Join Mailing List
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
In the past five years, real and present dangers to U.S. national security, especially Islamist terrorism and threats to the energy supply, have affected U.S. policy in Central Asia. The region has great energy potential and is strategically important, but it is land-locked, which complicates U.S. access and involvement there.[1]
The United States has varied and at times competing interests in Central Asia. The region, which includes the five post-Soviet states of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, as well as Afghanistan and the Caspian basin, plays an important part in U.S. global strategy in view of its proximity to Russia, China, India, Pakistan, Iran, and other key regional actors. No less important are its ethno-religious composition and vast deposits of oil, gas, coal, and uranium.
U.S. interests in Central Asia can be summarized in three simple words: security, energy, and democracy. The United States is waging an enduring struggle to safeguard the West in general and America in particular, not only from terrorist threats emanating from Afghanistan, but also from overreliance on unstable sources of hydrocarbons in the Middle East. In that effort, it is essential that U.S. foreign policy not inflate the importance of one interest to the detriment of the others.
A key U.S. national security concern is the diversification of energy sources, and the Caspian region is a significant alternative source of fossil fuels. To put things in perspective, however, it must be noted that while the Caspian Sea’s production levels are considerable, with peak production comparable to that of Iraq and Kuwait combined, they are much smaller than total Organization of Petroleum Exporting Countries (OPEC) output.
Production levels are expected to reach 4 million barrels per day (bbl/d) in 2015, compared to 45 million bbl/d for the OPEC countries in that year.[2] Central Asia is neither the world’s largest source of oil and gas nor easily accessible; market access is hindered by political and geographic conditions, including continued Russian influence, limited access to waterways beyond the Caspian Sea, and limited export infrastructure.
However, the region is clearly important geopolitically and geoeconomically. Russia controls the majority of oil export routes from reserves in Central Asia and the Caspian.[3] Nevertheless, prior and continuing efforts by major Western oil companies, particularly the Baku–Tbilisi–Ceyhan (BTC) pipeline, as well as current and planned investments in the Central Asian oil sector by India and China, have yielded more options for non-Russian export routes and diversification of the customer base. These developments may help to break the Russian energy-transit monopoly, but they also open the region to intensified competition over energy resources on the part of other energy-hungry economies.
China is steadily increasing its involvement in the energy sector, as demonstrated by the purchase of the PetroKazakhstan oil company last year, acquisition of Canada-based Nations Energy by China Interntional Trust and Investment Corporation (CITIC) in the fall of 2006, and the signing of several significant pipeline agreements. Russia and China have been cooperating to reduce U.S. influence in the region and, as they accrue more Central Asian energy assets, will have more leverage with which to prevent U.S. encroachment into their alleged spheres of influence.
What is needed in Central Asia is a policy that allows the United States to continue to diversify its energy supplies, station its military forces close to the most immediate threats, and create a lasting and deep impact by promoting democratic and free-market values in an area that is still undergoing political and economic development.
Policymakers and lawmakers alike should assess how energy issues fit into wider U.S. strategic interests in the region and develop balanced, nuanced policies that allow the U.S. to stay engaged where necessary while distancing itself from the less savory aspects of these regimes. To achieve these ends, the U.S. should:
Policy Overview
The hydrocarbon reserves of Central Asia are concentrated in the Caspian region. Azerbaijan is therefore a principal actor, despite its location in the Caucasus. It has considerable oil and gas resources in its own right and is central to non-Russian energy transit from Central Asia to points west. The bulk of Central Asian–Caspian hydrocarbons is located in Kazakhstan, Azerbaijan, Uzbekistan, and Turkmenistan. Both Tajikistan and the Kyrgyz Republic have limited reserves of oil and gas in amounts that thus far have not warranted much attention from foreign investors.
Table 1, which shows proven and possible oil reserves by country, demonstrates that the region’s largest oil deposits as well as the three largest regional oil projects are located in Kazakhstan and Azerbaijan. These three projects are in the Tengiz and Karachaganak fields in Kazakhstan and the Azeri–Chirag–Guneshli (deep-water) field in Azerbaijan.[4] Each project includes Western oil majors as shareholders.
Potential offshore reserves of Turkmen oil in the Caspian Sea have yet to be explored or developed because of disputes between Turkmenistan, Azerbaijan, and Iran over border delineation in the southern portion of the sea.[6]
Oil Transit
Existing oil pipelines in Central Asia include the following:
It is estimated that the oil fields of Central Asia are capable of producing about 4 million barrels per day in 2015, roughly equivalent to the daily production levels of Iraq and Kuwait combined.[8] Possible future oil pipeline projects include the Central Asia Oil Pipeline (CAOP) and the Kazakhstan–China pipeline, construction of which is already underway.
Finally, in December 2002, the governments of Turkmenistan, Afghanistan, and Pakistan signed a Memorandum of Understanding to construct the Central Asia Oil Pipeline, which would bring Uzbek and Turkmen oil to Gwadar, Pakistan, on the Arabian Sea. However, this project has been delayed by continued instability in Afghanistan.
Natural Gas
The Central Asian countries with the largest reserves of natural gas are Turkmenistan and Uzbekistan, although there are considerable amounts of gas in Kazakhstan (particularly the Karachaganak field in western Kazakhstan) and Azerbaijan (Shah Deniz). (See Table 2.)
Central Asian gas transit routes that are not controlled by Russia are scarce and are currently limited to the as yet unfinished Baku–Tbilisi–Erzerum pipeline, from Azerbaijan to Turkey, and Korpedzhe–Kurt-Kui, which is short, extending only from Turkmenistan to Iran. Future projects are hindered by heightened political risk and an unfriendly investment climate.
Other than Korpedzhe–Kurt-Kui, all Turkmen and Uzbek natural gas exports are controlled by Gazprom, and almost all Turkmen gas is exported to Russia via Uzbekistan or to Ukraine via Russia. Existing gas pipelines include:
Future gas transit projects include the Trans-Afghan Pipeline (TAP) and the South Caucasus (Baku–Tbilisi–Erzerum, or BTE) Pipeline. The TAP will bring gas from Turkmenistan through Afghanistan to Fazilka, a port on the Indian–Pakistani border. The governments of Turkmenistan, Afghanistan, and Pakistan signed a Memorandum of Understanding in February of 2006 for construction of the pipeline, and it also has strong backing from India. American officials are promoting the TAP, which will be renamed TAPI when India signs on, as an alternative to the Iran–Pakistan–India pipeline. However, instability in Afghanistan and questions surrounding the commercial viability of the project, which has a planned annual capacity of 1.1 bcf, have far delayed its implementation.
The BTE is currently under construction. It will run parallel to the BTC oil pipeline from the Shah Deniz gas fields in Azerbaijan to Greece and presumably will then be linked to Nabucco, a planned gas pipeline to bring Central Asian and Caspian gas through Greece, Italy, and Austria. The BTE’s planned initial capacity is 1.5 bcf/yr, to be increased to 3 bcf/yr by 2007. Major shareholders include BP, Statoil, SOCAR, LukAgip, Nico (Iran), and Total.
Further Investment
Western investments have made some inroads into the Central Asian oil industry, but the same is not true of the gas sector. The leaders of the biggest gas-producing countries—Turkmenistan and Uzbekistan—are not friendly with the U.S., and their investment climates are similarly unwelcoming.
Overall, in most of Central Asia, local economies are characterized by excessive government intervention, corruption, weak corporate governance, insufficient legislative frameworks, and incompetent, corrupt court systems. They exhibit a systemic failure to protect property rights.
Furthermore, they generally lack transport infrastructure that is not controlled by Russia. Yet Russia is doing its best to prevent foreign firms either from accessing its vast gas pipeline network or from building competing pipeline networks. If multiple gas pipelines connecting Central Asia to outside markets are built, competitive bidding by companies from energy-consuming countries along with increases in both production and demand could drive up prices for Central Asian gas. Both investors in and consumers of Central Asian and Caspian oil and gas would derive great benefit from the increases in exploration, development, extraction, and production that have resulted from increased foreign direct investment in the region.
These benefits have yet to be seen, however, because the Central Asian natural gas sector has received very little outside investment until recently. Russia, through Gazprom, continues to profit from its position as the largest recipient of gas exports from Central Asia. Gazprom buys Central Asian gas at prices as low as one-quarter to one-third of market prices in Europe and then resells gas at market rates. In 2003, Turkmenistan signed an agreement to sell almost all of its gas to Russia starting in 2009.[9]
Recently, however, China also has expressed interest in Turkmen gas. On April 3, 2006, the leaders of the two countries signed a deal whereby an export pipeline will be built from Turkmenistan to China and China will buy 30 billion cubic meters (bcm) of Turkmen gas every year for 30 years beginning in 2009.[10] On the surface, this Chinese–Turkmen deal seems to bode well for the foreign investment climate in Central Asia; however, suspicions abound that Turkmenistan may be overestimating its reserves of natural gas.[11] Thus, there is speculation that Turkmenistan, in making its deal with China, may have oversold its reserves.[12]This very feasible possibility highlights the lack of transparency in Central Asia’s oil and gas markets.
The same difficulties abound in Uzbekistan. Although foreign firms have expressed an interest in Uzbekistan, its natural gas sector remains largely closed to all comers except for Russia. Uzbekneftegaz had a production-sharing agreement with the British firm Trinity Energy, but Uzbekneftegaz broke the deal in 2005, alleging that the subsidiary company created to carry out the deal had not lived up to its end of the agreement.
Since then, Uzbekistan has been working more closely with Gazprom, signing a deal to provide Russia with up to 350 bcf annually, giving Gazprom access to gas fields in the Ustyurt region, and updating dilapidated gas pipelines.[13] In January 2006, Gazprom CEO Aleksei Miller signed a deal with Uzbek President Islam Karimov to transfer three of Uzbekistan’s largest gas fields—Urga, Kuanysh, and Akchalak—to Gazprom, in effect giving the firm a monopoly over the export of Uzbek gas. Some analysts suggest that Karimov is courting Russian favor in exchange for Russian assistance with regime security.[14]
Turkmenistan and Uzbekistan are not prime targets for most foreign investors. Neither country has yet implemented any substantial economic reforms, and both can be described as abysmal in terms of transparency and rule of law. The U.S. Department of State warns that “The government of Turkmenistan has a history of capricious and arbitrary expropriation of property of local businesses and individuals, including foreign investors….”[15] Furthermore, poor relations between Uzbekistan and the West, and with the United States in particular, preclude most opportunities for investment by Western firms.[16]
Investment Magnets: Kazakhstan and Azerbaijan
By contrast, U.S. involvement with Kazakhstan and Azerbaijan has been successful. In both countries, Western investment has been not only allowed, but facilitated by local governments, with a commensurate increase in per capita GDP and overall standards of living. Both countries are also now economically competitive in energy sectors on an international level.
Since independence, Kazakhstan has received higher levels of foreign direct investment per capita than any other Commonwealth of Independent States (CIS) country.[17] Investment in Azerbaijan rose by more than 30 percent between 2003 and 2004.[18] Both countries benefit from healthy levels of growth and foreign direct investment and have greater access to hydrocarbon export routes that do not go through and are not controlled by Russia. Although both countries have a long way to go to be considered mature democracies, their potential is undeniable, as can be seen with their more positive attitudes toward democracy, civil society, and the West compared to prevailing attitudes in Turkmenistan and Uzbekistan.
The two countries’ success in attracting foreign direct investment in their oil and gas sectors is due to privatization and reform efforts, as well as openness to Western oil majors,[19] although certain regulations, such as quotas on foreign employees and domestic content requirements, continue to deter investment.[20]Courting investment from a wider range of interested parties and enhancing competitiveness in their energy markets, both countries serve as an effective counterweight against pressure from Russia and China, and both have used this counterweight to their economic advantage.
The Allure of Central Asia
There are many political risks to doing business in Central Asia. As previously mentioned, property rights, transparency, and law enforcement are still in the process of development in these countries. Corruption is endemic, as are human rights violations. None of these issues deters Russian or Chinese investments, making competition in the area more difficult for Western firms that seek investment guarantees. Furthermore, Russia is making every effort to keep Western investments out of its former sphere of influence.
Security, particularly in terms of Islamist terrorism and radicalism (the Islamic Movement of Turkestan, the global Hizb’ut Tahrir, Akramiyya of Uzbekistan, and other organizations), is a pressing issue for all of Central Asia’s governments and may pose serious risks for potential investors in energy and vulnerable energy infrastructure.
Despite these political vulnerabilities, investors and governments in the U.S., the United Kingdom, France, Italy, Russia, China, and the Middle East still seem eager to lay claim to the hydrocarbon resources of Central Asia. One of the most attractive features of Central Asian oil and gas is that there are deposits that have yet to be explored or developed, and the national governments are reliant on foreign investors to provide the capital to undertake such costly projects.
Geopolitical considerations are another key concern as Central Asia continues to evolve as a highly important strategic area, especially for the U.S., Russia, China, Iran, and India. Political instability in other major oil- and gas-producing locations—the Middle East, Venezuela, and Nigeria—and increasing economic nationalism in Russia are also fueling the drive to claim a share of Central Asian resources.
Gazprom Dominance
Russia’s access to Central Asian (specifically Turkmen) natural gas is key to its domination of the European natural gas market,[21] primarily because of concerns, both within and outside of Russia, that Gazprom’s production levels will not be sufficient to uphold its end of gas export deals. At present, it appears that Gazprom’s natural gas export obligations cannot be met by Russian production alone, and future gas obligations, including a deal to provide China with 80 bcm of gas annually, will also require that Russia have access to the bulk of Turkmenistan’s and Uzbekistan’s production. As noted, this may be particularly problematic in light of Turkmenistan’s recent deal with China, which seemingly involves selling twice as much of the same gas supply.
A recent study of the Russian gas industry gives the following annual projections: Russian annual gas production will be 665 bcm, domestic demand will be roughly 479 bcm, exports to the European Union (EU) will be around 161 bcm, exports to the CIS are projected at 80 bcm, and exports to Asia are projected at 24 bcm. To meet its export obligations, Russia will have to import 79 bcm from producers in Central Asia.[22] Russia therefore has an incentive to maintain its close political and trade ties with Kazakhstan, Turkmenistan, and Uzbekistan in the years to come.
However, Kazakhstan has been and will likely continue to be open to a diverse range of investors, while Turkmenistan has already begun increasing the price of its natural gas. As export opportunities for the Central Asian states increase, not only will gas prices go up, but supply may be redirected to countries other than Russia that may not demand the same discounted prices that Russia does. In 2005, Russia was paying $44 per 1,000 cubic meters of Turkmen natural gas—five times below European gas market prices, which hovered around $220–$250.[23]
U.S.Role and Policy in Central Asia: Energy and Beyond
The U.S. is unlikely to become a single dominant power in Central Asia, nor is there any reason why it should attempt to achieve such a status. Realistic goals—energy security; proximity to the main theaters of operation in the war on terrorism, Afghanistan and Pakistan; combating the traffic in drugs, weapons, and weapons of mass destruction technology; and encouraging participatory and transparent social and economic development—require a sustainable engagement. This is especially the case as the U.S. focuses its resources and attention elsewhere, primarily in the Middle East.
The strategic location of the region and the intense global competition over its energy reserves will, to a certain extent, keep the U.S. involved. U.S. engagement is particularly constricted by uneasy relations with current Central Asian regimes, whose authoritarian tendencies are of no consequence to Russia, China, Iran, or even India.
Even if the U.S. had the capacity to limit the presence of other large powers in the region, to do so would be unwise. First of all, the primary U.S. goals in the region are energy security and proximity to terrorist threats, not outright control. Limiting other powers in the region is unnecessary and would be a grave mistake, just as it was an error for the U.S. to support an oil and steel embargo on Japan in the 1930s, triggering Japanese expansion in the Pacific.[24] The U.S. and other great powers share the goals of stability, economic development, and preventing religious radicalization and terrorism. Rather than openly antagonizing China, Russia, or India over their involvement in Central Asia, the U.S. should pursue the benefits to be derived from regional cooperation.
Despite the unappealing nature of the region’s authoritarian regimes, Chinese and Russian backing of these governments contributes to their short-term stability, staving off political crises. Political disintegration in any of these countries would have severe consequences for regional security, because they are for the most part impoverished, dissatisfied, largely Muslim, and thus susceptible to recruitment by fundamentalist Islamic groups. Furthermore, heroin trafficking is a serious problem in all of Central Asia, particularly Afghanistan and Tajikistan, and the collapse of any of the states would allow for even more prolific smuggling in narcotics, people, and possibly even nuclear weapons components. Overriding strategic imperatives suggest that it might be best to tread lightly until the region finds a measure of stability that allows for change without chaos.
One way for the U.S. to play a more influential role in the region is through the use of partners, such as India. As India is a U.S. strategic partner, a stable democracy, and a growing economic power, a greater Indian presence in the region may be beneficial for U.S. interests. India is refurbishing a former Soviet air base in Tajikistan (Ayni), which is intended as part of an effort to contribute to stability in Afghanistan and to battle Islamist terrorism in Central Asia.[25] Both goals are shared by the United States.
India can also lend its support to increasing export options for Central Asian oil and natural gas. In addition to helping to break up the Russian natural gas transit monopoly, this would contribute to economic growth, stability, and improved relations between the pipeline transit countries of India, Pakistan, and Afghanistan, which is in U.S. interests.
It is vital that the U.S. maintain and expand a multifaceted presence in Central Asia. The benefits of U.S. involvement accrue to both sides: The U.S. can protect its security, military, and geopolitical interests and its energy access while helping to promote the development of democracy and civil society in Central Asia. The developing nations of Eurasia can gain access to much-needed U.S. investment, security assistance, and global integration above and beyond what they are offered by Russia, China, India, and Iran.
Challenges to U.S. Energy Interests
A real challenge in promoting U.S. energy interests worldwide, including in Central Asia, is the high level of corruption in the state-run energy sectors. A recent report by the London-based Global Witness on the Turkmen–Ukraine gas trade “poses a difficult question for the EU and its neighbours: can they meet their energy needs without feeding corruption and undermining good governance in the countries that supply or transport this energy?”[26] This question could refer to other regions as well, including the Middle East.
The answer to that question, in Central Asia as well as in the Middle East, is a qualified “no.” This applies to both corruption and human rights abuses. Some argue that it would be unwise to sacrifice U.S. energy and security interests because of difficulty in dealing with regimes that do not share U.S. values. After all, such regimes are the majority among oil producers. This is a real challenge to U.S. policymakers.
The recent U.S. experience with criticism of President Islam Karimov of Uzbekistan over the Andijon massacre, in which the Uzbek military opened fire on armed Islamists as well as civilian protestors, is a case in point. This criticism provoked a harsh Uzbek response that resulted in the loss of both a strategic relationship and U.S. access to the Karshi–Khanabad air base. This incident can be seen as a valuable learning opportunity for U.S. policymakers. Intransigence on the issue of democracy development to the exclusion of other U.S. national interests and priorities has not served the U.S. well in Uzbekistan and has led to an overreliance on the Manas International Airport air base in Kyrgyzstan, which comes with an annual price tag in the $150 million range.
Given the high cost of human rights priorities, a more relevant question in this climate of energy insecurity and tight energy markets would be: “How can the U.S. successfully balance its security, energy, and human rights priorities in a way that maximizes U.S. interests?” The U.S. needs to stay engaged with the leaders of most states and with elites, political parties, and the people in Central Asia. Only through this sort of engagement will the U.S. begin to rebuild its former status as friend and model to these countries, as opposed to an external superpower determined to topple regimes in the region.
Policy Goals
By staying engaged and persistent, the U.S. may be able to make serious progress on achieving its objectives in Central Asia, which include:
What Should Be Done
To achieve these goals, the National Security Council should coordinate activities by the U.S. State Department, Department of Defense, Department of Energy, and other departments to pursue the following policies:
Conclusion
U.S. and Central Asian political, economic, and security interests are not mutually exclusive and may be better achieved through cooperation than through confrontation. Development and security of supply and transit is one such common interest that needs to be cultivated.
Not seeing eye-to-eye on every issue should not prevent states from working together to attain shared goals. Even if relations between the U.S. and Central Asian states or Russia are at a post-Soviet low point, common interests such as energy development, fighting terrorism, and limiting nuclear non-proliferation should be pursued and cultivated.
U.S. involvement and assistance contribute to the economic, political, social, and security development of the states of Central Asia. The United States should remain as engaged as possible in the region. Given recent tensions concerning values, preferred economic models, and political systems, such engagement will be complex. Continuous dialogue with regional actors, as well as with Russia, China, the European Union and its key members, Japan, and India, is required to coordinate policies and prevent crises.
This will demand give-and-take on both sides, and the U.S. may find that getting concessions requires making concessions. As the greater and more influential power, however, the U.S. may find it necessary at times to make the first move.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation. The author wishes to thankConway Irwin for help in researching and preparing this paper.
[1] For a detailed discussion of U.S. interests in Central Asia, see Ariel Cohen, Ph.D., ed., Eurasia in Balance: The US and the Regional Power Shift, U.S. Foreign Policy and Conflict in the Islamic World Series (London: Ashgate, 2005), esp. Chapter 3, pp. 69–101.
[2] U.S. Department of Energy, Energy Information Administration, “Country Analysis Briefs: Caspian Sea Region,” September 2005, at www.eia.doe.gov/emeu/cabs/Caspian/Oil.html (August 2, 2006).
[3] For a detailed discussion of U.S.–Russian competition in Eurasia, see Ariel Cohen, Ph.D., “Competition over Eurasia: Are the U.S. and Russia on a Collision Course?” Heritage Foundation Lecture No. 901, October 24, 2005, at www.heritage.org/Research/RussiaandEurasia/hl901.cfm.
[4] U.S. Department of Energy, Energy Information Administration, “Country Analysis Briefs: Caspian Sea Region,” September 2005.
[5] Tamam Bayatly, “BP Current Developments,” Azerbaijan International, Vol. 10, No. 1 (Spring 2002), atwww.azer.com/aiweb/categories/magazine/ai101_folder/101_
articles/101_petroleum_bp.html.
[6] U.S. Department of Energy, Energy Information Administration, “Country Analysis Briefs: Central Asia,” September 2005.
[7] The Consortium includes the government of Russia (24 percent); the government of Kazakhstan (19 percent); the government of Oman (7 percent); Chevron Caspian Pipeline Consortium Co. (15 percent); LUKARCO B.V. (12.5 percent); Mobil Caspian Pipeline Co. (7.5 percent); Rosneft–Shell Caspian Ventures Ltd. (7.5 percent); Agip International (N.A.) N.V. (2 percent); Oryx Caspian Pipeline LLC (1.75 percent); BG Overseas Holdings Ltd. (2 percent); and Kazakhstan Pipeline Ventures LLC (1.75 percent). See Caspian Pipeline Consortium Web site at www.cpc.ru.
[8] U.S. Department of Energy, Energy Information Administration, “Oil: Country Analysis Brief: Caspian Sea,” September 2005, at www.eia.doe.gov/emeu/cabs/Caspian/Oil.html; “Oil: Country Analysis Brief: Iraq,” June 2006, at www.eia.doe.gov/cabs/Iraq/Oil.html; “Country Analysis Brief: Kuwait,” June 2005, atwww.eia.doe.gov/emeu/cabs/kuwait.html (October 30, 2006).
[9] Vladimir Socor, “Central Asia Gas Update,” Eurasia Daily Monitor, February 1, 2005, atwww.jamestown.org/edm/article.php?article_id=2369177 (August 2, 2006).
[10] Daniel Kimmage, “Central Asia: Turkmenistan–China Pipeline Project Has Far-Reaching Implications,” Radio Free Europe/Radio Liberty, April 10, 2006, at www.rferl.org/featuresarticle/2006/04/55f9574d-407a-4777-9724-94
4e6c2ecd7b.html (August 2, 2006).
[11] S. Frederick Starr and Svante E. Cornell, “The Politics of Pipelines,” Johns Hopkins University, School of Advanced International Studies, at www.sais-
jhu.edu/pubaffairs/publications/saisphere/winter05/starr-cornell.html (October 30, 2006).
[12] Vladimir Socor, “Turkmenistan–China Gas Agreement Unrealistically Ambitious,” Eurasia Daily Monitor, April 10, 2006, at www.jamestown.org/edm/article.php?article_id=2370964 (October 30, 2006).
[13] U.S. Department of Energy, Energy Information Administration, “Country Analysis Briefs: Central Asia,” September 2005.
[14] “Business: Gazprom will see to stability of the Uzbek Regime,” Ferghana.ru, January 19, 2006, athttp://enews.ferghana.ru/detail.php?id=392328559837.
44,557,4847695.
[15] U.S. Department of State, “2005 Investment Climate Statement—Turkmenistan,” atwww.state.gov/e/eb/ifd/2005/42192.htm.
[16] Marat Yermukanov, “Kazakh–Uzbek Relations Show Signs of Improvement,” Eurasia Daily Monitor, March 22, 2006, at http://jamestown.org/edm/article.php?article_id=2370897.
[17] European Commission, “External Relations: The EU’s Relations with Kazakhstan,” June 2006, athttp://ec.europa.eu/comm/external_relations/kazakhstan/
intro/index.htm (October 30, 2006).
[18] European Commission, “External Relations: The EU’s Relations with Azerbaijan,” January 2006, athttp://ec.europa.eu/comm/external_relations/azerbaidjan/
intro/index.htm (October 30, 2006).
[19] Clinton R. Shiells, “FDI and the Investment Climate in the CIS Countries,” International Monetary Fund, 2003, pp. 9–10.
[20] Ibid., p. 18.
[21] Ariel Cohen, Ph.D., “The North European Gas Pipeline Threatens Europe’s Energy Security,” Heritage Foundation Backgrounder No. 1980, October 26, 2006, at www.heritage.org/research/Europe/bg1980.cfm.
[22] Roman Kupchinsky, “Russia: Gas Export Plans Dependent on Central Asia,” Radio Free Europe/Radio Liberty, March 28, 2006, at www.rferl.org/featuresarticle/2006/03/320159b4-
42de-41b1-bce5-4a5b51161edc.html (August 3, 2006).
[23] “Stalemate in Russia–Turkmenistan Gas Price Talks,” NewsCentralAsia.com, December 12, 2005, atwww.newscentralasia.com/modules.php?name=News&file=article
&sid=1638 (October 30, 2006).
