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06-07-2002
Russia is emerging as a key point on the US energy agenda. Washington is encouraging Moscow to assume a greater international role in energy markets. The US aim is to develop Russia and other Central Eurasian states into major oil suppliers, along with Mexico, Nigeria and other non-OPEC producers. However, energy-sector cooperation faces substantial obstacles, including lingering mutual suspicion and Russia’s inefficient energy network.
A joint declaration on strategic relations signed at the May summit of US President George W. Bush and Russian leader Vladimir Putin emphasized the potential for energy cooperation. The two sides expressed a desire for the "intensification" of joint development of resources, especially oil and gas - making a specific reference to the Caspian Basin. The document also recognized a "common interest" in promoting stability, sovereignty and territorial integrity of all states in Central Asia and the Caucasus. Thus, for the first time, policy coordination as well as energy cooperation has become an integral part of the mutual security agenda.
US policy makers and Russian oil executives expressed hope in conversations that the Bush-Putin summit would prove to be the first step of a major geo-economic realignment. At the same time, many acknowledge that implementation of the strategic cooperation plan will not be easy. Some wonder whether the markets, oil companies, and government bureaucracies will support the two presidents’ vision.
The Bush-Putin joint statement provides a clear road map for the development of the budding US-Russian energy alliance. It emphasizes contacts between top-level officials and the private sector energy executives. The first such meeting is expected to take place in Houston this autumn, 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 prevent freezing of oil wells when energy prices drop and production is curtailed.
Furthermore, the joint statement envisages cooperation in developing oil fields in third countries. Such cooperation could provide a big boost to Russian oil companies, which might have an easier time raising capital with the backing of US partners. It will also ease the ability of Russian conglomerates to obtain state-of-the art technology.
The United States has expressed interest in assisting investment in development and modernization of the Russian oil sector in East Siberia and the Far East, including the ocean shelf there. Russian and US companies will be encouraged to invest in Russian deep-water ports, transportation infrastructure, such as railroads and pipelines, and the modernization of the local energy infrastructure.
Boosting export capacity in the Pacific - including the creation of a supertanker fleet, and the construction of modern ports and pipelines in Siberia and the Far East - would help Russia supply the West Coast consumers in the United States directly. Russia would also be able to compete with the leading Middle Eastern producers in shipping oil to Japan, China and Korea.
Moscow’s willingness to cooperation in the Caspian region and recognition of the multiple directions of pipelines there indicates 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 doing this in exchange for equity participation in the consortium and for future US investments in the oil-rich Russian national sector of the Caspian.
The Russian oil majors are also moving into the US energy market. Lukoilwill start shipping gasoline to its 1,300 gas stations it acquired from Getty, while Yukos, the fastest-growing Russian oil company, is planning to start shipping crude oil to the US this year. Yukos’s target is to reach 3 million tons a year in exports by the end of 2003.
Yukos’s Chairman 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 be found along the Russian coasts of the Arctic and Pacific oceans. Thus, there appears great potential for Russia to emerge as a major global supplier. Yet, in addition to the Cold War’s legacy of mutual suspicion, there are practical hurdles that might trip up the US-Russian partnership.
Some experts question whether Russia has sufficient resources to become a significant supplier to the US market. Russian officials say that the country has only 40 years worth of known reserves. But analysts hesitate to accept this estimate, citing the fact that the Russian energy industry is extremely energy-inefficient. Russian energy prices are up to six times cheaper than the world market, which has resulted in inefficient operation and waste. Russian companies, for instance, use up to 30 percent more energy than their Western counterparts per unit of output.
As Russia negotiates its membership in the World Trade Organization (WTO), both the European Union and the United States are adamant that Russia brings its prices into alignment with global rates, thus eliminating the $5 billion hidden subsidy to its industry, according to the EU trade czar Pascal Lamy. Such a step will make more oil and gas available for sale abroad. But such a move could be politically sensitive for Russia, as it would place pressure on Putin’s administration to break up the government-controlled natural gas monopoly Gazprom, and allow competition in the currently moribund natural gas sector.
Another domestic challenge facing Russia is the modernization of the country’s infrastructure. Today, billions of dollars are wasted for heating tens of thousands of miles of pipe buried underground. In addition, Russia consumers pay only about 10 percent of the real cost of heating their homes. Russia’s foreign partners would also like to see Moscow simplify tax legislation concerning energy development, allowing oil and gas companies to write off prospecting costs and encourage discovery of new sources of hydrocarbons.
05-22-2002
When President George W. Bush and Russian president Vladimir Putin meet for summits in Russia and Rome later this month, they will have an opportunity to define a new framework for U.S.-Russia strategic relations that extends beyond the Cold War. The meetings in St. Petersburg and Moscow on May 23-26 and at the NATO-Russia summit in Rome two days later will allow the two leaders to focus on matters of national security and economic policy. This can become a foundation for a new 21st-century security architecture.
Given Russia’s proximity to Western Europe, the Middle East, Central Asia, and the Far East, establishing closer cooperation with Russia will have significant benefits for U.S. national security and regional and economic interests. Closer cooperation with Moscow is vital, for example, to isolating such terrorism-supporting states as Iran, Iraq, Syria, Libya, and North Korea and for slowing the transfer of Russian military technology to China.
In Moscow, they will sign a formal treaty that calls for deep cuts in nuclear arsenals on both sides over the next ten years. Both leaders are committed to ending the legacy of the Cold War by reducing the strategic nuclear arsenals of their countries to around 1,700-2,200 deliverable warheads each. Such a commitment will also be required in cooperative efforts to reduce the threat posed by the proliferation of weapons of mass destruction (WMD).
The new treaty allows flexibility by limiting its duration to ten years, by pacing the reductions within the ten-year period, and by allowing either party to withdraw from the treaty with three months’ notice. Another welcome sign of this flexibility is the agreement not to require the destruction of the warheads or to impose limitations on missile defenses.
During his summit meetings with President Putin, President Bush should ask for Russia’s support for removing Saddam Hussein from power. Bush should also encourage Moscow to terminate Russian sales of conventional weapons to Iran and technological cooperation to produce WMD. In 2001, Russia and Iran signed a $300-million a-year, multi-year arms export agreement, making Iran the third largest customer for Russian weapons after India and China. Moscow is also building two nuclear reactors at Bushehr, from which the precursors to nuclear-bomb fissile material could be obtained, and is selling sophisticated anti-ship missiles and other destabilizing weapons to Iran.
If Russia follows through on these points, the administration should be ready to offer an economic quid pro quo, such as participation in building the components of ballistic missile-defense systems and expansion of civilian space-launch quotas.
Bush and Putin should move forward with NATO-Russia cooperation. On May 28, NATO and Russia will sign an agreement to establish the NATO-Russia Council. The agreement was finalized at the meeting between NATO and Russian foreign ministers in Reykjavik, Iceland. This agreement will allow for joint development of policy and the planning of mutual activities in such areas as the war on terrorism and operations against terrorist organizations and their financial supporters. Joint NATO-Russian action will be aimed at nonproliferation and WMD security, special-forces inter-operability, educational exchanges between officers on all levels, peacekeeping operations, and comprehensive military reform. Both President Putin and Defense Minister Sergey Ivanov would welcome such a development.
In the past, the forum provided by the 1997 Permanent Joint Council often turned into a venue for Moscow to air its frustrations with NATO actions, such as the Balkans operations. Today, the joint NATO-Russia peacekeeping activities in that region demonstrate how these two sides can cooperate. Top U.S. generals, such as NATO commander General Joseph Ralston and commander-in-chief of Central Command (CENTCOM) General Tommy Franks, routinely praise Russia’s cooperation with the United States and NATO.
President Bush might also consider inviting President Putin to address the NATO summit in Prague in November. Bush should encourage Russia to expand its energy sales in the global market. Russia could increase energy sales significantly by enhancing the transparency of Russian businesses and shareholder rights for Western investors. U.S. companies need assurances that their investments in Russian fields and infrastructure are secure.
Russia exports over 1.8 billion barrels of oil and 6.7 billion cubic feet of natural gas per year. It is the world’s largest exporter of natural gas and second largest exporter of oil. Together with the countries of Eurasia, it could catch up with Saudi Arabia as a leading oil exporter by 2010. U.S. export-development agencies and the international financial institutions could assist foreign investors by insisting that the rule of law be honored and contracts upheld. A boost in Russia’s energy exports also would provide its European and Far Eastern customers with additional energy security in the event that OPEC continues its policy of high prices and production cuts.
Bush should also express support for lifting U.S. barriers to trade with Russia. The administration supports Russia’s economic integration with the West, including its membership in the World Trade Organization. President Bush should declare U.S. support for Russia’s accession in 2004, provided the negotiations in all sectors are completed successfully.
