The post-Saddam Iraqi government should prepare to privatize government assets by creating government-held companies instead of ministries, issuing stock for these companies, and implementing guidelines that allow for the introduction of modern management practices and GAAP standards. The central government should hire consulting firms to execute comprehensive assessments of companies it wishes to privatize in order to itemize inventory, to take stock of assets and liabilities, and possibly to settle some of their debts in preparation for privatization.
In particular, the Oil Ministry and regional oil companies should be restructured to transform them into attractive government-owned oil companies as an intermediary stage before initial public offering (IPO). For example, one company may focus its work in the southern portion of the country, another in the central region (around Baghdad) and the Western desert, and the third around Kirkuk in the North. Three more companies may be created, one to operate the pipelines, the second to operate the refineries, and the third to develop natural gas.
The stages of preparation for privatization could include:
Taking inventory of assets and liabilities;
Exercising necessary efficiency-improvement steps, such as retraining and layoffs (with compensation);
Introducing GAAP and other modern financial and management practices;
Signing international conventions against nationalization of foreign investments, such as the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the Washington Convention), the World Bank’s Convention on the Multilateral Investment Guarantee Agency (MIGA), and the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (1958);
Issuing company stock;
Running the companies under new, transparent, and efficient management for at least two years; and
Taking companies on road shows and completing IPOs in major financial centers such as New York and London, and floating stock in international markets.
Given adequate implementation of each of these stages, the time frame for this privatization effort could be four to five years after the new government is installed by the people of Iraq. During this time, the U.S. government and the IFIs would have to ensure that the political will for privatization remains intact. Management and accounting consultants hired by the new Iraqi government would have to ascertain that the program is transparent and on track.
Moreover, after privatization, Iraq must demonstrate that it is not losing tax revenue and that the government’s oil revenue is distributed among the regions equitably and efficiently, allocated to the worthy causes, and not wasted, looted, or abused, which could undermine the entire economic reform program.
Keep the budget balanced and inflation, taxes, and tariffs low.
International experience demonstrates that lower and flatter taxes (in the range of 20 percent or less), applied uniformly and in a non-discriminatory fashion, are an important investment magnet, especially for a country like Iraq that is rich in natural resources. Moreover, oil revenues will allow Iraq to keep the budget balanced and import tariffs low. Such a stable macroeconomic policy is likely to attract massive investment from a variety of sources, including the Middle East and Asia, not just the West, and boost income and employment.
Liberalize and expand trade, and launch an effort to join the World Trade Organization.
A study by the Council on Foreign Relations has demonstrated that a majority of Middle Eastern countries suffer from high import tariffs, red tape, and corruption--problems that depress GDP growth.33 Elimination of import taxes and tariffs and implementation of trade liberalization would provide an additional economic development engine for Iraq. The Bush Administration should provide technical assistance for trade liberalization and support Iraq’s eventual membership in the WTO.
Conclusion
For the Iraqi people, structural economic reform and comprehensive privatization of government assets is necessary to stimulate recovery and provide stability after years of disastrous economic policies under Saddam Hussein. The winning strategy of structural reform and privatization also would benefit the industrial world, the United States and its allies, countries of the Middle East, and the developing world.
Iraq’s return to global markets would allow for a more abundant and stable energy supply, a higher cash flow for the Iraqi people, and numerous business opportunities for the region and the world. Iraq’s restructuring and privatization of its oil and gas sector could become a model for oil industry privatizations in other OPEC states as well, weakening the cartel’s influence over global energy markets.
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1. U.S. Department of Energy, Energy Information Administration, "Iraq: Country Overview," at http://www.eia.doe.gov/emeu/cabs/iraq.html.
2. Ibid.
3. U.S. Department of State, Office of the Coordinator for Counterterrorism, "Appendix B: Background Information on Terrorist Groups," Patterns of Global Terrorism-2000, April 30, 2001, at http://www.state.gov/s/ct/rls/pgtrpt/2000/2450.htm.
4. Energy Information Administration, "Iraq: Country Overview."
5. U.S. General Accounting Office, U.S. Confronts Significant Challenges in Implementing Sanctions Against Iraq, GAO-02-625, May 2002, at http://www.gao.gov/atext/d02625.txt.
6. Alix Freedman and Steve Stecklow, "Secret Pipeline: How Iraq Reaps Illegal Oil Profits," The Wall Street Journal, May 2, 2002.
7. Gerald P. O’Driscoll, Jr., Edwin J. Feulner, and Mary Anastasia O’Grady, "Iraq," in 2003 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., forthcoming).
8. Ibid.
9. Economist Intelligence Unit, "Country Report, July 2002."
10. O’Driscoll et al., "Iraq," 2003 Index of Economic Freedom.
11. Ibid.
12. Bill Gertz, "Tab to Rebuild Iraq, Kuwait Estimated at $100 Billion," The Washington Times, March 4, 1991. More recent estimates confirm this range.
13. Julian Borger, "Post-Saddam Iraq Will Cost You, U.S. Warned," The Guardian, August 2, 2002, at http://www.guardian.co.uk/bush/story/0,7369,767755,00.html. Lawrence Lindsey, Director of the National Economic Council, is quoted as estimating a cost for the Iraq war of between $100 billion and $200 billion. It is unclear what is included in that figure. See Bob Davis, "Bush Economic Aide Says Cost of Iraq War May Top $100 Billion," The Wall Street Journal, September 16, 2002, p. 1.
14. "Round Table on Declining Oil Prices and Its Political Consequences in the Middle East," Middle East Studies, Vol. 6, No. 1 (Spring 1999), pp. 5-36, at http://www.netiran.com/Htdocs/Clippings/Economy/990322XXFE01.html.
15. Energy Information Administration, "Iraq: Country Overview," p. 14.
16. "Iraq’s oil reserves bigger than Saudi Arabia, Minister Says," BBC Monitoring, August 6, 2001, Al-Jumhuriyah Web site in Arabic, August 4, 2001.
17. "Iraq’s Oil Industry: An Overview," Platts, at http://www.platts.com/features/Iraq/oiloverview.shtml.
18. "Iraq Building E&D Project List for Post-U.N. Sanctions Period," The Oil and Gas Journal, Vol. 95, No. 15 (April 14, 1997).
19. Energy Information Administration, "Privatization and the Globalization of Energy Markets," Energy Plug, at http://www.eia.gov/emeu/plugs/plpgem.html.
20. Madsen Pirie, "Privatization," Concise Encyclopedia of Economics, at http://www.econlib.org/library/encl/privatizaiton.html.
21. World Bank, "Privatization: Eight Lessons of Experience," Policy Views from the Country Economics Department, July 1992, at http://www.worldbank.org/html/prddr/outdeach/or3.htm. For the latest annual update on global privatizations, see Reason Public Policy Institute, "Privatization 2002: Putting the Pieces Together," at www.rppi.org/apr2002.pdf.
22. World Bank, "Privatization: Eight Lessons of Experience."
23. Ibid.
24. Ibid.
25. Ibid.
26. See information at Republic of Turkey, Office of the Prime Minister, Ministry of Privatization Administration, http://www.oib.gov.tr/.
27. Dr. Shafiq Ghabra, "The View from Kuwait," The Middle East Forum, March 18, 2000. For more on Kuwait, see U.S. Department of Commerce, "Commercial Overview," at http://www.arabchamber.com/arab-coutnries/Kuwait/commercial_overview.htm. See also International Monetary Fund, "IMF Concludes Article IV Consultation with Kuwait," Public Information Notice No. 00/27, April 4, 2000, at http://www.imf.org/external/np/sec/pn/2000/pn0027.htm.
28. See Energy Information Administration, "Saudi Arabia," January 2002, at http://www.eia.doe.gov/emeu/cabs/saudi.html. On Iran, see "Round Table," Middle East Studies, at http://www.netiran.com/Htdocs/Clpppings/Feconomy/990322XXFE01.html.
29. Mary Jordan, "Drilling Stakes at Mexico’s Heart," The Washington Post, January 25, 2002.
30. The Russian government retained 38 percent of GAZPROM shares.
31. Energy Information Administration, "Russia," at http://www.eia.doe.gov/emeu/pgem/ch4a.html.
32. John C. Hulsman, Ph.D., and James Phillips, "Forging a Durable Post-War Political Settlement in Iraq," Heritage Foundation Backgrounder No. 1593, September 24, 2002.
33. Bernard Hoekman and Patrick Messerlin, "Harnessing Trade for Development and Growth in the Middle East," Council on Foreign Relations, 2002.
The Road to Economic Prosperity for a Post-Saddam Iraq
09-25-2002
As the Bush Administration and Iraqi opposition groups plan the future of a post-Saddam Hussein Iraq without its menacing arsenal of weapons of mass destruction (WMD), economic issues loom large. Iraq’s economy has been grossly mismanaged for 40 years, and its people desperately need an alternative strategy to supplant the failed policies of its dictator. Sound economics are needed to help them rebuild their lives and their country after two decades of wars and four decades of repression under the current regime.