[24] “Sino–Japanese War (1937–1945)—Major Invasion of Eastern China by Japan,” Japan-101 Information Resource, at www.japan-101.com/history/sino1.htm.
[25] Stephen Blank, “India: The New Central Asian Player,” Eurasianet.org, June 26, 2006, atwww.eurasianet.org/departments/insight/articles/eav062606a.shtml (August 3, 2006).
[26]Global Witness, It’s a Gas—Funny Business in the Turkmen–Ukraine Gas Trade, April 2006, p. 4, atwww.globalwitness.org/reports/show.php/en.00088.html (November 10, 2006).
In recent years, Russia has regained some of its former status, primarily through becoming a global energy and raw materials supplier and boasting a sustained economic growth rate of over 6 percent a year since 2000. Along with its elevated status, Russia has also begun to display some of its former Soviet-era hostility toward the West in general and the United States in particular, which may lead to unnecessary frictions and confrontations in the future. The moderator and the expert panelists assessed what the outcomes of the G-8 summit reveal about U.S.–Russian relations, as well as the future challenges and the opportunities for cooperation between the two countries. Although each speaker had distinct ideas as to the nature of U.S.–Russia relations, all four seemed in agreement that the best option for the U.S. and Russia is a pragmatic and realistic relationship based on the cooperative pursuit of common interests.
Russia Cannot Be Isolated
David Kramer
There has been a loud debate for months about U.S.–Russian policy on concerns of democracy backsliding, the problems encountered by NGOs, worrying internal trends, and Russian policy towards its neighbors. These concerns are balanced with Russia’s potential as a partner with the United States and Europe, as well as Asia, in dealing with a whole host of challenges from Iran to the Middle East to North Korea.
The promise of strategic partnership post-9/11 has not been fulfilled, but important work has been accomplished between our two countries and our two governments.
We feel that Russia cannot be ignored or isolated or treated as an adversary. On the contrary, we seek to work with Russia on the many areas where we share common interests and to push back, strongly if necessary, on issues where we disagree. What we have with the Russians is a realistic partnership and relationship.
President Bush has stressed the importance he places on keeping lines of communication open with President Putin, and went to St. Petersburg a day early last week so he could spend more time with President Putin, both formally and informally, in advance of the full G-8 program. The President used those opportunities to promote our interests and express our concerns, including over the trajectory of Russian democracy and civil society and its relations with its neighbors. The President also discussed ways we can work together on many problems that require our cooperation.
We feel we made significant progress on some areas but of course less than hoped for in other areas, and in particular on the WTO bilateral negotiations. In addition to the various G-8 agreements on energy security, health, and education, President Bush and President Putin announced the extremely important Global Initiatives to Combat Nuclear Terrorism, an important step in our counter-terrorism cooperation with Russia that has been a pillar of our relationship since 9/11.
Through this initiative, we join together to prevent terrorists and dangerous regimes from threatening us with the world’s most deadly weapons. Our cooperation will include the physical protection of nuclear materials, suppressing illicit trafficking of those materials, responding and mitigating the consequences of any acts of nuclear terrorism, and cooperating on the development of the technical means to combat nuclear terrorism, denying safe haven to terrorists, and strengthening our national legal frameworks to ensure the prosecution of such terrorists and their supporters.
The two presidents also announced new initiatives on the peaceful uses of nuclear energy and countering nuclear proliferation, expanding on initiatives that were already underway and which will include other nations.
There are areas where our two presidents don’t see eye to eye, including on Russia’s democratic development. President Bush has a regular dialogue with President Putin on the internal dynamics in Russia. Promoting civil society in Russia is key and will over the long run help transform Russia into a country where our values converge, which will make it easier and more productive for us to work together.
We know that nations that share values also share interests. A Russia that embraces pluralistic political institutions, personal liberty, and a transparent, empowering economic approach would be a Russia that shares European and American—and I believe universal—values.
Yet, to many Russians, democracy is a discredited concept because it unfortunately is associated with the chaos and weakness of the 1990s. The collapse of the state in the 1990s under Yeltsin and now the reemergence of the state under President Putin reflect the Kremlin’s tendency toward a pendulum approach in the way it exercises control.
Because promoting democracy is central to the foreign policy of the Bush Administration, the President has raised it with President Putin in private meetings, which we believe is the most effective approach. Where necessary, we speak out publicly on this issue, but we do so as a friend who raises concerns in a way designed to steer development in Russia in a positive direction.
The President underscored our concern by meeting with a diverse, outspoken group of Russian civil society activists representing the democracy, human rights, environmental, and health communities in Russia. The President’s meeting came after a meeting that was called “Other Russia” in Moscow that Assistant Secretaries Daniel Fried and Barry Lowenkron attended for the U.S. government.
A vibrant civil society also requires a vibrant entrepreneurial sector rooted in the rule of law, which can contribute to the modernization of the Russian economy. And to support one of the underpinnings of democracy—a strong and independent middle class—the President announced our intention to create the “U.S.–Russia Foundation for Economic Advancement and the Rule of Law,” which stands as a successor to the successful U.S.–Russia Investment Fund, known as TUSRIF, which was established in 1995 to promote the growth of the Russian independent entrepreneurship and improve the climate for private investment.
But I won’t pretend that we achieved all that we could. Concluding a bilateral WTO accession agreement was a high priority for President Bush. U.S. Trade Representative Susan Schwab and her team negotiated around the clock last week in an attempt to close on such an agreement. They were not successful, but only because they insisted on an agreement that would be commercially viable and pass muster with Congress. We will continue to work toward the goal of completing bilateral negotiations with the Russians and hope to do so in the coming months.
Now that the G-8 leaders have departed St. Petersburg, Russia will focus its attention on upcoming elections for the Duma and for the new President in 2007 and 2008, respectively. Democracies, of course, consist of more than just good elections, but the run-up to these elections—including the state of independent media and equal access for all parties and candidates to the press, as well as a level playing field and the help of civil society during that period—all of this will be a telling gauge by which we can measure Russia’s democratic progress.
We will continue to encourage Russia to take the steps necessary to become a strong, democratic, and prosperous member of the international community, and we will press for healthy, constructive relations between Russia and Russia’s neighbors.
Working with Russia is not always easy, but it requires a long-term approach. Through increased engagement including expanded people-to-people exchanges, we can build a foundation for better understanding for the years ahead, which will pay dividends for our broader, long-term relations.
We hope that Russia will define its role in the world in a way that allows us the possibility of genuine partnership, and not retreat into a world view defined by balance of power strategies and checking U.S. moves wherever possible. The U.S. is not Russia’s problem, and a democratic West and democratic neighbors are not a threat.
Our two countries and the entire world are safer as a result of our working together, and we would welcome even more the cooperation with Russia with whom our shared values would open the way to a complete and fruitful strategic partnership.
—David Kramer is Deputy Assistant Secretary for European and Eurasian Affairs, U.S. Department of State, and former Associate Director for the Russian/ Eurasian Program at the Carnegie Endowment for International Peace.
Hezbollah Hijacked the G-8 Summit
Ariel Cohen, Ph.D.
The G-8 event overall went well. Russia handled the management and public communications aspects of the summit very professionally. It had high-level representation from the G-8 countries, as well as from India, Brazil, China, and Kazakhstan. It also had a “Youth G-8,” in which President Putin met with young Russians and foreigners to hear their concerns, and a “Civil G-8,” where representatives from Amnesty International, Oxfam, and other organizations engaged in a real dialogue with President Putin on public policy. This is the “Clintonization of Vladimir Putin.” He charmed the leaders of these NGOs into having tea with him in his dacha, held four press conferences in St. Petersburg, and the agenda that the Russia side formulated—energy security, education, infectious diseases—was front and center.
Unfortunately, for the second year in a row, the G-8 Summit was hijacked by terrorists. Last year, in Gleneagles, it was al-Qaeda; this year, it was Hezbollah. Realizing the sophistication of Hezbollah’s leadership and their tight coordination with the Iranian leadership—their founders, funders, trainers, and suppliers—I cannot exclude the possibility that they were well aware that killing and kidnapping Israeli soldiers would lead to retaliation and escalation, diverting attention from the G-8 agenda.
The G-8 rose to the occasion and published a joint statement on the Middle East which included the following:
The immediate crisis results from efforts by extremist forces to destabilize the region and to frustrate the aspirations of Palestinian, Israeli and Lebanese people for democracy and peace. In Gaza, elements of Hamas launched rocket attacks against Israeli territory and abducted an Israeli soldier. In Lebanon, Hezbollah, in violation of the “Blue Line,” attacked Israel from Lebanese territory, killed and captured Israeli soldiers, reversing the positive trends that began with the Syrian withdrawal in 2005 and undermined the democratically elected government of Prime Minister Fouad Seniora.
The G-8 leaders demanded:
The return of the Israeli soldiers in Gaza and Lebanon unharmed, the end of the shelling of Israeli territory, the end to Israeli military operations, and the early withdrawal of Israeli forces from Gaza after the soldier is released….
And they continued:
We extend to the government of Lebanon the full support in asserting sovereign authority over all its territory in fulfillment of UN SCR 1559.
United Nations Security Council Resolution 1559 is a resolution that demands the disarmament of Hezbollah and the deployment of Lebanese armed forces to all parts of the country, in particular the south, for the disarming of militias.
The flare-up in the Middle East derailed an agenda which had Iran front and center as a joint diplomatic effort of the State Department, the NSC (National Security Council), Russia, the E-3 (Great Britain, France, and Germany), the International Atomic Energy Agency, and the Security Council. The challenge for the U.S., Russia, the E-3, China, India, and the rest, is to make sure that the Middle Eastern crisis does not divert our attention from the real threat to the Middle East and the whole world today—the Iranian nuclear program.
During the escalation of hostilities, Saudi Arabia, Egypt, and Jordan came out, for the first time, squarely against Hezbollah and its Iranian sponsors. They recognize that a nuclear-armed Iran will threaten the very fabric of nation-states in the Middle East. Radical Islam, whether Sunni or Shi’a, does not recognize national borders. It seeks a Caliphate, a sectarian-based trans-border entity. We can see the effects of sectarian-based violence in Iraq today.
The Middle East is in a process that goes way beyond the Israel–Hezbollah confrontation. Radicalization by Sunni extremists, such as al-Qaeda, and Shi’a extremists, including those in the Iranian government, are polarizing the Middle East, threatening not just the state of Israel but the moderate regimes of Saudi Arabia, of the Gulf States, Jordan, and Egypt. The G-8 countries need to address this trend in the future, building coalitions with moderate Arab regimes and other nations, including Israel, India, and Turkey.
An unstable Middle East threatens our survival both economically, as the region produces more than 40 percent of the oil the world consumes, and geopolitically and geostrategically, with the potential for a nuclear arms race triggered by Iran. This is not a Middle East that is in our national interests, or the international interests of any of the G-8 countries, including Russia.
The summit ended with a sense of foreboding. For two years running, the G-8 Summit has been derailed by terrorist attacks. This indicates that the G-8 must turn its attention to fighting terrorism on a security level, an economic development level, and a level of ideas. It must engage the world, especially the Muslim world, in the realm of hearts and minds and public diplomacy.
The G-8 format today may not be sufficient, and may need to seek further engagement with India, China, Brazil, and perhaps South Africa or Nigeria. An expanded format for the G-8 may be the key to providing truly global solutions to truly global challenges. A solid and productive U.S.–Russian relationship is needed to underpin such an enlargement.
—Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.
“Vladimir the Lucky”
Andrew Kuchins, Ph.D.
The history of Russia and East Central Europe is replete with colorful figures with catchy titles like “Vladimir the Apostle,” “Sviatopolk the Accursed,” “Vlad the Impaler,” and “Ivan the Terrible.”
The current Vladimir in the Kremlin is neither terrible nor saintly, and we have no grounds to conclude that Vladimir Putin is accursed. On the contrary, he may be the luckiest guy in the world today, and I do hereby anoint him “Vladimir the Lucky.” Mr. Putin is lucky because he happened to become president of Russia when oil prices were rising and then skyrocketed, and this has been the main factor behind Russia’s macro-economic “miracle” and its resurgence as a great power.
Only eight years ago, in 1998, the ruble collapsed. Russia defaulted on much of its debt and was virtually bankrupt. With oil at less than $15.00 a barrel, Russia received less than $40 billion a year in revenue from oil and gas sales, the most important source of economic growth. By 2000, when Mr. Putin took office, the average crude price was about $28.00 a barrel and Russia brought in about $75 billion. This year the U.S. Energy Information Administration projects that crude will average $61.00 a barrel, and Russia’s revenue from oil and gas sales may exceed $200 billion. Furthermore, Russia has more than $250 billion in reserves and a stabilization fund projected to reach close to $100 billion by the end of the year.
Vladimir’s good fortune extends beyond his petro-luck. On the eve of the G-8 Summit, Russian’s enemy no. 1, Shamil Basayev, was blown up preparing for a terrorist attack that might have spoiled Vladimir’s party in St. Petersburg. It’s likely that Mr. Putin created some of this luck for himself when his colleagues in the secret police finally took out the elusive Mr. Basayev just in time to burnish his reputation as a partner in the war on terror. Accidents don’t really happen accidentally in that part of the world.
Nevertheless, Vlad’s luck continued when hostilities broke out in Lebanon, diverting attention from the question about Russia’s fitness to host the G-8. The Middle East crisis ensured that Putin would be less isolated from his other “summiteers” than if the Iranian nuclear program had dominated the agenda. On Iran, Vladimir finds himself at odds with the Americans and the Europeans, whereas on Lebanon, Mr. Putin’s position is closer to that of his European colleagues. Overall, the G-8 Summit went well for Vladimir Putin. I don’t think that he wanted it to ever end.
In the bilateral meetings between Presidents Bush and Putin, both men certainly wanted to smooth out some of the differences in the U.S.–Russian relationship, but tensions were nonetheless on display.
The positive results of these meetings included two nuclear agreements: one to negotiate for cooperation on civilian nuclear technology, and one to extend the Proliferation Security Initiative to establish a global initiative to combat nuclear terrorism. These are both areas where Russia has capabilities to bring to the table and where we can cooperate.
But there was failure on the WTO agreement, which both presidents definitely wanted and worked very hard to reach. This failure reflects several things. On the U.S. side, Russia will have to come up for PNTR (Permanent Normal Trade Relations) status and the Senate must approve whatever agreement is reached. It may have been calculated that with the current negative attitude toward Russia in Congress, it would be worse for Mr. Bush, Mr. Putin, and the U.S.–Russian relationship if the bilateral agreement on WTO were reached this past weekend and then got shot down in Congress. Failure to reach an agreement also may reflect President Bush’s lessened authority, even within his party.
On the Russian side, there may have been a miscalculation in negotiating strategy. The Russians may have expected that they would not have to make the kinds of concessions and agreements that they needed to on the core technical issues that were blocking the agreement, thinking that the U.S. really wanted this deal. They had advised the U.S. that the decision about the Shtokman gas field and the selection of partners for Shtokman were being held up by the WTO agreement and another large commercial transaction, the Boeing deal.
Right now, Russia has a very cynical attitude toward democracy and toward our efforts to promote democracy around the world. We do believe that democratic governments are more capable and more effective and, as I wrote in a letter to Mr. Putin that was published inKommersant last week, implementing the institutions of democracy will make Russia more sovereign, but that is not how the Russians see it for a variety of reasons, including the legacy of the 1990s and current oil prices. Petro-states don’t typically undertake democracy campaigns when oil prices are very high.
And on the democracy question, Mr. Cheney’s comments in Vilnius, combined with President Ilham Aliev’s visit from Azerbaijan to Washington the week before and Mr. Cheney’s subsequent trips to Kazakhstan to meet with President Nursultan Nazarbayev, where the issues of democracy, civil society, and human rights were not on the public agenda, gives Russians the impression that democracy promotion is just a fig leaf for expansion of American hegemony and regime change in favor of pro-American forces.
We too easily believe that countries that share values and are democracies are going to agree with us on major foreign policy issues. Two of the most mature democracies and two of our oldest allies, France and Germany, did not agree with us about Iraq. I am very skeptical that if Russia were a mature democracy today that it would reach much of a different conclusion about Iran.
The G-8 summit emphasized that we are in a moment of transition in international relations from a unipolar world to a multipolar world and an erosion of the era of Western predominance. Mr. Putin and the Russians are thinking this right now. It was very telling that Mr. Putin met with the Chinese and the Indians, among others, after the formal G-8 meeting, and he expressed his most open support for their joining the G-8 in the future.
I predict that within five years, the G-8 will either expand or cease to exist as it looks more and more like an anachronism. In the 1970s, when the G-7 was formed, those seven economies commanded over 60 percent of the world’s GDP. Today, including Russia, the G-8 commands less than 45 percent of world GDP, and that percentage will probably fall in the coming years as large emerging market economies grow faster than the G-8 economies.
—Andrew Kuchins, Ph.D., is Senior Associate and Director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace and former director of the Carnegie Endowment’s Moscow Center.
RussiaIs Back on the World Stage
Angela Stent, Ph.D.
I regard the G-8 as a success both for the United States and for Russia. Despite the crisis in the Middle East, it played out as expected. I would also agree that Russia achieved much of what it wanted to at the G-8. The stakes for Russia were quite high, and it showed that after 15 years of political turbulence and instability Russia is back on the world stage. It is a major player, a stable, influential country reaping the benefits of high energy prices. Its economy has enjoyed a 6.1 percent average GDP growth rate since 2001 and it has a booming consumer market in which Americans and Europeans want to invest. Moreover, President Putin enjoys a 79 percent approval rate that his other G-8 colleagues can only envy.
How should we characterize this newly self-confident Russia? Let me quote from Defense Minister Sergei Ivanov. In last Friday’s Izvestiia he referred to Russia as an “energy superpower” and this is how he defined it: Russia is “a reliable and predictable partner who efficiently carries out the obligations assumed, especially in Europe.” However, “energy superpower” is an elusive and imprecise concept. When Western commentators talk about Russia as an energy superpower, they imply that it uses energy supplies as a form of political leverage, that it seeks to achieve with oil and gas what it once sought to achieve with nuclear weapons, namely greater global influence. On the other hand we usually refer to energy as “soft” as opposed to “hard power,” further confusing the metaphors. The real issue is where you draw the line between politics and business in Russia in a system characterized by a symbiotic nexus between political and economic elites and presence of the heads of the major energy companies in the Kremlin.
Last January’s gas dispute between Ukraine and Russia illustrates the complexity of these issues. In addition to the political factors involved, there were also economic elements, particularly the price Ukrainians were paying. The other geographical fact of life is Russia’s control of the transit routes in Eurasia. 80 percent of Russian gas that goes to Europe passes through Ukraine.
Despite its new self-confidence, Russia faces major challenges including a shrinking population. In 20 years time, where will the people come from to man the armed forces, to provide the labor for the economy? Moreover, one day energy prices will fall, as they inevitably do and if Russia hasn’t diversified its economy and invested more in its oil and gas sector, it will not be able to fill the new Asian pipelines it plans to construct. Moreover, the failure to tackle problems of corruption will also have a corrosive effect on the economy and society.
What is the U.S.–Russian agenda beyond the G-8? We should continue our cooperation on counter-proliferation, counter-narcotics and counter-terrorism, the issues that have engaged us since 9/11. But we should be realistic about the limits of our common interests and of our influence. Public criticism of Russia’s domestic system has not produced the results that we would have liked to have seen and therefore the conversation about democracy is best pursued out of the public eye.
During the next two years, succession issues will have a major impact on our relationship. In the United States, we may not know who will succeed President Bush, but we know the rules of the game for a presidential election. In Russia, however, the succession process is not predictable. The Kremlin is still defining the rules of the game and this means that Russia may become a more inward-looking and challenging partner.
The other major challenge in the next two years, one that cries out for more intense dialogue between Washington and Moscow is Russia’s neighborhood. Russia views “colored” revolutions as a Western effort to interfere in its rightful sphere of influence and seeks to minimize our influence there as we have seen in Central Asia. We need to engage in a more direct discussion of what both sides view as their legitimate interests in Eurasia. We have to try to convince Moscow that it would be better off with stable, prosperous, independent states on its borders, even if they don’t share the same domestic system as Russia, and even if at some point they aspire to membership in the European Union or even NATO.
Over the next two years, we need to stay involved with Russia on every level—with civil society, with trying to promote the middle class, bringing more students and young politicians and young leaders here. The amount of anti-Americanism among the young in Russia is growing exponentially, and we have to try and do whatever we can to counter that. We have to work with civil society there, to the extent that we’re able to, given the NGO legislation—we have to take the long term view of this, we have to understand that this process of transformation in Russia is a matter of decades. We had an unrealistic timetable in the 1990s for how long it would take for Russia to democratize, so we have to be engaged for the long haul. If we do not take the long-term view, then we will face the prospect of the U.S. and Russian orbits moving further apart and I don’t think that’s in anyone’s interest.
—Angela Stent, Ph.D., is Professor and Director of the Center for Eurasian, Russian and East European Studies at Georgetown University and the former National Intelligence Officer for Russia and Eurasia.
—Co-editor Conway Irwin is a 2005 graduate of the School for Advanced International Studies of Johns Hopkins University in Washington, D.C.
The Dragon Looks West: China and the Shanghai Cooperation Organization
09-07-2006
In 1996, five countries—China, Russia, Tajikistan, Kyrgyzstan, and Kazakhstan—formed an organization, the Shanghai Five, to resolve border disputes among its members. With the addition of Uzbekistan in 2001, it became the Shanghai Cooperation Organization (SCO), a grouping of Russia, China, and a number of under-developed and developing nations with little to bind them together save geography. Five years later, it has grown not only in size, with the granting of observer status to India, Iran, Mongolia, and Pakistan, but also in influence. The group focuses primarily on the security issues of the Chinese trifecta of “terrorism, separatism and extremism.” SCO member states have conducted a number of joint military exercises, and in 2003 created a joint counter-terrorism center in Tashkent, Uzbekistan.[1]
The organization calls for greater economic cooperation among its members, and at a meeting on September 23, 2003, Wen Jiabao, the premier of the People’s Republic of China (PRC), proposed the establishment over the long term of an SCO-wide free trade area[2] designed to improve the flow of goods in the region by easing trade restrictions, such as tariffs. China has also placed a heavy emphasis on energy projects, including exploration of new hydrocarbon reserves, joint use of hydropower resources, and water works development.
The SCO’s security agenda is vast. The organization has been compared to the Warsaw Pact and referred to as the “NATO of the East.”[3] Its agenda is infused with Chinese and Russian suspicion of U.S. designs in Eurasia and a desire to reduce U.S. influence in Central Asia. This is evident in both a 2001 SCO declaration[4] and a 2005 bilateral Russo–Chinese declaration regarding “World Order in the 21st Century,” in which the two great powers emphasize the principles of “mutual respect of sovereignty, territorial integrity, mutual non-aggression and non-interference.”[5] Such statements target the United States’ campaigns in Afghanistan and Iraq as well as its efforts to promote democracy in authoritarian former Soviet Republics, efforts which both Russia and China see as destabilizing. Furthermore, the SCO has urged the U.S.-led coalition to announce a timetable for withdrawing from Afghanistan.
Although China and Russia both have an interest in reducing American military power and influence in Central Asia, each country has its own distinct agenda. Russia hopes to utilize the SCO to buttress its monopolistic power in gas transit, and to lesser degree oil transit, in Eurasia. China, on the other hand, would like to structure the SCO as a facilitator of regional trade and investment with Beijing as the dominant player. Despite being substantially larger than the North Atlantic Treaty Organization (NATO) or the European Union in terms of total population, land size, and natural resources, the SCO is not yet strong enough to counterbalance the United States in terms of economic strength and military power.[6] However, the SCO’s statements regarding “sovereignty” and “non-interference” reflected Russia’s and China’s commitment to oust the U.S. from the Karshi-Khanabad air force base in Uzbekistan in 2005 and to impose restrictions and high costs on the U.S. Air Force presence in Kyrgyzstan’s Manas International Airport. The United States should remain wary of the growing influence and power of the Russia–China axis.
China’s SCO Goals
Politically, China regards the SCO as a means of creating a new Eurasian order to reduce U.S. military power and limit America’s democracy promotion abroad. After 9/11, with the consent of both Russia and Central Asian host governments, the United States stationed troops in Central Asia to support the military campaign in Afghanistan. At this point, China began to feel strategically deterred by the U.S. from both east and west—Central Asia and the Asian Pacific.[7] China has since re-engaged with the SCO, and with Beijing and Moscow opposing the U.S. campaign in Iraq, and Central Asian states beginning to show concerns regarding the U.S. policy of democratization, China’s recent efforts to court its neighbors to the west have paid off. Beijing has placed a strong emphasis on exploration and development of natural resources and increased economic cooperation. It has also assisted the Central Asian states in anti-terrorist efforts and bolstered the Russo–Chinese strategic partnership.
A strategic partnership between Russia and China, the two most powerful and influential players in the SCO, may bode ill for U.S. involvement in Central Asia. Indications of the Russo-Chinese partnership systematically reducing U.S. influence are evident in the Uzbek demand that the U.S. leave the Karshi-Khanabad base in July 2005. Russia and China took advantage of the harsh U.S. reaction to the killing by Uzbek interior ministry forces of Islamist rebels in Andijan in May of that year, and managed to convince Uzbek president Islam Karimov that the U.S. somehow had supported the insurgents.[8] Efforts by Moscow and Beijing in Kyrgyzstan have also been successful; Kyrgyzstan has increased the U.S. rent at the Manas air base from an annual $2.7 million to $150–200 million, while the nearby Russian base is rent-free.[9] Peter Rodman, assistant secretary of defense for international security affairs, remarked, “The SCO is trying to ask us to leave the area in a hurry.”[10] His statements reflect the challenges that the U.S. faces as a result of the emergence of the SCO under Russian and Chinese leadership.
China is eager to expand its military influence in Central Asia as well. Beijing has contacted Kyrgyz officials to explore the possibility of Chinese military bases in Kyrgyzstan.[11] Increasing regional militarization and power rivalry in Central Asia raises the possibility that military means could be used in addressing regional issues, especially religious radicalism, terrorism, and narcotics trafficking.[12] Security issues remain a prime concern for China. Separatist movements in Xinjiang, led by the Uighur Muslim minority, have opposed the Chinese regime for decades. After the collapse of the Soviet Union, Beijing successfully garnered an agreement from Central Asian states not to support, protect, or train Xinjiang rebels. Since then, China and Central Asian states have signed agreements on combating separatism and terrorism, launching military and security cooperation in the border regions and beyond.