The U.S. statute known as the Jackson-Vanik Amendment, which denies Russia permanent trade status, is a relic of the Cold War. It was passed in 1974 when the Soviet Union severely limited emigration. Congress suspended application of the amendment after the Soviet Union collapsed. At the Russia summit, President Bush should express his support for a permanent lifting of the Jackson-Vanik restrictions, which Congress could accomplish by attaching an amendment to upcoming trade legislation.
The forthcoming U.S.-Russia summits offer both countries a unique opportunity to launch a strategic partnership that would assure greater security in the 21st century. At the summit meetings, both President Bush and President Putin should deal with the baggage that has hampered U.S.-Russia relations in the past, such as Moscow’s ties with Iran and Iraq and other states that sponsor terrorism.
The two leaders will put to rest the legacy of the Cold War by signing a strategic treaty to reduce their nuclear arsenals. Most important, they should expand joint actions in the war on terrorism, as well as establish goals for NATO-Russian cooperation and support policies that further integrate Russia into the global market.
Why Russia’s Accession to the WTO Is in America’s Economic and Strategic Interests
05-22-2002
Among the important topics of discussion for President George W. Bush and Russian President Vladimir Putin at their May 23-25 summit meetings in Moscow and St. Petersburg will likely be Russia’s accession to the World Trade Organization (WTO). The issue richly deserves their attention. Since China’s accession to the WTO in November 2001, Russia is the largest economy that is not yet a part of this global trade forum. Given Russia’s growing importance as a strategic partner of the United States in the war on terrorism and the growth in its economy over the past three years, Russia’s accession to the WTO is clearly in America’s interest.
The objectives of U.S. trade policy include achieving more equitable and reciprocal market access for U.S. goods, services, and investment, and reducing and eliminating barriers to trade and other market-distorting policies and practices. American consumers and Russian businesses will benefit from lower trade barriers to Russian goods, such as steel, fuel for nuclear reactors, and certain types of aircraft. The negotiations over Russia’s membership in the WTO should clearly focus on such mutual interests.
To join the organization, however, Russia must implement several important economic adjustments in order to comply with WTO requirements. These include eliminating tariffs on certain goods; creating a non-discriminatory, transparent environment for foreign goods and services; reforming the financial and banking sectors; and introducing decisive measures to protect foreign investors and intellectual property rights. These requirements are part of the universal accession policy for all candidate countries, and Russia should not be subject to any special considerations or compromises. The United States should be clear and unwavering on this point: Russia must fully implement all of the WTO accession requirements.
In discussions and negotiations with Russia as well as in meetings of the WTO Quad Group--an advisory group that is taking a lead in the Russian accession talks and that includes the United States, the European Union (EU), Canada, and Japan--the United States should support Russia’s efforts to join the WTO and open its market further to trade and foreign investment. That is the best course, both to facilitate Russia’s integration into the community of democratic market-oriented states and to boost its role as an anti-terrorism partner of the United States.
While in Moscow, President Bush should publicly endorse Russia’s "graduation" from Jackson-Vanik Amendment restrictions that prevent it from enjoying permanent normal trade relations with the United States and prevent equal treatment of Russia as a trade partner, which the WTO rules require. Among the issues to discuss, the President should focus on tariffs that Russia may seek to maintain, such as those on pharmaceuticals, the aerospace sector, and steel, and ways for Russia to reform and open its banking, financial, and insurance services sectors. 2
America’s Stake in Russia’s Accession to the WTO
Economists and political thinkers have long recognized that free trade and the spirit of commerce promote international understanding and reduce hostility and mistrust among nations. The reality of the global economy today reinforces that principle. 3 Free trade is a U.S. foreign policy priority: an effective way to promote and protect America’s economic interests. Given Russia’s new role as a strategic partner in the U.S.-led campaign to end terrorism, expanding trade with Russia and helping it to become a full member of the community of developed democratic states is in America’s best interests. 4
Joining the World Trade Organization would help fulfill these objectives and enhance Russia’s latest rapprochement with America and its allies. It would create more favorable conditions for U.S. exporters and investors in Russia, and give U.S. consumers greater access to cheaper Russian goods.
Russia has been the largest market for U.S. poultry (until the recent but temporary ban) and a major market for U.S. beef and pork. Moreover, U.S. consumers buy 2 million gallons of vodka, over 3.6 million Arctic King crabs, and precious metals such as palladium from Russia. 5
According to the U.S. Department of Commerce, Russia has a massive potential for trade and investment and represents a ready market for a wide range of technologically sophisticated American products. 6
The 2002 World Economic Forecast of the International Monetary Fund (IMF) predicts that the global economic slowdown will be relatively less severe in Russia and Eastern Europe, which will continue to maintain viable markets for capital and consumer goods. 7
The Russian Federation is already the world’s second-largest oil-producing country.
Russia is quickly becoming an important "swing" oil producer for the global energy markets. The instability in the Middle East raises Russia’s importance as a reserve oil supplier for Europe and Japan, helping to keep oil prices down. President Putin, his cabinet, and the major Russian oil companies have demonstrated a readiness not to march in lockstep with the OPEC oil cartel, keeping Russian oil prices within the $21 to $25 per barrel price range rather than raise them with OPEC. 8
Accession to the WTO will help make Russia’s economy more transparent and predictable, increase the protection of minority shareholder rights, and strengthen the enforcement of contracts. Such reforms, for example, will create a strong incentive for foreign corporations to boost their investment dollars in the Russian oil and gas industry, which in turn would allow Russia to increase energy exports at moderate prices. As energy exports expand, Russia’s domestic output--or gross domestic product (GDP)--would grow, and demand for American goods and services would increase.
What WTO Membership Would Mean for Russia
The WTO is one of the largest and fastest-growing international organizations, with 144 member states and regions representing all the major world economies. 9 It has already admitted some former Soviet states, such as the three Baltic states of Estonia, Latvia, and Lithuania, as well as Georgia, Kyrgyzstan, and Moldova.
Joining the WTO would foster economic reform, which is important to Russia and to the global economy. President Putin’s recent State of the Federation speech demonstrated his commitment to implementing free-market policies aimed at achieving stable economic growth and a modernized economic system. 10 In his words,
[T]oday countries compete along all the parameters of economics and politics: the size of the tax burden, level of security of the country and its citizens, guarantees of protection of property rights. They compete as far as attractiveness of the business climate, development of economic freedoms, and quality of state institutions and effectiveness of the court and legal system. 11
Market Reforms Are Underway. In the past three years alone, Russia has begun to implement a coherent policy of economic reform, which includes lowering personal income taxes to 13 percent (a flat tax), the corporate tax rate to 24 percent, and small-business income taxes to 20 percent. Russia also is taking steps to privatize land, achieve a federal budget surplus, and introduce greater transparency in corporate governance.
Although Russia’s economy is far from being prosperous, its economic performance during that same period fosters moderately optimistic forecasts. The Russian economy grew 5.3 percent in 1999, 8.3 percent in 2000, and 5 percent in 2001. 12 The Ministry of Trade and Economic Development estimates that the GDP growth rate will continue to rise at about 3 percent to 5 percent each year from 2002 through 2004. 13 Industrial output is expected to have similar increases, and real disposable household income is expected to rise at a stable level of 4 percent to 5 percent.
In the long run, opening Russia’s economy to free trade through WTO accession would increase foreign competition and investment and allow Russia to reduce its indebtedness (currently about $137 billion). Russia would progress from one of the world’s largest debtors to an important economic partner of the United States and other Western economies. 14
Despite such benefits of joining the WTO, the issue is under debate in Russia. Proponents of quick accession view membership as a strong incentive for economic reform; opponents believe that the process is a way to pressure the government to make further economic reform. The financial industry in particular has been resisting accession, claiming that WTO membership would wipe out Russia’s banking sector.
Such arguments, however, are protectionism at its worst. Lack of competition in the financial sector imposes a heavy burden on the economy. There is no reason to expect that this sector, which has enjoyed protection for 10 years and which was an active enabler and participant in Russia’s 1998 financial crisis, will become more efficient in the foreseeable future without exposure to foreign competition and expertise.
In fact, the majority of Russian businessmen support Russia’s accession to the WTO as a way to open markets overseas to their products and increase their ability to defend Russian business interests abroad. According to Igor Yurgens, Vice President of the Russian Union of Industrialists and Entrepreneurs (the leading Russian business coalition), 70 percent of its members support WTO accession. 15 Besides giving Russia a unique chance to attract foreign capital, accession likely would improve the overall business and investment climate by introducing international product standards and making Russian goods more competitive globally.
WTO membership would protect the rights of both domestic and foreign investors. Russian economists predict that the overall decline in productivity following introduction of the WTO standards would be minimal--perhaps no longer than a year, and primarily in food production and the transportation industry. But the increased competition and the availability of high-quality inputs for domestic industries would stimulate growth, and growth in productivity would likely begin in the second year after accession. 16 If Russia does not join the WTO, however, it will find it harder to solve its serious economic problems and risk its best chance to integrate fully into world trade and investment flows.