Saddam Hussein’s regime has succeeded in bankrupting the country even though it boasts the world’s second largest oil reserves after Saudi Arabia. Gross domestic product (GDP) for 2001, at the market exchange rate, is estimated to be only about one-third the level in 1989.1 Iraq also is hobbled by its $140 billion foreign debt.2 This devastation was wrought by such policies as the nationalization of the country’s chief export commodity, oil; extensive central planning of industry and trade; the 1982-1988 war against Iran; and the invasion of Kuwait, which precipitated the 1991 Gulf War. And Saddam still stubbornly refuses to meet the terms for lifting the economic sanctions that the United Nations has imposed on his regime.
Saddam also has succeeded in diverting at least $6.6 billion--primarily in revenues from smuggled oil and kickbacks--to his program to develop nuclear, chemical, and biological weapons and platforms for their delivery. He continues to support terrorist organizations, such as Hamas and the Popular Front for the Liberation of Palestine (PFLP), which the U.S. Department of State includes on its list of state sponsors of terrorism.3 Presumably, a post-war U.S. military presence in Iraq and Iraq’s future security forces will ensure that the new Iraqi government does not continue to develop WMD and support terrorism.
The future of Iraq depends not only on the ouster of the repressive regime, but also on the ability of the new Iraqi leaders to reverse the damage through policies that will spur real economic growth. The sooner the threat from Saddam’s WMD programs ends and the Iraqi economy recovers, the sooner the United States and the other security forces will be able to depart.
A double strategy of ensuring security and enabling economic growth will need international support. The Bush Administration should help Iraqi opposition leaders to develop an economic reform package for their country. The new post-Saddam federal government should develop a modern legal system that recognizes property rights and is conducive to privatization; create a public information campaign that prepares the people for structural reforms and privatization; hire expatriates and Western-educated Arabic speakers with financial, legal, and business expertise for key economic positions; deregulate prices, including prices in the utility and energy sectors; prepare state assets in the utility, transportation, pipeline, energy, and other sectors for privatization; keep the budget balanced and inflation, taxes, and tariffs low; liberalize and expand trade; and launch an effort to join the World Trade Organization (WTO).
The Tough economic Road Ahead
Iraq’s Lifeblood: Oil
As Chart 1 and Chart 2 show, the Iraqi economy is dominated by the oil sector, which provides more than 60 percent of Iraq’s GDP and 95 percent of its hard currency earnings.4 The economic sanctions imposed by the U.N. in the past decade to try to force Saddam to give up his weapons of mass destruction not only have not worked, but have helped to depress foreign trade.
According to the U.S. General Accounting Office (GAO), however, oil smuggling and illegal surcharges of 25 cents to 50 cents a barrel on legal oil purchases bolster Saddam’s regime. These illegal activities during 1996-2002 have provided unaccounted revenues of at least $6.6 billion,5 which Saddam has been free to spend to develop WMD and support terrorism.6 How much Saddam is actually spending on his deadly arsenal is hard to tell. The lack of information is so pervasive that the international financial institutions (IFIs), foreign government agencies, and private businesses that provide country economic analysis and data do not publish any official economic statistics or estimates for Iraq.7
This means that no recent data on Iraqi government consumption of GDP are available. In 1993, the most recent year for which data are available, government consumption amounted to 13.9 percent of GDP. According to the Economist Intelligence Unit,
Oil revenue has been the mainstay of government income since the 1950s. In 1968 the oil-based nature of the economy was reinforced by the introduction of a centralized socialist system, with the government regulating all aspects of economic life other than peripheral agriculture, personal services and trade.... Meanwhile, the state’s centrality to the economy has increased because the vast majority of imports and foreign exchange have been controlled by the government.8
The socialist Ba’ath government has demonstrated gross mismanagement of the oil sector. During the 1960s, exploration stopped and the sector was nationalized, which bred corruption and mismanagement. Oil production has barely increased since 1980. In 2001, oil production stood at approximately 2.8 million barrels a day. Today, Saddam’s regime controls oil exploration, extraction, refining, pipelines, ports, and all utilities, but oil export prices are set by the U.N. sanctions regime.
Taxing Imports, But Not Smugglers
The Economist Intelligence Unit notes that direct taxation has never been a preferred means of raising revenue in Iraq.9 As the International Monetary Fund (IMF) reports, "imports are restricted by [U.N.] sanctions. All imports subject to import duty are also subject to a customs surcharge.... Imports of commodities are normally handled by the public sector."10 Although the government of Iraq inspects and regulates all imports, a small private sector is involved in considerable smuggling and black market currency exchange activities.
Tough Investment Environment
Even though Iraq has permitted some foreign investment in its oil industry and private sector, mainly to help it rebuild from the damage of the Gulf War, it discourages most capital inflows. The legal system does not guarantee contracts. Inflation in Iraq remains high. From 1994 to 2001, Iraq’s weighted average annual rate of inflation was 80.4 percent; for 2001-2002, the rate has ranged from 60 percent to 70 percent.11
The government controls almost all prices, and rationing is the norm for items like food. The regime continues to distribute imported goods in what is essentially a highly centralized command economy structure, although it does retain the ability to skew the distribution of food and other items as a way to favor cronies.
There is no application of modern property rights protected by legislation and enforced through the courts. The Revolutionary Command Council (RCC) of Iraq holds all executive, legislative, and judicial authority. The RCC’s chairman, Saddam Hussein, appoints a council of ministers who are theoretically vested with executive authority, but in fact they are able only to rubber-stamp the decisions of the RCC and its chairman. The judiciary is not independent; consequently, there is no check on Saddam’s power to override any court decision.
AFTER Saddam: The outlook for Iraq and World Energy Markets
One thing is clear: Saddam’s regime, obsessed with control and coercion, is destroying the wealth of the Iraqi people. After liberation from this regime, it will be important for the Iraqi people to rebuild their economy, especially the oil sector, increase GDP and improve the standard of living, attract foreign investment, and improve government services through privatization.
The Cost of Rebuilding
The cost of rebuilding the country will be high. If Operation Desert Storm reconstruction costs are used as the basis for estimation, the cost of rebuilding Iraq after Saddam’s regime falls will be in the $50 billion to $100 billion range.12 Together with repaying the Iraqi foreign debt, the more realistic figure is $200 billion.13 However, as long as structural economic reforms are undertaken, Iraq’s vast oil reserves are more than ample to provide the funds needed to rebuild and boost economic growth.
The United States, through its executive directors at such IFIs as the IMF and World Bank, and other international governmental and non-governmental organizations, should begin to advise the future leaders of Iraq’s three primary ethnic groups to establish policies that will lead to a thriving modern economy. These policies should be based on "best practices" developed around the world in the 1990s, when the largest government privatizations in history occurred.
During the Iran-Iraq War and the post-Gulf War sanctions period, Iraqi petroleum production declined significantly. Saudi Arabia filled the void, generating a net profit of $100 billion. The funds it generated represent monies that should have benefited the Iraqi people.14 (See Chart 3.)
Following the demise of Saddam Hussein, it is unlikely that the Saudi kingdom would transfer a fraction of its production quota under the Organisation of Petroleum Exporting Countries (OPEC) regime to Iraq to compensate for those lost profits and facilitate its rebuilding. Iraq will need to ensure cash flow for reconstruction regardless of OPEC supply limitations. Combined with the potential privatization of the oil industry, such measures could provide incentive for Iraq to leave the OPEC cartel down the road, which would have long-term, positive implications for global oil supply.
Potential Benefits of Leaving the OPEC Regime
An Iraq outside of OPEC would find available from its oil trade an ample cash flow for the country’s rehabilitation. Its reserves currently stand at 112 billion barrels, but according to the U.S. Energy Information Administration, it may have as much as 200 billion barrels in reserve.15 Iraqi officials estimate even more: According to oil minister Amir Muhammad Rashad16 and Iraqi Senior Deputy Oil Minister Taha Hmud, the reserves can be as high as 270 billion to 300 billion barrels, making them equal to Saudi Arabia’s.17
Iraq’s 1990 output prior to the beginning of the Gulf War stood at 3.5 million barrels a day, while oil discovery rates on a few new projects in the 1990s were among the highest in the world: between 50 percent and 75 percent. Given Iraq’s own output projections, it may be capable of pumping as much as 6 million barrels (by 2010) to 7 million barrels (by 2020) a day, more than doubling current production levels.18 (See Chart 4.)
Depending on the dynamics of global economic growth and world oil output, Iraq’s increase in oil production capacity could bring lower oil prices in the long term. An unencumbered flow of Iraqi oil would be likely to provide a more constant supply of oil to the global market, which would dampen price fluctuations, ensuring stable oil prices in the world market in a price range lower than the current $25 to $30 a barrel. Eventually, this will be a win-win game: Iraq will emerge with a more viable oil industry while the world will benefit from a more stable and abundant oil supply.
PRIVATIZATION:
Learning from the past
Boosting oil exports and oil industry privatization by itself still may not be sufficient for growth over the long haul. To rehabilitate and modernize its economy, a post-Saddam government will need to move simultaneously on a number of economic policy fronts, utilizing the experience of privatization campaigns and structural reforms in other countries to develop a comprehensive policy package.
Several lessons from other countries’ privatization experiences are particularly relevant to Iraq’s situation. Specifically:
LESSON #1: Privatization works everywhere
Between 1988 and 1993, 2,700 state-owned businesses in 95 countries were sold to private investors.19 In 1991 alone, $48 billion in state assets were privatized worldwide.20 Privatizations led to higher productivity, faster growth, increased capacity, and cheaper services for consumers.