The People’s Liberation Army (PLA) has been involved in several joint exercises with troops from other SCO states, including the first-ever bilateral joint exercise with Russian forces in the summer of 2005. China and Russia kicked off Peace Mission 2005 with a ceremony in Vladivostok, just 30 miles from the North Korean border. The war games involved nearly 10,000 troops (including 1,800 Russian military personnel); scores of advanced aircraft (including Russian TU-95 and TU-22 heavy bombers, which can carry cruise missiles); and army, navy, air force, marine, airborne, and logistics units from both countries.[13]
Russia has given the Chinese the first demonstration of the supersonic “carrier-buster” cruise missile Moskit, one of the most advanced weapons in the Russian arsenal, and a weapon clearly designed to get the attention of the U.S. Navy.[14] Although Peace Mission 2005 was ostensibly held under the aegis of the SCO, the fact that it involved amphibious landings, sea blockades, and other operations that are totally irrelevant to the geography of landlocked, desert Central Asia suggests that the SCO is primarily a vehicle for a new Beijing–Moscow condominium in Asia, and is not intended as a true multilateral security framework for Central Asia.
Fueled by Oil and Gas. Oil and gas constitute the most essential economic and strategic reasons for China to engage with the Central Asian states. China’s increasing domestic demand for energy, especially the fossil fuel imports required to sustain its current economic growth rate of more than 9 percent[15] has compelled Chinese leaders to search for new energy suppliers. Ensuring control of Eurasian oil is a logical path, as some of these oil and gas resources can be piped into China, obviating the need for more expensive and less secure transportation by tanker.
Chinese interest in the SCO mainly hinges on widening access to Central Asian energy as a means to diversify China’s sources of imports. In the fall of 2005, China purchased Petrokazakhstan, a Canadian-registered oil company, for close to $4.5 billion.[16] In December 2005, China and Kazakhstan jointly opened the 998-kilometer Atasu–Alashankou pipeline, projected to deliver up to 200,000 barrels of oil per day by 2007.[17]
Taking advantage of the volatile political situation in Uzbekistan, China rushed to provide economic assistance in the form of a $600 million loan to start development of a gas pipeline to connect Uzbekistan’s considerable gas resources to the Kazakhstan–China gas pipeline which is currently under construction. A gas pipeline spur from Turkmenistan is under discussion as well.[18] China is also involved with less energy-rich Central Asian countries, but on a smaller scale. In 2005, China loaned Kyrgyzstan $5.7 million and Tajikistan $5 million to buy Chinese goods.[19] Chinese officials have even floated the idea of building a pipeline among member states. Such a proposal indicates the depth of Beijing’s interests in securing access to the region’s energy resources. Chinese investment may significantly improve the region’s infrastructure and commercial potential. However, as these states increasingly depend on China as source of both investment and security, the likelihood of China intervening in their domestic affairs will grow. Beijing’s generous economic assistance begs the question of whether the Chinese are attempting to create a “traditional ‘vassal’ relationship between China and the Central Asian states through investment, trade and military cooperation.”[20]
The Evolution of Chinese Foreign Policy
Official relations between China and other states have traditionally been governed by the principle of “li”, the “Confucian rules of propriety,” formulated in the Zhou Dynasty.[21] The principle regulated familial and social relations within China.[22] Traditional center-periphery relations, with China in the center, compelled China’s neighbors to recognize Chinese superiority by paying tribute to the Chinese emperor.
The Chinese empire attempted peaceful persuasion as a means of bringing non-Chinese into the empire without establishing direct control over their territories. The Chinese worldview was “Sino-centric,”[23] with China as the center of the only known civilization. They had no plans of formal expansion, as was evident in Ming’s foreign policy of isolationism in the 15th century. In the expedition by Admiral Zheng He to the Western Ocean, in the Ming dynasty, he did not establish Chinese colonies overseas. However, the growth of Chinese influence in Xinjiang continued in the 16th–17th centuries.
Beginning in the early 19th century, China was subject to foreign influence and colonization. After the Opium Wars in 1843, the Chinese territories were divided among Western powers. This provoked a nationalism powered by simultaneous feelings of humiliation and pride. Increasingly, China has stepped up its nationalist rhetoric, especially with regard to using force if necessary in order to solve the “Taiwan question.”[24] The passing of the Anti-Secession Law in 2005 by the National People’s Congress provided a legislative basis for China to invade Taiwan.
On several occasions, Chinese leaders have touted China’s leading role in the international community. Its Realpolitik philosophy is that the international system is characterized by a constant struggle for domination, and that China must engage in that battle, its main adversary being the United States. The signing of free trade agreements between Beijing and the Association of Southeast Asian Nations (ASEAN) serves to consolidate Chinese economic influence in Asia. Militarily, China has moved even further afield by dispatching peacekeepers to Haiti. China has departed from its traditional isolationist philosophy and sought to project its influence abroad. China is, at present, a regional power with global aspirations, and if it continues on the path of economic growth and projection of influence, its aspirations may be realized.
China and Central Asia
China’s relationships with the peoples of Central Asia have fluctuated throughout history. There have been times of peace, war, trade, isolation, deception, and cooperation. Traditionally, the Chinese empire has been perceived as an aspiring hegemon, if not outright aggressor in Central, Southeast, and Northeast Asia, and a significant portion of Central Asia was once an integrated part of the Chinese tributary system.[25] As early as 138 B.C., in the Han Dynasty, under the leadership of Zhang Qian, information about hitherto unknown states to the west generated much interest in the court. Increased contact gradually led to the creation of the Silk Road, which facilitated trade between the Chinese empire and Central Asian states. The importance of the Silk Road reached its height during the Tang dynasty, with relative internal stability in China after the divisions of the earlier dynasties. It was during this period that the Chinese traveler Xuan Zhang crossed the region and obtained Buddhist scriptures from India. In the 13th century, under the leadership of Genghis Khan, the builder of the Mongol empire, the whole of Central Asia from China to Persia was united. However, with the decline of the Mongol empire, the revival of Islam, and the isolationist policies of the Ming dynasty in the 17th century, China gradually lost interest in the region. Although the Chinese attempted to bring the Kazakhs into a vassal relationship in the 18th century,[26] the Chinese empire under the Qing dynasty was subjected to foreign colonialism, and China ended its land expansion. Russia, on the other hand revived its expansionist policies after losing the Crimean War in 1856 by gaining control of the Central Asian Turkestan.[27] It was not until the collapse of the Soviet Union in 1989 that China regained its interests in the region.
Since then Beijing has been actively seeking to exert military, political, and financial influences in the region. Chinese President Hu Jintao has even touted the region’s centrality to Chinese development, a sentiment which likely accounts for the recent joint military exercises, increased political cooperation, and increase in trade between China and Central Asia. China has replaced the United States as a significant source of trade, investment, and consumer goods to Central Asia. The Xinhua News Agency boasted that Chinese business supplied $500 million in investment to the region in 2003.[28] Railways and roads will provide the necessary transportation links that will connect China’s booming East with Central Asia. Some compare recent Chinese involvement there to modern vassal relations, in which China uses Central Asia as a buffer zone and an economically integrated entity that will help to advance the Chinese global agenda.
Beijing’s interests in the SCO can be separated into two different categories: economic and security. At least two institutional players are competing to set foreign policy and security agendas: the PLA and the Foreign Ministry. These two entities have often engaged in a struggle to determine Chinese foreign policies. Unsurprisingly, the military often favors hawkish policies, while diplomats prefer peaceful means. However, in the SCO, both the diplomats and the military have adopted forward strategies for China. Lieutenant General Li Qianyuan, head of the Chinese military delegation in the SCO, stated that the high-level joint military exercise exhibited the SCO states’ determination to fight terrorism, separatism, and extremism.[29] Following the proclaimed success of a Sino–Kyrgyzstan joint anti-terror exercise in 2002, the defense ministers from SCO states signed, at the summit held in Moscow in May 2002, a treaty on conducting this joint anti-terrorist military exercise.
Fighting separatism is a priority for Beijing. The separatist movements in Xinjiang constantly resist the Chinese regime. After the disintegration of the czarist empire, the Muslim minority in the province saw an opportunity to recreate the Muslim state of East Turkestan. There was a spike in separatism after the disintegration of the Soviet Union as well. Suspecting that other Central Asian states might protect separatists, Beijing warned that Chinese investment and trade in the region would be in jeopardy if the Central Asian states refused to comply with Chinese demands. Since the early 1990s, the PLA has maintained around 200,000 soldiers in Xinjiang who are tasked with monitoring the Muslim population.[30]
The Chinese government has claimed that the Taliban and Osama bin Laden have been harboring Uighur terrorists in Afghanistan.[31] However, the U.S. invasion of Afghanistan destroyed Uighur revolutionaries’ safe haven. In this respect, China and the U.S. share a common goal in combating nationalism and radical, political Islam. Though China has been uncomfortable with American military presence in Central Asia, Beijing has voiced qualified support of U.S. operations in Afghanistan against Muslim militants.[32] However, the extent of cooperation is limited, as the Chinese fear that the permanent stationing of American troops in the region will change the power balance. Both Russia and China hope to consolidate their influence in this region by diminishing the U.S. regional presence.
The Current and Potential Clashes of Interest between China and Russia
The SCO cannot be regarded as simply a monolithic entity. States’ interests inevitably conflict with each other. Sino–Russian current and future contradictions are the most obvious, but other conflicts abound. For instance, the Kyrgyz are unsatisfied with ceding a mountain range to China in the framework of a peace treaty. Specifically in the Asky riots in 2002, there was a protest against the Kyrgyz government ceding too much territory to China in land negotiations.[33] There have even been reports of Chinese diplomats being assassinated because of the Kyrgyzstani populace’s frustration towards Beijing. Similarly, the clash of interests between China and Russia is evident in military strategic and energy considerations. Since 2004, high-profile Russian officials have stressed Moscow’s opposition to a Chinese military presence in Central Asia.[34] Russia opposes a growing strategic role for China.
Conflicts of interest are most pronounced in the energy sector. In 2005, the Russian energy firm Gazprom and KazMunaiGaz, Kazakhstan’s main gas pipeline firm, agreed to increase gas transit of Turkmen and Uzbek gas via Kazakhstan to Russia for export to Gazprom’s European customers. This move may restrict China’s gas importing options in the region.[35] Furthermore, while China wanted the main Siberian oil pipeline to end in Daqing, in Heilongjiang province, Russia prefers a more expensive pipeline to Nahkhodka on the Pacific Coast with a spur to Daqing. Such a route will give Russia greater flexibility to export not only to China but also to Japan and Korea. Japan has even expressed willingness to subsidize the construction of the pipeline. Russia has remained cautious about the final decision on the direction and structure of the Siberian pipeline, which demonstrates that Russia does not want to become dependent on a single Chinese customer for its oil.
Russia, joined by U.S. energy companies, has attempted to obstruct Chinese efforts to buy energy holdings in the region, compelling the Chinese to search for other oil and gas options, such as cooperation with Iran. Iran’s ties with China (and Russia) are strengthening, and it sought to apply for full SCO membership. China currently imports around 13 percent of its oil from Iran. Pakistan is also interested in SCO membership, in exchange for which President Pervez Musharraf is offering China an “energy corridor” to Central Asia and the Middle East. Chinese interest in exploring a link to the long Turkmenistan–Afghanistan–Pakistan–India (TAPI) gas pipeline reflects the Chinese agenda of diversifying its sources of energy. However, Chinese and Russian officials have explicitly ruled out Iran becoming an SCO member, and have also ruled out any further expansion of the SCO membership in the near future. The Chinese Assistant Foreign Minister, Li Huio, stated that the SCO will not take in new members before its six members “make serious studies.”[36]
Implications for the United States
The United States is concerned that Beijing and Moscow are using their diplomatic alliance to limit America’s role in Central Asia. Both Russia and China would prefer that Central Asian countries’ contacts with the West be managed, or at least approved, by Moscow and Beijing. But the chief beneficiary from the SCO is China.[37] Beijing’s standing in the SCO and relatively good relations with the U.S. and Europe give China the opportunity to serve as an intermediary for the West.
Russia’s reluctance to construct an oil pipeline between Daqing and Siberia indicates Russian concerns about Chinese control over its natural resources. Moscow is also concerned about China’s military intentions, creating a sense of mistrust between the two powers. Despite Russia’s and China’s joint denunciation of the American military presence in Central Asia, Kyrgyzstan has allowed the United States to maintain its base at Manas, and Kazakhstan will even host NATO’s Steppe Eagle exercise in September. The SCO is not yet a cohesive entity in challenging the United States militarily or economically.
NATO may explore expanding relations with the SCO. Options for cooperative efforts may go beyond the existing NATO–Russia Council, and the Partnership for Peace, of which most Central Asian states are members. NATO members have a degree of cohesion and unity of values not yet present among SCO members and observer states, which often demonstrate considerable differences of approach and interest. Equally important, the SCO is a relatively small organization, still in its infancy, with an operating budget less than $30 million and a staff of a few dozen people. NATO, being larger, stronger, and more experienced in transnational security issues, can engage the SCO in discussions of strategic issues facing the region and develop paths for cooperation along the lines of the Partnership for Peace.
The United States should also seek bilateral agreements with the larger organization. Given that the SCO primarily serves as a geopolitical counterweight to the United States, American entrance into the organization is unlikely. The 2005 U.S. application to join the SCO was rejected.[38] Under such conditions, it is doubtful the United States and China can agree on terms for American membership without conceding their respective interests. However, the United States does not necessarily need membership in the organization to work closely with Central Asian states. It should renew its application to join as an observer and look to friendly states, such as Kazakhstan and Mongolia, for support. Whether or not the U.S. is able to attain observer status, it should use every diplomatic tool in its arsenal to oppose Iran’s intention to join as a full member.
Should Iran be permitted to enter the SCO, this will be a clear indication that Russia and China side with Iran on the issue of nuclear proliferation. Furthermore, inclusion of Iran would give the SCO significant influence over one of the world’s largest supplies of oil and gas reserves, in addition to potentially another nuclear arsenal. Russian President Vladimir Putin’s suggestion of forming a “natural gas OPEC” with Iran and Turkmenistan is of particular concern. These three countries are first, third, and fourth, respectively, in natural gas reserves, and will have the capacity to raise the global price of gas by regulating supply.
If the United States hopes to gain observer status in the SCO, it should engage the Central Asian states specifically by balancing democracy promotion and democratization with its other national interests, including security and energy. With the exception of Turkmenistan and Uzbekistan, most of the Central Asian states continue to maintain links with the United States to balance Russian and Chinese power. The U.S. should use what remaining contacts and leverage it has and continue to improve relations with friendly Central Asian states by providing economic, governance, and legislative reform assistance, and by enhancing military-to-military relationships. Working alongside these state governments in combating jihadists and terrorist organizations, the U.S. can appeal to common goals and secure American strategic and energy interests in the region.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies at the Heritage Foundation. This paper is based on his testimony before the U.S.–China Economic and Security Review Commission on August 3, 2006. The author thanks Heritage Foundation interns Thomas Chou and Conway Irwin for their assistance in preparing the testimony.
[1] U.S. Department of State, Office of the Coordinator for Counterterrorism, “Patterns of Global Terrorism—2003,” April 29, 2004, at http://hongkong.usconsulate.gov/uscn/state/2004/042901.htm (August 1, 2006).
[2] Meng Yan, “Free Trade Zone Proposed,” China Daily, September 24, 2003, at http://www.chinadaily.com.cn/chinagate/doc/2003-09/24
/content_267127.htm (July 27, 2006).
[3] Fredrick W. Stakelbeck Jr., “A New Bloc Emerges?” The American Thinker, August 5, 2005, at http://www.americanthinker.com/articles.php?article_id=4703 (July 26, 2006).
[4] Shanghai Cooperation Organization, “Declaration on Establishment of Shanghai Cooperation Organization,” June 15, 2001, at
http://www.sectsco.org/html/00088.html (August 1, 2006).
[5] Sergei Blagov, “Shanghai Cooperation Organization Summit Suggests New Russia-China Links,” Eurasia Daily Monitor, July 6, 2005, at http://www.jamestown.org/edm/article.php?article_id=2369975 (July 26, 2006).
[6] William Choong, “China and Russia: New ‘Axis’ in the Making?” The Straits Times, July 21, 2006, at http://straitstimes.asiaone.com/portal/site/STI/menuitem.c
2aef3d65baca16abb31f610
a06310a0/?vgnextoid=6fadbe120b93a010VgnVCM1000000a
35010aRCRD&vgnextfmt=vgnartid:258ec9dc32d8c010Vgn
VCM100000430a0a0aRCRD:vgnpdate:1153519140000 (August 1, 2006).
[7] Wu-ping Kwo and Shiau-shyang Liou, “Competition and Cooperation between Russia and China in Central Asia and “Shanghai Co-operation Organization: Analytical View from International Regime,” National Chengchi University, April 18, 2005, at http://iir.nccu.edu.tw/hjourn/is_c/is_c_9403.htm (July 27, 2006).
[8] Personal interviews with Uzbek officials who requested anonymity, Tashkent, October 2005.
[9] Kin-Ming Liu, “The Most Dangerous Unknown Pact,” The New York Sun, June 13, 2006, at http://www.nysun.com/article/3436 (July 26, 2006).
[10] Ibid.
[11] Stephen Blank, “China Joins the Great Central Asian Base Race,” EurasiaNet Daily, November 16, 2005, at http://www.eurasianet.org/departments/insight/
articles/eav111605.shtml (July 26, 2006).
[12] Ibid.
[13] Ariel Cohen, and John J. Tkacik, Jr., “Sino-Russian Military Maneuvers: A Threat to U.S. Interests in Eurasia,” Heritage Foundation Backgrounder No. 1883, September 30, 2005, at http://www.heritage.org/Research/RussiaandEurasia/bg1883.cfm
[14] Ibid.
[15] “Wildfire Chinese Growth Persists,” BBC News, April 20, 2005, at http://news.bbc.co.uk/2/hi/business/4464229.stm (July 30, 2006).
[16] Keith Bradsher, “Chinese Company to Buy Kazakh Oil Interest for $4 billion,” The New York Times, August 22, 2005, at http://www.nytimes.com/2005/08/22/business/worldbusiness/22cnd-oil.
html?ex=1282363200&en=cdbe608997c31770&ei=5090&partner=r
ssuserland&emc=rss (July 27, 2006).
[17] Stephen Blank, “China Make Makes Policy Shift, Aiming to Widen Access to Central Asian Energy,” Eurasianet.org, March 13, 2006, at http://www.eurasianet.org/departments/business/articles
/eav031306_pr.shtml (July 26, 2006).
[18] Ibid.
[19] Niklas Swanstrom, “China and Central Asia: A New Great Game or Traditional Vassal Relations?” Journal of Contemporary China (2005), 14 (45), p. 579.
[20] Ibid., p. 581.
[21] The Zhou Dynasty lasted from 1022 BC to 256 BC.
[22] Pan Yihong, “Traditional Chinese Theories of Foreign Relations and Tang Foreign Policy,” David C. Lam Institute for East-West Studies, 1998, at http://www.cic.sfu.ca/nacc/articles/panyihong/panyihong.html (July 30, 2006).
[23] Robert Ross, The Great Wall and the Empty Fortress: China’s Search for Security (New York: W.W. Norton & Company, 1997), p. 23.
[24] Wade Boese, “U.S.-Chinese Relations Strained Over Taiwan,” Arms Control Today, March 2000, at http://www.armscontrol.org/act/2000_03/chimr00.asp?print (July 30, 2006).
[25] Swanstrom, “China and Central Asia,” p. 569.
[26] Mark Dickens, “Major Events Relevant to Central Asian History, Part 2 (Since 1600),” Oxus Communications, at http://www.oxuscom.com/cahist2.htm (July 28, 2006).
[27] Library of Congress, Federal Research Division, “Russia: Foreign Affairs after the Crimean War,” at http://reference.allrefer.com/country-guide-study/russia/russia25.html
[28] Swanstrom, “China and Central Asia,” p.580.
[29] “SCO Begin Anti-terror Maneuvers in Kazakhstan,” People’s Daily (Beijing), August 6, 2003, at http://english.peopledaily.com.cn (July 27, 2006).
[30] Swanstrom, “China and Central Asia,” p.572.
[31] Ibid.
[32] “Statement by the Foreign Minister,” Chinese Ministry of Foreign Affairs, December 19, 2001.
[33] Matthew Oresman, “Assessing China’s Reaction to Kyrgyzstan’s “Tulip Revolution,” Central Asia-Caucasus Analyst, April 6, 2005, at http://www.cacianalyst.org/view_article.php?articleid=3195&SMSESSION=NO (July 30, 2006.)
[34] Stephen Blank, “China Joins the Great Central Asian Base Race.”
[35] Stephen Blank, “China Makes Policy Shift.”
[36] Dr. Maqsudul Hasan Nuri, “Pakistan and SCO,” The International News, March 11, 2006, at http://www.jang.com.pk/thenews/mar2006-daily/11-03-2006/oped/o4.htm (July 27, 2006).
[37] Howard W. French, “Shanghai Club, Once Obscure, Now Attracts Wide Interests,” The New York Times, June 16, 2006 (Lexis-Nexis, July 27, 2006).
[38] Stakelbeck, “A New Bloc Emerges?”
09-06-2006
by Stephen Johnson, Ariel Cohen, Ph.D., and William L. T. Schirano
Venezuelan President Hugo Chávez has embarked on a military buildup, to counter alleged U.S. plans to invade his country, and has recently visited Russia, Iran, China, Syria, and other countries to finalize purchases and lobby for a seat on the U.N. Security Council. Chavez’s aggressive policies could endanger U.S. allies in Latin America and a major source of U.S. oil imports.
Like Fidel Castro in 1961, Chávez is acquiring Russian assault rifles, combat aircraft, and possibly surface-to-air missiles, and he shares a hegemonic and anti-American international agenda with Iranian President Mahmoud Ahmadinejad. Unlike Castro, he is not dependent on a sponsor state and can finance his own adventures with booming state petroleum sales.
Because Chávez has no limits on acquiring or transferring arms, U.S. policymakers should strengthen regional alliances to prevent aggression, sanction Chávez in international forums, and press suppliers like Russia to withhold sales of offensive weapons systems.
The New Castro? Venezuela’s current arms buildup resembles events in the Caribbean in 1958, when Fidel Castro wrote a guerrilla companion that his destiny was to wage war against the United States. In 1960, Cuba began to receive Soviet weapons shipments, including light bombers, MiG jet fighters, SA-2 surface-to-air missiles, and finally nuclear-tipped SS-4 medium-range ballistic missiles, which provoked a U.S.–Soviet showdown in 1962.
In the 1970s and 1980s, when Cuba and the Soviet Union tried to establish satellite regimes in Africa and Central America, they armed, among others, Nicaragua’s Sandinista revolutionaries and El Salvador’s Farabundo Martí Liberation Front. The United States thwarted those plans by backing a Central American transition to democracy.
Mentored by Castro, Chávez is keenly aware of prior defeats and how to avoid them. Though freely elected, he has replaced Venezuela’s checks and balances with a crony congress, silenced critics with draconian media laws, and placed the state oil company under his thumb as head of the National Oil Council. Unbridled by popular will or economic sense, Chávez wants to block U.S. influence and become a power unto himself—picking up where Castro left off.
Courting Outside Partners. Soon after his election in 1998, Chávez began to curtail 50 years of U.S.–Venezuelan military cooperation. Finally, in 2004, his government asked the U.S. military mission to leave Venezuela’s armed forces headquarters in Caracas. Anti-drug operations and training of Venezuelan pilots in U.S.-supplied F-16 fighters ceased. Shortly thereafter, Venezuela began to seek arms from Russia. The Bush Administration suspended arms sales in May 2006, and Spain and Sweden are withholding weapons with U.S. components.
Chávez has signed contracts worth $3 billion for 24–30 military airplanes and more than 50 helicopters, has agreed to buy some 100,000 Kalashnikov assault rifles to arm a new reserve force, and reportedly is seeking short-range surface-to-air missiles. During the last week of July 2006, he was in Moscow to finalize the purchase of the Su-30 supersonic fighter-bombers and Mi-35 assault helicopters. He also signed an agreement to purchase a Kalashnikov weapons and munitions plant.
In Belarus, Chávez announced a strategic alliance with President Alexander Lukashenko to keep “hands at the ready on the sword” against imperialism. Iranian President Ahmadinejad awarded him a medal and promised collaboration on developing new oil fields. In China, Chávez pledged to shift more petroleum exports to Beijing. Meanwhile, ties with North Korean leader Kim Jong-Il could facilitate the acquisition of intermediate-range missiles.
Venezuela is replacing some military equipment that has fallen into disrepair, but setting up a Russian weapons plant and striking alliances with state sponsors of terrorism (Iran, Cuba, and North Korea) is alarming. Chávez already allows Colombian rebels to resupply in Venezuela and funds like-minded Bolivarian movements in neighboring countries. Venezuelan Kalashnikovs could help them go from street marches to armed attacks. The Su-30 will be Latin America’s most advanced attack aircraft. With North Korean ballistic missiles, Venezuela could threaten neighbors and the United States, and a gelling global oil alliance could limit U.S. imports at a critical moment.
Planning for the Worst. Latin America has only begun to turn the corner toward democratic governance, stable markets, and peaceful relations with neighbors. Chávez hopes to use guns and rhetoric to restore Castro’s revolutionary agenda. In response, U.S. leaders should:
Conclusion. By reaching out to Russia and Iran, Hugo Chávez threatens U.S. allies and vital interests. His new military muscle portends another decade of bloodshed, misery, and lost economic opportunity in Latin America. America and its allies need to be ready to confront those plans— probably sooner rather than later.
President Bush’s Agenda for the G-8 Meeting in St. Petersburg
06-30-2006
The G-8 meeting on July 15 and the Bush–Putin summit in St. Petersburg, Russia, may mark the most serious tests of U.S.–Russian and East–West relations since the collapse of the Soviet Union. Mutually amassed grievances have led some in Washington to question whether President George W. Bush should attend and whether Russia should remain in the G-8.
The United States has been highly critical of developments in Moscow’s domestic and foreign policy, such as increased restrictions on democratic freedoms within Russia and increasingly assertive interventions in the political and economic affairs of former Soviet republics.