Russia’s Efforts to Join the WTO. The history of Russia’s candidacy for membership began in 1990, when the USSR was granted observer status at the meetings of members of the General Agreement on Tariffs and Trade (GATT)--the precursor to the WTO. In 1992, Russia submitted a formal request to become a member of the GATT. A Working Party established by the General Council for conducting negotiations on Russia’s accession was created in 1993 and became a WTO body after implementation of the WTO Agreement on January 1, 1995.
Currently, 50 member states actively participate in the Working Party on Russian accession, which is open to all WTO members that wish to participate in the negotiation process. Since 1998, Russia has opened bilateral negotiations on tariffs and specific market access with 30 countries and has pursued negotiations on trade in goods and services with 10 countries. Since 1999, Russia has conducted negotiations on two tracks: bilateral negotiations with countries concerned about market access and policies in goods and services, and multilateral negotiations with the WTO regarding changes in Russia’s laws toward accession requirements.
Nevertheless, many Russian officials fail to understand that the rules of accession to the WTO are not subject to negotiation. These core requirements are standard for all countries seeking membership. What can be negotiated are the schedule of accession and the criteria and methodology of adjusting policies to certain universal requirements. Extensions, not exceptions, are subject to consideration. The timetables for tariff reductions in third countries, which affect Russia, are not even under Russia’s control. Not being a WTO member, and being outside the world trade negotiations, means that Russia cannot participate in such negotiations.
This lack of influence is a strong incentive for Russia to join the global trade organization. Minister of Economy and Trade German Gref said during testimony before the Russian Parliament that the country’s inability to join the WTO costs the economy $4 billion every year. He added that, in 2002, the government is planning to undertake a special program to prepare for membership. 17
An additional incentive for membership is supplied by the more than 120 various sanctions and trade restrictions currently applied to Russia by world markets. Some of these sanctions are the legacy of the Cold War, and some apply generally to all non-WTO countries. For the most part, Russia’s accession to the WTO would relieve this burden on its economy. A special committee on WTO accession was established within the Russian government in 2002 to coordinate the process.
Another difficulty is that accession is a consensus decision of all WTO members. It is difficult for a large economy like Russia’s not to affect other countries’ economic interests. It will be challenging for Russia and the other countries whose interests are at stake to compromise regarding trade rules.
A quick completion date for Russia’s accession to the WTO is difficult to envision. During the last World Economic Forum meeting in New York in January 2002, WTO President Michael Moore said that he expects Russia to join the organization in two years. 18 Gref has said that membership in WTO is not expected for at least the next 18 months. After the latest round of negotiations with the Working Party, which was viewed as relatively unsuccessful, Maxim Medvedkov, the head of the Russian delegation and Deputy Minister of Economic Development, made a more pessimistic forecast of three to four years. Although Russia’s leadership has demonstrated a strong commitment to accelerating the process, it now appears that 2003 or 2004 is more realistic for full accession. 19
While it would be beneficial for Russia to have access to the WTO’s dispute settlement process to protect its trade interests and provide foreign investors with a streamlined dispute resolution system, many obstacles remain to be overcome.
Obstacles to Accession
Like many other countries that aspire to WTO membership, Russia must overcome legislative hurdles. The Russian government has approved a list of legislative acts that are to be submitted to the Parliament in order to bring Russian laws in compliance with WTO rules. The list includes laws that regulate protective antidumping and compensatory measures for imports; licensing of exports and imports; government subsidies; customs tariffs and duties; standardization and certification of finished goods; foreign currency controls; and production of spirits and alcohol drinks. A new edition of Russia’s Customs Code must be enacted as well. 20
Moreover, there are several areas in which the Russian government disagrees with the WTO on economic policies. The main areas of dispute involve tariffs, protection of intellectual property rights, non-tariff barriers to trade like subsidies and red tape, and reform of the banking sector.
Tariffs. Russia currently has one of the lowest levels of trade barriers in the world. The nominal tariff rates vary between 7 percent and 15 percent, which is low by WTO standards. The effective (real) rate is estimated at only 5 percent, since 50 percent of overall imports are subject to various waivers and exceptions.
The adoption of WTO standards--despite fears among some Russian politicians and businessmen--would not decrease the overall level of protection for domestic businesses. To the contrary, it would allow the government to correct trade policy by shifting from ineffective, complex, and often contradictory and corrupt practices to more transparent ones. Under the influence of the WTO, Russia already has made a significant change to create more favorable conditions for external trade; it has consolidated tariffs into four major product groups (raw materials, semi-finished goods, foodstuffs, and finished products).
The Russian government disagrees with the WTO, however, on the length of the transition period for introducing new tariffs. Currently, all WTO candidates face a three-year period for introducing tariffs. Russian negotiators want an exception; they seek a seven-year extension to introduce tariffs in order to complete modernization of sectors that are most vulnerable to foreign competition. Resistance comes primarily from sectors that would be hurt by so-called sectoral initiatives, which assume zero tariffs for 10 groups of goods: pharmaceuticals, furniture, medical, construction and agricultural equipment, paper articles, steel, toys, beer, and strong beverages.
Other "sectoral initiative" requirements include harmonizing tariffs for chemical goods at the level of 5.5 percent to 6.5 percent; joining the Agreement on Trade in Civil Aircraft, which demands zero tariffs on a wide range of aircraft and related products; and signing the Agreement on Information Technology, which requires a gradual reduction of tariffs on 400 items, including computers and software.
Import tariffs also under negotiation between Russia and the WTO Working Party include those imposed on automobiles, non-ferrous metals, and furniture. In agriculture, four groups of products are under pressure for tariff reduction from other WTO members: meat, grain, fish, and butter. In addition, Russian tariffs for U.S. wood product exports are at the level of 20 percent, compared with the preferential rate of 5 percent for tropical hardwood logs, lumber, and veneer. 21 Russia should be looking to countries such as Chile to assuage its fears of how a decrease in tariff protection would affect such sectors. 22
Protection of Intellectual Property Rights (IPR). IPR is a major U.S. concern, especially regarding its software and entertainment industries. According to a 1991 U.S.-Russian bilateral trade agreement, Russia is required to provide adequate protection for intellectual property, and the Russian government took steps to create a legal framework that will approach international standards on intellectual property protection. After July 1998 amendments to Russia’s law "On Certification of Products and Services," approximately 30 percent of 22,000 Russian legal norms became compatible with international standards, making the system more transparent and less time-consuming. 23
Nevertheless, in 2001, Russia was mentioned in the U.S. Special 301 Priority Watch List along with 16 other countries that lack legislation to control pirate optical media (CD) production and exports of CDs and CD-ROMs. The adoption of a new regulation in May 2000 was another important step to protect property rights. However, the situation has not improved significantly. Millions of pirated music and software CDs and DVDs are being sold for $2 to $3 across the country. The inability of Russia to cope with the requirements of the bilateral agreement shows that it is still unprepared to meet more complicated obligations under the WTO Agreement on Trade Related Aspects of Intellectual Property Rights.
Another related concern is Russia’s court system, which is considered to be inadequately prepared to handle sophisticated patent and trademark disputes.
Subsidies and Red Tape. Special WTO regulations allow countries to employ some non-tariff measures, such as import quotas and subsidies in agriculture. The level and regulation of subsidies in Russia’s agricultural sector remains one of the main points of disagreement with the Working Party on Russian accession. There are two principal concerns: the level of subsidies and the inability to change this level after an agreement with the WTO. WTO regulations do not allow members to extend protectionist policies or change the overall amount of subsidies or tariffs once their level has been set and approved by the organization.
The currently negotiated threshold for overall Russian subsidies is $16 billion, which experts consider to be sufficient for effective protection. This level of subsidy constitutes a significant share of the current budget, and reaching it is unlikely to be feasible in the foreseeable future. Nevertheless, the Russian government insists on having decision-making power on the amount of agricultural subsidies in contradiction of the WTO standards. In addition, Russia has a wide variety of informal subsidies, primarily on the supply of cheap energy to producers as well as a system of barter trade.
The U.S. representatives in the Working Party have demanded that Russia join the WTO Agreement on Government Procurement, which stipulates a necessity for members to provide transparency and non-discrimination in bidding on government contracts. This would require the elimination of prohibitions against the purchase of foreign goods and services from foreign suppliers, as well as termination of set-asides and offsets for domestic producers or widely used red tape practices that prevent foreign products, services, and suppliers from entering the Russian market. Today, the government is engaged in vague tendering procedures, which allows use of single-source contracts and keeps vital technical specifications classified.
Reform of the Banking Sector. WTO membership will require Russia to have a more open and competitive financial sector. A few Russian banks that have a significant political influence on the government are among the major groups resisting WTO accession.