In one study, the World Bank reviewed 41 firms privatized by public offerings in 15 countries. This review demonstrates that privatization will increase the return on sales, assets, and equity. As privatized firms grow, they often increase their workforces. In another study, the World Bank reviewed 12 privatization efforts in four countries, and its findings also demonstrate why privatization is good for the economy as a whole, no matter where it is implemented.21
LESSON #2: Privatization works best when it is part of a larger structural reform program
Privatization needs to be accompanied by reforms to open markets, removal of price and exchange rate distortions, reductions in barriers to entry, and elimination of monopoly powers. In addition to these policies, governments should enact legislation that protects consumer welfare.22 Such successful structural reform and privatization programs were implemented in the 1990s in Poland, Hungary, the Czech Republic, and the three Baltic States, particularly Estonia.
LESSON #3: Privatization of large enterprises requires preparation
Successful privatizations of large enterprises may necessitate such advance actions as breaking them into smaller competitive units, recruiting experienced private-sector managers, adopting Generally Accepted Accounting Principles (GAAPs), settling past liabilities, and shedding excess labor.23
LESSON #4: Transparency and the rule of law are critical
Opaque privatization and allegations of corruption and cronyism provide political ammunition to the opponents of market-based policies. To eliminate those problems and be successful in its privatization efforts, the government must adopt competitive bidding procedures, objective criteria for selecting bids, and protocols for hiring independent privatization management firms, and establish a privatization authority with minimal bureaucracy to monitor the overall program.24
LESSON #5: A minimal safety net is necessary to support laid-off workers and prevent social unrest
Buyouts of the state-owned enterprise’s management and labor force, as well as distribution of some of the privatized firm’s shares to its management and labor force, can go a long way toward alleviating social tensions that might undermine public support for privatization.
LESSON #6: Privatization is taking place in the Middle East
Privatization is no longer an affair of affluent or middle-income countries. From Margaret Thatcher’s Great Britain, privatizations of state-owned assets and structural reform policies spread to many countries in Africa, Asia, and Latin America, including the Philippines, Malaysia, Jamaica, and Sri Lanka. An internal study of World Bank managers in the Middle East and North African department found that many were enthusiastic in supporting privatization efforts in their regions.25 A number of Middle Eastern states, including Iraq’s neighbors Turkey26 and Kuwait,27 are pursuing privatization of their telecommunications, transportation, utilities, and oil sectors and services, while others, such as Iran and Saudi Arabia, have declared their intentions to privatize assets and are in the policy discussion stage.28
Lessons from Oil and Gas Privatizations
Oil privatization remains a politically painful issue in many countries. Economic nationalists claim oil is a "national patrimony,"29 whereas socialists and radical Islamists call private and foreign ownership of natural resources "imperialist" and other such pejoratives. Such rhetoric has one goal: to keep a precious and profitable resource in the hands of the ruling elite, be it a communist party politburo, a dictator, or a group of mullahs.
In fact, oil is a commodity and should be managed according to the laws of economics and best business practices. Even a country as fiercely nationalist as Russia recognizes this and is undertaking the largest oil sector privatization in history. The lessons from past experience in oil privatizations are also positive. Specifically:
ENERGY SECTOR LESSON #1: First "entitize," then privatize
The Conservative government of Margaret Thatcher successfully privatized some British oil assets in the 1980s. In the early 1990s, Russia carved up its state-run oil ministry into regional monopolies. It created joint stock companies, later selling stock to the Russians, first, and then to foreigners. The Ministry of Privatization distributed some stocks to managers and workers in order to smooth the path to privatization. Since privatization, many of these stocks, such as in LUKoil, Tyumen Oil Co. (TNK), and Yukos, have risen in price considerably.
The Russian government did not go all the way, however. For example, it did not privatize Transneft, a company that controls its pipeline infrastructure, or fully privatize some oil companies, such as Slavneft and Zarubezhneft and GAZPROM, the giant natural gas monopoly that boasts the world’s largest natural gas reserves and controls a 90,000 km pipeline network.30 The partial privatization effort has led to friction between state-controlled entities and the privatized-publicly held companies over pipeline access.
ENERGY SECTOR LESSON #2: Oil privatization generates high economic efficiency and market capitalization
The results of Russian oil privatization are fascinating: While the privatized Russian oil companies significantly expanded their production and exports and significantly increased market capitalization, GAZPROM did not. The government-controlled pipeline operator also has had difficulty providing adequate pipeline capacity to the quickly developing oil sector.
Meanwhile, privatized Russian companies not only have attracted Western portfolio investment, but also have been more successful than GAZPROM in attracting capital for foreign direct investment. Several leading Russian publicly traded oil companies also transformed their antiquated, Soviet-era accounting practices to the GAAP standard, hired Western managers, and became centers for dissemination of Western management and accounting skills across Russia’s industrial sectors. Moreover, Russia’s largest oil companies, such as LUKoil and Yukos, are fast becoming major global oil players. LUKoil recently purchased 1,300 Getty gas stations in the United States, and LUKoil and Yukos are selling American Depository Receipts (ADRs) on the New York Stock Exchange.
ENERGY SECTOR LESSON #3: Keep it clean, and keep it profitable
The major problem with the Russian oil privatization effort has been its relative opacity, especially in the early 1990s. Scandals included the oil-for-shares debacle in which Boris Yeltsin’s government took loans from banks in exchange for shares of the oil companies. The government never repaid the loans, and the companies became the property of politically connected banks.31 The insider dealing provoked a political row that discredited privatization in the public’s eyes.
Other problems in Russia have been privatization through vouchers and the denial of access to foreigners in early privatization stages in order to assuage nationalists in the parliament. These policies resulted in much lower revenues (by as much as a factor of 10) than the government could have received for the privatized assets.
AN ECONOMIC REFORM PLAN FOR POST-SADDAM IRAQ
The Bush Administration should provide leadership and guidance for the future Iraqi government to undertake fundamental structural economic reform. This process should include a massive, orderly, and transparent privatization of state-owned enterprises, especially the restructuring and privatization of the oil sector. These steps would greatly enhance needed access to global capital markets.
U.S. political commitment will be needed to motivate international organizations to provide appropriate expertise and technical assistance. Inter alia, these organizations could include IFIs such as the International Monetary Fund and the World Bank, and would likely encompass such diverse non-governmental organizations (NGOs) as the National Endowment for Democracy, the Center for International Private Enterprise, the American Bar Association, and the AFL-CIO.
In particular, the Bush Administration should convince the future federal government of Iraq to come to an agreement on how oil revenues are taxed and proceeds are distributed to the country’s three distinct ethnic regions--Shiite Arabs, the Kurds, and the Sunni Arabs. Successfully privatizing the country’s oil fields, refining capacity, and pipeline infrastructure will mean higher efficiencies and higher tax revenues in the oil sector.
What a New Iraqi Government Must Do
The Administration, the IFIs, and other economic decisionmakers should prepare and provide support for a future federal Iraqi government to:
Develop a modern legal environment that recognizes property rights and is conducive to privatization. Protection and enforcement of property rights and access to successful alternative dispute resolution mechanisms are vital policies for fostering economic growth and foreign investment. Iraq also will need to build modern and well-functioning regulatory and supervisory frameworks and institutions in the oil and gas, banking, securities, and financial services areas. Such a legal and business environment should be equitable and non-discriminatory, and it should not distinguish between Iraqi-Arab nationals and foreigners.
The U.S. government, its allies, and international organizations should be ready to provide technical assistance in the legal, economic policy, and public administration areas. Working cooperatively with the United States, the European Union, and the IFIs, the post-Saddam government of Iraq will need to boost the court system and the rule of law. It will need to provide legislation to allow the use of broad alternative dispute resolution mechanisms outside of Iraq, as the local laws may change too quickly (and the local court system too slowly) for local judges to be able to follow and apply new legislation. Education for judges about the latest legal developments in the economic area will also be important. The courts will have to boost the enforcement of court rulings independent of the executive branch. The central government will need to pay judges and court employees adequate salaries to keep corruption in check.
Educate and prepare the Iraqi population for structural reform and privatization through a public information campaign.
Only when the public, including key stakeholders, elites, and the population at large, understand the goals of economic reform will they become more receptive to change and less likely to succumb to the anti-Western demagoguery that undoubtedly will emanate from the remnants of the discredited Ba’ath establishment and Islamic fundamentalists. The new Iraqi government will need to use the media and the educational system to explain the benefits of privatization and the changes to come in order to ensure broad public support.
Hire Iraqi expatriates, as well as other Western-educated Arabic speakers with financial, legal and business backgrounds, for key positions in government.
Examples of this approach in Eastern Europe demonstrate that Western-educated experts can implement economic reforms better than a former socialist bureaucracy can. Younger, well-educated technocrats have an advantage in their ability to communicate effectively with both locals and Westerners, including international providers of technical assistance. In implementing structural reform, the best results are achieved by teams of local and Western experts working together.
Deregulate prices in Iraq, including prices in the utilities and energy sector.