Russia, for its part, opposes discussion of further NATO enlargement to include Georgia and Ukraine and fears that Western support for Russian pro-democracy nongovernmental organizations (NGOs) might one day provoke a “color” revolution in Moscow. Russia also blames the U.S. for blocking its accession to the World Trade Organization (WTO), despite Russia’s flagrant violations of intellectual property rights and severe limitations on foreign investment.
Mutual animosity notwithstanding, the U.S. and Russia have more to lose by antagonizing one another than by putting aside their differences on issues of utmost importance to both countries, especially the global war on terrorism, nonproliferation, and energy security.
At the summit, President Bush may ease the current atmosphere of tension between the two countries by focusing on the gains to be made through cooperation on these issues. Specifically, he should:
Focus on the Iranian issue by stressing the danger that a nuclear-armed Iran poses to Russia, especially in the Caucasus and Central Asia.
Emphasize the need for international firms to participate in large-scale Russian oil and gas projects.
Propose U.S. participation in confronting security threats emanating from the Caucasus and Central Asia.
Reassure President Vladimir Putin that U.S. support for political and media freedoms and human rights is not aimed at toppling the Putin regime, but that they are a sine qua non for further Russian participation in the G-8.
These actions may prove crucial in thawing the chill in the U.S.–Russian relationship, which threatens to do both sides more harm than good. Improved relations between Moscow and Washington may also help to justify Russia’s membership in the G-8 by confirming its dedication to cooperation on transnational issues.[1] Business cooperation, such as expanding sales of Russian uranium to the U.S. and U.S. civilian aircraft to Russia, and the lifting of U.S. objections to Russia’s storing of nuclear waste from third parties, such as Asian countries that operate American reactors, would contribute to improvement in relations.
Cooling U.S.–Russian Relations
On May 4, 2006, Vice President Richard Cheney gave a speech in Vilnius lambasting Russian policies that have dashed U.S. hopes for a democratic, market-oriented, post-communist Russia,[2] revealing that the political capital granted to Russia when it was invited to join the G-7 in 1997 is nearly exhausted.
After the collapse of the Soviet Union, both Russians and Americans believed that the introduction of democracy and capitalism would bring Russia closer to the West materially, politically, and spiritually.
Some Russian pundits have suggested that capitalism and democracy have failed to deliver the peace and prosperity that Russians desired, leading many to suggest that a Western society requires underlying Western values, not Russian ones. They have since advocated pursuit of a distinctly Russian “third way” that involves increased state intervention in the economy.[3] Pursuit of this third way has thus far coincided with economic growth, relative stability, and international prestige—developments that were assisted by the exorbitant rise in oil and gas prices, which have fueled prosperity since 2000. However, this has come at the price of the democratic freedoms and human rights that Americans hold dear.
As the U.S. and Russia have pursued their own, at times contradictory interests, they have clashed. The U.S. has pushed NATO’s borders uncomfortably close to Russia and is promoting NATO membership for Ukraine and Georgia, which Russia opposes. The U.S. has supported the Rose, Orange, and Tulip Revolutions in Georgia, Ukraine, and the Kyrgyz Republic, respectively, which ousted regimes loyal to Moscow and raised the specter of a similar upheaval in Russia. Washington has also sought closer ties with the strategically located and energy-rich states of Central Asia, much to the Kremlin’s chagrin.
On the other hand, Russia has irritated the U.S. by:
Refusing to cooperate on the Iranian nonproliferation issue and selling conventional arms to Iran;
The virtual absence of the rule of law, including politically motivated, heavy-handed interventions in business and financial markets;
Locking Western energy majors out of oil, gas, and pipeline projects in Russia and the former Soviet Union;
Continued efforts to monopolize the transportation of energy to Europe from energy-rich Central Asian states, such as Kazakhstan and Turkmenistan;
Using energy as a political and economic weapon to intimidate neighbors, such as Georgia and Ukraine;
Supporting secessionist regions in former Soviet republics (i.e., Abkhazia and South Ossetia in Georgia, Nagorno–Karabakh in Azerbaijan, and Transdniestr in Moldova);
Pressuring Kyrgyz and Uzbek officials to force the U.S. military to evacuate bases at Manas international airport and Karshi–Khanabad,[4] respectively;
Consolidation of Kremlin control over political parties, regional governments, television and print media, domestic and foreign NGOs, and “strategic assets” (e.g., oil, gas, telecommunications, and minerals).
Neither side’s actions are exclusively intended to provoke the other. The provocations are side effects of their pursuit of competing interests. Recognizing this fact and seeking common interests may be key to avoiding a Cold War–style rift between the two powers.
The Sources of Russian Foreign Policy Behavior
After World War II, with Stalin’s Red Army victorious in Middle Europe and Mao’s revolutionaries gaining the upper hand in China, the forces of capitalism and communism seemed evenly matched, and the ideological chasm seemed unbridgeable. Today, Russia’s position in the global hierarchy has different roots and therefore poses a whole new range of challenges to U.S. policymakers.
With the price of oil over $70 a barrel, Russia is flush with cash, and great revenues call for “great deeds.” These include funding new ballistic missiles, new nuclear submarines, and separatist militias in Transdniestr and Abkhazia, which threaten the stability of Moldova and Georgia and the wider Black Sea–Caucasus region.
Another obstacle to U.S.–Russian cooperation is the political culture among elites, which exhibits a KGB and militsia (police) ethos, mixed with some 1990s “wild East” Moscow capitalism. Neither these siloviki nor their oligarchic business partners favor “democrats” or Yankees who demand access to oil and gas patches—the “patrimony of the people”—that the Russian government controls.
Communist ideology has been replaced with a revived Moscow-centric Russian Orthodox worldview. This quasi-religious geopolitical system of beliefs views Russia as the heir of Byzantium, the Third Rome, which is always apart from Europe and America.
This places Russia closer to the “East” (China and the Muslim world) than to the materialistic postmodern West, which is said to lack soul and spirit. Islam is hailed as an “authentic” religion of Russia, which recently has become an observer in the Organization of the Islamic Conference and the Arab League.[5] Russia has also pursued diplomatic cooperation with the Iranian ayatollahs and Hamas. This rapprochement with the Muslim world risks driving a wedge between allies in the global war on terrorism.
Russia’s truculent treatment of Georgia and Ukraine—interruptions in gas supplies and stoking of separatism—have further irked Washington. The orchestrated eviction of the U.S. military from the Karshi–Khanabad base in Uzbekistan, conducted in cooperation with China, marked the flowering of a “beautiful friendship” between Moscow and Beijing aimed at undermining Washington’s interests.[6]
Russia’s diplomatic ambivalence over the Iranian nuclear program, demonstrated by chumminess with Iranian President Ahmadinejad, whose presence at the July 2006 Shanghai Cooperation Organization summit was highly publicized, is exhausting the White House’s patience.[7] The suspicion is that the Kremlin, together with Beijing, is willing to provide Ahmadinejad with the same political cover that Saddam Hussein purchased with oil-for-food contracts—except that this time, Russia will be paid in multibillion-dollar nuclear reactor contracts, air defense missiles, submarine sales, and bribes.
Russian–Iranian plans to squeeze the U.S. out of the Persian Gulf are also a source of concern, not just in Washington, but in Europe, Japan, and the Gulf itself. As roughly two-fifths of the world’s oil passes through the Strait of Hormuz,[8] edging America’s military power out of the Gulf would leave European and East Asian energy security at the mercy of nuclear-armed Shi’a radicals in Tehran, supported by Moscow and Beijing.
Finally, the Kremlin has done little to assuage foreigners’ fears of investing in Russia. The YUKOS affair, in which politically motivated Russian officials targeted Russia’s most efficient energy company, communicated to investors that their property rights were not secure. More recently, in March 2006, Interior Ministry agents seized a shipment of 167,500 Motorola mobile phones worth an estimated $17 million. Roughly 50,000 were destroyed for being “hazardous to users’ health,” and the remaining 115,000 remain in legal limbo for unspecified reasons.[9] Arbitrary regulations, rampant corruption, and legal irregularities raise concerns about the reliability of Russian markets.
Furthermore, Russian officials have recently confirmed that foreign companies will be restricted to minority ownership in any deposits of oil and gas deemed “strategic”[10] and have repeatedly delayed a crucial decision regarding which U.S. companies will be allowed to participate in developing the Shtokman gas field. Some analysts suspect that the participation of U.S. companies in developing Shtokman and the sale of Boeing civilian jets to Russia will be contingent on Russian accession to the WTO.[11] Squeezing out Western companies from choice Russian energy developments and other investments only exacerbates investors’ fears, and politically motivated restrictions on market participation strengthen U.S. reservations about Russian WTO membership.
What the U.S. Should Do
In dealing with Russia, the U.S. needs to keep in mind some basic economic and geopolitical realities:
Russian leaders will continue to pursue optimization of their global power by leveraging energy resources.
The West remains Russia’s principal customer for its energy and raw materials.
Despite strained relations with the U.S., Russian officials understand that provoking an outright global confrontation with the U.S. and its allies is beyond the country’s economic capabilities and counter to its long-term interests.
Russia’s full economic integration into the world is in the U.S.’s strategic interest.
For the U.S., simultaneously taking on global terrorism, Iraq, Iran, Russia, and China may constitute a dangerous global overreach.
Armed with this understanding at the upcoming meeting with President Putin and the G-8 summit, President Bush should:
Focus on the Iranian threat by stressing that a nuclear-armed Iran may support anti-Russian and radical Islamic forces in the Caucasus and Central Asia. The President should also warn Putin that the continued flow of Russian technology and assistance to Iran’s nuclear and missile programs, along with insufficient Russian cooperation on restraining Iran’s nuclear efforts, is souring Russia’s relations with its Western partners and may lead to expanded sanctions against Russian companies that are involved in such transfers of technology.
Emphasize the need for international firms to participate in large-scale Russian oil and gas projects, including the Shtokman gas field in the Barents Sea. The massive investments, technology, and expertise required to develop Russia’s hard-to-reach oil and gas resources indicate that Russia would be wise to court foreign investors, not exclude them, while oil prices are high. Discrimination against foreign companies and businessmen may further delay Russia’s membership in the WTO.
Propose U.S. participation in confronting security threats emanating from the Caucasus and Central Asia, including the spread of radical Islamic terrorism; trafficking in drugs, weapons, and human beings; and proliferation of weapons-of-mass-destruction technology. The U.S. and Russia should launch a joint threat assessment and task the joint U.S.–Russian anti-terrorism task force chaired by Undersecretary of State Nicholas Burns and Russian Deputy Foreign Minister Sergei Kislyak with putting together a policy package to be implemented in this area.
Reassure President Putin that U.S. support for political and media freedoms and human rights is not aimed at toppling the Putin regime, but that they are a sine qua non for further Russian participation in the G-8.
Conclusion
At the G-8 and Bush–Putin summits, the U.S. should endeavor to pursue the diplomatic and strategic cooperation that characterized U.S.–Russian relations during the 1990s and after 9/11, but on a new level. This new paradigm should take into account Russia’s current role as an energy giant while recognizing U.S. interests vis-à-vis Iran, Iraq, and Eurasia.
However, the U.S. cannot wait forever. If no positive changes are in evidence, the U.S. may recommend expanding the G-8 to include China, India, and Brazil on the economic tier while returning to the G-7 format on the political tier.
—Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.
[1] U.S. Department of State, Bureau of International Information Programs, “What Is the Group of 8,” at usinfo.state.gov/ei/economic_issues/group_of_8/what_is_the_g8.html (June 28, 2006).
[2] Richard Cheney, “Vice President Cheney’s Remarks at the 2006 Vilnius Conference,” Vilnius, Lithuania, May 4, 2006, at www.whitehouse.gov/news/releases/2006/05/20060504-1.html (June 28, 2006).
[3] MosNews, “Pro-Kremlin United Russia Sees Way of Growth in State Regulation of Economy,” November 26, 2005, at www.mosnews.com/news/2005/11/26/unitedrussia.shtml (June 19, 2006).
[4] Vladimir Socor, “Moscow’s Central Asian Friends Campaign Against U.S. Bases,” Eurasia Daily Monitor, August 11, 2005, at www.jamestown.org/edm/article.php?volume_id=407&issue_id=3434&article_id=2370142 (June 19, 2005).
[5] Yin Gang, “Russia, Sole Winner of the Iran Crisis,” Common Ground News Service, April 19, 2006, at www.commongroundnews.org/article.php?sid=1&id=1644 (June 19, 2006).
[6] Stuart D. Goldman, “Russia,” Congressional Research Service Report for Congress, May 8, 2006, www.fas.org/sgp/crs/row/RL33407.pdf (June 20, 2006), and Ariel Cohen, Ph.D., “Uzbekistan’s Eviction Notice: What Next?” Heritage Foundation Executive Memorandum No. 978, August 18, 2005, at www.heritage.org/Research/RussiaandEurasia/em978.cfm.
[7] Ariel Cohen, Ph.D., “Bear and Dragon Summit,” Heritage Foundation Commentary, June 14, 2006, at www.heritage.org/Press/Commentary/ed061406b.cfm (June 20, 2006).
[8] U.S. Department of Energy, Energy Information Administration, “Persian Gulf Oil and Gas Exports Fact Sheet,” Country Analysis Brief, September 2004, at www.eia.doe.gov/emeu/cabs/pgulf.html (June 19, 2006).
[9] Steven Lee Myers, “Phone Seizure Seen as Example of Russian Corruption,” The New York Times, June 14, 2006, p. A3, at www.nytimes.com/2006/06/14/world/europe/14russia.html?pagewanted=all (June 28, 2006; subscription required).
[10] Guy Chazan, “Russia to Tighten Access to Oil and Gas Reserves,” The Wall Street Journal, June 14, 2006, at online.wsj.com/article/SB115023865846579404.html?mod=todays_asia_economy_and_politics (June 28, 2006; subscription required).
[11] Stephen Boykewich, “Shotkman Gas Project Linked to WTO Fight,” The St. Petersburg Times, April 14, 2006, www.sptimes.ru/index.php?action_id=2&story_id=17321 (June 20, 2006).
06-13-2006
On June 15 members of the Shanghai Cooperation Organization (SCO) will gather for their annual meeting at the birthplace of this Eurasian bloc—Shanghai. Since its modest economic beginnings in 2001, when it facilitated China’s return into its Central Asian backyard for the first time in almost 1,000 years, the SCO has become a Eurasian powerhouse with an increasingly strong military component. The United States should watch for anti-American developments at the SCO while exploring ways to establish a dialogue with it.
Guest of Honor: Ahmadinejad
Washington pundits and policymakers have pooh-poohed the power of the SCO—to their own peril. At this year’s summit, the guest of honor is Iranian President Mahmoud Ahmadinejad, who will be pushing for the Islamic Republic’s full membership in the increasingly anti-American organization. Iran currently holds observer status, along with India, Pakistan, and Mongolia. Belarussian president Alexander Lukashenko is also knocking on the SCO’s doors to gain leverage against Russia, an SCO member.
Moscow sources are saying that full membership may not be in the cards for either the Slavic dictatorship or the Shi’a theocracy. Ahmadinejad, however, will be rewarded with one-on-one meetings with SCO heads of state, including Chairman Hu of China, Russian president Vladimir Putin, and Kazakhstani president Nursultan Nazarbaev.
The U.S. should keep a close watch on SCO-Iranian coziness, as it may indicate growing coordination between Moscow, Beijing and Teheran. This may prove especially salient if Iran rejects the latest incentive package and refuses to cease uranium enrichment and open its 18-year-old nuclear program for invasive inspections by the International Atomic Energy Agency (IAEA).
Giant Stakes for Russia and China
Considering the giant stakes for Russia and China in bilateral relations with Teheran, the U.S. may fail to convince Russia and China that embracing Iran may not be consistent with their long-term interests. Russia recently announced the sale to Iran of TOR-1-M surface-to-air missiles for defense of its Bushehr nuclear reactor and its sprawling nuclear industry from hypothetical American or Israeli air attacks. Moscow’s interest not only in conventional arms sales but also in expanding nuclear reactor sales, as well as Chinese deals to import natural gas to the tune of over 100 billion dollars over 30 years, is common knowledge.
However, longer-term problems with a radical Iran should occupy the attention of the SCO leaders in Shanghai. Specifically, a nuclear-armed, religiously aggressive and truculent Iran may well challenge Russia’s support for the authoritarian and secular post-Soviet rulers in the Caucasus and Central Asia. Iran was behind a Sunni Islamist opposition in the Tajik civil war in the early 1990s and is making inroads into Azerbaijan.
Geopolitical Setbacks for U.S.
At the Shanghai summit, the U.S. should watch for other anti-American developments. Last year the SCO, encouraged by Russia and China, passed a resolution demanding U.S. withdrawal from an air base in Karshi Khanabad, Uzbekistan. U.S. refusal to finalize payments for the base and its harsh denunciation of President Islam Karimov for civilian casualties in suppressing an Islamist rebellion in Andijan in May 2005 also contributed to the Uzbek decision to expel U.S. forces.
This year, Russia has dictated to the Kyrgyz Republic terms and conditions for hosting the only remaining major U.S. air base in Central Asia, at the Manas airport in the capital Bishkek. Moscow has demanded ceasing all reconnaissance flights and limiting use of the base to resupply missions in Afghanistan. It has also encouraged Kyrgyz President Kurmanbek Bakiev to demand $100 million dollars in aid and to increase rent for the base sixfold.
Kazakhstan: The Pivot of U.S. policy in the Region
There is good news regarding the SCO. The U.S. is expanding ties with Kazakhstan, major oil producer with the region’s most liberal economic policy. It is also the nation most open to the West in the region. During his May visit to the country, Vice President Dick Cheney praised President Nursultan Nazarbaev, who runs this state sandwiched between two giants with imperialist histories, Russia and China.
Central Asian SCO members and observers—Afghanistan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan—are in dire need of political modernization and economic development, and Kazakhstan can act as a role model. Kazakhstan plans to move away from energy and raw material foundations to machine building, construction and services. Almaty, the business capital, is in the midst of a construction boom and is now dotted with glittering shopping malls and shiny new cars. High oil prices have more than quadrupled Kazakhstan’s per capita income over the last decade, and oil production is scheduled to reach 3.5 million barrels a day by 2012.
Mr. Nazarbaev is engaged in a balancing act among Russia, China and the U.S. He is expanding an oil pipeline to the Russian port of Novorossiysk and has built an oil pipeline to China. He has announced an agreement to supply oil to the Baku-Ceyhan pipeline consortium led by British Petroleum. He has also been responsive to U.S. demands not to build a pipeline to Iran. Recently, Nazarbaev sent a letter to President Ahmadinejad, calling him to abandon the Iranian military nuclear program, just as Kazakhstan gave up its nuclear arsenal after the collapse of the Soviet Union.
Unfortunately, the majority of the states in Central Asia has taken a different course and remains largely under the influence of China and Russia. There is no doubt as to China and Russia’s intentions in Central Asia—to gain control of natural resources and check U.S. influence in the region. The growing power and influence of the SCO indicate that they may be succeeding.
U.S. Policy Challenges
The U.S. can counter the rise of the SCO. First, Washington should recognize that China and Russia have a history, a present, and a future in this strategic area. They are extremely sensitive to U.S. proclaimed interests and do not welcome “the new kid on the block.” Washington’s diplomatic messages to these two powers and all SCO members and observers should remain tactful and nuanced.
The U.S. can demonstrate to Beijing that Russia is dragging it into an anti-American bloc, which is counter to China’s long-term interests. Russia is a high cost oil producer, and Middle Eastern instability keeps its oil prices high and its budget revenues higher. ?senior Putin foreign policy advisor told me that Russia will quietly cheer more Middle East instability as oil prices may climb to $90 a barrel or higher. China, on the other hand, is an energy-starved economic powerhouse dependent on cheap Middle East oil. China has an interest in seeking peace in the Gulf to ensure the security of its growing energy investments. If not restrained and contained, Iran is likely to drive world oil prices higher as it pursues its aggressive, terror-enhancing policy, supporting jihadi Islamists and challenging moderate Sunni regimes from the Gulf to Morocco.
Washington should focus Moscow’s attention on the geopolitical repercussions of a radical, nuclear-armed Iran, which is likely to throw its weight around Russia’s southern “soft underbelly”.
The U.S. should develop its relationship with Kazakhstan and warmly greet President Nazarbaev when he visits in September. The U.S. should also encourage democratization, property rights protection, and free market economic policies in Kazakhstan and, as much as possible, in other SCO countries, especially Kyrgyzstan and Tajikistan. Regional wealth creation will go a long way to stem the rise of radical Islam. A dose of modern secular education and the encouragement of more peaceful variants of Islam, such mystical Sufism, would also help.
Conclusion
During its long war on Islamist terrorism and the political ideology that breeds it, America can ill-afford a conflict with Russia and China in Eurasia. Thus, Washington must explore ways to establish a dialogue with the SCO on its fifth anniversary. It may otherwise risk yet another humiliation at the hands of Moscow and Beijing.
The Real Culprit Behind Price-Gouging: OPEC
05-31-2006
by Ariel Cohen and William L T Schirano
With the summer driving season now upon us, no one expects a break in the price of gas at the pump. The realities of supply and demand, however, have not stopped some in Congress from seeking a quick fix to the complex problem of high fuel prices.
Recently, in a rare display of bipartisan cooperation, members of Congress pinned the rise of gas prices on “big oil” price-gouging, blaming American oil companies. Yet, a recent investigation by the Federal Trade Commission (FTC) found that claims of price-gouging had less to do with “Big Oil” than they did with “regional or local market trends.”[1]
While Congress spends its time chasing this “white whale,” state-owned oil companies that make up the Organization of Petroleum Exporting Countries (OPEC), and control 80 percent of the world’s oil reserves, continue to gouge the American consumer through a series of monopolistic practices. This week, OPEC is expected to announce that it will maintain its current output level—a decision that will do little to ease oil prices that have reached more than $70 a barrel.[2] If Congress is serious about alleviating the price-gouging that contributes to high gas prices, it ought to begin by allowing the federal government to sue OPEC.
At a time when oil prices are climbing to ever-higher levels, this measure would be a welcome first step towards reestablishing the free market in this strategically important sector. Indeed, this move is long overdue and points the way to a second, more important step: allowing private antitrust suits against OPEC.
The Intolerable Status Quo
Since its inception in 1960, OPEC, which is dominated by Persian Gulf producers, has successfully restricted its member states’ petroleum production, artificially distorting the world’s oil supply to line its members’ pockets. Member states’ production quotas are determined at semi-annual meetings of members’ petroleum ministers and are at times changed through telephone consultations. Several times, this supply-fixing strategy has devastated the U.S. and global economies:
In 1973, OPEC’s actions in response to U.S. support for Israel, which was attacked in the Yom Kippur War, resulted in a worldwide economic recession that lasted from 1974 to 1980.
In 1980, OPEC’s failure to increase production in the face of the Iranian revolution resulted in historically high oil prices of $81 per barrel (in 2005 dollars).
In 1990, OPEC refused to increase production sufficiently to keep prices stable as Saddam Hussein occupied Kuwait.
Lately, OPEC’s resistance to add productive capacity has sent oil prices to $75 a barrel, once again endangering U.S., and worldwide, economic growth.
The cartel’s operations ensure that its members’ oil and gas economies remain insulated from foreign investment flows. Members of OPEC have not worked to enhance the rule of law and property rights and have imposed severe restrictions to prevent foreign investors from owning upstream production assets, such as oil fields and pipelines. This is a testament to the cartel’s de facto monopoly over the petroleum market—a strategy that has resulted in higher oil prices for American consumers.
Indeed, the only serious challenge to the organization came in 1978 when a U.S. non-profit labor association, the International Association of Machinists and Aerospace Workers (IAM), sued OPEC under the Sherman Antitrust Act in IAM v. OPEC. The U.S. Court of Appeals for the Ninth Circuit rejected the case in 1981. OPEC, the court affirmed, could not be prosecuted under the Sherman Act due to the foreign sovereign immunity protection it claimed for its member states. Prevailing legal doctrines, however, suggest that government-owned companies that engage in purely business activities do not warrant sovereign immunity protection.[3]
High oil prices, which OPEC facilitates, serve to transfer wealth from Western consumers to petroleum producers. This wealth transfer funds terrorism through individual oil wealth and government-controlled “non-profit” foundations. It also permits hundreds of millions of dollars to be spent on radical Islamist education in madrassahs (Islamic religious academies).
Furthermore, the oil-cash glut in the Gulf states and elsewhere empowers resistance to much-needed economic reform in oil-producing countries. Western consumers fund state subsidies for everything from health care to industry to bloated bureaucracy.
Getting Serious About OPEC’s Price-Gouging
Growing concerns over energy prices prompted Congress last year to examine the legal hurdles that prevent the United States from defending its economic and national security interests. In the early part of 2005, a group of senators led by Sen. Mike DeWine (R-OH) introduced the “No Oil Producing and Exporting Cartels Act” (S. 555), known as NOPEC, to amend the Sherman Act. This bill would make oil-producing and exporting cartels illegal. The measure remains in the limbo of the Senate Legislative Calendar under General Orders.
On June 21st, DeWine, with the support of Sen. Herb Kohl (D-WI), added an amendment based on NOPEC to the Energy Policy Act of 2005. Like NOPEC, this amendment would have modified sections of the Sherman Act to allow the U.S. Department of Justice (DOJ) or the FTC to bring suits against OPEC for its monopolistic practices. The amendment did not make it into the final energy bill.
In April of 2006, Senator Arlen Specter introduced the “Oil and Gas Antitrust Act of 2006” (S. 2557), another bill that takes aim at the Sherman Act. That bill has also been placed on Senate Legislative Calendar under General Orders.
If Congress is serious about the issue of price-gouging, it must allow federal suits against OPEC. If OPEC is to be reined in, individuals and companies that it has damaged must also be allowed to bring suits against the cartel. As the IAM v. OPEC decision made clear, Congress cannot rely on the courts when it comes to amending the Sherman Act.
Conclusion
It is time for OPEC to cease its monopolistic practices. Otherwise, the American people can expect more of the same from this cartel—higher gas prices and shrinking wallets.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security, William L T Schirano is a Research Assistant, in the Sarah and Douglas Allison Center for Foreign Policy Studies of the Kathryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation.
Reducing U.S. Dependence on Middle Eastern Oil
05-07-2006
The United States is the largest oil importer in the world, bringing in 13.5 million barrels per day (mbd), which accounts for 63.5 percent of total U.S. daily consumption (20.6 mbd). [1] Oil from the Middle East (specifically, the Persian Gulf) accounts for 17 percent of U.S. oil imports, and this dependence is growing.