After the financial crisis of 1998, the Russian banking system collapsed. Today, the retail banking sector is dominated by a government monopoly, Sberbank (Savings Bank), which accounts for 73 percent of deposits and 20,000 branches. 24 Sberbank is a gargantuan and opaque institution. Similar to Russia’s tariff policy, it is not the formal protection in the sector but the overall negative environment for investment that prevents foreign banks from entering the Russian market. The government has already waived a legislative limitation of 12 percent ownership for foreign banks, since it has never been reached.
After the 1998 financial crisis, many smaller banks were closed by the Central Bank, and a more restrictive system of licensing was introduced. According to some analysts, this created a non-transparent environment that stifles competition and prevents the sector from developing. Without a significant foreign presence, Russia’s financial sector lacks the proper incentives to improve operations. Only sectors that are subject to strong foreign competition, such as investment, have seen competitive domestic financial firms emerge. Foreign financial institutions bring with them "best practices." At the same time, Russian institutions that are protected from foreign competition, such as the retail and commercial banks, insurance companies, and private pension funds, remain highly inefficient.
Implications for U.S.-Russia Policy
As Undersecretary of the Treasury John Taylor stated during a press conference in Moscow in October 2001, Russia’s accession to the WTO remains a priority for the United States. 25 Indeed, the United States will play an important role in Russia’s accession to the WTO as leader of the WTO Quad Group, which eventually will direct Russia’s accession process. The U.S. objectives in helping Russia become a WTO member include achieving more equitable and reciprocal access for U.S. goods, services, and investment in the Russian market, and reducing and eliminating barriers to trade and other trade-distorting policies and practices.
One of the remaining obstacles to Russia’s membership in the WTO is the lack of permanent normal trade relations (PNTR), which has been blocked by the restrictions in the Jackson-Vanik Amendment. This relic of the Cold War was passed in 1974 when the Soviet Union had severely limited emigration. Congress suspended application of the amendment after the Soviet Union collapsed, but it remains on the books, preventing Russia’s equal treatment as required by WTO rules.
Members of Congress, in stalling on efforts to grant Russia PNTR, raise issues that go beyond free emigration and human rights. For example, some have conditioned removing the strictures of Jackson-Vanik on resolving disputes with Russia over U.S. chicken imports and compliance with U.S. demands on WTO accession. 26
At the upcoming summit in Moscow, President Bush can make clear America’s support for Russia’s accession to the WTO by emphasizing several key priorities. Specifically, the United States should:
Support Russia’s efforts to open its economy to trade and investment. Joining the WTO will cause Russia to open its market further to foreign goods, services, and investment; reduce barriers to trade and other trade-distorting practices; and support transparency, accountability, and the rule of law. Open trade will facilitate Russia’s integration into the community of democratic states and boost its role as a strategic anti-terrorism partner of the United States. President Bush should publicly endorse Russia’s accession to the WTO to open its market, especially its oil and gas industry, to American investors. Russia’s growing economy, and especially the energy sector, represents a ready market for a wide range of technologically sophisticated American products. The United States should recommend that Russia create a non-discriminative and transparent environment to increase incentives for American entrepreneurs to develop its oil and gas sector. This would strengthen Russia’s position as an important energy supplier in the global market and improve the overall competitiveness and performance of the Russian economy.
Endorse Russia’s "graduation" from Jackson-Vanik restrictions that prevent it from enjoying permanent normal trade relations with the United States. Congress should assist Russia’s effort to become a member of the WTO by permanently lifting the Jackson-Vanik restrictions, which it could accomplish by attaching an amendment to trade legislation.
Focus discussions on the tariffs that Russia must eliminate or reduce, as required by WTO accession rules. The United States also should recommend to the WTO Quad Group that the Russian government eliminate or cut its tariffs, as required by the WTO accession rules, primarily on such products as pharmaceuticals; medical, construction, and agricultural equipment; aerospace; autos; and steel. The U.S. Trade Representative should insist on Russia’s full implementation of the WTO accession requirements within the universal time frame and without maintaining any protectionist policies.
Support Russia’s membership in the WTO Agreement on Government Procurement. The WTO Quad Group should include a requirement for accession that Russia sign this agreement, which stipulates that members provide transparency and non-discrimination in government procurement. This would mean both eliminating constraints on the purchase of foreign goods and services by the Russian government and clamping down on Russia’s well-known use of red tape.
Advise the Russian government and Central Bank on ways to reform and open the banking, financial, and insurance services sectors. Russia’s Ministry of Trade and Economic Development, Central Bank, and Ministry of Finance are in charge of the WTO negotiations and financial sector reforms. They should be encouraged to move forward with reforms of the banking and financial services sectors. Without significant foreign competition, Russian banks lack incentive to improve operations and achieve a transparent financial system based on international standards. Restructuring and modernizing the financial services sector also would create more support for WTO accession in the Russian business community.
Request that Russia’s Ministry of Trade and Economic Development implement the WTO’s intellectual property rights requirements. Intellectual property rights requirements (known as TRIPS) should be implemented prior to WTO accession. The failure to introduce policies that protect intellectual property rights will result in a reduction of investment in vital high-tech sectors. Russia’s inability to cope with the requirements of the 1991 bilateral U.S.-Russia agreement on protecting intellectual property rights in optical media shows that it is unprepared to meet the WTO standards on IPR. 27
Conclusion
Russian President Vladimir Putin understands that only the West has the capacity to become the principal source of investment capital for Russia and a substantial market for its energy resources. Putin and Prime Minister Mikhail Kasyanov have stated that Russia is eager to join the WTO and will become a reliable trade partner and energy supplier for the West, regardless of what may happen to the flow of oil from the Middle East. The lack of WTO membership slows both trade and investment activity in Russia.
At the May summit meetings with Putin, President Bush should publicly support Russia’s accession to the WTO by 2003 or 2004, provided its negotiations with the WTO in all sectors have been completed successfully. Russia’s accession will facilitate political and economic reforms and promote cooperation with the United States and its allies in the war against terrorism.
Given Russia’s increasing importance as a strategic partner of the United States in the war on terrorism and the growth in its economy over the past three years, Russia’s accession is clearly in America’s interests. The United States, however, should insist that Russia follow the universal requirements for WTO membership that all candidate countries must satisfy, including decisive measures to protect intellectual property rights, eliminate and reduce tariffs, create a non-discriminatory and transparent environment for foreign goods and services, and reform the banking sector.
1. The author thanks Gerald P. O’Driscoll and Aaron Schavey of the Center for International Trade and Economics (CITE) at The Heritage Foundation, as well as former interns Piotr Kaznacheev, Ph.D. candidate, Moscow State University, and Elena Simonova, a former Russian Economic Ministry official, for their contributions to this study.
2. "WTO Reviews Draft Accession Texts for Russia; Negotiator Details Contention," BNA Regulation, Law and Economics No. 81, April 26, 2002, p. A24.
3. See, for example, Immanuel Kant, "Perpetual Peace: A Philosophical Sketch," at http://www.mtholyoke.edu/acad/intrel/kant/kant1.htm; Richard Cobden, "Free Trade with All Nations," at http://www.geocities.com/Athens/Acropolis/5148/cobdenonfreetrade.html; "Richard Cobden," at http://www.spartacus.schoolnet.co.uk/PRcobden.htm; and Thomas J. DiLorenzo, "Frederic Bastiat (1801-1850): Between the French and Marginalist Revolutions," at http://www.mises.org/fredericbastiat.asp.
4. Ariel Cohen, "Russia and Eurasia," in Stuart M. Butler and Kim R. Holmes, eds., Issues 2002: The Candidate’s Briefing Book (Washington, D.C.: The Heritage Foundation, 2002), at http://www.heritage.org/issues/russiaandeurasia/russia_background.html.
5. Edward Gresser, "A View from Outside: Russia and the Case for the WTO," Progressive Policy Institute Policy Report, April 2002, pp. 3-4.
6. U.S. Commercial Services, "Country Commercial Guides for Russia," at http://www.usatrade.gov/website/ccg.nsf.
7. International Monetary Fond, "World Economic and Financial Surveys: World Economic Outlook: The Information Technology Revolution," October 2001.
8. "Oil Price Deal Sought with Russia," at http://www.cnn.com/2002/WORLD/europe/03/04/russia.opec/index.html.
9. For background information on the WTO, see Brett D. Schaefer, "The Bretton Woods Institutions: History and Reform Prosposals," Heritage Foundation Economic Freedom Project Report No. EFP 00-01, April 2000, at http://www.heritage.org/library/efp/efp00-01.html.
10. "Poslaniye Prezidenta Rossiyskoi Federatsii V. V. Putina Federal’nomu Sobraniyu Rosskiiskoi Federatsii (Message of the President Vladimir Putin to the Federal Assembly of the Russian Federation)," April 18, 2002, at http://president.kremlin.ru/events/510.html.
11. Ibid.
12. Evgeny Gavrilenkov, "Economic Growth and Crises: Evidence from Russia and Other Controversial Economies," Center for Strategic and International Studies, Washington, D.C., December 7, 2001, at http://www.csis.org/ruseura/pl011207.htm.