Quick price deregulation will be key to ensuring an adequate supply of goods for consumers and ending rationing. It will contribute to increased exports of oil and gas, which in turn will provide additional earnings and tax revenues for the government to share among the regional and local governments.32
Prepare to privatize assets in the industrial, utility, telecommunications, banking, transportation, port and airport, and pipeline and energy sectors.
The post-Saddam Iraqi government should prepare to privatize government assets by creating government-held companies instead of ministries, issuing stock for these companies, and implementing guidelines that allow for the introduction of modern management practices and GAAP standards. The central government should hire consulting firms to execute comprehensive assessments of companies it wishes to privatize in order to itemize inventory, to take stock of assets and liabilities, and possibly to settle some of their debts in preparation for privatization.
In particular, the Oil Ministry and regional oil companies should be restructured to transform them into attractive government-owned oil companies as an intermediary stage before initial public offering (IPO). For example, one company may focus its work in the southern portion of the country, another in the central region (around Baghdad) and the Western desert, and the third around Kirkuk in the North. Three more companies may be created, one to operate the pipelines, the second to operate the refineries, and the third to develop natural gas.
The stages of preparation for privatization could include:
Taking inventory of assets and liabilities;
Exercising necessary efficiency-improvement steps, such as retraining and layoffs (with compensation);
Introducing GAAP and other modern financial and management practices;
Signing international conventions against nationalization of foreign investments, such as the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the Washington Convention), the World Bank’s Convention on the Multilateral Investment Guarantee Agency (MIGA), and the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (1958);
Issuing company stock;
Running the companies under new, transparent, and efficient management for at least two years; and
Taking companies on road shows and completing IPOs in major financial centers such as New York and London, and floating stock in international markets.
Given adequate implementation of each of these stages, the time frame for this privatization effort could be four to five years after the new government is installed by the people of Iraq. During this time, the U.S. government and the IFIs would have to ensure that the political will for privatization remains intact. Management and accounting consultants hired by the new Iraqi government would have to ascertain that the program is transparent and on track.
Moreover, after privatization, Iraq must demonstrate that it is not losing tax revenue and that the government’s oil revenue is distributed among the regions equitably and efficiently, allocated to the worthy causes, and not wasted, looted, or abused, which could undermine the entire economic reform program.
Keep the budget balanced and inflation, taxes, and tariffs low.
International experience demonstrates that lower and flatter taxes (in the range of 20 percent or less), applied uniformly and in a non-discriminatory fashion, are an important investment magnet, especially for a country like Iraq that is rich in natural resources. Moreover, oil revenues will allow Iraq to keep the budget balanced and import tariffs low. Such a stable macroeconomic policy is likely to attract massive investment from a variety of sources, including the Middle East and Asia, not just the West, and boost income and employment.
Liberalize and expand trade, and launch an effort to join the World Trade Organization.
A study by the Council on Foreign Relations has demonstrated that a majority of Middle Eastern countries suffer from high import tariffs, red tape, and corruption--problems that depress GDP growth.33 Elimination of import taxes and tariffs and implementation of trade liberalization would provide an additional economic development engine for Iraq. The Bush Administration should provide technical assistance for trade liberalization and support Iraq’s eventual membership in the WTO.
Conclusion
For the Iraqi people, structural economic reform and comprehensive privatization of government assets is necessary to stimulate recovery and provide stability after years of disastrous economic policies under Saddam Hussein. The winning strategy of structural reform and privatization also would benefit the industrial world, the United States and its allies, countries of the Middle East, and the developing world.
Iraq’s return to global markets would allow for a more abundant and stable energy supply, a higher cash flow for the Iraqi people, and numerous business opportunities for the region and the world. Iraq’s restructuring and privatization of its oil and gas sector could become a model for oil industry privatizations in other OPEC states as well, weakening the cartel’s influence over global energy markets.
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1. U.S. Department of Energy, Energy Information Administration, "Iraq: Country Overview," at http://www.eia.doe.gov/emeu/cabs/iraq.html.
2. Ibid.
3. U.S. Department of State, Office of the Coordinator for Counterterrorism, "Appendix B: Background Information on Terrorist Groups," Patterns of Global Terrorism-2000, April 30, 2001, at http://www.state.gov/s/ct/rls/pgtrpt/2000/2450.htm.
4. Energy Information Administration, "Iraq: Country Overview."
5. U.S. General Accounting Office, U.S. Confronts Significant Challenges in Implementing Sanctions Against Iraq, GAO-02-625, May 2002, at http://www.gao.gov/atext/d02625.txt.
6. Alix Freedman and Steve Stecklow, "Secret Pipeline: How Iraq Reaps Illegal Oil Profits," The Wall Street Journal, May 2, 2002.
7. Gerald P. O’Driscoll, Jr., Edwin J. Feulner, and Mary Anastasia O’Grady, "Iraq," in 2003 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., forthcoming).
8. Ibid.
9. Economist Intelligence Unit, "Country Report, July 2002."
10. O’Driscoll et al., "Iraq," 2003 Index of Economic Freedom.
11. Ibid.
12. Bill Gertz, "Tab to Rebuild Iraq, Kuwait Estimated at $100 Billion," The Washington Times, March 4, 1991. More recent estimates confirm this range.
13. Julian Borger, "Post-Saddam Iraq Will Cost You, U.S. Warned," The Guardian, August 2, 2002, at http://www.guardian.co.uk/bush/story/0,7369,767755,00.html. Lawrence Lindsey, Director of the National Economic Council, is quoted as estimating a cost for the Iraq war of between $100 billion and $200 billion. It is unclear what is included in that figure. See Bob Davis, "Bush Economic Aide Says Cost of Iraq War May Top $100 Billion," The Wall Street Journal, September 16, 2002, p. 1.
14. "Round Table on Declining Oil Prices and Its Political Consequences in the Middle East," Middle East Studies, Vol. 6, No. 1 (Spring 1999), pp. 5-36, at http://www.netiran.com/Htdocs/Clippings/Economy/990322XXFE01.html.
15. Energy Information Administration, "Iraq: Country Overview," p. 14.
16. "Iraq’s oil reserves bigger than Saudi Arabia, Minister Says," BBC Monitoring, August 6, 2001, Al-Jumhuriyah Web site in Arabic, August 4, 2001.
17. "Iraq’s Oil Industry: An Overview," Platts, at http://www.platts.com/features/Iraq/oiloverview.shtml.
18. "Iraq Building E&D Project List for Post-U.N. Sanctions Period," The Oil and Gas Journal, Vol. 95, No. 15 (April 14, 1997).
19. Energy Information Administration, "Privatization and the Globalization of Energy Markets," Energy Plug, at http://www.eia.gov/emeu/plugs/plpgem.html.
20. Madsen Pirie, "Privatization," Concise Encyclopedia of Economics, at http://www.econlib.org/library/encl/privatizaiton.html.
21. World Bank, "Privatization: Eight Lessons of Experience," Policy Views from the Country Economics Department, July 1992, at http://www.worldbank.org/html/prddr/outdeach/or3.htm. For the latest annual update on global privatizations, see Reason Public Policy Institute, "Privatization 2002: Putting the Pieces Together," at www.rppi.org/apr2002.pdf.
22. World Bank, "Privatization: Eight Lessons of Experience."
23. Ibid.
24. Ibid.
25. Ibid.
26. See information at Republic of Turkey, Office of the Prime Minister, Ministry of Privatization Administration, http://www.oib.gov.tr/.
27. Dr. Shafiq Ghabra, "The View from Kuwait," The Middle East Forum, March 18, 2000. For more on Kuwait, see U.S. Department of Commerce, "Commercial Overview," at http://www.arabchamber.com/arab-coutnries/Kuwait/commercial_overview.htm. See also International Monetary Fund, "IMF Concludes Article IV Consultation with Kuwait," Public Information Notice No. 00/27, April 4, 2000, at http://www.imf.org/external/np/sec/pn/2000/pn0027.htm.
28. See Energy Information Administration, "Saudi Arabia," January 2002, at http://www.eia.doe.gov/emeu/cabs/saudi.html. On Iran, see "Round Table," Middle East Studies, at http://www.netiran.com/Htdocs/Clpppings/Feconomy/990322XXFE01.html.
29. Mary Jordan, "Drilling Stakes at Mexico’s Heart," The Washington Post, January 25, 2002.
30. The Russian government retained 38 percent of GAZPROM shares.
31. Energy Information Administration, "Russia," at http://www.eia.doe.gov/emeu/pgem/ch4a.html.
32. John C. Hulsman, Ph.D., and James Phillips, "Forging a Durable Post-War Political Settlement in Iraq," Heritage Foundation Backgrounder No. 1593, September 24, 2002.
33. Bernard Hoekman and Patrick Messerlin, "Harnessing Trade for Development and Growth in the Middle East," Council on Foreign Relations, 2002.
Iran’s Claim Over Caspian Sea Resources Threaten Energy Security
09-05-2002
The need for Washington to focus its attention on energy security and diversification became clear as the war on terrorism began. The U.S. should strongly oppose Iran’s threatening military actions to claim a larger portion of the energy-rich Caspian Sea. The Caspian basin, a land-locked body of salt water bordered by Iran, Azerbaijan, Russia, Kazakhstan, and Turkmenistan, harbors billions of barrels of proven oil reserves and over 200 billion barrels of potential reserves.2 (See Table 1.) The market value of that oil could exceed $5 trillion, according to some estimates. The sea also may hold up to 325 trillion cubic feet of natural gas. Combined with Russia’s resources, by 2010 the region could supply up to one half of the energy resources now provided by the Middle East.