There is a broad consensus in America, from the President to the man on the street, that this situation is detrimental to the country’s economic health. In his 2006 State of the Union address, President George W. Bush said, “[W]e have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world.” [2] While recognizing the problem is laudable, however, little has been done to solve it.
Limiting the hold of Middle Eastern oil on the U.S. economy will require creativity and genuine effort. Specifically, the Administration should:
Prepare for contingencies in which oil-rich countries become destabilized;
Assist friendly Persian Gulf states in enhancing the security of their oil facilities; and
Diversify U.S. energy sources and oil imports to reduce dependence on Persian Gulf oil.
Beyond these general guidelines, it is crucial that the U.S. follow through with these specific measures:
Boost efforts to roll back Iran’s subversive ideological, terrorist, and military threats;
Expand military contingency plans and prepare a rapid reaction force;
Diversify the energy basket by expanding domestic production of oil and gas and by lifting the bureaucratic barriers that prevent greater use of nuclear energy;
Encourage expanded methanol and ethanol production and imports; and
Expand the Strategic Petroleum Reserve.
Table1
Source: U.S. Department of Energy, Energy Information Administration.
Growing Dependence on Imported Oil: A National Security Threat
The U.S. government predicts that by 2025, the country will import 68 percent of its oil.[3] At best, the measures in the Energy Policy Act of 2005[4] will slow the growth rate of U.S. dependence only slightly.[5]
Many have suggested, quite correctly, drilling for oil in the Alaska National Wildlife Refuge (ANWR), a small part of Alaska’s remote Arctic slope. However, even opening ANWR would add only 1 mbd to U.S. production—barely 5 percent of America’s growing oil consumption, which currently stands at 20.6 mbd.[6] Table 1 lists the world’s largest oil producers and consumers in 2004. Map 1 illustrates the sources of U.S. oil imports.
Map1
Sources: U.S. Department of Energy, Energy Information Administration, “International Petroleum (Oil) Imports
and Exports,” at http://www.eia.doe.gov/emeu/international/oiltrade.html (March 21, 2006). Map based on R. I. Gibson,
“Some Interesting Oil Industry Statistics,” Gibson Consulting, at http://www.gravmag.com/oil.html#imports (March 21, 2006).
However, there is a more pressing problem. Two-thirds of the world’s oil reserves are concentrated in the increasingly unstable Middle East and are controlled by members of the quasi-monopolistic Organization of Petroleum Exporting Countries (OPEC).[7] Over the years, OPEC has been quick to cut supply and slow to increase production, bringing oil prices to today’s high levels.[8] Most OPEC member countries and other oil producers have high levels of government economic regulation and corruption, as documented in the Index of Economic Freedom, published by The Heritage Foundation and The Wall Street Journal.[9] Thus, consumers are effectively paying two premiums on oil: one for security and one for suppliers’ economic inefficiency and monopolistic behavior.
The countries listed in Table 2 and Table 3 produce about 61 mbd, or about 73.5 percent of world production. OPEC countries account for about 33 mbd, or 40 percent of world production.
Table2
Source: U.S. Department of Energy, Energy Information Administration.
Table3
Source: U.S. Department of Energy, Energy Information Administration.
Global fuel consumption is projected to increase by 100 percent to 150 percent over the next 20 years, driven largely by the rapidly growing Chinese and Indian economies, and this increased demand will force prices even higher. The supply of conventional light sweet crude oil is likely to dwindle, opening the door to expanded market shares for heavy oil and oil with high sulfur content, as well as oil extracted from oil sands and alternative fuels.[10]
Threats to Key Suppliers
The oil market operates today without cushions of additional production capacity or significant strategic petroleum reserves beyond the U.S. reserves. For example, al-Qaeda’s February 24, 2005, attack on the Aramco facility in Abqaiq, Saudi Arabia, sent shock waves through the world’s financial markets. On the same day, the price of oil on international markets jumped nearly $2, despite the attack’s complete failure. (The terrorists and two security guards were killed.)[11]
Most analysts agree that this attack and an averted attempt on March 28 were merely trial runs in a much longer campaign designed to disrupt the global economy, particularly the oil and gas industry.[12] As the September 2001 World Trade Center attacks demonstrated, al-Qaeda tends to return to the scene of the crime, so another strike on Abqaiq and other oil targets is likely.
Both Osama bin Laden and Ayman al-Zawahiri have repeatedly called for attacks on key Western economic targets, especially energy sources.[13] In a tape aired by Al Jazeera, Zawahiri said:
I call on the mujahideen to concentrate their attacks on Muslims’ stolen oil, most of the revenues of which go to the enemies of Islam while most of what they leave is seized by the thieves who rule our countries.[14]
The unfortunate reality is that the Middle East remains the strategic center of gravity of the global oil market—a position that is not likely to change in the medium term. As long as radical Islam, China, India, and Europe continue the struggle for the world’s limited oil supply in the Middle East, the region will remain unstable. If the U.S. is to protect itself from these economic and political threats, it must reduce its dependence on Middle Eastern oil as quickly and efficiently as possible.
Oil as a Weapon
Many Arab leaders understand the dynamic of this dependence. For example, as early as 1990, the late Yassir Arafat said:
When the North Sea oil dries up in 1991, the United States will want to buy Arab petroleum. And when the American oil fields themselves run dry and oil consumption in the United States increases, the American need for the Arabs will grow greater and greater.[15]
This observation has not been lost on the current generation of politicians and terrorist leaders. However, bin Laden and Zawahiri are not satisfied with the unwieldy weapons of oil boycotts, threats of boycotts, and buying political influence in the West. Instead, they are clearly zeroing in on the oil-rich kingdoms of Saudi Arabia and the Gulf as their principal targets. They also appear increasingly interested in attacking the entire global oil industry, from wells to wheels.
The failed February strike and the prevented March attack on Abqaiq were not the first times that al-Qaeda has targeted energy assets in the region. In October 2002, al-Qaeda attacked the Limbourg, a French oil tanker, off the coast of Yemen with a suicide boat filled with explosives. In 2002, American and Saudi intelligence agencies uncovered a plot by al-Qaeda sympathizers inside Saudi Aramco to destroy key Saudi oil facilities. In 2003–2004, al-Qaeda attacked the Saudi port of Yanbu and murdered five Western engineers working there.[16]
Indeed, terrorist attacks against energy infrastructure are not the exception, but the rule, as an examination of the three primary regional challenges to energy security in Iraq, Iran, and Saudi Arabia illustrates.
Iraq. While the removal of Saddam’s regime may have been a positive factor for energy security because it freed Iraq from the U.N. sanctions that restricted oil exports, the postwar turmoil in Iraq is hindering the foreign investment that could help to expand Iraqi oil exports. This makes building a politically stable and peaceful Iraq all the more important.
Meanwhile, pipeline sabotage by foreign and domestic insurgents has crippled Iraqi oil production. Today, Iraq produces 800,000 to 1.3 million barrels per day less than it produced before Operation Iraqi Freedom in 2003.[17] According to the Iraqi oil ministry, the 186 insurgent attacks on the oil industry cost the country $6.25 billion in lost revenue during 2005 and claimed the lives of 47 engineers and 91 police and security guards.[18]
Poor U.S. postwar planning, coupled with Iraqi corruption, mismanagement, lack of investment, and inept technological exploitation of the existing fields, has clearly had a detrimental effect on production. However, terrorism, sabotage, and sectarian violence are at the heart of Iraq’s reduced oil production.
Oil export routes are hampered as well. With both the Saudi–Iraq pipeline to the south and the Syrian pipeline to the west off-line,[19] Iraq is vitally dependent on two pipelines: one from Kirkuk to the Mediterranean port of Ceyhan in the northwest and the Basra pipeline in the south.
Escalating violence is further impeding oil production and cash flow for the central government in Baghdad. The fear that the situation may deteriorate further has fueled speculation that the Kurdish region in northern Iraq may decide to pursue independence—a development that might invite both Turkish and Syrian military involvement. If this were to happen, Iraq’s oil fields in the north (the largest in the country) and the strategic Kirkuk–Ceyhan pipeline would likely remain under a security threat for the foreseeable future.
Iran. Despite Iranian President Mahmoud Ahmadinejad’s earnest and ongoing attempt to project the image of an irrational leader of what international relations theorists have called a “crazy state,” many analysts have yet to recognize fully the dire ramifications of Iran’s professed intention to develop a nuclear weapons program.
If diplomacy fails, Iran’s pursuit of nuclear weapons will leave the U.S. and its allies with few choices, similar to the options that President John Kennedy faced 40 years ago during the Cuban missile crisis.
On one hand, the U.S. and its allies could choose the military option, deciding that a nuclear-armed Iran that sponsors global terrorist organizations like Hezbollah, Hamas, and Palestinian Islamic Jihad is incompatible with the post-9/11 world.
Yet, the economic consequences of a military strike on Iran’s nuclear facilities to the world energy market would likely be significant, if not disastrous. Immediately following military action, uncertainty about Iran’s ability to sustain oil production at the current level of 4.05 mbd could drive oil prices above $80 per barrel.[20] If Iran retaliated and escalated by shutting down the Strait of Hormuz, which would merely require placing anti-ship mines in the strait,[21] the temporary loss of more that 15 million barrels of oil to the international market could drive oil prices above $83 per barrel, the historic height of the 1970s (adjusted for inflation).[22]
On the other hand, Iran’s aspirations in the region are far-reaching. Allowing Iran to join the nuclear club introduces the possibility of Iranian interference throughout the Middle East, especially given Iran’s location near so many of the world’s largest oil fields. (See Table 4.) The large Iranian military, amply supplied by Russia and China, would be in a position to dominate the Persian Gulf under a nuclear umbrella, with U.S. ground forces pinned down in Iraq.
Currently, Iran enjoys the support of some Shi’a in Iraq, especially Muqtada Sadr’s Mahdi Army, and in the Shi’ite-populated Ash Sharqiyah (Eastern) Province of Saudi Arabia. This appeal could facilitate the takeover of some of the largest oil fields in the world. In a worst case scenario, a nuclear Iran could threaten the United Arab Emirates and Kuwait. If this were to happen, the Islamic republic could quickly secure a sizable part of the world’s oil supply, bringing the nuclear-armed militant Shi’ite Muslim state close to a virtual monopoly over the world’s energy market.
Saudi Arabia.Saudi Arabia not only is the world’s largest exporter of oil, but also has the biggest share of unused oil production capacity, which is crucial for cushioning oil markets from supply disruptions elsewhere. Thus, the political stability and future of Saudi Arabia’s oil industry remain paramount to forecasting trends in the oil economy of the Middle East in the next 15 to 20 years.
If Saudi Arabia remains stable or even increases production, the world has a couple of decades to make the transition to new fuels, probably a combination of hydrocarbons and non-hydrocarbons. This transition needs to be manageable and not too disruptive so that industries can adjust and raise the capital necessary to create new technologies and distribution networks. However, a combination of security factors and economic policies is making this kind of “soft landing” less likely than an escalating energy shortage, rife with international security and economic crises. A successful attack on the Saudi oil facilities could cut Saudi supply and neutralize Saudi Arabia’s 1.5–2 mbd surplus oil producing capacity, which in turn would destabilize world oil markets, undermining international energy security.
Internally, the Saudi leadership has spent much of its recent existence on the knife’s edge. The balancing act between supplying the United States with oil on one hand and financing radical Islamists on the other was always a tremendously risky feat for the monarchy. The attack on Abqaiq demonstrates the potentially disastrous consequences of a misstep.
The attacks on Abqaiq most probably signal an escalation of a low-intensity terrorist war between the oil-rich Saudi monarchy and the jihadis in which oil fields, pipelines, pumping stations, ports, and terminals are soft targets, vulnerable to the types of asymmetric attacks that are already the bloody hallmark of al-Qaeda. According to Newsweek, a successful strike on Abqaiq could have cut Saudi output by more than 4 mbd for two months or more, with disastrous consequences for the global economy.[23]
Even more frightening is the prospect of jihadis mounting an outright takeover of the country. Under such a scenario, radical Islamists dedicated to overthrowing the Al Saud regime would slowly build up their forces until they could exploit a revolutionary situation created by a succession struggle, a political assassination, or some other circumstantial trigger.
Uprisings, if not checked, could lead to the regime’s overthrow and political turmoil, which would deeply affect oil production capacity and immediately and directly threaten Western experts and workers in Saudi Arabia. Osama bin Laden has stated his belief that oil should cost $145–$200 per barrel.[24] If radical Wahhabis succeeded in taking over Saudi Arabia, they would likely drastically reduce production. The radical regime’s anti-Western policies, including the pursuit of nuclear weapons, could trigger Western economic sanctions, which would likely include limits on investment and spare parts for the oil industry or even an outright trade boycott. Furthermore, if the survival of the world’s economy is threatened, military action to remove an al-Qaeda–type regime could not be ruled out.
Table4
Source: : U.S. Department of Energy, Energy Information Administration.
Implementing a Three-Pronged Strategy
The United States and its allies need to pursue a three-pronged strategy by preparing for contingencies in which the oil-rich regimes become destabilized, assisting friendly Persian Gulf states in enhancing security of their oil facilities, and diversifying U.S. energy sources and oil imports to reduce dependence on Persian Gulf oil. Specifically, the United States should:
Boost efforts to roll back Iran’s subversive ideological, terrorist, and military threats to Iraq and other Arab states of the Persian Gulf through close cooperation with those governments. It is crucial that the United States deter, contain, or disarm Iran through cooperation with its allies, particularly those oil-producing states that are most directly threatened by Iran. The U.S. defense and intelligence community should build capacity in Iraq, Turkey, and other border states. The U.S. should ascertain that these countries are staffing their intelligence and internal security agencies with reliable personnel.
Expand military contingency plans and prepare a rapid reaction forcein cooperation with U.S. allies in the region to secure and protect the Persian Gulf oil infrastructures if terrorists attempt to seize or destroy them. Such a force should be fully interoperable with the Gulf Cooperation Council militaries. U.S. military and intelligence agencies should support countries and companies in the region in efforts to increase their defenses against terrorist attacks on oil facilities.
The Administration should also ensure that U.S. intelligence and law enforcement agencies receive full cooperation from the Persian Gulf states, particularly Saudi Arabia, in the war against terrorism. An integrated and computerized real-time operations center is needed to integrate intelligence and operations to protect oil and gas infrastructure in the Gulf. The U.S. should pressure Persian Gulf states to intercept and disrupt all financial support for al-Qaeda and similar organizations around the world. These efforts should include using financial controls and improved banking transparency to cut funding for virulently anti-American/anti-Western clergy, radical Islamic academies (madrassahs), and those elements of private or state-run media that incite terrorism.
Diversify the sources of U.S. energy importsaway from the Persian Gulf, importing more oil from other sources such as West Africa and Eurasia, more natural gas from Canada and Mexico, and more liquid natural gas (LNG) from Russia and Africa. The Bush Administration should direct the Departments of State and Energy to provide economic aid incentives and technical assistance to non–Middle Eastern oil-producing countries to simplify regulations and speed up the licensing process for expanding and building new pipelines and refiners.
Diversify the U.S. energy basketby expanding domestic production of oil and gas and by lifting the bureaucratic barriers to greater use of nuclear energy. The White House and Department of Energy should actively lobby Congress to expand domestic petroleum and gas production, such as in ANWR; to allow states to override the federal limitations on continental shelf exploration and exploitation; and to speed up licensing and construction of LNG terminals.[25]
Encourage expanded production and imports of methanol and ethanol.Congress should work with the U.S. Department of Commerce to lift import tariffs on foreign ethanol produced from sugar cane.[26] The U.S. should also encourage research and development of market-based alternatives and enhanced technologies to help meet the nation’s future needs without dependence on foreign oil.
Expand the Strategic Petroleum Reserve(SPR) and create a U.S. Strategic Gasoline Reserve. Currently, the U.S. SPR is sufficient for only 90 days. It needs to be expanded gradually to 180–250 days. The U.S. Department of Energy should cooperate with the European Union, China, India, and Japan to encourage all oil-importing countries to build up their strategic reserves to at least six months.
Conclusion
It is only a matter of time until America’s energy security, including its economic health and defense capabilities, will be jeopardized by the growing political instability, terrorism, and potential warfare in the Middle East. Over time, the U.S. needs to limit its dependence on foreign oil, especially from the Middle East, shifting to other sources of supply and eventually to new types of energy sources. Limiting U.S. dependence on Middle Eastern oil will be a major strategic challenge for the U.S. in the coming decades.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation. The author wishes to thank research assistant William Schirano for assistance in preparing this paper.
[1]U.S. Department of Energy, International Energy Administration, “U.S. Weekly Petroleum Products Product Supplied,” at http://tonto.eia.doe.gov/dnav/pet/hist/wrpupus2w.htm (March 31, 2006).
[2]George W. Bush, “State of the Union Address by the President,” January 31, 2006, at http://www.whitehouse.gov/stateoftheunion/2006 (March 5, 2006).
[3]Justin Blum, “Bill Wouldn’t Wean U.S. Off Oil Imports, Analysts Say,” The Washington Post, July 26, 2005, p. A1, at http://www.washingtonpost.com/wpdyn/content/article/
2005/07/25/AR2005072501707.html (March 29, 2006).
[4]Public Law 109–58.
[5]Blum, “Bill Wouldn’t Wean U.S. Off Oil Imports.”
[6]U.S. Department of Energy, “U.S. Weekly Petroleum Products Product Supplied.”
[7]The 11 OPEC members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.
[8]Àriel Cohen, Ph.D., and William Schirano, “Congress Should Lift OPEC’s Immunity,” Heritage Foundation WebMemo No. 777, June 27, 2005, at http://www.heritage.org/Research/Energyand
Environment/wm777.cfm.
[9]For example, in terms of economic freedom, Iran, Venezuela, and Nigeria were ranked 156th, 152nd, and 146th out of 157 countries, respectively. See Marc A. Miles, Kim R. Holmes, and Mary Anastasia O’Grady, 2006 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2006), at http://www.heritage.org/index.
[10]“Supply and Demand: World Oil Markets Under Pressure,” CBC News, April 28, 2005, at http://www.cbc.ca/news/background/oil/supply_demand.html (March 6, 2006).
[11]Aljazeera.net, “Al-Qaida Says It Hit Saudi Oil Facility,” February 25, 2006, at http://english.aljazeera.net/NR/exeres/A429E32C-D484-424E-9C58-D9E287580817.htm (March 6, 2006).
[12]Stratfor, “Saudi Arabia: Abqaiq Attack Thwarted,” March 29, 2006, at http://www.stratfor.com/products/premium/read_article.php?selected=Situation%20Reports&sitrep=1&id=264105 (March 31, 2006). See also “Saudi Arabia Nabs 40 Terror Suspects,” Kuwait Times, March 31, 2006, at http://www.kuwaittimes.net/Navariednews.asp?dismode=article&artid=829180313 (March 31, 2006).
[13]“‘Bin Laden’ Tape Urges Oil Attack,” BBC News, at http://news.bbc.co.uk/2/hi/middle_east/4101021.stm (March 29, 2006). See also Agence France-Presse, “Bin Laden Threat Drives Oil to Four-Month High,” The Taipei Times, January 21, 2006, p. 12, at http://www.taipeitimes.com/News/worldbiz/archives/
2006/01/21/2003290110 (March 5, 2006).
[14]“Bin Laden War on West Just Starting: Deputy,” The Age (Melbourne, Australia), December 8, 2005, at http://www.theage.com.au/news/world/bin-laden-war-on-west-just-starting-deputy/2005/12/07/1133829660913.html (March 29, 2006).
[15]Al-Musawwar, January 19, 1990, cited in Mitchell G. Bard, “Middle East Policy and Oil,” Jewish Virtual Library, at http://www.jewishvirtuallibrary.org/jsource/US-Israel/usoil.html (March 29, 2006).
[16]Saudi–US Relations Information Service, “Gunmen Attack in Yanbu,” Special Report No. 3, May 3, 2004, at http://www.saudi-us-relations.org/newsletter2004/saudi-relations-interest-05-03.html (March 5, 2006).
[17]U.S. Department of Energy, “Iraq: Oil,” Energy Information Administration Country Analysis Briefs, December 2005, at http://www.eia.doe.gov/emeu/cabs/Iraq/Oil.html (March 6, 2006).
[18]“Oil Attacks Costing Iraq $6.25 billion,” iexpode, February 19, 2006, at http://iexplode.blogspot.com/2006/02/oil-attacks-costing-iraq-625bn.html (March 5, 2006).
[19]Ibid.
[20]Anadolu News Agency, “Iran Warns of Excessive Oil Prices,” Zaman (Istanbul), February 14, 2006, at http://www.zaman.com/?bl=hotnews&alt=&trh=20060214&hn=29790 (March 6, 2006).
[21]Kenneth R. Timmerman, “Iran Readies Plan to Close Strait of Hormuz,” Newsmax.com, March 1, 2006, at http://www.newsmax.com/archives/articles/2006/2/28/181730.shtml?s=lh (March 6, 2006).
[22]Hong Kong Trade Development Council, “Reassessing the Impacts of Higher Oil Prices,” tdctrade.com, August 1, 2005, at http://www.tdctrade.com/econforum/boc/boc050801.htm (March 6, 2006).
[23]Christopher Dickey, “Saudi Storms,” Newsweek, October 3, 2005, athttp://www.msnbc.msn.com/id/9468701/site/newsweek (March 6, 2006).
[24]Randeep Ramesh, “Blood and Oil,” Guardian Unlimited, October 17, 2002, at http://www.guardian.co.uk/oil/story/ 0,11319,813965,00.html (March 6, 2006).
[25]Ben Lieberman, “State of the Union 2006: Dusting Off the Old Energy Policy,” Heritage Foundation WebMemo No. 979, January 31, 2006, at http://www.heritage.org/Research/Energyand
Environment/wm979.cfm.
[26]Ariel Cohen, Ph.D., “Increasing the Global Transportation Fuel Supply,” Heritage Foundation Executive Memorandum No. 986, October 25, 2005, at http://www.heritage.org/Research/EnergyandEnvironment
/em986.cfm.
01-09-2006
Seventeen years since the fall of the Berlin Wall is sufficient time to reflect upon the amazing transformation of NATO and its frontiers. From bringing the Central European states back into their European home, whole and free, to extending membership to the former captive nations of Estonia, Latvia, and Lithuania, NATO has done very well indeed.
New Challenges
NATO today is a player in a world which has fundamentally changed from the organization’s beginnings in 1949. Gone are Joseph Stalin and his double-headed monster of repressive secret police and the Red Army. Gone are the Soviet Union and its global empire. Western Europe is safe from a conventional attack directed by Moscow. The bipolar, rigid world of two ideologically opposing blocs and military machines is a part of 20th century history.
However, many Europeans and Americans have died of terrorist violence in the last five years. The source of the violence is another hateful, totalitarian ideology— radical Islam. And the sources of that ideology, its training and recruiting grounds, as well as its sources of funding are in the Greater Middle East, including the Mediterranean basin, through the Fertile Crescent, and into the remote valleys and gorges of the Caucasus and Pakistan, the deserts of Central Asia, the plateaus of Afghanistan.
This is no longer a conventional threat of panzer divisions in the Fulda Gap, or intercontinental ballistic missiles launched from Totsk or Balakovo in Russia. Today’s suicide bombers may be indoctrinated by Gulf-based mullahs, trained in camps in the Northwestern province in Pakistan or in the battlefields of Iraq, funded by an illegal charity “front” in London, and execute their gruesome work in Madrid or Paris. Most important, they have the freedom to replicate their hateful views in Paris and London and on the Internet with little to nothing done to shut them down.
But there are additional threats. Russia is slowly drifting away from the common Euro-Atlantic system of values and shared net threat assessments. It is pursuing a policy to exclude NATO and the United States from Central Asia and keep the “frozen conflicts” in Moldova, Abkhazia, South Ossetia, and Karabakh on ice.
While Russia participates in joint exercises with NATO, such as Operation Active Endeavor, which will include two Black Sea Fleet ships taking part in counter-proliferation activities in the Mediterranean, Moscow is threatening Ukraine not to pursue membership in the Alliance. Russia wants other post-Soviet countries to conduct all contacts with NATO through the Collective Security Treaty Organization—a new version of the old CIS Warsaw Pact that the Ministry of Defense and the Kremlin control.
Political instability and state failure in the Caucasus and Central Asia, as well as in the Muslim states of the Southern and Eastern Mediterranean and the Greater Middle East, is another long-term systemic threat, which may endanger Europe and North America.
Failed leaders produce failed policies. Failed policies generate failed states. Those, like Afghanistan under the Taliban, spawn safe havens for terrorists. It is happening in Somalia and other parts of Africa, and in the Northwestern province of Pakistan. It is happening in southern Afghanistan, where thankfully NATO is expanding its operations. And it may happen in Gaza, the Northern Caucasus, the Ferghana Valley, and in the highlands of Tajikistan and Kyrgyzstan.
To be an effective provider of security, NATO is concerned today with the entire spectrum of problems and potential problems—from the Iranian nuclear and missile program, which will threaten Europe, to emerging networks of terrorist organizations which spawn cells capable of massive urban terrorist attacks in Europe.
At the same time, many politicians and analysts say that NATO cannot be everywhere and do everything. When you look on the map and see NATO in Darfur and Pakistan, you realize that even NATO, with its vast capabilities, is limited—and must limit itself—in its geographic scope and ambition.
Implementing Existing Commitments
NATO still needs to fully implement commitments it took upon itself in Prague, Berlin, and Istanbul.
At their 2002 meeting in Prague, NATO heads of state and government opened a new chapter in the Alliance’s history by inviting seven countries, including the three Baltic States, to accession talks and committing themselves to equip NATO with new capabilities to meet the security threats of the 21st century.