13. Ministry of Trade and Economic Development of Russia, "Main Economic and Social Indicators of Russia Federation Until 2004," at http://www.economy.gov.ru.
14. "Finance Ministry Sanguine About Foreign Debt," Yahoo International Finance Center, at http://biz.yahoo.com/ifc/ru/news/22602-4.html.
15. "70% of Russian Businessmen for Russia’s Early Accession to WTO," Pravda.ru, October 23, 2001, at http://english.pravda.ru/world/2001/10/23/18898.html.
16. "Russia in WTO: Myths and Reality ("Rossiya v WTO: Mify i Realnost"), A Report by the Center of Financial and Economic Research supported by Club 2015, 2001, at http://www.cefir.ru.
17. "Russia in WTO--Pluses and Minuses," Pravda.ru, February 13, 2002, at http://english.pravda.ru/economics/2002/02/13/26383.html.
18. "Russia to Become Full-fledged WTO Member by Mid-2003," at http://english.pravda.ru/world/2002/01/10/25186.html (May 2002).
19. "Focus: Russia’s WTO Accession Pace May Be Slowing," at http://www.prime-tass.com/news/66/opened/20020402/210262.asp (May 2002).
20. "On Approval of Plan of Action for Adduction of Russian Legislation in Conformity with the Norms and Rules of the World Trade Organization," Direction of the Government of the Russian Federation, No. 1054-p, August 8, 2001.
21. Office of the United States Trade Representative (USTR), "Foreign Trade Barriers: Russia’s Trade Summary," 2001, at http://www.ustr.gov/html/2001_russia.pdf.
22. Glenn W. Harrison, Thomas F. Rutherford, and David G. Tarr, "Trade Policy Options for Chile: A Quantitative Evaluation," World Bank Group Policy Research Working Paper No. 1783, June 1997, at
http://wbln0018.worldbank.org/research%5Cworkpapers.nsf/View+to+Link+
WebPages/5C3A69A7767E040B852567E000541C6C?OpenDocument.
23. USTR, "Foreign Trade Barriers: Russia’s Trade Summary."
24. Peter Aven, presentation at the U.S.-Russian Business Council 2002 Forecast Conference, Washington, D.C., April 17, 2002. Aven is president of Alfa-bank, the largest private bank in Russia.
25. Russian News Agency, Interfax, October 29, 2001.
26. Opening Statement of the Hon. Sander M. Levin, a Representative from the State of Michigan, in Hearing to Explore Permanent Normal Trade Relations for Russia, Committee on Ways and Means, U.S. House of Representatives, April 11, 2002, at http://waysandmeans.house.gov/trade/107cong/4-11-02/4-11levi.htm.
27. U.S. Department of Commerce, "NIS: Intellectual Property Rights--301 Watch List," at http://www.bisnis.doc.gov/bisnis/
country/000731BNAIPR301.htm.
U.S.-Russia Summit Priorities: The Strategic Framework, a Nuclear Arms Agreement, and Trade
05-14-2002
When President George W. Bush and Russian President Vladimir Putin meet for summits in Russia and Rome later this month, they will have an opportunity to define a new framework for U.S.-Russia strategic relations that extends beyond the war on terrorism. Such a framework could lay the foundation for a new 21st century security architecture while facilitating Russia’s integration into the European-North Atlantic security and economic environment.
Given Russia’s proximity to Western Europe, the Middle East, Central Asia, and the Far East, and in light of Putin’s decision to line up with the United States in the war on terrorism, 1 establishing closer cooperation with Russia will have significant benefits for U.S. national security and regional and economic interests. Closer cooperation with Moscow is vital, for example, for isolating such terrorism-supporting states as Iran, Iraq, Syria, Libya, and North Korea and for slowing the transfer of Russian military technology to China. 2
On the Summit Agenda
At the summit meetings in St. Petersburg and Moscow on May 23-26 and at the NATO-Russia summit in Rome on May 28, President Bush and President Putin will focus on matters of security and economic policies. In Moscow, they will sign a formal treaty that calls for deep cuts in nuclear arsenals on both sides over the next 10 years. Both leaders are committed to ending the legacy of the Cold War by reducing the strategic nuclear arsenals of their countries to around 1,700 to 2,200 deliverable warheads each. Such a commitment will also be required in cooperative efforts to reduce the threat posed by the proliferation of weapons of mass destruction (WMD), to increase security in regions of common interest, and to increase trade to strengthen economies.
The treaty to reduce U.S. and Russian offensive nuclear arsenals is compatible with currently projected U.S. security requirements. These requirements, however, could change with little warning. As a result, reductions should proceed cautiously and the process should permit flexibility. The treaty allows flexibility by limiting its duration to 10 years, by pacing the reductions within the 10-year period, and by allowing either party to withdraw from the treaty with three months’ notice. Another welcome sign of this flexibility is the agreement not to require the destruction of the warheads or to impose limitations on missile defenses.
Specifically, during his summit meetings with President Putin, President Bush should:
Ask for Russia’s support for removing Saddam Hussein and his regime from power. For Russia, the issues in Iraq are primarily the Soviet-era debt of $11 billion to $13 billion for arms sales during the Iran-Iraq war and how the oil deals secured by Russian companies in Iraq (worth $30 billion in cash flow for the life of the projects) would be grandfathered in under a new regime. In addition, Russia is concerned about the territorial integrity of Iraq. President Bush could secure Russia’s active diplomatic and military participation in an operation against Baghdad by guaranteeing that such concerns would be addressed in the post-Saddam Iraq in a manner that is satisfactory to Russia. 3
Encourage Moscow to terminate Russian sales of conventional weapons to Iran and technological cooperation to produce WMD. In 2001, Russia and Iran signed a $300 million a year, multi-year arms export agreement, making Iran the third largest customer for Russian weapons after India and China. Moscow is also building two nuclear reactors at Bushehr, from which the precursors to nuclear bomb fissile material could be obtained, and is selling sophisticated anti-ship missiles and other destabilizing weapons to Iran. 4
On May 6, Under Secretary of State John Bolton called for the United States and Russia to sign a political declaration on the New Strategic Framework that would cover not just strategic offense and defense systems, but also nonproliferation and counterproliferation. 5 Such a framework should promote cooperation to prevent Iran from becoming a nuclear state armed with ballistic missiles. The Administration should be ready to offer an economic quid pro quo for Russia’s actions, such as participation in building the components of ballistic missile defense systems and expansion of civilian space launch quotas.
Reject any limitations on strategic defenses. Although the treaty to reduce strategic nuclear arms does not include a provision limiting missile defense programs, the Russians may seek such limitations through other declarations to be issued during the summit. President Bush, as he has in the past, should continue to resist Russian pressure to limit missile defenses. According to the Nuclear Posture Review (NPR), strategic defenses--which include missile defenses--are a necessary leg of the new strategic triad that includes offensive strategic forces and responsive forces. Now that the 1972 Anti-Ballistic Missile (ABM) Treaty with the former Soviet Union is scheduled to lapse in mid-June, nothing should reimpose its limitations on missile defense.
Move forward with NATO-Russia cooperation. On May 28, NATO and Russia will sign an agreement to establish the NATO-Russia Council. This agreement should allow for joint development of policy and the planning of mutual activities in such areas as the war on terrorism; operations against terrorist organizations and their financial supporters; nonproliferation and WMD security; special forces interoperability; educational exchanges between officers on all levels; peacekeeping operations; and comprehensive military reform, 6 which President Putin and Defense Minister Sergey Ivanov would welcome.
In the past, the forum provided by the 1997 Permanent Joint Council often turned into a venue for Moscow to air its frustrations with NATO actions, such as the Balkans operations. 7 Today, the joint NATO-Russia peacekeeping activities in that region demonstrate how these two sides can cooperate. Top U.S. generals, such as Supreme Allied Commander Europe General Joseph Ralston 8 and Commander in Chief of Central Command (CENTCOM) General Tommy Franks, routinely praise Russia’s cooperation with the United States and NATO. 9 The NATO-Russia Council should be seen as a first step on the road to greater security integration between Russia and the North Atlantic alliance. The President also should invite President Putin to address the NATO summit in Prague in November.
Encourage Russia to expand its energy sales in the global market. Russia could increase energy sales significantly by enhancing corporate governance transparency and shareholder rights for Western investors. In addition, production could be increased by including 100 new oil and gas fields in the Production Sharing Agreement (PSA) legislation, which allows Western oil companies to be compensated by drawing oil for sale from the jointly developed fields. U.S. companies need assurances that their investments in Russian fields and infrastructure are secure. President Bush should ask Putin to support guarantees for Western companies through expanded PSA legislation and to ensure its passage in the Duma.