Last year, Iran--a known sponsor of terrorism--began an aggressive campaign to claim a greater portion of the Caspian Sea and its resources. Its leaders have asserted that Iran has territorial and treaty rights to as much as 20 percent of the Caspian Sea surface area and seabed, significantly more than its long-recognized sector comprising about 12 to 14 percent.3 (See Map 1.) Tehran’s use of air and naval forces to threaten a U.S.-British company exploring a field in Azerbaijan’s sector jeopardizes, in addition to energy production and energy security, Western investments and the economic development of the post-Soviet states in that region.
The Caspian Sea region is expected to produce and export more oil in the future. (See Table 2.) This would benefit not only Azerbaijan, Kazakhstan, and Turkmenistan, which depend almost exclusively on oil revenues, but also Russia and Iran, which have major oil deposits in their sectors of the seabed. For the West, oil from this region could bypass the politically risky bottleneck of the Persian Gulf, helping to lessen its dependence on OPEC nations.
Iran’s actions should not be tolerated. Washington should promote peace and security in the Caspian region to ensure the flow of foreign investments to energy resource development and transport to global markets. The Bush Administration should voice its strong opposition to Tehran’s attempts to bully its neighbors and expand Iran’s claims to Caspian Sea energy resources. It should support a U.S. Security Council resolution calling for the peaceful settlement of all Caspian Sea disputes. And it should work with its NATO allies to help Azerbaijan expand its military, coast guard, and border control capabilities.
Iran’s Threat to Peace in the Caspian Region
Iran’s use of military force to assert its claim to part of Azerbaijan’s sector of the Caspian Sea undermines energy security and the future of Caspian oil and gas development. Iran not only has violated its neighbor’s air space and territorial waters, but on one occasion even amassed ground troops on their border.4
These aggressive actions were a blatant violation of international law. On July 23, 2001, an Iranian warship and two jets forced a research vessel working on behalf of British Petroleum (BP)-Amoco in the Araz-Alov-Sharg field out of that sector. That field lies 100 kilometers (60 miles) north of Iranian waters. Due to that pressure, BP-Amoco immediately announced that it would cease exploring that field, which it did by withdrawing the research vessels.5
Iran’s leaders have stepped up their claims. Deputy Foreign Minister Ali Ahani has stated that no energy exploitation by bordering countries should take place in disputed parts of the sea.6 His superior, Foreign Minister Kamal Kharrazi, escalated the rhetoric and declared that no bordering country has the right to exploit the Caspian energy reserves "before a legal status is established for the sea."7 Senior Iranian politicians even remarked that Azerbaijan used to be an Iranian province, implying that Iran’s actions are therefore justified.8
Thus far, Azerbaijan has acquiesced to the pressure from Iran. During a May 2002 visit to Iran, Azerbaijani President Heydar Aliev agreed to stop exploration in the disputed oil field of Araz-Alov-Sharg until the border issue is settled--a small but significant achievement for Iran. As Aliev departed Tehran, Iranian President Mohammad Khatami reiterated Iranian claims for 20 percent of the territory and the shelf of the Caspian Sea, stating, "We have rights in the Caspian Sea and are determined to defend those rights."9 His statement cast a long shadow over the earlier Azerbaijani announcement that Baku and Tehran had agreed to the "median line" demarcation, which extends national borders to the middle line of the sea, giving Iran less than the one-fifth share it demands.10
While the Araz field holds but a small fraction of the total deposits in the sea, Iran’s action threatens all Caspian basin energy enterprises. U.S. and multinational oil companies have invested billions to develop the Caspian resources and are involved in a number of consortia in the region. This energy development has occurred without intervention from Iran in the past.
Iran’s military action against an international company, and its intransigence on maritime border issues, endanger the ability of companies like BP-Amoco to explore the Caspian basin for oil and therefore threaten U.S. investments. (See Table 3.) A threat to current or future oil supplies could drive up prices and scare off investors. Oil companies active in the region may decide to forgo exploration and therefore revenue--a sizeable sacrifice if the global economy recovers or demand starts rising because of anti-terrorist military actions. At stake are over 200 billion barrels of oil with a current market value of more than $5 trillion, as well as trillions of cubic feet of natural gas. (See Table 2 and Table 3.)
The Iranian action is particularly troubling in that it targeted a field explored by a major U.S.-British international oil company as well as companies from Norway (Statoil), Azerbaijan (SOCAR), and Turkey (TPAO). Iran has not, however, targeted any Russian or Arab interests. It is also significant that the attack came during the final stages of planning for construction of the strategically important Baku-Tbilisi-Ceyhan pipeline, which will make Turkey (not Iran) the main outlet for Caspian oil. The pipeline would reduce Iran’s control over oil exported from the Caspian.
Iran also is carefully expanding defense ties with Armenia, a country technically at war with Azerbaijan. With Iranian instigation, Armenia would be capable of disrupting and threatening the Baku-Tbilisi-Supsa and future Baku-Tbilisi-Ceyhan pipelines, since a part of their route is located less than 30 miles from the Armenian-Azerbaijani ceasefire lines.
Until Iran ends its support for terrorism, and its bullying, it should not be invited to participate in resource-sharing agreements in the Caspian beyond its territorial waters. The latest round of Iranian muscle-flexing endangers billions of dollars already invested in Caspian energy projects and could discourage billions more in future investments.
IRAN DISPUTES LEGAL STATUS OF CASPIAN SEA
Iran has disputed not only the maritime and seabed boundaries demarcating its sector of the Caspian Sea, but also the sea’s legal status since the collapse of the Soviet Union. The dispute focuses on the question of whether the Caspian is a sea or a lake and has implications for both the applicability of the U.N. Convention on the Law of the Sea and negotiation of the boundary demarcation regime affecting the littoral states’ rights to significant oil deposits.1
The Caspian Sea is the largest body of salt water on Earth with no natural connection to the ocean. Land borders between Iran and the Russian Empire-USSR were delineated and demarcated in the 19th century and remained unchanged until the Soviet Union collapsed in 1991. However, under 1921 and 1940 treaties between communist Russia and Iran, sea and seabed boundaries were not established.2 Moreover, those treaties defined the rules for shipping and fishing, not for oil or gas exploration. The USSR was able to explore the Caspian Sea for oil without interference from Iran.3 According to experts like Professor Bernard Oxman, the treaties also prohibited Iran from deploying naval assets in the Caspian Sea.4
After the Soviet Union’s collapse, the regime allowing unhindered oil exploration applied to the USSR’s successor states in the region--Russia, Azerbaijan, Kazakhstan, and Turkmenistan. These countries are involved in peaceful negotiations to determine the maritime boundaries for their sectors of the seabed. Most legal scholars agree that a combination of customary international laws of the sea and rules regulating lakes should guide decisions regarding the Caspian’s maritime boundaries.5 They base their determination on decisions made by the International Court of Justice regarding the boundaries of Lake Constance between Germany and Austria and in the Bay of Fonseca in the Pacific Ocean.
Iran’s long-recognized sector of the Caspian Sea covers 12 percent to 14 percent of its surface area. The collapse of the USSR has changed neither the size nor the status of the Iranian sector. However, Iran now demands either a condominium (or joint sovereignty) that would allow it to claim equal proceeds from all energy developed at the sea bed, regardless of its investment in that development,6 or the expansion of its sector to at least 20 percent of the surface area and seabed. That territory includes part of the oil-rich Azerbaijani sector. Many legal scholars agree that Iran’s claims are backed by neither legal precedent nor law.7
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1. Energy Information Administration, "Caspian Sea Region: Legal Issues," July 2002, at http://www.eia.doe.gov/emeu/cabs/casplaw.html.
2. Theodore C. Jonas, Esq., "`Parting the Sea’: Caspian Littoral States Seek Boundary Disputes’ Resolution," Oil and Gas Journal, May 28, 2001, p. 66.
3. For detailed treatment of the legal aspects, see Bernard H. Oxman, Professor of Law, University of Miami School of Law, "Caspian Sea or Lake: What Difference Does It Make," Caspian Crossroads, Vol. I, No. 4 (Winter 1996), at
http://www.usazerbaijancouncil.org.
4. Ibid.
5. Jonas, "`Parting the Sea’," and Oxman, "Caspian Sea or Lake: What Difference Does It Make."
6. BBC News, "Azerbaijan Protests Over Iranian Ship Interception."
7. See, for example, Brice M. Clagett, Esq., "Ownership of Seabed and Subsoil Resources in the Caspian Sea Under the Rules of International Law," Caspian Crossroads, Vol. I, No. 3 (Fall 1995).
Russia’s Equivocating Policy on Iran
During Iranian Deputy Foreign Minister Alhani’s hasty visit to Moscow in August 2001, the two countries reiterated that the Soviet-Iranian treaties signed in 1921 and 1940 remain in place.11(See text box, "Iran Disputes Legal Status of Caspian Sea.") Iran also remains an important buyer of Russian arms and military technology.12 Their relationship was buoyed under former Prime Minister Evgeny Primakov, who saw Iran as a potential partner in Moscow’s efforts to offset the influence of the United States in Central Asia and the Middle East. And both Moscow and Tehran have reason to try to block any trans-Caspian oil and gas pipelines that would go in an east-west direction, bypassing their territory.13 However, each would prefer diverting the energy flows either north or south to their own respective territory, creating a level of competition between them for those resources.