The two-day “transformation summit,” which took place on November 21–22, 2002, ended with the adoption of far-reaching decisions on the Alliance’s future roles and tasks. These included the creation of a cutting-edge NATO Response Force, a commitment to enhance the Alliance’s military capabilities, and a statement on Iraq. Specifically, members agreed to the following:
U.S.–European Union cooperation should be continuously based on the March 17, 2003, Berlin Plus agreement, which was designed to definitively resolve questions of compatibility between the EU and NATO. Berlin Plus has four elements:
In the 2004 Istanbul Declaration, members decided to address NATO’s Mediterranean and Greater Middle East dimensions. Specifically they agreed to:
This ambitious agenda cannot be implemented with today’s level of military and security expenditure. NATO countries which dedicate only 1.1 percent–1.5 percent of their GDP to the overall effort are not pulling their weight. The current allocations are not sufficient to fully fund the Prague and Berlin Plus commitments, the war on terrorism, and out-of-area deployments, including peacekeeping missions. To survive, NATO needs to find financial resources to fund its vital missions. Otherwise, as Ben Franklin said, “Those who would sacrifice liberty for security deserve neither.”
Fighting Terrorism
Since 9/11, the NATO leaders have reaffirmed many times that terrorism and proliferation are the current threats to the Euro-Atlantic community. Fighting in and rebuilding Afghanistan, as well as training Iraqi forces, are principal commitments that NATO is pursuing in that realm. However, even after the attacks in Madrid and London, one gets the impression that NATO does not have sufficient capabilities to fight the global war on terrorism.
While engagements in Afghanistan, Iraq, Kosovo, and Darfur are contributing to providing security and training the forces, NATO can play a greater role in fighting terrorism and building new relationships and alliances in the Mediterranean, the Greater Middle East, and Eurasia—alliances that are vital to success in the new war.
The national interest in opposing the 21st century networked, borderless, jihadi movements with their terrorist organizations is not clearly articulated. Often, notions of political correctness cloud the threat assessment, the rhetoric, and the judgment of what is really at stake, which is, simply put, the survival of Western civilization.
Western institutions need to evolve to respond to jihadi threats. Today’s national armies, courts, law enforcement, security services, legal systems, and international organizations were designed in the 19th and 20th centuries to fight a different enemy: other nation-states or coalitions thereof. These were times of conventional, colonial, or ideological warfare, not terrorism empowered by weapons of mass destruction.
Those institutions were created in a different time to address different challenges. Police pursued known local criminals, who grew up in local communities. Courts applied laws and evidence rules drafted in the quaint times of the 19th century. Spies penetrated each other’s organizations, deciphered aerial or satellite photography, or collected information in diplomatic cocktail parties.
Industrial-era militaries consist of units which fight along massive front lines. They include ballistic missile regiments, fleets, tank divisions, and air armies. All this is often of little use in fighting globally networked terrorist cells.
Western societies and NATO need to evolve to answer these new challenges. The new enemy requires a new knowledge base and new skill sets. Languages, history, religion, and geography about which we once knew very little all need to be a part of the modern decision-maker’s and officer’s discourse and at the fingertips of contemporary law enforcement and intelligence officials. While millions of Arabic, Farsi, and Pashtu speakers live in Europe and the U.S., there is a shortage of operatives and translators who are fully conversant in these languages and cultures. We have not begun fighting a war of ideas. We have a hard time integrating immigrants. National court systems, especially in Europe, are slow and cumbersome in response to agile terrorist threats, as tragedies in Madrid and London demonstrated.
This evolution to adjust and win the new conflict is the greatest challenge the West is facing, and NATO, as its pre-eminent military alliance, is facing it as well.
Reaching Out to the Greater
Middle East
Part of the new orientation of NATO is the Mediterranean Initiative and the Istanbul commitment to the Greater Middle East. In engaging Arab and Muslim decision-makers and militaries, using the experience of the Partnership for Peace is necessary but will be more difficult than in the former Soviet Bloc. Chris Donnelly, godfather of the Partnership for Peace, has pointed out that the cultural gap between NATO and Greater Middle East polities today is much wider than between Western and Eastern Europe in the early 1990s.
However, we cannot lose time. We are living today in an era when Arab nationalism, most of all symbolized by the military regimes of Egypt, Syria, and Iraq, has collapsed. Liberalism, unfortunately, is still weak. Radical Islam, from its Muslim Brotherhood brand to the al-Qaeda variety, is a dangerous ideology which threatens the well-being of Muslim societies from Marrakesh to Bangladesh. And it is surely capable of deadly attacks against the West.
The Southern Mediterranean political systems are desperately in need of fresh air. Decision-makers need to be exposed to new ideas in the realms of security. Militaries need to come under stricter civilian control and assume a role in fighting terrorism. Bringing missions from the Greater Middle East to Brussels, exposing them to NATO’s ways, expanding dialogue and cooperation will go a long way toward familiarizing these future allies with NATO’s norms and Western culture. This is likely to be a long-haul fight—much longer and slower than the European expansion and Partnership for Peace.
However, there is a threat of “mainstreaming” Islamist movements and terrorist organizations. Just as we would not suggest legalizing al-Qaeda or the Taliban, we should rule out legalization and inclusion of Hizballah, Islamic Jihad, Hizb ut-Tahrir al-Islami, Hamas, and the Muslim Brotherhood. These are totalitarian movements which advocate genocidal violence and the subjugation of women, deny full rights to people of different religions and ethnic groups, and are completely intolerant of practices of Islam different from their own. They should not be embraced. Those who embrace them do so at their own peril.
The War of Ideas
Another vital dimension of fighting the war on terrorism is the battle of ideas. Only if the West and moderate Muslims offer the masses in the Greater Middle East a future which is more attractive and realizable than the “glorious sacrifice” of jihad do we have a chance to win this war.
So far, we have failed to mobilize for a war of ideas the way we did in the Cold War against communism. Partially, this is because many still think that radical Islam is a religion rather than a hateful political ideology. Partially, it is because we have lost the touch, the institutional memory and tools we used to keep in the toolbox.
Those who remember the United States Information Agency, who have known Radio Liberty–Radio Free Europe at its prime, and who know how the West supported Soviet and Eastern European dissidents know exactly what I am talking about. Just as we helped Alexander Solzhenitsyn, Andrei Sakharov, Vaclav Havel, and Lech Walesa to become the alternative leadership for their societies, we need to do it again for the Muslim world.
And just as we developed political warfare tools which made rock music, modern art, and consumer goods hip and desirable for the socialist camp to the point of bankrupting Marxism–Leninism, we need to look for ideas, symbols, and people who can marginalize radical Islam. Half of the Muslim population is women. Well, this is a good place to start. There are repressed ethnic and religious minorities, the exploited business community, just sane people who understand that jihad is destructive for them and for us, who want compatibility and coexistence with the West. There, too, are good places to start.
No doubt, Muslims themselves can and need to fight this battle for themselves, but we need to help them to ensure our own survival. NATO needs to think how to make political warfare part of its doctrine and operations.
Russia and Eurasia
One area where secular Muslim societies and moderate Islam coexist and thrive with Christians and Jews is in the former Soviet areas. NATO should maintain and expand the Partnership for Peace with the Central Asian republics and Azerbaijan.
However, the recent developments in Uzbekistan cause concern. Russia to a large degree has been behind the hard line undertaken by Islam Karimov’s regime after the tragedy in Andizhan. Russian dezinformatsiya operations may be behind the paranoid belief in Tashkent that the U.S. was behind the Andizhan riots, and even that there are contacts between the U.S. and Tahir Yuldash, the head of the Islamic Movement of Turkestan, an al-Qaeda–affiliated terrorist group.
Russia wants to be an autonomous player in Eurasia. Its post-communist unreformed security and foreign policy elites feel more comfortable with Chinese communists and Iranian mullahs than with Western politicians and security planners. The Soviet-era mistrust of NATO and the U.S. is running high—and that mistrust is being encouraged in high places.
Stratospheric oil prices may allow Russia to continue this policy for a while. However, the difficult demographic, health, and social conditions at home sooner or later will force Moscow to reconsider its approach. For now, Russia fans the fears of “orange revolutions” in Central Asia and the Caucasus, calling for regimes there to use force against their own people.
After its departure from Uzbekistan, the U.S. needs to rely on the forward operations base (FOB) at the Manas airport in Bishkek, Kyrgyzstan, and negotiate for another one in Tajikistan. Russia is concerned that the U.S. may establish bases in Georgia, Azerbaijan, and even Turkmenistan (despite the fact that the latter is most likely impossible as long as Turkmenbashi rules the country with an iron fist). As NATO bases in Romania and Bulgaria are coming on-line, the chain of bases from the Black Sea through the Caspian and into Central Asia will be a great priority for the U.S. global military posture.
Russia has many other concerns. It is worried about Poland’s participation in the American missile defense program. In the latest meeting between the Ukrainian Defense Minister, Anatoliy Hrytsenko, and his Russian counterpart, Sergei Ivanov, the Russian side threatened to stop military industrial cooperation with Ukraine if Ukraine joins NATO.
Russia is also apprehensive about withdrawal of its military bases from Georgia and opposes deployment of NATO peacekeepers along the Azeri–Armenian line if and when the two countries sign a peace agreement. Of course, such a deployment would be predicated on the willingness of NATO members to deploy peacekeepers.
With that, it is important for NATO to continue to engage Russia. Thus, the Active Endeavor counter-proliferation naval exercises, in which Russia takes part, are important. So is Russia’s ability to take part in peacekeeping operations using its Fifteenth Brigade, along the lines of a successful Russian deployment in Bosnia in 1996–1999.
Most important, NATO should entice Russia to train its officers and civilian decision-makers to facilitate military reforms and bring the military under more enhanced civilian control. Recent hostilities in the Northern Caucasus demonstrate that today’s Russian Army and security forces do not possess the training, fortitude, and esprit de corps needed to stem the Islamist insurgency in the region. In view of this, expanding Russian commitments in Central Asia seem foolhardy at best.
Ukraine. The debate on Ukraine’s membership in NATO will depend on a number of factors, especially political development in Ukraine, such as the March 2006 parliamentary elections. Moscow, no doubt, will react with vitriol should Ukraine be invited to join. It tripled the prices of natural gas it supplies to Ukraine.
So far, according to public opinion polls, a minority of Ukrainians support their country joining NATO. Kyiv saw its first anti-NATO demonstration, reportedly 30,000 strong. Supporters and opponents of membership may push for a national referendum—this is what President Victor Yushchenko has promised. A victory for the pro-Russian forces who oppose Ukraine’s membership in the parliamentary elections could delay that issue for years to come.
Finally, it is membership in the European Union, with its attendant economic reforms and subsidies, which most Ukrainians covet. However, this is hardly in the cards after the failure of this year’s European Constitution referendum in France and the Netherlands.
The Caucasus. NATO so far has not deployed any meaningful contingent in the Caucasus. However, the “unfreezing” of conflicts in Abkhazia, South Ossetia, and, most important, in Nagorno–Karabakh may put new requirements on the Alliance.
Romualdas Razuks, NATO’s representative in the Caucasus, said that if both parties so request, NATO may deploy peacekeepers to the Azerbaijan– Armenia border. However, many members’ forces are under pressure, and it will not be easy to find sufficient troops. The same goes for Abkhazia.
Only when Russia is convinced by NATO to stop supporting separatists can the situation really change. Thus, encouraging members of the Partnership for Peace to follow their Individual Partnership Action Plans (IPAPs), which Georgia and Azerbaijan submitted in 2004 and Armenia submitted in the summer of 2005, is the best way to arrive upon regional cooperation by the three South Caucasus states under the NATO umbrella.
A similar situation applies to the Trans-Dniester conflict in Moldova. Russia is not interested in ending the conflict, believing that a pro-Moscow, communist exclave in the vicinity of the Southeastern NATO flank is to Russia’s strategic advantage. Thus, Western pressure to “unfreeze” the conflicts and find common ground with Russia must continue.
Conclusion
NATO has reached a new watershed in which it needs to seriously evaluate both its geographic scope and the spectrum of threats it is willing to address. The Alliance’s leaders need to view its capabilities with clarity and sobriety. NATO needs to approach future missions with realism, both military and economic.
The first order of the day is triage—agreeing on threat assessments and defining which missions are vital for NATO members’ interests. Clearly, integrating the Balkans and expanding ties with Ukraine are missions most members agree on. Beyond that, NATO needs to balance ambition and funding. It is difficult to have an ambitious deployment policy or far-reaching and expensive partnerships while budgets stagnate or decline.
Some experts caution that NATO should not attempt to grab every mission, thus dispersing and dissipating its strength. It needs to hold Article V sacrosanct, build strength from within, and remain a “political clubhouse” while following the path articulated in Berlin and Prague. Indeed, post-expansion integration and interoperability, combined with improving the doctrine, building airlift and high-tech capabilities, and evolving NATO’s personnel skill set to fit 21st century threats, are vital for the Alliance’s survival and war-fighting ability.
There are also visionary leaders, like former Spanish Prime Minister Jose Maria Aznar, who believe that NATO needs to focus on fighting terrorism at home and limit deployment in faraway lands. He calls for building global alliances with like-minded democracies, such as Israel, Australia, and Japan. As far as security in Central Asia is concerned, I would also suggest expanding cooperation with Turkey, a veteran NATO member; with India; and, in certain cases, with Pakistan.
One thing is clear: NATO members need to share their threat assessments and agree upon the best ways to fight these threats. Workable strategies in the Mediterranean and the Greater Middle East, including Iran, Iraq, and the war on tårrorism, need to be developed. NATO also may play a role in the future sanctions against Iran’s nuclear weapons program. This may be a serious challenge for which NATO needs to be ready.
NATO needs to build on the Istanbul Declaration, expand the Mediterranean Dialogue, and examine expansion of ties with the Gulf Cooperation Council. Having Arabs and Israelis under the same neutral roof of military cooperation may create an environment of building trust and understanding. Disseminating the Western notion of civilian control over the military and security forces may go a long way in modernizing Middle Eastern military and security establishments and spreading initial notions of democratic civil–military relations.
In Eurasia, NATO needs to develop ties with the three South Caucasus states and expand, to the degree possible, training and cooperation with Kazakhstan, Kyrgyzstan, and Tajikistan. NATO should be ready to resume ties with Uzbekistan and Turkmenistan when feasible.
Finally, the Alliance should expand ties with Russia beyond the NATO–Russia Council, to include peacekeeping exercises, officer training exchanges, and selective joint maneuvers. Above all, NATO has to assist Russia in enhancing civilian control over the military and enacting a military reform which makes Russia’s forces modern, compact, and defensive.
To conclude, NATO members need to provide leadership, develop policies, and find means— both financial and personnel—to deal adequately with the increasingly unstable environment along the Alliance’s frontiers. The stakes are too high: survival of our civilization. Failure is not an option.
Increasing the Global Transportation Fuel Supply
10-25-2005
Despite soaring oil prices, oil and gas producers worldwide have failed to expand either supply or investment levels, falling short of meeting the rapidly growing global demand. The key challenge is ensuring an adequate supply of transportation fuel for cars and airplanes--not electricity, which can be generated from coal and nuclear reactors.
The war on terrorism and operations in Iraq and Afghanistan, as well as high rates of economic growth in China and the United States have caused additional gasoline and jet fuel shortages that have led to higher prices. Fuel costs represent an indirect tax that may seriously affect the economy, possibly even causing a global recession. Furthermore, leading industry experts believe that the global oil well is running dry. Even if this is not the case, developing the remaining supply poses problems that continue to confound the industry.
Insufficient Infrastructure. Currently, supply is limited by insufficient transportation and refining capacity. No new refineries have been built in the U.S. in the past three decades. In addition, world spare tanker capacity, which is essential to transport oil from overseas, no longer exists, and excess refinery capacity is at an all-time low.
Overregulation. While many oil fields are headed for depletion, national oil companies control 58 percent of oil and natural gas reserves. Laws requiring the government to own and/or control significant shares in oil ventures are common in many oil-producing countries. Overregulation prevents oil companies from owning mineral rights, while weak rule of law and insufficient protection of property rights in many oil-rich regions makes multibillion-dollar investments too risky.
A Poor Investment Environment. In many oil-producing countries, arbitrary laws, failing and corrupt legal systems, selective taxation, conflicting legal codes, and government failure to enforce contracts have created a murky investment environment. Nationalization has a particularly chilling effect. Russia frightened many investors away by breaking up its major oil company, Yukos, and suing British Petroleum’s Russian partner for $790 million in back taxes. Saudi Arabia abandoned its much-touted privatization of natural gas production.
Unpredictable International Actors. Pipelines must often cross unstable regions and borders to reach markets, so elaborate international agreements are needed before pipelines can be built. Political and ethnic conflicts and terrorism in the Middle East, Africa, the Caspian region, and South America also create grave investment concerns. Some analysts warn that a carefully targeted terrorist attack on oil facilities in Saudi Arabia could reduce Saudi oil production to 4 million barrels per day or less for up to three months, which would have disastrous results for the global economy.
Weak Lending Institutions. In many countries, lending institutions are weak, and excessive taxation diverts oil revenues before appropriate investments for future development are made. This limits the funds available to develop new fields and tempers the profit motive to expand production. These anti-business barriers have hindered investors from expanding oil and natural gas supplies, even in the face of surging demand.
Steps to Be Taken. To help ensure energy security in the near future, the Administration should:
Develop a comprehensive strategy to change the oil investment climate. Such a strategy should involve the Departments of State, Energy, and Treasury and be coordinated by the National Security Council. Consumer countries, including the G-8 and major oil consumers, should use diplomatic and economic means to pressure OPEC and non-OPEC suppliers to liberalize their foreign investment laws, break up state monopolies, and phase out undue government intervention. Efforts to promote such policies through international financial organizations should be increased. Economic assistance should emphasize economic freedom in potential recipients, including a liberal investment climate similar to Millennium Challenge Account re-quirements. Arms and vital equipment sales should be conditioned on improving the investment climate in the energy sector. The U.S. should also condition accession to the World Trade Organization (WTO) on policy changes that facilitate foreign investment.
Build more tankers, pipelines, and refineries. The Departments of State and Energy should provide economic aid incentives and technical assistance to oil-producing and refining countries to simplify regulations and speed up the licensing process for the expansion of existing and building of new pipelines and refineries, especially in Mexico, Central America, and the Caribbean. Major shipbuilding companies should be encouraged to expand their tanker fleets. The U.S. Trade Representative should use the WTO, North American Free Trade Agreement, and Central American Free Trade Organization to reduce barriers to oil-sector investment and development.
Remove tariffs on imported ethanol. Since the 1973 Arab oil embargo, Brazil has reduced its dependence on foreign oil by more than half by developing "fuel-flexible" vehicles that run on any combination of gasoline and ethanol. Currently, 4 million such cars are on U.S. roads. Adding such a feature costs as little as $150 per car. The U.S. should follow Brazil’s example by turning ethanol into a fuel of choice. However, making fuel-flexible cars viable will require lifting the U.S. tariff on imported ethanol (currently 54 cents per gallon) because the U.S. ethanol industry relies on corn and grain sorghum, which yields much less ethanol per pound than sugar cane.
Conclusion. There is no silver bullet that will increase the supply of oil and natural gas or wean the United States from its dependence. The future may bring significantly higher energy prices, but an unabated and sharp hike in oil prices could cause a global recession, as has happened twice in the past. To avoid a massive crisis, the U.S. government, in cooperation with the private sector, needs to expand the transportation fuel supply before it is too late.
06-29-2005
In his speech before the men and women of the Airborne and Special Operations Forces at Fort Bragg, President George W. Bush clarified for the American people what is at stake in Iraq. He defined the enemy as Islamist totalitarians who are willing to kill innocent men, women and children—including fellow Muslims—for the sake of their ideology.
The President also defined the path forward: “As Iraqis stand up, we will stand down.” He established, however, that there would be no deadline or schedule for pulling out American troops.
Finally, the President thanked the men and women of U.S. armed services and their families for their sacrifices in the cause of freedom. He called for young people to volunteer for military careers—an important message in these days of declining enlistment rates and some schools closing their doors to military recruiters.
In all, President Bush presented a broad and honest strategy to the American people. Iraq is an important part of the long war on terror, and no matter how long it takes, we must prevail there.
Wartime Leadership
In the next few days it will become clear whether the American people heed the President’s message. Bush was reelected as a wartime leader. In November 2004, voters trusted him more than they did his opponent to plot the course to victory in Iraq and in the war on terror. Tuesday’s speech provided clarity that will help Americans to decide whether he is on the right track.
It is clear that Iraq cannot fully develop as a free nation when terrorists, both foreign and domestic, are killing thousands, including politicians, members of the judiciary, and the technocrat elite.
The Middle East cannot overcome the afflictions of radicalism, fundamentalism and terrorism without democratic reforms and alternative political models being allowed and promoted in key states, such as Saudi Arabia and Egypt. Achievements in Lebanon and the Palestinian Authority are baby steps in comparison with what must happen in the future for democracy to take root in the Middle East.
In World War II, the military defeats of Nazism and Japanese militarism were followed by de-Nazification and war crime trials. In the Middle East, things cannot go much differently if the cause of freedom is to prevail.
Challenges Ahead
In the months to come, Iraqis will finally hold trials for Saddam Hussein and his henchmen. This is a good start, but other challenges remain. As CENTCOM Commander General John Abizaid recently testified in a Senate hearing, more jihadi fighters are converging on Iraq today than six months ago. These are terrorists who come from all corners of the Muslim world to take part in jihad, or holy war, against the American “infidels” and their allies.
After using the fighting in Iraq to train, many of the battle-hardened survivors return to their countries of origin to prepare the next step of jihad. Terror generals from Osama bin Laden to Ayman al-Zawahiri want Iraq to become a major terrorist training ground, as Afghanistan was during the long battle against the Soviets in the 1990s. Defense Secretary Donald Rumsfeld recently testified that the U.S. engagement in Iraq could last years.
To sustain a struggle, the terrorists are dependent upon a global network of recruiters from London to Lahore. These recruiters are financed by hundreds of millions of dollars collected through Al Qaeda-owned businesses and by the donations of rich businessmen around the Persian Gulf. These donors are brainwashed in hundreds of mosques by radical imams and mullahs, who are often on government payroll.
The Islamist terrorist worldview is formed and reinforced by a network of well-financed anti-American and anti-Western media, also predominantly government-supported, such as Hizbollah’s Al Manar, which continue to broadcast with impunity. Education systems that are influenced by Wahhabi and Moslem Brotherhood clerics from kindergarten to graduate school reinforce radical Islam’s murderous views. Their curricula are imbued with anti-Western, anti-Christian, anti-Hindu, and anti-Semitic messages.
Beyond Iraq
The social pathologies of the Middle East, which have given birth to two failing ideologies—Nasser-style Arab nationalist socialism and extremist Islamism—will take time to address. They need be dealt with primarily by Middle Eastern societies themselves, drawing on American, Western, and global support and know-how. The world cannot afford to tolerate the spread of Islamist terrorism, especially when terrorists and terror-supporting regimes covet weapons of mass destruction.
A major improvement in U.S. intelligence and covert action is still needed to identify and neutralize the brainwashing, recruitment, and terrorist smuggling networks that enable the Iraqi jihad and other terrorist actions to continue.
The governments of Syria, Saudi Arabia, and Iran need stop the terrorist operations that are being conducted on their soil or on their payrolls. This will not happen until they come under heavier U.S. pressure. The Syrian-Iraqi border must be sealed, and the terrorist smugglers there deterred or eliminated. Bankrolling and harboring terrorists and terrorist organizations must stop.
Jihadi and anti-American propagandists must be rendered silent, be it in the mosque, the madrassah, or the TV station. Just as the U.S. and its allies did not tolerate Nazi propaganda in 1946, incitement to kill Americans and American allies should not be tolerated today.
It is also high time for major curriculum revision in the Middle East. Countries awash with oil cash can no longer afford to refuse to reform and modernize their education systems. Schools must be transformed from jihad factories into agents of change, institutions that actually educate tolerance and modernity.
Conclusion
To defeat Iraqi insurgents and global terrorists, the Bush Administration will need to win in Iraq and go beyond Iraq—diplomatically, economically, intelligence-wise, and perhaps even militarily. The United States needs to support moderate Islamic and secular forces in the Muslim world, not just to discredit Islamism, but to promote and instill new ideas of tolerance and freedom. It will be long and tough war, but defeat is not an option. President Bush made that patently clear last night.
Congress Should Lift OPEC’s Immunity
06-27-2005
On June 21, the Senate voted in support of an amendment to the Energy Bill that would allow the federal government to sue the Organization for Petroleum Exporting States (OPEC). At a time when oil prices are climbing to ever-higher levels, this measure is a welcome first step towards reestablishing the free market in this strategically important sector. The move is long overdue and points the way to a second step: allowing private antitrust suits against OPEC.
The Intolerable Status Quo
Since its inception in 1960, OPEC, which is dominated by Persian Gulf producers, has successfully restricted its member states’ petroleum production, artificially distorting the world’s oil supply to line its members’ pockets. Member states’ production quotas are determined at semi-annual meetings of members’ petroleum ministers and are at times changed through telephone consultations. Several times, this supply-fixing strategy has brought devastation to the U.S. and global economies:
In 1973, OPEC’s actions in response to U.S. support for Israel, which was attacked in the Yom Kippur War, resulted in a worldwide economic recession that lasted from 1974 to 1980.
In 1980, OPEC’s failure to increase production in the face of the Iranian revolution resulted in historically high oil prices of $81 per barrel (in 2005 dollars).
In 1990, OPEC refused to increase production sufficiently to keep prices stable as Saddam Hussein occupied Kuwait.
Lately, OPEC’s resistance to add productive capacity has sent oil prices to $60 a barrel, once again endangering U.S.—and the world’s—economic growth.
The cartel’s operations ensure that its members’ oil and gas economies remain insulated from foreign investment flows. Members of OPEC have not worked to enhance the rule of law and property rights and have imposed severe restrictions to prevent foreign investors from owning upstream production assets (oil fields and pipelines). This is a testament to the cartel’s de facto monopoly over the petroleum market. Indeed, the only serious challenge to the organization came in 1978 when a U.S. non-profit labor association, the International Association of Machinists and Aerospace Workers (IAM), sued OPEC under the Sherman Antitrust Act, in IAM v. OPEC. But the case was rejected in 1981 by the U.S. Court of Appeals for the Ninth Circuit. OPEC, the court affirmed, could not be prosecuted under the Sherman Act due to the foreign sovereign immunity protection it claimed for its member states.
That decision was wrong. Government-owned companies that engage in purely business activities do not warrant sovereign immunity protection according to prevailing legal doctrines.[1]
High oil prices, which OPEC facilitates, serve to transfer wealth from Western consumers to petroleum producers. This wealth transfer funds terrorism through individual oil wealth and government-controlled “non-profit” foundations. It also permits hundreds of millions of dollars to be spent on radical Islamist education in madrassahs (Islamic religious academies).