Russia exports over 1.8 billion barrels of oil and 6.7 billion cubic feet of natural gas per year. It is the world’s largest exporter of natural gas and second largest exporter of oil. 10 Together with the countries of Eurasia, it could catch up with Saudi Arabia as a leading oil exporter by 2010. 11 U.S. export development agencies, such as the Overseas Private Investment Corporation (OPIC), the Export-Import Bank, and the international financial institutions, could assist foreign investors by insisting that the rule of law be honored and contracts upheld. A boost in Russia’s energy exports also would provide its European and Far Eastern customers with additional energy security in the event that OPEC continues its policy of high prices and production cuts.
Express support for the lifting of U.S. barriers to trade with Russia. The Administration supports Russia’s economic integration with the West, including its membership in the World Trade Organization (WTO). President Putin has declared that Russia will not require any special deals from the WTO, so standard WTO criteria for membership should apply. President Bush should declare U.S. support for Russia’s accession in 2004, provided the negotiations in all sectors are completed successfully.
The U.S. statute known as the Jackson-Vanik Amendment, which denies Russia most favored nation status, is a relic of the Cold War. It was passed in 1974 when the Soviet Union severely limited emigration. Congress suspended application of the amendment after the Soviet Union collapsed. At the Russia summit, President Bush should express his support for a permanent lifting of the Jackson-Vanik restrictions, which Congress could accomplish by attaching an amendment to trade legislation.
Conclusion
The forthcoming U.S.-Russia summits offer both countries a unique opportunity to launch a strategic partnership that would assure greater security in the 21st century. At the summit meetings, both President Bush and President Putin should focus on casting off the baggage that has hampered U.S.-Russia relations in the past, such as Moscow’s ties with Iran and Iraq and other states that sponsor terrorism.
The two leaders will put to rest the legacy of the Cold War by signing a strategic treaty to reduce their nuclear arsenals. Most important, they should expand joint actions in the war on terrorism, as well as establish goals for NATO-Russian cooperation and support policies that further integrate Russia into the global market.
1. "Russia Embraces U.S.-Led Effort," Associated Press, September 25, 2001, at http://wildcat.arizona.edu/papers/95/26/05_4_m.html.
2. For additional information on this issue, see Ariel Cohen, "The Russia-China Friendship and Cooperation Treaty: A Strategic Shift in Eurasia?" Heritage Foundation Backgrounder No. 1459, July 18, 2001.
3. See also Ariel Cohen, "Bringing Russia into a Coalition Against Saddam," Heritage Foundation Executive Memorandum No. 812, April 29, 2002.
4. Brenda Shaefer, "U.S. Needs Russia to Help Contain Iran," at http://www.ksg.harvard.edu/news/opeds/shaffer_russia_iran_oped_latimes_022102.htm; see also "Russia to Pursue Nuclear, Military Cooperation with Iran," Agence France-Press, Moscow, April 3, 2002, at http://www.hindustantimes.com/nonfram/030402/dLFOR70.asp.
5. John R. Bolton, "Beyond the Axis of Evil: Additional Threats from Weapons of Mass Destruction," Heritage Foundation Lecture No. 743, May 6, 2002.
6. For further discussion of this agenda, see Ariel Cohen, "Russia and Eurasia: Promoting Security, Prosperity, and Freedom," in Stuart M. Butler and Kim R. Holmes, eds., Issues 2002: The Candidate’s Briefing Book (Washington, D.C.: The Heritage Foundation, 2002), at http://www.heritage.org/issues/chapters/chapter20_russia.html.
7. "The NATO-Russia `Founding Act’: Stepping Stone or Stumbling Block for a European Security Architecture?" Berlin Information-Centre for Transatlantic Security (BITS), British American Security Information Council (BASIC), Summit Briefing Paper No. 97.1, July 4, 1997, at http://www.basicint.org/founding.htm.
8. Walter Pincus, "Anti-Terror War Binds U.S., Russian Militaries," The Washington Post, May 3, 2002, p. A22.
9. Francescca Mereu, "Russia: Franks Praises Russia Cooperation in Antiterror Campaign," RFE-RL, March 21, 2002, at http://www.cdi.org/russia/198-2.cfm.
10. U.S. Department of Energy, Energy Information Administration, "Country Analysis Briefing," at http://www.eia.doe.gov.
11. Edward L. Morse and James Richard, "The Battle for Energy Dominance," Foreign Affairs, April 2002, at http://www.foreignaffairs.org/articles/Morse0302b.html.
04-29-2002
As President George Bush prepares for the upcoming summit with Russian President Vladimir Putin in St. Petersburg and Moscow on May 23-26, he must look for ways to encourage Russia to become a full ally in the war on terrorism and a strategic partner in the new global security environment. This means encouraging Russia to support an effort to make the world safe from the growing threat posed by Saddam Hussein and his weapons of mass destruction (WMD).
In recent private interviews with the author in Moscow, top Russian parliamentary leaders and presidential policy advisers indicated that protecting Russia’s multibillion-dollar interests in Iraq remains a priority, regardless of who is in power in Baghdad. But when asked to choose between Saddam’s friendship and America’s good will, they indicated they would support a U.S. policy to remove Saddam from power. This major policy shift would entail Moscow’s breaking the friendly ties with Saddam’s regime that it has maintained since the 1960s, especially under former Prime Minister Evgeny Primakov (the top Arab affairs expert in Moscow and the former chairman of the USSR Supreme Soviet’s upper house).
A U.S.-led coalition to change the political landscape in Iraq would benefit from Russia’s participation. At the summit, the Administration should secure Moscow’s support by focusing on ways to expand security and intelligence cooperation and to assure the repayment of Iraq’s debt to Russia by any future post-Saddam government.
Breaking with Baghdad. Moscow has supported the U.S.-led war on terrorism. In Afghanistan, for example, it provided U.S. troops with high-quality intelligence and the Northern Alliance with timely arms supplies. It is working with Washington to secure, by May 30, U.N. Security Council approval of a new list of goods restricted for export to Iraq.
Moscow, long Baghdad’s main arms supplier and business partner, began supporting the United States against Iraq after the Soviet Union began to implode. It supported the U.S. coalition in the Gulf War despite Primakov’s efforts to protect Saddam, although the Iraqi dictator was still able to curry diplomatic and economic favor in Moscow throughout the 1990s by providing preferential treatment for Russian companies in oil drilling and refining and by promising billion-dollar contracts to the influential Russian military-industrial complex.
Moreover, according to an aide to former President Boris Yeltsin, Vyacheslav Kostikov, Saddam has bought the support of politicians such as Vladimir Zhirinovsky and his Liberal Democratic Party. Saddam also paid for the lobbying efforts of Russian business tycoons and former senior officials who make millions of dollars reselling Iraqi oil in the gray market and supply Iraq with legal and illicit goods, including military equipment banned under U.N. resolutions. Representative Curt Weldon (R-PA) is among those who have accused Russia of supplying Baghdad with ballistic missile gyroscopes, biological warfare manufacturing equipment, and sophisticated surface-to-air missiles, a financial tie that will require deep determination to break. Others report that Ukraine has sold Baghdad an anti-stealth aircraft radar system called Kolchuga.
Moscow also has important economic interests in Iraq:
A Soviet-era debt of $7 billion to $8 billion, generated by arms sales to Iraq during the Iran-Iraq war. Adjusted for inflation, that debt is worth from $10 billion to $12 billion today.
Lucrative contracts to operate and develop giant oil fields in Iraq, signed by Russia’s major oil company, LUKoil, and the government-owned Zarubezhneft and worth as much as $30 billion over 20 years. These include the Western Qurna oil field and wells already developed by Russian oil companies Slavneft and Tatneft.
Trade in Russian goods under the U.N.-sponsored oil-for-food program, worth between $1 billion and $1.5 billion a year.
Such interests pose significant impediments to Moscow’s severing its ties with Iraq. However, Moscow must understand that its economic interests will not be secure as long as Saddam remains in power.
What the Administration Should Propose. U.S. and Russian policymakers clearly recognize the growing threat Saddam poses to global security. What is needed is a strategy for removing him from power and ushering in a pro-democracy government. To assist the United States, Putin must confront the lingering pro-Iraqi sentiment in the Foreign Ministry, military-industrial complex, and oil lobby. He must demonstrate how Russia’s cooperation in the coalition would benefit Russia. To make Moscow a full partner in the anti-Saddam coalition, the Administration should:
Offer to support the repayment of Iraq’s Soviet-era debt by a future pro-Western government in Baghdad. Alternatively, Washington may consider brokering a deal in which the $100 billion Soviet debt to the Paris Club is reduced by the amount of Iraq’s debt to Russia, or about 12 percent, when Saddam is removed.
Offer to support Russian companies’ contractual rights to Iraqi oil fields with the post-Saddam government. Russia may fear that these contracts could be annulled by a future government in Baghdad. The United States could improve its long-term security dividend and enhance Russia’s role in the anti-terrorism coalition by recognizing existing Russian energy interests in Iraq.
Begin a more transparent and reciprocal data exchange with Russia on black market oil sales and arms and military technology transfers. For example, Washington and Moscow should exchange data on export licenses and illegal arms transfers to Iraq, including WMD procurement through Russian companies.