Russia is also now a part of the U.S.-led anti-terrorism coalition. At the August 2001 summit of leaders of the Commonwealth of Independent States (CIS), President Vladimir Putin called the land-locked Caspian "the sea of peace and tranquility" and the Iranian use of force in the Caspian "impermissible."14 His rapprochement with the United States and its European NATO allies in the war against terrorism signaled that the Kremlin would continue a multi-vector policy, remaining friendly to the West and multinational oil companies while attempting to direct the flow of Caspian oil and gas to its pipelines.
Some Moscow energy analysts believe that Russia--a country saddled with a large national debt where energy exploration is costly--would fare better in a tight energy market with oil prices above $20 per barrel. Former Russian Energy Minister Sergey Generalov believes this price is the point at which exploration in the Caspian Sea becomes profitable.15 Plans to expand the north-south transportation corridor between Europe and the Persian Gulf and to route Caspian oil through Russia and Iran could mean hundreds of millions of dollars in oil transit revenue for those two governments.16
The Kremlin faces a real dilemma following Iran’s use of naval power in the Caspian Sea last year. It must decide whether to side with the West and Azerbaijan, its CIS ally, or with its arms customer, Iran. Maintaining an equivocating policy will only encourage Iran’s intransigence, which would threaten the flow of future foreign investments in Caspian Sea exploration and production.
As U.S.-Russian ties develop, the Kremlin has done little to allay Tehran’s fears that the condominium hinted at by Presidents Putin and Khatami in March will turn out to be short-lived. At the same time, Russia has not fully supported the position of its CIS allies; it did not endorse, for example, Azerbaijani President Aliev’s statement that the post-Soviet Caspian littoral states should negotiate among themselves while excluding Iran.
In October 2001, Iranian Defense Minister Admiral Ali Shamkhani signed a multibillion-dollar contract with Russia for a supply of sophisticated weapons to Tehran.17 This may further Russia’s interest in engaging Iran as a potential strategic partner and keeping tensions in the region simmering, even though a 1995 secret agreement signed by then-Russian Prime Minister Victor Chernomyrdin and U.S. Vice President Al Gore called for limiting advanced arms sales from Russia to Iran.18 Putin renounced that agreement in fall 2000.19
The relationship developing between Russia and Iran is similar to the Sino-Russian attempt to construct a condominium in Central Asia with the June 2001 "Shanghai Six" agreement and the July 2001 Sino-Russian Treaty of Friendship. Moscow also was not happy with the demonstration of air power exhibited by Turkey on August 23, 2001, when 10 F-16s accompanied Turkish Chief of Staff General Hussein Kivrikoglu on a visit to Azerbaijan.20 The old Soviet and Primakov-era paradigms were based on the principle that it was in the interests of Iran and Russia to keep the United States and Turkey from expanding their influence in the area; but Russia now is positioned on the side of the United States and the antiterrorism coalition, and growing Turkish-Russian economic ties are helping to alleviate their historic rivalries. Turkey will be a major customer of the Russian gas company, Gazprom, when it starts receiving natural gas through the Blue Stream pipeline across the Black Sea.
Thus, Russia is attempting to juggle complex and often competing interests in this key geo-economic Caspian region. It wants to remain the predominant military power there and has begun flexing its muscles. For example, it has boosted the capabilities of its Caspian flotilla even while allowing the rest of the Russian Navy to deteriorate. The flotilla conducted live-fire maneuvers during Putin’s visit to Baku in February 2001, a demonstration of gunboat diplomacy predating Iran’s actions in the Caspian by six months.21
In May 2002, following a summit of Caspian states in Ashgabat at which Turkmenistan failed to produce an accord on dividing the sea’s resources, President Putin ordered Russia’s army, air force, and Caspian fleet on the largest maneuvers in the area in post-Soviet history. These maneuvers were conducted in August 2002 and involved 60 surface ships, 30 aircraft, and 10,000 troops. Russian, Azerbaijani, and Kazakhstani forces have participated.22 The exercise may be the strongest signal thus far that Russia will attempt to assert its own geopolitical interests in the energy-rich region. The maneuvers spread along the whole northern and central sections of the Caspian Sea and included combined operations and simulated interaction between the Caspian Fleet, the Caucasus Military District, and possibly elements of the newly created Urals military district.23
Internal CIS Realpolitik would appear to dictate that the Kremlin would protect its allies, even against Iran, while discouraging them from turning to the West. Its allies will judge Moscow based on its ability to guarantee stability to allow the effective demarcation of the Caspian Sea sectors. Significantly, Washington’s growing interest in the Azeri-Iranian conflict could lead Moscow to seek U.S.-Russian consultations, even cooperation, to ease tensions in the region.
Assuring Peace in the Caspian Region
The war against terrorism necessitates the protection of U.S. energy and security interests. The provocative actions by Iran against a U.S.-British international oil company exploring the Caspian basin jeopardize those interests. Iran is a state supporter of terrorism whose oil revenues are bolstering its ballistic missile and weapons of mass destruction programs. In order to keep the peace in the Caspian region and protect Western investments as well as access to vital energy resources, the Bush Administration should:
Call for the demarcation of the Caspian Sea territorial boundaries along the "median line" proposed by all CIS states. A senior U.S. foreign policy official should issue a statement calling for peace and security in the Caspian region and warning Tehran to refrain from using military force to threaten energy exploration projects in the other sectors. Such a statement also should promote the rapid and commercially viable development of Caspian energy resources based on current and future production-sharing agreements.
Seek a U.N. Security Council resolution calling for the peaceful settlement of Caspian Sea disputes. In this context, the Administration should seek support from U.S. allies in Europe, particularly Great Britain, which with its European Union allies (such as France and Germany) also should demand that Iran refrain from any and all use of force. President Bush should ask President Putin, who has called for the peaceful settlement of claims in the Caspian Sea, to involve Moscow in the drafting of the U.N. resolution.
Expand Azerbaijan’s military capabilities through its ties with NATO and the Partnership for Peace (PFP). Azerbaijan would benefit from the expertise of NATO and others in learning how to strengthen its capabilities to protect its own borders. Programs may be undertaken under the PFP umbrella and could include developing an integrated military-civilian air traffic control system; developing and training its coast guard and border guards; upgrading its command, control, communications, and intelligence (C3I) systems to NATO standards; and developing military interoperability with NATO. Azeri officers, especially border guards and coast guard-navy officers, should be invited to train at NATO war colleges, especially in Turkey since they would face little to no language barrier.
Expand political and economic ties with Armenia. The Armenian military is capable of disrupting the flow of oil from the Caspian Sea to ports on the Black Sea and the Mediterranean. Though the Bush Administration was correct in sanctioning Armenian companies for smuggling military and dual-use technology to Iran, Armenia now feels isolated, and its government is moving toward closer ties with Iran. The United States should work to expand relations with Armenia in economic and security areas in order to deny Iran an important ally in the Caucasus region.
CONCLUSION
Energy development in the oil- and gas-rich Caspian Sea basin would help ensure energy security, a key issue in the war against terrorism. It also would promote the independence and economic development of post-Soviet states in that region. But Iran’s gunboat diplomacy last year could threaten energy development by deterring foreign investment. The United States should call on Iran to stop its aggressive behavior, and it should mobilize its allies to work for a peaceful settlement of the territorial disputes over the maritime borders of the states bordering the Caspian Sea.
1. The author thanks Heritage Foundation interns Elena Simonova and Anar Akhmadov for their assistance with the research for this paper.
2. See, for example, Energy Information Administration, at http://www.eia.doe.gov/emeu/cabs/caspgrph.html#TAB1; International Energy Agency, at http://www.iea.org/pubs/studies/files/caspian/overview.htm; and Ray Leonard, presentation at Center for Strategic and International Studies, at http://www.csis.org/energy/020600_leonard_files/frame.htm.
3. Michael Lelyveld, "Russia: Iran Seeks Assurances on Caspian Division," Radio Liberty-Radio Free Europe Newsline, August 14, 2001, at http://www.rferl.org/nca/features/2001/08/14082001115154.asp, and "Russia: Moscow May Intervene in Caspian Dispute," Radio Liberty-Radio Free Europe Newsline, August 3, 2001, at http://www.rferl.org/nca/features/2001/08/03082001113745.asp.
4. Mahir Iskenderov and Tim Wall, "Caspian Sea Disputes Flare, Raising Doubts About Oil and Gas Exploration," Eurasianet.org, August 7, 2001, at http://www.eurasianet.org/departments/insight/articles/eav073101.shtml.
5. BBC News, "Azerbaijan Protests Over Iranian Ship Interception," July 24, 2001.
6. "Iran’s Deputy Foreign Minister to Arrive in Azerbaijan," Pravda Online, August 27, 2001, at http://english.pravda.ru/cis/2001/08/27/13387.html.