Furthermore, the oil-cash glut in the Gulf states and elsewhere empowers resistance to much-needed economic reform in oil-producing countries. State subsidies for everything from health care to industry to bloated bureaucracy continue unabated, funded by Western consumers.
Congress Gets Into Action
Growing concerns over energy prices have at last prompted Congress to examine the legal hurdles that prevent the United States from defending its economic and national security interests. In the early part of 2005, a group of senators led by Sen. Mike DeWine (R-OH) introduced the “No Oil Producing and Exporting Cartels Act” (S. 555), known as NOPEC, to amend the Sherman Act to make oil-producing and exporting cartels illegal. The bill is currently on the Senate calendar.
On June 21st, DeWine, with the support of Sen. Herb Kohl (D-WI), was able to add (through voice vote) an amendment based on NOPEC to the Energy Policy Act of 2005. Like NOPEC, this amendment would modify sections of the Sherman Act to allow the U.S. Department of Justice or the Federal Trade Commission to bring suits against OPEC for its monopolistic practices.
The House now has a unique opportunity to:
Join forces with the Senate in defending American businesses and consumers. The DeWine-Kohl Amendment would send a strong and long-overdue signal to OPEC oil barons that they must stop limiting production and investment access.
Allow private suits against OPEC. If OPEC is to be reined in, individuals and companies that it has damaged must also be allowed to bring suits against the cartel. As the IAM v. OPEC decision made clear, it is up to Congress to amend the Sherman Act rather than rely upon the courts. Reform should not and end with the DeWine-Kohl amendment.
Conclusion
The DeWine-Kohl amendment would place much needed pressure on OPEC. It is time for the cartel to cease its monopolistic practices. Otherwise, the American people can expect more of the same from OPEC—insufficient production and higher energy bills.
06-13-2005
Opened late last month, the Baku-Tbilisi-Ceyhan (BTC) oil pipeline has a capacity of 1 million barrels of oil per day and is the greatest achievement in the Caspian energy area. The pipeline will take oil from Azerbaijan and eventually Kazakhstan to the global markets—free of Russian and Iranian domination. After years of inaccessibility for the West, vast oil reserves under the Caspian Sea—comparable to those in Kuwait—are now within hand’s reach of the world’s commodity markets.
The Heritage Foundation was an early supporter of this important project—quickly dubbed “the New Silk Road”—and was active in educating U.S. policymakers about its importance and helping them understand and work through difficulties in the region. In 1996, for example, Ariel Cohen drew U.S. policymakers’ attention to the developing “Great Game” of oil politics in the Caucasus and Central Asia in “The New ‘Great Game’: Oil Politics in the Caucasus and Central Asia,” “U.S. Policy in the Caucasus and Central Asia: Building A New “Silk Road,’” “U.S. Policy in the Caucasus and Central Asia: Building A New ‘Silk Road’ to Economic Prosperity,” and “Ethnic Interests Threaten U.S. Interests in the Caucus;” and later to Iran’s claim of Azerbaijan’s share of Caspian resources as a threat to energy security.
Completion of BTC would have been unattainable without U.S. support and championing of for democratic transition, sovereignty, and security cooperation in Georgia and Azerbaijan. The Heritage Foundation has forwarded these policies throughout. For example: “Securing the Democratic Transition in Azerbaijan,” “Aliev Dynasty or Azerbaijiani Democracy? Securing A Democratic Transition,” “U.S. Should Support Georgian Democracy and Independence,” and “Our Challenge in Georgia.” Dr. Cohen also co-authored and edited Eurasia in Balance, a book on U.S. strategy in the Caucasus and Central Asia, available this month from the British publisher Ashgate and on Amazon.com.
Halted several times by ethnic fighting in South Ossetia and Adzharia, the BTC will flourish if there is a peaceful resolution of the conflicts in the region. Promoting peace in this area has long been in the U.S. interest and is now perhaps even more so.
The BTC is the first link between the Caspian and the Mediterranean, to be followed by a natural gas pipeline between Azerbaijan and Turkey, and will be a key component of U.S. energy security for years to come. In addition, it is the largest foreign investment project in the region since the fall of the Soviet Union. Partially financed by its shareholders, such as British Petroleum and Azeri State Oil Company SOCAR, the project also received assistance from international financial institutions, such as the International Finance Corporation, the European Bank for Reconstruction and Development, and the U.S. Export-Import Bank, all of whom hail BTC as a model of development. It promises to be a gateway for revenue that could well bolster economic and democratic development in the Caucasus and Central Asia. This is a virtuous cycle; these gains will serve to improve the West’s access to diversified oil supplies and reduce its dependence on the Middle East.
Heritage is proud to have supported the Baku-Tbilisi-Ceyhan pipeline.
04-20-2005
The Bush administration’s desire to promote the globalization of democratic values is fueling tension in the United States’ relationship with Russia, a country that has experienced a dramatic erosion of its geopolitical influence over the past 18 months.
Following a meeting in Moscow on April 20, US Secretary of State Condoleezza Rice and Russian President Vladimir Putin both expressed satisfaction about the current state of bilateral relations. Despite their positive assessments, strains in the US-Russian relationship are readily evident.
Prior to meeting Putin, Rice voiced criticism of Russia’s democratization record, specifically citing the fact that the Russian government maintains a stranglehold on television outlets in the country. “There should be more independent media so that people can debate and make decisions about the future of Russia, democratic Russia, together,” Rice said during an interview broadcast by Ekho Moskvy radio. The secretary of state also suggested that Russia’s executive branch under Putin had accumulated excessive power at the expense of Russia’s other branches of government.
While critical of the Russian government, Rice emphasized that Washington and Moscow remained strategic partners, adding that the United States sought to build a “constructive, friendly relationship” with Moscow. The apparent US desire not to fully alienate Russia is rooted in geopolitical pragmatism. An antagonistic Moscow could greatly complicate a number of important international issues, including the global threat posed by radical Islam and nuclear non-proliferation.
Rice insisted insist during the Ekho Moskvy interview that the United States does not seek to replace Russia as the key power in the Caucasus and Central Asia – two areas that have traditionally sat well within Russia’s sphere of influence. However, recent actions indicate that Russian officials are extremely wary of American intentions.
One indicator of Russia’s concern is reflected in Moscow’s changing stance toward the Organization for Security and Cooperation in Europe. OSCE election monitors were highly visible in recent elections in Georgia, Ukraine and Kyrgyzstan, [For background see the Eurasia Insight archive] and the group’s reports on election flaws played a background role in fueling revolutions in all three states. [For background see the Eurasia Insight archive]. Russia now wants the OSCE to focus more on security, and it has adopted a cantankerous stance on several budgetary issues.
While US and Russian officials strive to preserve the veneer of a cooperative spirit, experts on both sides are far blunter in their criticisms, and more willing to use confrontational rhetoric. Debates during conferences on regional issues are now sometimes flavored with a touch of Cold-War era hostility. Such debates occurred in February in the Georgian capital Tbilisi during a conference called The South Caucasus in the 21st Century: Challenges and Opportunities.
During the three-day meeting, sponsored by the Georgian Foundation for Strategic and International Studies, Stephen Sestanovich, a former top US diplomat during the Clinton administration who is currently a senior fellow at the Council on Foreign Relations, courted controversy when he suggested that the concept of the Caucasus lying within the “post-Soviet space” was outdated. Instead, he advocated that the Caucasus ought to be identified simply as part of Europe, a change that could help to subtly weaken Russia’s traditional high-profile role in the region.
S. Frederick Starr, the chairman of the Central Asia-Caucasus Institute at the Johns Hopkins School of Advanced International Studies, appeared to criticize Russia’s stance on the region’s so-called “frozen conflicts,” involving Georgia’s separatist territories of Abkhazia and South Ossetia, along with Nagorno-Karabakh. [For background see the Eurasia Insight archive]. “Conflict resolution failed not only due to intransigence of the sides and insincere policies of regional powers, but also because the efforts of good and tenacious people in international organizations to settle the conflicts have failed,” Starr said. He went on to suggest that if Russia does not respect territorial integrity of South Caucasus states – Georgia, in particular -- then the West should “open up” issues relating to the Northern Caucasus for discussion, including self-determination for Chechens.
Vyacheslav Nikonov, a pro-Putin political scientist and the president of the Politika Foundation in Moscow, staunchly defended the Russian record in the Caucasus, adding that Russia intended to remain an influential player in the Caucasus. Russia “is on the rise and its power will increase, whether you like it or not,” he said. The fact that millions of ethnic Armenians, Azeris and Georgians live in Russia grants Moscow a right to take an active interest in South Caucasus affairs, Nikonov maintained.
Yevgeny Kozhokin, the director of the Russian Institute of Strategic Studies, suggested that the United States and Russia should pursue “big issues,” such as the growing geopolitical influence of China and international terrorism, and Washington could leave “small fry” regional issues, such as the future political status of South Ossetia, for Moscow and Tbilisi to resolve exclusively.
Vladimir Socor, a senior fellow at the Washington, DC,-based Jamestown Foundation, said relying on Russia to work out its differences with Georgia on South Ossetia and Abkhazia would be a mistake. Socor assailed Russia for its failure to fulfill security commitments made during the OSCE’s Istanbul summit in 1999. He said political settlements to the two conflicts would remain elusive unless new peace-keeping and negotiating frameworks were established. “Existing frameworks for negotiations are relics of another era before the expansion of the EU and NATO,” Socor said “The UN mission in Abkhazia helps put an undeserved international gloss on the Russian framework designed to perpetuate secession and the occupation of Abkhazia.”
04-08-2005
A wave of democratic change is spreading around the world, from Afghanistan to Iraq to Ukraine, from Lebanon to Kyrgyzstan. These historic events demonstrate that we live in a truly interconnected world. President George W. Bush’s words, spoken in his second inaugural address and State of the Union speech, are resonating around the world and moving crowds.
The promotion of democracy remains an important goal of U.S. foreign policy. The ADVANCE Democracy Act (S. 516 and H.R. 1133), currently being considered by the Senate Committee on Foreign Relations and House Committee on International Relations, is intended to further this goal but could actually hinder it. The U.S. should continue its tradition of aiding burgeoning democracies around the world, but it should do so in a way that also takes into account U.S. vital interests, especially national security.
Equally important, the U.S. should promote democracy without limiting the executive branch’s ability to conduct foreign policy. Formulating and conducting diplomacy is an exercise in balancing U.S. interests abroad, including America’s relations with its allies in the war on terrorism and other military and business priorities. Diplomacy should be conducted with a dose of healthy realism. It cannot ultimately serve U.S. interests if it blindly pursues ideology.
A good example to follow is Ronald Reagan’s focus on the "evil empire" of the Soviet Union and his Administration’s championing of democracy promotion as a foreign policy priority in the USSR, Eastern Europe, and Latin America. Reagan eventually succeeded and tossed communism into the dustbin of history. Similarly, the soaring rhetoric of President Bush’s second inaugural address will require practical and realistic implementation. Learning from Reagan’s example, this means making strategic decisions about which regions of the world to prioritize as the focus of American resources and involvement. It also means that democracy promotion is only one tool in the foreign policy toolbox, which also includes free trade promotion, economic development, multilateral cooperation, and, in some rare cases, the use of force.
More Work Needed. The ADVANCE Democracy Act serves the American public by emphasizing the role of democracy in U.S. foreign policy in general and at the State Department in particular. The bill reaffirms U.S. political support for democracy and allocates funds to support the Community of Democracies, an international forum of democratic nations.
However, Congress should avoid the temptation to micromanage U.S. foreign policy. Democracy overseas, in particular, does not lend itself to management by foreign officials, especially diplomats, who are trained to interact with host governments and report back home.
The bill sets out to spread "universal democracy" worldwide, but its expansive legislative language sacrifices foreign policy flexibility and agility. Simply put, it is written too broadly. In particular, the ADVANCE Democracy Act dilutes the executive branch’s constitutional role in conducting foreign policy by over-prescribing analytical frameworks and tools. It assumes that all non-democratic states are de facto hostile to U.S. security. This is simply not the case.
The bill’s language requires mechanically classifying every state as "democratic," "partially democratic," or "non-democratic," ignoring any nuances or differences. In fact, the State Department may wind up fighting not to place states in "negative" categories in order to preserve good relations with host governments in pursuing other U.S. interests, such as trade and security.
Terrorist Threat Ignored. The bill ignores the war on terrorism as the main imperative of U.S. foreign policy. Instead, it should explicitly target countries that allow terrorist organizations to function within their territories or otherwise support terrorism. It should also focus on repressive regimes that ban political opposition, thus breeding terrorism.
The proposed legislation also ignores the organic nature of democracy by not acknowledging the importance of culture and history to the development of democracy in a country. It de facto imposes Western concepts of democracy instead of allowing it to grow locally. The bill ignores the fact that democracy is a process, not an event, and substitutes elections for democracy.
The act also disregards the possibility of electoral outcomes inimical to U.S. foreign policy goals, such as Islamists seizing power through elections in the Middle East, as could happen with the Muslim Brotherhood in Syria and Egypt or Jamaat Islamiya in Pakistan. Elections are not a cure-all for dictatorship. If democracy does not take root, it can open the door to totalitarianism, as Weimar Germany demonstrated in 1933.
Finally, this bill could alienate regimes that remain supportive of U.S. policies and are gradually evolving into democracies, such as Jordan and Morocco.
What Congress Should Do. To advance democracy, Congress should:
Keep the language reaffirming U.S. political support for democratic governance.
Add a clause specifying that support for democratic governance should be pursued after a full assessment of this policy and its value to U.S. vital national interests, including security priorities in the war on terrorism, through an interagency process led by the National Security Council.
Recommend a comprehensive review of financial assistance for the promotion of democracy to ensure efficiency and effectiveness.
Target funds for implementation of democracy programs to the National Endowment for Democracy and non-governmental organizations (NGOs) rather than expand the State Department bureaucracy.
Specify the intelligence community’s role in engaging in political warfare and promoting democracy in countries where U.S. diplomats and NGOs cannot operate.
Focus U.S. promotion of democracy on the Muslim world without harming America’s vital interests in the war on terrorism.
Conclusion. Democracy varies from country to country. It is not "one-size-fits-all." In helping freedom to blossom and take root, the U.S. should do what is possible and necessary, taking into account U.S. national interests while avoiding what is unrealistic.
03-29-2005
Kyrgyzstan’s revolution is widely welcomed in Washington, and has some American policy planners contemplating the possibility of regime change in other Central Asian nations, especially Turkmenistan and Uzbekistan.
The tendency among Bush administration supporters is to see Kyrgyzstan, where Bishkek protesters pushed President Askar Akayev from power on March 24, as part of the trend toward genuine democracy in the former Soviet Union, closely linked to Georgia’s Rose Revolution in 2003, and Ukraine’s Orange Revolution in 2004. [For additional information see the Eurasia Insight archive]. In the Bush administration view, all three revolutions are, at their core, reactions against the “managed democracy” model of government, in which the trappings of a democratic system is grafted on to an authoritarian-minded leadership structure. [For additional information see the Eurasia Insight archive].
Events in Kyrgyzstan help justify Washington’s pursuit of the “Bush Doctrine,” or the globalization of American democratic values, Bush administration supporters contend. Many of those associated with the Republican Party establishment believe the Bush Doctrine served as a major source of inspiration for Kyrgyzstan’s popular protest movement, which began amid allegations of vote-manipulation during the country’s recent parliamentary election. [For background see the Eurasia Insight archive].
Just a few years ago, Washington embraced Akayev as an ally, portraying him as the leader of Central Asia’s most progressive government. Indeed, Kyrgyzstan was at one point hailed as an “island of democracy.” But the very event that brought the United States and Kyrgyzstan closer together, the September 11 terrorist tragedy, also prompted Akayev to embrace an increasingly authoritarian governing style. Faced with a rising threat presented by Islamic radicalism in Central Asia, Akayev sought to stifle political opposition. At the same time, his administration tolerated widespread corruption, while members of family accumulated vast fortunes by using political influence to establish extensive business networks.
In recent years, Akayev, aiming to prop up his authority, played a double-game involving the United States and Russia. Following the September 11 tragedy, the Kyrgyz government granted the US military basing rights at the Manas air field outside Bishkek. [For background see the Eurasia Insight archive]. In late 2003, Akayev welcomed the opening of a Russian base in Kant, also outside Bishkek. In hosting the two bases, Akayev apparently hoped to secure increased support for his administration by playing the two regional powers off each other.
Having soured on Akayev’s conduct, Washington policy planners were not especially sorry to see his administration toppled. Akayev has not yet formally resigned and is now living in exile outside of Moscow. The leaders of Kyrgyzstan’s provisional government – including interim Prime Minister Kurmanbek Bakiyev, interim Interior Minister Feliks Kulov and interim Foreign Minister Roza Otunbayeva – are all familiar faces in Washington, and Bush administration officials appear to believe that a close US-Kyrgyz political relationship can now be reestablished.
The revolutionary turn of events in Kyrgyzstan has prompted some Bush administration officials to wonder whether more “democratic dominos” could fall in Central Asia in the near future. Frustration in Washington is running high with President Islam Karimov in Uzbekistan. Like Akayev, Karimov forged a close strategic relationship with the United States during the early stages of the global anti-terrorist campaign. [For background see the Eurasia Insight archive]. However, Washington’s has grown increasingly annoyed with Karimov’s hard-line domestic political policies, as well as his intransigent resistance to implementing long-promised economic reforms. [For background see the Eurasia Insight archive]. Many policy makers also see the erratic behavior of Turkmenistan’s leader, Saparmurat Niyazov, as a regional security liability.
A high-level US National Security Council official suggests that Karimov, Niyazov and other authoritarian leaders may be digging their own political graves with their absolute refusal to ease up on repression and to encourage reforms in their respective nations. A major source of concern in Washington is that hard-line governmental practices in Central Asia are helping to swell the ranks of Islamic extremist groups, including Hizb-ut-Tahrir. [For background see the Eurasia Insight archive].
Washington policy makers are relieved that the revolution in Kyrgyzstan proved to be relatively bloodless, with only a handful of deaths occurring during the March 24 protests and subsequent looting spree. Most are well aware that if the regimes in Uzbekistan and Turkmenistan end up confronting mass protests movements, security forces could be issued orders by embattled political leaders to shoot.
At this stage, US officials are engaging members of the Kyrgyz provisional government, discussing ways to promote economic stability and a return to constitutional order. On March 28, the American envoy to Kyrgyzstan, Ambassador Steve Young, met with Bakiyev, and separately with representatives of the Organization for Security and Cooperation in Europe, to explore ways to ensure to conduct of free and fair elections in the coming months. A tentative date for a new presidential election has been set for June 26.
While eager to assist the provisional government in fostering democratic changes, US diplomats have sought to avoid, or downplay questions concerning the legitimacy of the change in Kyrgyzstan’s political order. [For additional information see the Eurasia Insight archive]. Kyrgyzstani authorities -- including Omurbek Tekebayev, speaker of the country’s unicameral parliament – have admitted that recent developments, including the manner in which the provisional government was formed, have not always followed the Kyrgyz constitution. At the same time, Tekebayev and others have defended the provisional government’s formation and its actions so far as politically necessary, given the collapse of Akayev’s administration and Akayev’s departure for Russia.
At State Department briefings both on March 25 and March 28, spokesman Adam Ereli dodged the tangled issue of the provisional government’s legitimacy, specifically whether its leaders followed the rule of law in coming to power. “We’re dealing with reality on the ground [in Kyrgyzstan] with the understanding that what happens should happen consistent with the rule of law, consistent with the will of the Kyrgyz people and supported by the international community.”
02-28-2005
The Russian oil and gas sector’s new paradigm can be summarized in two words: "state domination." The free-market paradigm has been abandoned. In December 2004, the tax authorities bankrupted YUKOS, a major oil company, for alleged tax arrears and sold its main production unit, Yuganskneftegaz, to the state-owned oil company Rosneft, using a straw company as an intermediary. Chinese state banks apparently financed the purchase with $6 billion in loans. To top it off, Rosneft is merging with state-owned Gazprom, the largest natural gas company in the world.
The Bush Administration and U.S. oil companies need to recognize that the Russian energy sector is now operating on a new model of state domination and control. Successful U.S.-Russian energy cooperation depends on the U.S. and Russia arriving at a framework agreement during President George W. Bush’s visit to Russia in May to celebrate the 60th anniversary of the Allies’ victory in Europe. Washington should condition U.S. agreement to Russia’s entry into the World Trade Organization (WTO) on the creation of transparent rules and investment protection for U.S. companies that invest in Russia. President Bush should specifically request that U.S. companies participate in construction of the Murmansk pipeline and the Shtokman natural gas projects in the Barents Sea.
The Kremlin, not the private sector, has become the key decision maker in licensing oil fields, determining the location of pipelines, and approving consortia for production and transportation. The biggest problems in the post-YUKOS Russian oil sector are the intrusive role of the state, overregulation, the violation of property rights, opaque transactions, and xenophobia toward foreign investors. Exxon and Total, a French firm, recently announced that they would scale down involvement in Russia’s oil markets, and capital flight from Russia has increased from $2.9 billion in 2003 to $9 billion-$12 billion in 2004.
Vladimir Putin’s economic adviser Andrey Illarionov called the sale of Yuganskneftegaz the "swindle of the year" and warned that Russia is on its way to joining the Third World economically. While Illarionov was demoted for his candor, he was not fired. Clearly, the Russian elite is deeply divided over energy policy.
Global Ambitions. The Kremlin wants to play a major role in Russia’s domestic and global energy markets while keeping foreign investors at bay. The government-owned Gazpromneft (the combined Gazprom and Rosneft) will be a major global company, bigger than Petroleas de Venezuela (PVDSA) and comparable to Saudi Arabia’s Aramco (both state monopolies), and will become an instrument of Russian foreign policy throughout the region and around the world.
With anti-Americanism on the rise in Moscow, Russia wants to use its energy muscle to develop a more robust presence in the Commonwealth of Independent States, Europe, and Asia. It is buying up strategic infrastructure companies, such as pipelines, refineries, electric grids, and ports in Georgia, Hungary, and Ukraine. Russian officials have implied that 20 percent of Yuganskneftegaz would be sold to China. Moscow is enticing Japan to pay for the Nakhodka pipeline--cooperation that could create competition between China and Japan in the Far East. There are hopes in some quarters that Russia’s energy, supplemented by Iran and Venezuela, can power a global coalition with China and the Muslim world to offset U.S. hegemony.
After September 11, 2001, it was hoped that Russia and Eurasia could provide a welcome addition, if not an alternative, to Middle East oil, but this hope seems to have been premature. Russia’s real challenges, beyond government renationalization, are the antiquated pipeline network, which is a government monopoly, and high production and transportation costs. In December 2004, the Russian government committed to building the Taishet-Nakhodka pipeline, a gargantuan 4,300 kilometer project that will cost $12 billion and is designed to provide 80 million tons of oil per year to the Asian Pacific market, including up to 30 million tons to China. The Russian government seems to have lost interest in the pipeline from Western Siberia to Murmansk--the easiest way to export oil to the United States.
The U.S. Response. The Bush Administration and U.S. companies need to push energy cooperation issues at the highest level, beginning at the Bush-Putin Summits in Moscow in May and following up at the G-8 Summit in Scotland in July. Specifically, the Administration should:
Recognize that the Russian energy sector is operating on a new model predicated on total state domination and control. All future dealings in Russia must receive full Kremlin blessings. If the U.S. wishes to maintain an interest in Russian oil, the U.S. government must become a participant in assuring the viability of future deals.
Arrive at a framework agreement on U.S.-Russian energy cooperation. The U.S. should insist that such a framework include a key role for the private sector in developing Russian energy resources and infrastructure. Investment stability and recognition of Western investors’ property rights need to be acknowledged at the highest level.
Condition U.S. agreement to Russia’s entry into the WTO on the creation of transparent rules and investment protection for U.S. companies that invest in Russia.
Request that U.S. companies participate in construction of the Murmansk pipeline and the Shtokman natural gas projects in the Barents Sea.
Conclusion. U.S. and Russia are still "energy compatible." One is an importer and the other, an exporter. But recent events, by diminishing the attractiveness of Russia’s energy investment opportunities, will adversely affect the country’s economic development in the medium and long terms. In addition, Russia’s decision-making elite is split between those who view the takedown of YUKOS as a heavy-handed operation that caused unacceptable collateral damage and those who believe that the end justified the means. Statism and opacity conceal corruption; and nationalist rhetoric covers up protectionism, backwardness, greed, and graft. As a WTO candidate and G-8 member, Russia cannot afford any of these.
02-23-2005
MOSCOW -- Meetings with key Russian officials in this town last week reveal that the Putin Administration is facing a crisis of confidence. Russian Prime Minister Mikhail Fradkov’s Cabinet survived a Duma vote of no confidence on February 9th, but the real target of the abuse heaped on the Prime Minister by the nationalist and leftist opposition parties, which are artifacts of power elites, was never in doubt: Mr. Putin himself.
President Bush’s summit with Mr. Putin in Bratislava Thursday February 24th will be the most difficult meeting two men ever had. One year after Putin handily won a second presidential term, his domestic and foreign challenges are snowballing, and his aura of an almost-superhuman invincibility is quickly dissipating. This is not to say, however, that Putin should be looked down upon or counted out: he is still in control.
Moscow politicians are uneasy with the country’s perceived lack of domestic and foreign policy direction. Consequently, a 2008 transition to a successor hand-picked by Putin is no longer a sure thing. Neither is passage of constitutional-legislative changes that would guarantee Putin’s continued rule as Prime Minister after two presidential terms -- with enhanced powers, such as control of defense, the security services, and the legal system.
Russia’s political malaise has set in despite high oil prices and a robust GDP growth rate of around 7 percent. Still, a 20 percent drop in Putin’s popular support leaves one to speculate how quickly the situation could deteriorate if oil prices tumbled. The climate of stagnation and uncertainty manifests itself in numerous areas, including failure to attain economic growth to realize Putin’s proclaimed goal of doubling the GDP by 2010. The elites perceive this as a failure to achieve an important national target. Deteriorating investor confidence quadrupled capital flight in 2004.