Appoint a senior Administration official to negotiate U.S.-Russian understandings on a post-Saddam Iraq. This person should be well-versed in Middle East geopolitics, energy economics, and finance issues. Putin should be asked to appoint a similarly qualified high-ranking official for these negotiations.
Conclusion. U.S.-Russian cooperation on a regime change in Iraq should be mutually beneficial. Helping Putin secure Russia’s economic interests in Iraq would weaken domestic criticism of his support for President Bush’s Iraq policy. Such cooperation would also lessen criticism of the Bush policy toward Iraq in Europe and the Arab world. Finally, it could lay the foundation for a fruitful partnership in the war against terrorism and in efforts to reduce the threat posed by WMD proliferation.
04-23-2002
The repercussions of the failed coup against Venezuelan President Hugo Chavez extended halfway across the world to the shores of the Caspian, where the leaders of the littoral nations are set to meet to discuss dividing the sea’s abundant energy resources. Instability in Venezuela, the world’s fourth-largest oil supplier, has Eurasian states scrambling to seize the moment of opportunity for their own energy sectors.
Like leaders in Turkmenistan, Uzbekistan, Georgia and Azerbaijan, Venezuelan politicians use their countries’ oil riches as leverage when negotiating with the United States and Europe. With the world’s fourth-largest oil supply held hostage, 60-year-old Pedro Carmona became an unlikely coup leader. Carmona, the head of Venezuela’s largest chamber of commerce, had earned a reputation for authoritarian leanings. On April 9, weeks after starting to protest the appointment of Chavez cronies to the board of the state oil company, Carmona and Venezuela’s largest trade union group organized a general strike. Two days later, the military shot at a massive opposition march, killing 16 protesters. The military kicked out Chavez, and appointed Carmona as head of a junta. Carmona promptly dissolved the National Assembly, Constitution, courts and public offices - he later told Venezuelan newspapers he had done this "to facilitate a rapid transition to new elections" - but the plotters soon gave in to popular revolt and reinstated Chavez on Sunday April 14.
The two-day drama echoes the 1991 Russian coup attempt that killed the Soviet Union. Like the Communist bureaucrats who seized and then lost the Kremlin, Carmona blamed staff for his failure, claiming that numerous people wrote and rewrote decrees dissolving public institutions during the chaos. But while the Soviet Union was a foundering economy, Venezuela’s state-controlled oil company is the United States’ third-largest supplier.
Diplomats in Washington are pointing fingers in the wake of charges that the Bush administration failed to adequately condemn an antidemocratic coup. But whatever the diplomatic fallout, energy analysts and foreign policy experts agree that the episode raises serious long-term questions about the political risk in the United States’ three biggest suppliers - Saudi Arabia, Iraq and Venezuela. While nobody suspects Venezuela of harboring terrorists, the coup attempt has made its oil supply seem as vulnerable to manipulation as any Persian Gulf nation’s. This realization is pushing the United States to seek new sources of energy.
Compared to Venezuela, Russia and the Caspian nations look very stable. On April 18, a week after Chavez returned, Russian President Vladimir Putin delivered his State of the Federation address to the parliament. The address focused on the necessity to improve the state bureaucracy and assure faster economic growth and more foreign investment. Moreover, Putin spoke little about Russian foreign policy, generally acknowledging that Russian military competition will be much less important than economic competition.
He dedicated seven out of nine paragraphs to the Commonwealth of Independent States (CIS), clearly making relations with the former Soviet republics a top priority in Russian foreign policy. The leading opportunities for absorbing foreign investment - and some of the most fruitful joint venture prospects between Russia and its former republics - lie in the energy sector. Russia clearly is striving to connect its desire to become a major player in the global energy markets with its dominant role in the "near abroad."
One way to boost Russia’s standing with oil purchasers and would-be oil exporters is to develop private companies’ capacity. CEO Mikhail Khodorkovsky of Yukos Oil, Russia’s fastest-growing company, addressed this on April 16, when he joined Mikhail Friedman and Petr Aven of the Alfa-Group, which includes the Tyumen Oil Company, for a symposium at the US-Russian Business Council. The speakers agreed that Russia’s economy needs to grow more steeply than the 3.5 to four percent annual rate currently forecast by Economic Development Ministry. Critically, in light of Venezuela’s turmoil, they assert that Russia can conduct an energy policy independent from the OPEC cartel, eventually boosting production to the Soviet-era level of around 450 million tons a year.
Other Russians also seem eager to bring modern technology and salesmanship to the nation’s natural resources. Leonid Grigoriev, a prominent Russian economist and an advisor to the Ministry of Energy, says Siberia has the largest coal resources on the planet. He says these can produce competitively priced power if they acquire modern technology. More broadly, the Putin Administration is sparing no effort to organize the post-Soviet countries in the Caucasus and Central Asia into the Eurasian Economic Union (EEU) and Eurasian Energy Community (EEC), which will coordinate oil and natural gas exports from Russia, Kazakhstan, Azerbaijan and Turkmenistan.
Putin often conducts phone conferences with the Kazakhstani president Nursultan Nazarbayev and other regional leaders to discuss energy policy. He also planned to press Azerbaijan, Iran, Kazakhstan, and Turkmenistan toward an agreed method for dividing the Caspian Sea’s resources at the Caspian summit in Ashgabat on April 23.
Even though Putin enjoys more stability and has focused more squarely on energy investment than Chavez, Russian coordination efforts are moving too slowly to make them a short-term substitute for Venezuelan supply. So far, plans to form a unified Central Asian energy network have run into bureaucratic resistance and ineptitude. If Putin overcomes this resistance, these organizations may help him counter-balance the increasingly unstable Gulf producers and increase Russia’s influence along its periphery. This would provide a multiplier to Putin’s geo-economic strategy.
As Venezuela’s reputation founders, many multinational energy firms already have put down stakes in Russia., ExxonMobil, which has strong ties to the Bush administration, has invested over $10 billion in the Sakhalin-1 oil and gas fields and expressed interest in building a natural gas pipeline from Sakhalin to Japan. Royal Dutch Shell is in talks with Gazprom and Russian Prime Minister Mikhail Kasyanov about buying out Gazprom’s share in the giant Sakhalin-2 project, promising to invest $8-10 billion. On April 16, British-American conglomerate BP announced it would spend $375 million to raise its stake in Sidanko, which previously went through a bruising bankruptcy, from 10 percent to 25 percent.
Chaos in Venezuela and violence in the Middle East can only make Russia and Eurasia look increasingly attractive for energy investors. Provided they can steer a common course with leaders in neighboring countries - and can preserve financial transparency - Putin and Russian oil companies may boost their country’s influence by skillfully taking advantage of its competitors’ increasing political risk.
03-18-2002
The US government is putting the best face possible on Uzbek President Islam Karimov’s visit to Washington. Officials from the State Department, National Security Council and the Pentagon stress that Karimov promised to improve Uzbekistan’s human rights record, adding that they believe Karimov is sincere in his desire to promote civil society in the Central Asian nation.
Karimov ended his US visit on March 14 with several stops in New York, including a brief visit to the downtown site where the World Trade Center buildings once stood. The same day in Washington, officials gave Karimov’s performance high marks. The Uzbek leader has faced widespread criticism in recent years for a crackdown on basic rights in Uzbekistan. But Bush Administration officials insisted that Karimov recognized domestic rights conditions in Uzbekistan needed to improve. The Uzbek leader also admitted that his government had to relinquish total control over the economy.
"He is not stupid," one US official said. "He delivered a surprisingly intelligent speech to the business community; and his remarks to President Bush were quite sincere - unless he deserves an Oscar for acting."
Some advocates have worried that by stepping up aid to Uzbekistan after joining the war on terrorism, the United States would reward Karimov’s repressive rule. One official, speaking on background, disputed that notion. "He understands that he has a problem with human rights, and he openly said so. He owes the United States his security, if not his survival," the official said. "I don’t think he will string us on and lead us by the nose."
Karimov certainly seemed humbled, according to note-takers, at his meetings with President George W. Bush and Secretary of State Colin Powell. The Uzbek leader repeatedly voiced appreciation for the Americans’ respectful and low-key tone, say government officials with knowledge of the meetings. Karimov gave a clear-cut promise to "improve behavior" in the future.
"If only anyone explained these things to me this way before," Karimov reportedly lamented, "we would be along the way to implement these reforms... These issues are our responsibility. We will follow through on what we signed. I understand that Uzbekistan needs it, not the United States."
US officials said both Bush and Powell stressed to Karimov that without significant improvements on human rights and economic liberalization, the US Congress will not be receptive to further allocations of economic and security assistance.
US officials suggest that Karimov has already moved to fulfill his pledge to improve the country’s democratic climate. Prior to arriving in Washington, the Uzbek government registered a human rights organization, and released over 800 political prisoners from prison. Human rights organizations have praised Karimov’s recent moves, but say they alone do not comprise a liberalization trend.