7. Lelyveld, "Russia: Iran Seeks Assurances on Caspian Division."
8. "Storm in the Precious Teacup," The Economist, August 2, 2001, at http://www.globalpolicy.org/security/natres/oil/centralasia/2001/0802casp.htm.
9. "Iran to Defend Rights in Caspian Rumpus," OGN Online, Vol. 19, No. 33 (August 26 - September 1, 2002), at
http://www.oilandgasnewsworldwide.com/News.asp?Article=6146.
10. Michael Lelyveld, "Caspian: Azerbaijan, Iran Seek New Phase in Border Dispute," Radio Liberty-Radio Free Europe, June 18, 2002, at http://www.rferl.org/nca/features/2002/06/18062002165038.asp. See also Ariel Cohen, "Iran’s Intentions on Caspian Issue Remain Unclear Following Azerbaijani Leader’s Visit," EurasiaNet.org, May 22, 2002, at http://www.eurasianet.org/departments/insight/articles/eav052202.shtml.
11. Lelyveld, "Russia: Iran Seeks Assurances on Caspian Division."
12. Ariel Cohen and James Phillips, "Russia’s Dangerous Missile Game in Iran," Heritage Foundation Executive Memorandum No. 503, November 13, 1997.
13. A. P. Guzhvin, "Dlia kogo-to Kaspii - bol’shaya igra, dlia astrakhantsev - zhisn’" (For some the Caspian is a Great Game, for Astrakhanites it is life itself ), Neftegazovaya Vertikal’, No. 4 (April 1998), pp. 22-25.
14. Michael Lelyveld, "Russia: Moscow May Intervene in Caspian Dispute," Radio Liberty-Radio Free Europe Newsline, August 3, 2001, at http://www.rferl.org/nca/features/2001/08/03082001113745.asp.
15. Georgy Osipov, "Neft’ vpadaet v Kaspiyskoye More" (Oil flows into the Caspian Sea), Segodnya, No. 167 (August 1, 2000), at http://www.segodnya.ru/w3s.nsf/Archive/2000_167_econom_text_osipov1.html.
16. Leonid S. Severtsev, "Rossia-Iran: Druzhba Navek?" (Russia-Iran: Friendship Forever?), Dipkurier Internet, at
http://world.ng.azimuth/2001-04-05/5 friendship.html.
17. "Russia, Iran to Step Up Military Cooperation," Agence France-Presse, October 5, 2001, at http://www.djinteractive.com.
18. Severtsev, "Rossia-Iran: Druzhba Navek?"
19. "USA Mulls Imposing Sanctions Against Russia," Pravda Online, November 23, 2000, at http://english.pravda.ru/main/2000/11/23/1094.html.
20. Michael Lelyveld, "Iran: Hurdles Remain in Improving Ties with Azerbaijan," Radio Liberty-Radio Free Europe Newsline, August 21, 2001, at http://www.rferl.org/nca/features/2001/08/21082001111410.asp.
21. Vladimir Socor, "The Guns of Summer: Iran Prowls the Caspian," Wall Street Journal Europe, August 3, 2001, p. 7.
22. Yevgeny Verlin, "We Won’t Surrender Our Caspian Sea," Expert, No. 30 (August 19, 2002), p. 51.
23. Ariel Cohen, "Caspian Fleet Flexes Muscles," EurasiaNet.org, May 11, 2002, at http://www.eurasianet.org/departments/insight/articles/eav051102.shtml.
09-04-2002
Russian Prime Minister Mikhail Kasyanov recently concluded a visit to China with unusual declarations concerning key strategic areas. Moscow and Beijing are trying to keep American security initiatives in check.
Kasyanov’s responsibilities normally include the economy, not defense, which is President Vladimir Putin’s purview. Nevertheless, the Russian premier and his Chinese counterpart, Zhu Rongji, have signed a declaration opposing the militarization of space and supporting a key role for the U.N. Security Council in the fight against terrorism.
"The declaration is a follow-up on the June 27 joint proposal before the U.N. Conference on Disarmament in Geneva for a new international treaty to ban weapons in outer space," says Col. Larry Wortzel (U.S. Army, Ret.), a former U.S. military attachй in Beijing. Wortzel points out that this treaty, if approved, will deny the Bush administration a key component for ballistic-missile defense: space-based interceptors, similar to the Reagan-era Brilliant Pebbles system. However, it is certain that the U. S. would veto the treaty, Wortzel says.
China and Russia are challenging U.S. predominance by highlighting the role of the U.N. — and their own veto power at the Security Council — in the war against terrorism. Moscow and Beijing also oppose space-based missile defense, which, from their point of view, would give Washington policymakers a great advantage.
Unlike the old days of Sino-Soviet friendship of the early 1950s, when Moscow led and Beijing followed, today China is no follower. And arms sales are the lifeblood of the relationship. After all, cash infusions from China (and Iran) are crucial to the ailing Russian military-industrial complex.
Sources in Moscow tell NRO that Kasyanov has signed arms-sales agreements with Beijing worth billions of dollars. But as of this past June, President Putin classified all arms-transfer statistics with China at the request of Beijing; so no official announcements were made during Kasyanov’s visit to China.
Today, China is Russia’s number-one arms buyer, responsible for close to 40 percent of the lucrative $4 billion-a-year trade. Last year alone China bought 40 Sukhoi fighters, and is now negotiating the purchase of eight Kilo-class submarines worth $1.6 billion, as well as building a helicopter-manufacturing joint venture in Harbin.
Russia is also selling China a wide array of technology needed to build up its nuclear arsenal, from warhead designs to uranium-enrichment technology. In addition, Russia is building two civilian nuclear reactors in China and hoping to sell more.
"The good news is that China is incapable of developing these military technologies and production on its own," Wortzel says. "Their own defense industry is incapable of sustaining a modern war… It is essentially a one-time-use military, which may be extremely dangerous at the start of a war, but will be unable to continue to fight."
Most of the systems that China buys extend her power-projection capability, enhancing the range and deadliness of her air force and navy, and protecting her military from American retaliation. For example, the AWAC planes Beijing wanted to buy from a Russian-Israeli joint venture would have given it command-and-control superiority against Taiwan, while Russian destroyers and subs armed with supersonic anti-ship missiles can be deadly against U.S. naval-battle groups in the South China Sea. It is highly symbolic that during his visit, Kasyanov voiced full support of China’s position on Taiwan and Tibet, positions that the U.S. does not share.
A Russian military analyst who requested anonymity tells NRO that the Russian military ran war games and concluded that China would win in any conventional war against Russia. And Moscow is not willing to contemplate a nuclear annihilation. As a result, Russia will sell China almost anything to appease Beijing.
However, this is a marriage of convenience, not a steamy romance. Russia and China have their share of disagreements. Moscow is concerned about the great numbers of Chinese migrants in the sparsely populated Russian Far East. It is also worried that China is aggressively linking its support of Russian membership in the WTO with free entrance of Chinese labor for Russian employers and access to Chinese goods and services in Russian markets. In addition, Beijing insists that Russia tie its Siberian oil exports exclusively to China by building a pipeline into Manchuria. Russia wants to build the pipeline to the Pacific port of Nakhodka, allowing it to diversify its customer base and export to Japan, Korea, and the U.S.
The bad news is, Russia still possesses a world-class military-industrial complex, inherited from the Soviet Union, and wants to sustain it by selling arms to China, India, Iran, and other countries. Russia’s military-security elite will try to keep it afloat at all costs regardless of Washington protests.
Thus, Russia is likely to continue to sell weapons to its neighbors, sowing the seeds of regional instability in the process. It sold to both sides during the Iran-Iraq war in the 1980s, and will supply the Vietnamese and North Koreans with modern aircraft and tanks, while selling the same to China and South Korea.
As the specter of 9/11 recedes into the past, business as usual takes over. Old mischief is here again.
08-23-2002
Is America’s honeymoon with Russia over? Last weekend Iraq’s ambassador to Moscow, Abbas Khalaf, announced that Russia will be signing a $40 billion, ten-year economic cooperation pact with Saddam. Does this mean Putin supports Iraq against the possible U.S. military operation? Only recently, Moscow declared that it will sell five more nuclear reactors to the mullahs in Tehran — and that the North Korea’s "Dear Leader," Kim Jong Il, will visit Russia.
Suddenly it almost looks like 9/11 never happened. Could Russia be returning to its position as patron saint of the axis of evil?
Not so fast. There’s no change of course.
The window of opportunity for the U.S. to develop a closer relationship with Moscow has not closed — at least not yet. But there are warning signs that America’s inability to deliver the goods for Putin — combined with the anti-Americanism of many of Russia’s ministers and bureaucrats — could derail the beginning of a beautiful friendship.
The Russian-Iraqi agreement had been in the works for two years. The Iraqi leader, realizing that he’s about to be sunk by a U.S. attack, is grasping at straws in hopes of finding shelter and support through his former patron. But the Iraqi-Russia economic pact is a fantasy.
The agreement was rammed through the Russian bureaucracy by one of Russia’s oil giants, LUKoil. The company, which is owned by Azeri billionaire Vagit (Wahid) Alekperov, has signed promising agreements with the Baath regime in Baghdad — including one to develop the giant West Qurna field. LUKoil, which recently purchased close to 1,300 Getty gas stations in the U.S., is hoping to preserve its strategic investment in Iraq. But lobbying for ties with Saddam today may backfire in postwar Iraq tomorrow.