Karimov’s actions follow a big increase in American aid. In the current supplemental 2002 US assistance budget, Uzbekistan is about to receive over $155 million - $83.5 million above the aid allocated prior to the September 11 attacks. The US Export-Import Bank also inked a fresh $55 million credit facility for small and midsize Uzbek businesses during Karimov’s visit. About one-half the aid total will consist of security assistance, including communications gear for the Uzbek military and programs aimed specifically at improving border patrols. The remaining half of aid would be devoted to a wide variety of socio-economic areas, including programs to combat the spread of HIV/AIDS, the environmental rehabilitation of the Aral Sea basin and improvements in social services in the Ferghana Valley, Central Asia’s agricultural heartland and center of radical Islamic sentiment.
In Washington, Karimov also reached out to the international financial institutions, such as the World Bank and the International Monetary Fund (IMF), after repeatedly snubbing these organizations’ advice for years. The IMF closed its offices in Uzbekistan in 2001, citing frustration over the Karimov government’s reluctance to carry out essential reforms, including the convertibility of the local currency, the som.
The Bush Administration officials who deal with Uzbekistan on a daily basis told EurasiaNet that they understand that they must pursue human rights and political liberties in the name of security. Without security, there will be no investment; but without investment, there will be no economic development. However, they also stressed that in the middle of the war on terrorism, security takes the front seat.
Karimov remains concerned about national security and in Washington held meetings with top defense department officials. Indeed, the centerpiece of his visit was the signing of a Declaration of Strategic Cooperation. The Pentagon has taken a lead in cooperating, training and supplying the Uzbek military. Despite the rumored death of Islamic Movement of Uzbekistan leader Juma Namangani during the anti-terrorism campaign in Afghanistan, Karimov is anxious to keep building the Uzbek military’s capacity.
Even if the IMU cannot reconstitute, Hizb-ut-Tahrir, a radical Islamist party, which advocates the overthrow of Karimov’s regime, could help foment anti-government unrest. The Strategic Cooperation pact includes a promise by Americans to "regard with grave concern any external threat" to the Uzbek government. Hizb-ut-Tahrir already causes grave concern both for the Karimov regime and for the US government, American diplomats stressed.
Because of these concerns, some in the US human rights community recognize that in order to pursue specific liberalization measures, or to get notorious cases of persecution reversed, it may be worthwhile to work through the Pentagon. "The US military has a unique channel of communication with the Karimov regime," says one congressional staff member who is deeply involved in promoting democracy in Uzbekistan.
However, the Pentagon is primarily focused on future geopolitical engagement in Uzbekistan, irrespective of the human rights climate. In their meeting, Karimov and Secretary of Defense Donald Rumsfeld discussed the future of American bases in Central Asia. The US government’s official position is that it does not seek permanent bases in Central Asia. At the same time, officials say they want access to former Soviet facilities for an indefinite period - at least as long as the war on terrorism is continuing. Such a formula is vague enough to keep everyone in the region nervous, but it avoids a direct clash with Russia over regional spheres of influence. In October 2001 Russia requested - and conducted - consultations with the United States over the future of Central Asia. The second round of consultations will take place in Moscow in April.
According to sources present at Karimov’s talks with Bush, Powell and Rumsfeld, the Uzbek ruler’s main worry - and warning - was about Iranian meddling in Afghanistan. Karimov apparently believes that Tehran will try to undermine stability there by exploiting centuries-old ethnic rivalries, in order to undermine the United States and its allies. If that scenario were to materialize, the United States would need to act as a more solicitous friend to players throughout the region, including Karimov himself. As one American diplomat said, "if you thought politics make strange bedfellows, try war - it makes stranger ones."
02-19-2002
Reports that al Qaeda fighters, possibly including Osama bin Laden himself, have found refuge in Georgia are stoking pressure for outside military intervention. Top Russian officials are once again hinting that Moscow may feel compelled to intervene militarily to contain Islamic radicals in Georgia. Georgian President Eduard Shevardnadze is categorically opposed to Russian intervention in the Pankisi Gorge, but he has indicated that he would consider a Georgian-US joint operation.
The top US diplomat in Georgia, Philip Remler, helped focus attention to the brewing crisis in the Pankisi with an announcement that al Qaeda fighters had infiltrated the region. Georgian leaders have not disputed Remler’s assertion.
In recent days, Russian officials have fueled concerns with speculation that bin Laden may be among those on the loose in the Pankisi Gorge - a claim that Georgian officials deny.
Since mid-January Georgian security have attempted to crack down on criminality in the Pankisi area. But the February 17 kidnapping of four Georgian police officers on duty in the region underscores the weakness of the state’s authority.
Russian Defense Minister Sergei Ivanov warned that Georgia’s chaotic conditions warranted the launch of an immediate anti-terror offensive. If Georgia is incapable of conducting such operations, Ivanov hinted the Russian military could take matters into its own hands.
"On the one hand, it is, of course, sovereign Georgia’s business," Ivanov told the Interfax news agency. "On the other, [should we really] sit and wait and see how tensions mount there and how this region is turning into a mini Chechnya, or mini Afghanistan?"
The prospect of Russian intervention clearly does not appeal to Georgian officials. Shevardnadze on February 18 described the idea of a Russian operation in the Pankisi area as "unacceptable."
At the same time, Shevardnadze announced that Tbilisi was considering a joint security operation with the United States. "As for the possibility of a future joint action with the U[nited] S[tates] special forces in the Pankisi Gorge, we haven’t yet had systematic discussions on that," Shevardnadze confessed. "But, if it becomes necessary, we have been and remain ready for dialogue."
In his announcement about the presence of Islamic radicals in Georgia, Remler indicated that Washington was willing to enhance security cooperation with Georgia. The timing of his comments, some analysts believe, may have been designed to forestall a Russian military move in Georgia.
Most regional analysts and policy makers have known that the Pankisi Gorge has served as a haven for Chechen separatists and other Islamic radicals since the first Chechen war (1994-1996). The Chechen fighters and terrorists connected with Afghanistan are allied with the radical Chechen field commanders Shamil Basaev, Ruslan Gelaev and Khattab.
The Kremlin has complained for years that the Shevardnadze government has covered up the Pankisi situation. According to a March 2001 report by the popular Georgian TV channel Rustavi-2, Pankisi has become a supply base to which the Georgian Ministry of State Security has transported Turkish aid to the Chechen separatists. According to the Georgian Minister of State Security Valery Khaburdania, the radical pan-Turkist Grey Wolves were the conduit of assistance to the Chechens.
In the past, Moscow’s complaints about the flow of aid to Chechens via the Pankisi did not draw any reaction from Washington. Senior officials in the US Department of State now say they are facing a dilemma on Pankisi. On the one hand, securing independence and territorial integrity of Georgia is at the top of the US agenda for the Caucasus. On the other hand, improving relations with Russia, especially concerning the conduct of anti-terrorism operations, has become a strategic priority.
According to the Georgian official, Azeri security officials tipped off Georgian authorities about the terrorist penetration. Georgian security officials announced February 9 that two foreigners with apparent ties to Khattab had been arrested.
Today, disparate Trump policies —more muscular American diplomacy, less soft power, higher tariffs, and the quest for cheap energy — are being tested together in Venezuela. The pro-Russia, pro-China, and pro-Iran far left Maduro regime in Caracas has long been a thorn in the side of the United States in the often-neglected Latin American theater.
The first Trump Administration focused heavily on applying pressure to the country to minimize its benefits from oil exports in the U.S. American economy. Now, early in President Trump’s second term, he is reviving efforts to weaken the Chavista dictatorship by imposing secondary tariffs of 25% on all imports from countries that buy Venezuelan oil, starting on April 2nd. Additionally, on March 29th, the U.S. informed foreign partners of Venezuela’s state-owned oil company, Petroleos de Venezuela (PVDSA), that it plans to revoke authorizations issued by the Biden Administration for them to export Venezuelan oil and byproducts, putting further pressure on Venezuela’s ability to export.
While such measures will have certainly gotten Venezuelan President Nicolás Maduro’s attention, targeting that country’s most profitable industry may be insufficient to implement the president’s agenda.
Read the full article here.
Dr. Ariel Cohen discusses the ceasefire deal between Israel and Hamas, how each party will likely proceed, and theUnited States' involvement in the agreement.
https://youtu.be/izKqUhFdcPo
The 29th annual UN Climate Change Conference begins on November 11th in Baku, Azerbaijan. Many environmentalists are pessimistic about the conference, with the choice of Azerbaijan as the host country, China’s negotiation strategies, and the American election results.
A major Russian military buildup on the border with Ukraine has recently sparked fears of a potentially dramatic escalation in the simmering seven-year conflict between the two countries. Although tensions have eased somewhat following Moscow’s April 22 announcement of troop withdrawals, the threat of a new Russian offensive remains.