Slavneft is another company with interests in Iraq, and that has been active on Saddam’s behalf in Moscow. Until recently the company had close ties to the fiercely anti-American, ultra-nationalist politician Vladimir Zhirinovsky. Duma and government sources in Moscow have repeatedly alleged that Zhirinovsky and his Liberal Democratic party (which, in reality, is neither liberal nor democratic) is supported by Saddam.
Pavel Felgengauer, a well-known Russian security analyst, told the BBC on Monday that it is not clear which Russian foreign policy is served by the recently announced agreement: that of President Putin, or that of LUKoil; as he put it: "We have several foreign policies." Other Moscow-based analysts, who asked not to be identified, told NRO that LUKoil has bought the Russian foreign ministry "lock, stock and barrel." Others were almost proud that private interests now influence Russian foreign policy — just like in any other state. "It is safer that companies influence our decision making. In the past it was all done behind the closed doors of the Politburo," said one observer.
The problem of articulating the new Russian foreign and defense policy is not new, however, and has long worried Putin’s advisers in Moscow as well as Russia watchers in Washington. Foreign Minister Igor Ivanov, for instance, reflects the anti-American and pro-Arab opinions of Soviet-era diplomats such as ex-prime minister Evgeny Primakov, who appointed him. Ivanov is not trusted by Putin’s inner circle, but he has also not been replaced, as Putin is delaying a purge of the foreign ministry.
The ministry of defense is now under the leadership of Putin’s confidante, ex-KGB general Sergey Ivanov. Ivanov is Russia’s first "civilian" cefense minister, but reforms have been slow in coming. When Bush and Putin seemed to have hit it off, the bureaucrats were not thrilled.
Today, the question is whether Putin’s foreign policy is being hijacked by companies and by the Soviet-era, anti-American elite. The figures certainly do not add up. If Russian-Iraqi trade now stands at about $1 billion a year, it would need to quadruple in order to meet that $40 billion mark during the ten-year period. This is simply not going to happen.
The astronomical figure may, however, be a signal to Washington that Russia wants to be compensated if Saddam is removed. At the recent G-8 summit, Putin told Bush that Moscow will shed no tears over Saddam provided Iraq repays the Soviet-era $7 billion debt formerly owed to the U.S.S.R. Adjusted for inflation, today Iraq’s debt comes to about $12 billion. Moreover, if Russia loses the oil concessions that have been signed off by Saddam, and if oil prices go down as Iraq starts to pump more oil to pay for postwar reconstruction, Moscow will lose some of its oil-export revenues — perhaps as much as $4 billion a year.
With Iran, the story is different. The huge Iranian nuclear contract was lobbied for by MinAtom, the Soviet-era nuclear ministry, which is trying to keep factories with tens of thousands of jobs afloat. MinAtom’s bureaucrats are not exactly Yankee fans. True, in the long term, a nuclear-armed Iran on Russia’s borders would make for a difficult neighbor. Tehran could stir up unrest in the Muslim areas of the Caucasus and in Central Asia. But it’s short-term greed — and millions of dollars in bribes — that are keeping the Iranian contract on track despite America’s loud protestations.
Finally, the take on North Korea in Moscow is that the former satellite is finally coming to its economic senses, and may provide an opportunity for Russian companies. The Russians believe Comrade Kim presides over a North Korean version of perestroika, which could bring elements of a market economy and foreign investment to Pyongyang. Russia does not want to lose out to China, Japan, South Korea — or to the U.S. — when the last business frontier opens up.
This is what the recent agreements are all about. The message of Putin’s advisers is that they’re willing to negotiate to address American security concerns. Both the Kremlin and the White House should seriously explore that window of opportunity to forge a strategic relationship. Russia needs to understand that it can’t entertain Iran and Iraq and still be considered a legitimate partner in the antiterrorism effort. And the Bush administration should give Russia’s economic interests a fair hearing, without compromising U.S. defense concerns. In the 21st century, it’s as much about geo-economics as about geopolitics.
06-20-2002
The U.S. has declared energy cooperation with Russia as one of the main points of a strategic framework the Bush administration is developing with the Kremlin. The May Bush-Putin summit declarations, as well as conversations with government energy officials in Moscow and senior managers of the major Russian oil producers, indicate the beginnings of a major energy-policy trend.
The U.S. has begun expanding Russia’s role in the global energy markets, and is turning turn the vast Eurasian landmass into one of the major oil suppliers to the U.S. - alongside Mexico, Nigeria, and other non-OPEC producers. These developments will reverberate beyond the bilateral U.S.-Russian relations in the years to come.
The joint declaration on the new strategic relations signed at the Bush-Putin summit focuses on "intensification" of cooperation in prospecting for energy and developing resources - especially oil and gas - "including in the Caspian region."
The strategic document also recognizes a "common interest" in promoting the stability, sovereignty, and territorial integrity of all states in Central Asia and the southern Caucasus. It mentions cooperation in resolution of regional conflicts, including Abkhazia and Nagorno-Karabakh. Thus, for the first time, policy coordination as well as energy cooperation have become an integral part of the mutual security agenda.
Beyond this framework, the joint statement on energy dialogue goes a long way to indicate the direction of the coming U.S.-Russian energy alliance. That alliance will include meetings between officials and high-level private-sector energy executives. The first such meeting will take place in Houston, Tex., in the fall of this year, Russian government sources in Moscow said.
The joint statement on energy mentions "reducing instability and increasing predictability and reliability" of the global energy markets. This means giving the Russian oil companies long-term contracts within pre-agreed price corridors, necessary to operate Siberian fields in conditions of extreme cold and to prevent the freezing of oil wells when energy prices drop and production is curtailed.
Furthermore, the joint statement envisages "joint projects" - including cooperation in developing oil fields in third countries. Russian oil companies may have an easier time raising capital in the global markets if they have the backing of U.S. partners and will get access to state-of-the-art technology.
The U.S. has expressed interest in assisting investment in the development and modernization of the Russian oil sector in east Siberia and the Far East (including the ocean shelf there). Russian and U.S. companies will be encouraged to invest in Russian deep ports, transportation infrastructure such as railroads and pipelines, and the modernization of electricity-generation capabilities and natural gas and oil refineries.
Creating a fleet of supertankers in the Pacific, as well as building modern ports and pipelines in Siberia and the Far East, will allow Russia to supply consumers on the West Coast directly. Russia will also be able to compete with the leading Middle Eastern producers in shipping oil to Japan, China, and Korea. Both presidents specifically mentioned the success of the Sakhalin-1 project, next to Japan’s shore. And China is planning to become a large importer of oil after 2005.
The cooperation in the Caspian region and the recognition of the multiple directions of pipelines there together indicate that Russia is on board in recognizing the geo-economic legitimacy of the Baku-Tbilisi-Ceyhan (BTC) pipeline, developed by a consortium led by British Petroleum (BP)-Amoco. Moscow is recognizing this in exchange for equity participation in the consortium and for future U.S. investments in the oil-rich Russian national sector of the Caspian.
The Russian oil majors are wasting no time moving into the U.S. energy market: Lukoil will start shipping gasoline to the 1,300 gas stations it acquired from Getty; and Yukos, the fastest-growing Russian oil company, is planning to start shipping crude oil to the U.S. this year. Yukos’s target is to reach three million tons a year in exports by the end of 2003.
It is often asked whether Russia has sufficient resources to become a significant supplier to the U.S. market. Russian officials admit the country has only 40 years’ worth of known reserves. However, there is a surprising answer. First, the Russian industry is extremely energy-inefficient, and the Russian energy prices are up to six times lower than the world market’s. Herein lies the waste. Russian companies use up to 30 percent more energy than their Western counterparts per unit of output, and sometimes more. As Russia negotiates its membership in the WTO, both the European Union and the U.S. are adamant that Russia bring up its prices in accordance with global rates, thus eliminating the $5 billion hidden subsidy to its industry, according to EU trade czar Pascal Lamy. Such a step will make more oil and gas available for sale abroad. Eventually, Russia will be forced to break up the government-controlled natural-gas monopoly Gazprom and to allow competition in the currently moribund natural-gas sector.
Second, the use of modern technologies in industry and for home heating - for instance, small power-generating facilities instead of the huge centralized ones Russian inherited from the Soviets - will make it possible to cut heating costs. Today, billions of dollars are wasted to heat the tens of thousands of miles of pipe buried underground. And consumers will be made to pay real prices to keep their houses warm: today they pay only 10 percent.
Finally, the Russian government should make its energy-tax legislation stable and predictable, and allow oil and gas companies to write off prospecting costs, encouraging the discovery of new sources of hydrocarbons. Yukos’s founder and CEO Mikhail Khodorkovsky believes Russia can boost production from the current 350 million tons a year to 450 million in 2005 and 500 million tons in 2010. Large deposits of oil can also be found along the Russian coasts of the Arctic and Pacific oceans.
Thus, Russia and Eurasia are poised to become major energy partners of the U.S. at a critical point of the war on terrorism. The Bush-Putin summit was the opening act of a major geo-economic realignment. The real question is whether the markets, oil companies, and government bureaucracies will support the two presidents’ vision.