The state power is monopolized by a small group of Putin loyalists, primarily from the St. Petersburg security services and mayor’s office. This group has overtaken state-owned companies, the justice system and courts, and even private businesses. If Putin is perceived by his group as too weak, it may attempt to remove him. However, this total control raises stakes for an anti-Putin coalition in the future, and increases the incentive to dilute or terminate the power of the St. Petersburg group -- through the ballot box or by other means if necessary.
There is a widespread perception in Moscow that the current Prime Minister Fradkov and his cabinet failed. Most recently, the Cabinet bungled social welfare reform that was supposed to replace in-kind benefits for the elderly with monetary payments. Inadequate planning and poor execution led to the largest campaign of street demonstrations since Putin’s coming to power in 1999. The forthcoming reform of subsidized housing and utilities could further damage the regime’s prestige. Putin’s attempts to appease the protesters by paying off officers, military retirees, and students, while simultaneously boosting the FSB and military budgets, have created an impression of weakness and indecision.
Protectionism and economic nationalism are rampant. Recently, the Minister of Natural Resources announced that "non-Russian resident companies" will be denied access to Russian natural resources, such as oil, gold and other minerals. This approach will allow Russian companies with dubious connections to the Ministry or the Kremlin to successfully bid for lucrative licenses while excluding foreigners. Already, the YUKOS affair has cost Russia tens of billions of dollars of opportunity cost in lost investment. Putin’s chief economic advisor, Andrey Illarionov, openly termed the sale of the YUKOS main production unit, Yuganskneftegaz, the "swindle of the year", while Putin’s Minister of Economic Development German Gref has publicly called for its return Yugansk to YUKOS.
Russia’s policy fiascos are multi-dimensional. Private, corporate, or bureaucratic interests trump raison d’etat in a manner the regime of Nicholas II did in the early 20th century. Policy makers allow themselves to fall back on Soviet clich?s, or even on their czarist era great power precursors. Thus, Russia opposes the US policy on Iranian nuclear disarmament, "not because of Iran, but because it pushes us into a corner," as one senior Russian lawmaker put it. He added that US unilateral policies based on military superiority are unacceptable not only to Russia, but also to China, France and Germany.
The era of quick US fixes in Russia is over, and Washington’s advice is no longer welcome -- if it ever was. Give-and-take, however, may still be the best diplomatic tool, as senior Russian officials say that many issues on the bilateral agenda are negotiable.
US interests in Russia include cooperation on terminating Iran’s nuclear arms program; non-proliferation; the global war on terrorism; Russian membership in WTO; and bilateral energy and economic cooperation. President Bush should maintain a solid working relationship with Putin, while supporting the forces of democracy, tolerance, open markets and civil society in the long term. This balancing act is not an easy task.
The US should request Moscow’s cooperation in neutralizing the Iranian nuclear weapons program as it will threaten Russia. Washington should foster Russian cooperation in the former Soviet areas, including troop withdrawals and bringing to closure "frozen conflicts" in Moldova, Georgia, including Abkhazia, and Nagorno-Karabakh. The US should condition progress of Russia’ WTO accession talks upon dismantling state monopolies and reversing opaque and protectionist economic practices. Finally, Washington should express support for democratization of mass media and encourage Russia to promote private and public non-state TV channels. Finally, Bush should clarify that the US is not seeking its dismemberment and fully recognizes its territorial integrity from Kaliningrad in the West to Dagestan in the South.
In Bratislava, President Bush needs to emphasize security, such as disarming of Iran and non-proliferation. Lecturing about democracy may not be effective; carrots-and-sticks may work better. Russia is facing a period of political instability as the power elites jockey for positions in the 2007-2008 electoral cycle. The US should not pick favorites, but rather champion transparency, democracy and business cooperation, while protecting its own security and economic interests in Russia and Eurasia.
02-21-2005
MOSCOW — President Bush’s summit with Vladimir Putin in Bratislava Thursday Feb. 24 will be the most difficult meeting two men ever had. A year after Mr. Putin handily won a second presidential term, his domestic and foreign challenges are snowballing, and his aura of an almost-superhuman invincibility is quickly dissipating. This is not to say Mr. Putin should be looked down upon or counted out: He is still in control.
Meetings with key Russian officials in Moscow reveal that the Putin administration faces a crisis of confidence. Russian Prime Minister Mikhail Fradkov’s Cabinet survived a Duma no-confidence vote Feb. 9. But the real target of the abuse heaped on the prime minister by the nationalist and leftist opposition parties, which are artifacts of power elites, was never in doubt: Mr. Putin himself.
Moscow politicians are uneasy with the country’s perceived lack of domestic and foreign policy direction. Consequently, a 2008 transition to a successor hand-picked by Mr. Putin is no longer a given. Neither is passage of constitutional-legislative changes to guarantee Mr. Putin’s continued rule as prime minister after two presidential terms — with enhanced powers, such as control of defense, the security service and the legal system.
Russia’s political malaise has set in despite high oil prices and a robust growth of around 7 percent in the gross domestic product. Still, a 20 percent drop in Mr. Putin’s popular support leaves one to speculate how quickly the situation could deteriorate if oil prices tumbled.
The stagnation and uncertainty manifest themselves in many areas, including failure to attain economic growth to realize Mr. Putin’s goal of doubling the GDP by 2010. Elites perceive this as failure to achieve an important national target. Deteriorating investor confidence quadrupled capital flight last year.
The state power is monopolized by a small group of Putin loyalists, primarily from the St. Petersburg security services and mayor’s office. This group has overtaken state-owned companies, the justice system and courts, and even private businesses. If Mr. Putin’s group perceives him as too weak, it may try to remove him. However, this total control raises stakes for an anti-Putin coalition in the future, and increases the incentive to dilute or terminate St. Petersburg group’s power — by the ballot box, or other means if necessary.
There is a widespread perception in Moscow that the current Prime Minister Fradkov and his Cabinet failed. Most recently, the Cabinet bungled social welfare reform that was supposed to replace in-kind benefits for the elderly with monetary payments.
Inadequate planning and poor execution led to the largest street demonstrations since Mr. Putin came to power in 1999.
The forthcoming reform of subsidized housing and utilities could further damage the regime’s prestige. Mr. Putin’s attempts to appease the protesters by paying off officers, military retirees and students, while boosting FSB and military budgets, have created an image of weakness and indecision.
Protectionism and economic nationalism are rampant. Recently, the minister of natural resources announced that "non-Russian resident companies" will be denied access to Russian natural resources, such as oil, gold and other minerals. This approach will allow Russian companies with dubious connections to the Ministry or the Kremlin to successfully bid for lucrative licenses while foreigners are excluded.
Already, the YUKOS affair has cost Russia tens of billions of dollars in lost investment. Mr. Putin’s chief economic adviser, Andrey Illarionov, openly termed the sale of the YUKOS main production unit, Yuganskneftegaz, the "swindle of the year," while Mr. Putin’s Minister of Economic Development German Gref has publicly called for return of Yugansk to YUKOS.
Russia’s policy fiascos are multidimensional. Private, corporate or bureaucratic interests trump raison d’etat as in the regime of the early 20th century’s Czar Nicholas II. Policymakers fall back on Soviet cliches, or even on their czarist-era great-power precursors. Thus, Russia opposes U.S. policy on Iranian nuclear disarmament, "not because of Iran, but because it pushes us into a corner," as a senior Russian lawmaker put it. He said U.S. unilateral policies based on military superiority are unacceptable not only to Russia, but to China, France and Germany.
The era of quick U.S. fixes in Russia is over, and Washington’s advice is no longer welcome — if it ever was. Give-and-take, however, may still be the best diplomatic tool, as senior Russian officials say many issues on the bilateral agenda are negotiable.
U.S. interests in Russia include cooperation on terminating Iran’s nuclear arms program; nonproliferation; the global war on terrorism; Russian World Trade Organization membership; and bilateral energy and economic cooperation.
President Bush should maintain a solid working relationship with Mr. Putin, while supporting the forces of democracy, tolerance, open markets and civil society in the long term. This is not an easy balance to achieve.
The U.S. should request Moscow’s cooperation in neutralizing the Iranian nuclear weapons program, since it will threaten Russia. Washington should foster Russian cooperation in the former Soviet areas, including troop withdrawals and closure of "frozen conflicts" in Moldova, Georgia, including Abkhazia, and Nagorno-Karabakh. The U.S. should condition progress of Russia’s WTO accession talks on dismantling state monopolies and reversing opaque and protectionist economic practices.
Finally, Washington should express support for democratization of mass media and encourage Russia to promote private and public nonstate TV channels. Finally, Mr. Bush should clarify the United States is not seeking Russia’s dismemberment and fully recognizes its territorial integrity from Kaliningrad in the west to Dagestan in the south.
In Bratislava, President Bush needs to emphasize security, such as nonproliferation and disarming Iran. Lectures on democracy may not be effective; carrots-and-sticks may work better.
Russia faces political instability as the power elites jockey for positions in the 2007-2008 electoral cycle. The U.S. should not pick favorites, but rather champion transparency, democracy and business cooperation, while protecting its own security and economic interests in Russia and Eurasia.
10-15-2004
President Alexandr Lukashenka of Belarus has added a referendum to the October 17 parliamentary elections, asking Belarusians to allow him to participate in the next presidential election (prohibited by his own tailor-made constitution) and to remove the presidential term limits from the constitution.
Lukashenka, an authoritarian, anti-Western populist and former collective farm boss, took office illegally after the 1996 constitutional coup. If the October 17 referendum passes, he will have taken a giant step toward becoming a "president for life"--an unseemly sight in democratic Europe. Not only could he run for a third term in 2006, but for an indeterminate number of terms thereafter. This would allow him to remain in office indefinitely--particularly given his policy of preventing political parties from competing in parliamentary elections, having equal access to the media, or placing their own observers on local and regional electoral commissions as provided by law.
The authoritarian Belarus has become a near-pariah state in Europe, especially after Lukashenka caused several opposition leaders to "disappear" in the late 1990s. Sources in Minsk confirmed that the dictator’s henchmen murdered them. The U.S. and the EU countries responded by jointly agreeing to deny travel visas to a list of Belarusian officials from Lukashenka’s inner circle. This may be a step in the right direction, but it is insufficient. Lukashenka can simply retaliate by banning U.S. and EU officials from visiting Belarus.
Moscow Apprehensive. Some in the Putin Administration are also apprehensive about Lukashenka and resent the basket-case Belarusian economy that is an albatross around their country’s neck. Moreover, the Putin Administration is aware that Lukashenka nurses an ambition to engineer a unification between Russia and Belarus in such a way that he could run for president of Russia. In fact, Lukashenka has expressed his admiration for Hitler and Stalin.
Russians should know that, if they absorb Belarus or even tolerate the abuses of power, the influence of Lukashenka’s authoritarianism may exacerbate their own country’s uneasy relationship with democracy. Furthermore, the world’s indifference to Lukashenka’s power grab may encourage President Vladimir Putin’s entourage to advise Putin to remain in power after 2008, when his term ends.
Cooperation with Europe. The U.S. and Europe have numerous interests at stake in Belarus, including how its failed democracy may influence its neighbors, particularly Russia and Ukraine, which will elect its next president on October 31. Belarus is also suspected of selling weapons to rogue regimes, such as Iran and Saddam’s Iraq. Anti-Western arms dealers in Minsk may also be selling weapons to terrorist groups around the world, including those fighting in Iraq.
However, the West has some powerful tools for fighting the Belarusian dictator and his henchmen. In the past, the U.S. has worked with allies such as Italy and the U.K. to stop overseas shipments of Ukrainian arms to the Balkans in violation of international sanctions. Furthermore, the U.S. has never recognized an absolute sovereign immunity defense, which means heads of state can be prosecuted under U.S. law. The U.S. also has investigated leaders from the post-Soviet states, including Ukrainian President Leonid Kuchma (and most of his senior team) and the late Azerbaijani President Heydar Aliev. Former Ukrainian Prime Minister Pavlo Lazarenko and former Panamanian President Manuel Noriega have been convicted in U.S. courts. There are many opportunities for Washington, London, Paris, Berlin, and Brussels to cooperate on Belarus.
On October 6, Congress passed the Belarus Democracy Act of 2004 (H.R. 854), sponsored by Representative Chris Smith (R-NJ) and others, to fund a broad range of measures to support democracy in Belarus. Although this is a beginning, the executive branch and Congress need to do more. Specifically, they should:
Denounce publicly Lukashenka’s violations of the constitution and electoral procedures, and the State Department should amplify its criticism of Belarus’s flawed political system.
Declare , with the EU, that the referendum and parliamentary elections are illegitimate if observers from the Organization for Security and Co-operation in Europe find election falsification or other violations.
Use domestic and international law enforcement agencies, such as Interpol, in cooperation with EU members, to coordinate criminal investigations into homicides, money laundering, and illegal arms trading linked to the Lukashenka regime.
Investigate the disappearances of Lukashenka’s political opponents, provided there is a jurisdictional nexus to the U.S. and/or Europe. Both the U.S. Justice Department and its European counterparts can do so. Moreover, Europe and the U.S. could initiate criminal proceedings against those in the president’s circle who ordered and participated in the murder of opposition politicians and journalists.
Seize assets of Lukashenka and his inner circle through criminal proceedings against illegal arms sales and money laundering operations if Belarus violated U.S. or international sanctions. The U.S. and EU would be entitled to enforce such sanctions even if the violations did not occur in America or Europe.
Fund , together with the EU, an international broadcasting operation by opposition radio and television stations from countries around Belarus, and expand people-to-people and educational exchanges.
Consult with Russia regarding possible political changes that would make Belarus more democratic and predictable. Such a coordinated effort would benefit Russia by making the transit route for Russian gas to Europe less prone to Lukashenka’s interference and would eliminate the need for Russia to support the Belarusian economy with subsidized natural gas at a cost of over $2 billion per year.
Conclusion. Lukashenka thinks he is the permanent ruler of Belarus, but the people of Belarus deserve better. From day one, the next Congress and Administration should provide leadership to help make Belarus free.
08-18-2004
After open-collar, red-shirt-clad Hugo Chavez claimed a victory in a referendum, the global oil outlook is gloomier than before. Geopolitically, Venezuela has become a flashing red light.
During his six years in power, Mr. Chavez has increasingly politicized oil, nationalized and mismanaged the national oil company PDVSA, and used its finances as a political kitty (up to $3.7 billion this year alone) to buy off the poor. Beyond Venezuela, he sees himself replacing Fidel Castro as the leader of Latin America’s radical left, opposing democracy, free markets, and American influence.
Mr. Chavez uses oil as a political tool to advance his hemispheric and global ambitions. He played a key role in the 1999 and 2003 decisions of the Organization of Petroleum Exporting Countries to cut production and coordinate policy aimed at driving oil prices higher. In 2000, Mr. Chavez visited Iran, Iraq, Libya and Saudi Arabia, further agitating for production cuts and quota enforcement. The year, he promised Fidel Castro 53,000 barrels of subsidized oil a day in exchange for the services of Cuban teachers — and intelligence experts.
Until the Chavez presidency, oil-rich Venezuela had been at peace with its neighbors and a firm American ally.
The situation changed in 1998. As a presidential candidate, Mr. Chavez campaigned against the "savage capitalism" of the United States. He allegedly aided Afghanistan’s Taliban government following the September 11, 2001, attack on the United States. Mr. Chavez also proclaimed Cuba and Venezuela were "called upon to be a spearhead and summon other nations and governments" to fight free market capitalism.
After a June 24, 2004, U.S. Senate hearing on the Venezuela situation, Mr. Chavez called U.S. congressmen "dogs of war, those that intend to dominate the world, those imperialists."
In Venezuela’s immediate area, Mr. Chavez has aided the narco-terrorist Revolutionary Armed Forces of Colombia (FARC). In Bolivia, Mr. Chavez supported indigenous activists who led an uprising that forced elected President Gonzalo Sanchez de Lozada from office in October 2003. And in El Salvador, Venezuelan troops on a post-earthquake mission urged villagers to support the leftist Farabundo Marti National Liberation Front.
Mr. Chavez’s Fifth Republic Movement (MVR) party is allied with the Brazil-based Foro de Sao Paulo — an organization of some 39 rabidly leftist parties and guerrilla organizations from 16 countries in the hemisphere. It opposes U.S. counternarcotics collaboration with Latin America and the Free Trade Area of the Americas, which it characterizes as a U.S. "annexation."
In November 2003, Mr. Chavez inaugurated the first Peoples Bolivarian Congress, whose cells now spy on neighbors in Venezuela. It brought together 400 representatives from 20 Latin American countries expressly to condemn the policies of the United States, the U.S. Southern Command, the International Monetary Fund and the World Bank.
But it is his handling of oil, which reveals an agenda of destructive populism. During its 20-year history PDVSA built a reputation for smooth operation and competence. Even though it nationalized its oil industry in 1975, exploration and production were reopened to foreign participation in 1996.
The 2002-2003 national strike devastated the oil giant. Some 35,000-40,000 skilled workers, including fire fighters, walked out while spillage and fires ensued. Daily production dropped from 3 million barrels (mbd) to 600,000 barrels. Mr. Chavez fired 18,000 skilled managers and workers, further undermining PDVSA’s precarious situation.
Mr. Chavez arrested oil sector reforms and began expropriating foreign assets. His 1999 constitution prohibited future PDVSA privatization; his 2001 Hydrocarbon Law doubled royalties on foreign operators from 16.67 percent to 30 percent and required a majority government stake in future joint ventures. During the 2002 strike, the Venezuelan military seized an information technology company jointly owned by PDVSA and Virginia-based Science Applications International Corporation (SAIC). Such expropriations jeopardize the investments of international major oil companies — such as Mobil, ChevronTexaco and ConocoPhillips — in oilfield development projects like those in Venezuela’s Orinoco basin.
However, while PDVSA projects $37 billion in new investment, including $10 billion from international companies, Mr. Chavez’s action threaten its 2004-2009 development plan.
Today PDVSA depends on U.S. refineries, which partially supply its CITGO gas station chain. PDVSA owns refining facilities in Louisiana, Illinois, Texas, New Jersey and Georgia, as well as several installations in Europe. Irresponsible tampering with U.S. and international company activities by the Chavez government could prompt legal proceedings against Venezuelan holdings in the West.
Despite recent high oil prices that have provided a fresh infusion of cash, PDVSA remains in disarray. This year’s internal investment fell from $5 billion to $4.3 billion while salaries went up 60 percent despite no apparent increase in productivity or number of employees. Without reinvestment in equipment and maintenance, PDVSA will not be able to maintain current production levels.
Besides supplying the United States with 1.5 million barrels of oil a day (mbd), Venezuela provides most of the petroleum for U.S. allies in the Caribbean and Central America.
Mr. Chavez has the luxury of cutting deliveries to those who opposed him. Caribbean leaders know opposing Mr. Chavez could result in high prices or delivery cuts. In September 2003, Mr. Chavez punished the Dominican Republic for harboring former President Carlos Andres Perez — who "might" conspire against his government. He stopped oil deliveries, prompting a temporary energy crisis.
Beyond the hemisphere, he is preparing to shift exports to an increasingly oil-thirsty China, making Venezuela less dependent on U.S. petroleum sales. A deal signed on July 14, 2004, to build oil and gas pipelines between the Maracaibo Basin in Venezuela and the Caribbean and Pacific coasts in Colombia would enable Venezuela to ship petroleum to China without using the Panama Canal. This would make it more critical than ever for Mr. Chavez to secure a pliant government in Colombia to keep this facility operating in Venezuela’s interest.
By destabilizing and replacing democratic governments in hydrocarbon-rich Bolivia, Colombia and Ecuador, he also could achieve a regional energy monopoly that could support rogue regimes and frustrate U.S. interests in the hemisphere. Mr. Chavez brought Cuban intelligence advisers to facilitate what may become a Castro-style dictatorship plus petrodollars.
For years, Republicans have tried to shove Latin America to the foreign policy back burner, while Democrats have feigned interest with insignificant and ineffective foreign aid programs. It’s time for U.S. leaders to stop pretending nothing is wrong. Mr. Chavez wants to harm the U.S. where it hurts the most — in the wallet and the oil tank.
President Bush had better watch out.
08-12-2004
Venezuelan President Hugo Ch?vez is systematically leading his country into dictatorship by provoking internal conflict and characterizing his internal opponents as traitors. Beyond Venezuela, he sees himself replacing Fidel Castro as the leader of Latin America’s radical left--uniting the region against U.S.-style democracy, free markets, and American influence.
Ch?vez derives popular support from fellow ideologues and a small but committed segment of Venezuela’s largely poor population, and he is beginning to use the hemisphere’s dependence on Venezuelan oil to encourage leftist movements elsewhere and to pressure other countries into acquiescing to his activities. By politicizing and mismanaging the state petroleum industry, Ch?vez is jeopardizing vital U.S. interests in the Western Hemisphere.
The good news is that the majority of Venezuelans do not support Ch?vez’s evolving dictatorship. Opponents have succeeded in petitioning for a referendum to recall him from office on August 15. Democratic governance and free markets are making slow strides in Latin American countries formerly ruled by dictators. While oil resources give him power, countries can buy oil from other vendors.
The bad news is that Ch?vez has consolidated his hold over Venezuela’s public institutions and is manipulating the electoral system in his favor. Increasing global demand for petroleum has given him an international power base, and his anti-American political agenda--fueled by petrodollars--could threaten nearby fledgling democracies and flourishing markets.
To strengthen Venezuela’s thread-like hold on democracy, cut the potential for regional destabilization, and deter manipulation of energy markets, the United States should help to keep Venezuela in the hemisphere’s democratic fold; promote private property rights and the rule of law, including in the natural resources sector; develop alternate sources of petroleum; and engage Latin America more effectively to help allies strengthen democratic institutions and market economies.
Reform, Then Reversal
Venezuelan leaders have never permitted either true representative democracy or really free markets. Until 1958, Venezuela was ruled by generals who first taxed coffee exports and then--after its discovery in 1917--petroleum. They created a welfare state and led citizens to believe that all could benefit from this underground treasure. In 1958, the country rejected military dictatorship in favor of civilian-elected rule. The first president, Romulo Betancourt, tried to institute free-market policies, but an economy and political system run by insiders and ratified by elections proved resistant to change.
During the 1970s, Venezuela nationalized its oil industry and gradually incurred increasing debt through runaway government spending on social programs designed to placate the middle class and the poor. The roller coaster of rising and falling market prices failed to sustain subsidies and programs to provide menial jobs to otherwise unemployed citizens. As a result, the average Venezuelan actually became poorer.
In 1992, a band of army officers led by Lt. Col. Hugo Ch?vez Fr?as attempted to overthrow President Carlos Andr?s P?rez. Although court-martialed and jailed, Ch?vez emerged a hero. In 1998, he was elected president on promises to clean out corruption and reduce poverty. Once in office, Ch?vez promoted a new consitution to consolidate his powers and began to constrain the business community, civil society, and rival politicians.
By 2001, Venezuelans had begun to protest his attempts to nationalize the Venezuelan Workers Union and turn schools into political indoctrination centers with Cuban curricula and teachers. Massive demonstrations followed in 2002. When 150,000 protesters marched on the presidential palace on April 11, Ch?vez reportedly ordered snipers to fire on them. Top generals convinced him to resign and replaced him with a hastily assembled junta headed by protest organizer and Chamber of Commerce and Industry President Pedro Carmona. The Rio Group of 19 Latin American presidents1 denounced the event as a coup, while the United States guardedly urged Venezuelans to restore democratic order.
Accounts of what happened next vary, but the junta attempted to dissolve the National Assembly and dismiss other elected officials. The military withdrew its support for the insurrection and brought Ch?vez back two days after his departure. The president later denied his resignation, and no investigation occurred to reveal what transpired.2 Later, opponents tried to force another resignation by staging a massive national strike (December 2002-January 2003) that spread to the state oil company, causing a temporary shutdown in January 2003. When that failed, more democratically minded detractors prevailed to seek a referendum on his presidency.
From Friend to Foe
Until the Ch?vez presidency, oil-rich Venezuela had been at peace with its neighbors and a firm American ally. Shortly after coming to power in Cuba in 1959, Fidel Castro visited President Betancourt in Caracas and asked him to join an alliance against the United States. Betancourt refused, and an angry Castro began sending insurgents to overthrow Venezuela’s democracy in 1961. In the 1970s, President Carlos Andr?s P?rez discouraged further external aggression by improving relations with Cuba, as well as the Soviet Union and China, while remaining a friend to the United States.3
But the situation changed in 1998. As a presidential candidate, Hugo Ch?vez campaigned against the "savage capitalism" of the United States. On August 10, 2000, he became the first foreign leader to visit Saddam Hussein since the Gulf War, and he allegedly aided Afghanistan’s Taliban government following the September 11, 2001, attack on the United States.4 At the same time, Ch?vez said that Cuba and Venezuela were "called upon to be a spearhead and summon other nations and governments" to fight free market capitalism.5
He cut back U.S.-Venezuelan military cooperation on counternarcotics by refusing overflights of U.S. aircraft tracking drug smugglers. In May 2004, Defense Minister Jorge Garc?a ordered the U.S. military mission to leave the Fuerte Tiuna offices that it had occupied for the past 50 years.6
Since his brief departure from power in April 2002, Ch?vez has charged the United States with complicity in what he now calls an attempted coup against him. After a June 24, 2004, U.S. Senate hearing on the situation in Venezuela, Ch?vez characterized U.S. Congressmen as "dogs of war, those that intend to dominate the world, those imperialists."7
Within Venezuela’s immediate neighborhood, reports suggest that Ch?vez has aided the narcoterrorist Revolutionary Armed Forces of Colombia (FARC). Videos and documents revealed by dissident Venezuelan military officers portray official promises of supplies and refuge as well as the existence of several FARC fronts on the Venezuelan side of the Colombia-Venezuela border.8 In Bolivia, Ch?vez reportedly has close ties to indigenous activists Felipe Quispe and Evo Morales, who helped lead an uprising that forced elected President Gonzalo S?nchez de Lozada from office in October 2003. And in El Salvador, Venezuelan troops sent to help victims rebuild after a devastating earthquake in 2001 were nearly declared persona non grata for allegedly urging villagers to support the leftist Farabundo Mart? National Liberation Front. 9
President Ch?vez’s Fifth Republic Movement (MVR) party is allied with the Brazil-based Foro de S?o Paulo--an organization of some 39 leftist parties and guerrilla organizations from 16 countries in the hemisphere. It shares Ch?vez’s anti-American agenda, opposing U.S. counternarcotics collaboration with Latin America and the Free Trade Area of the Americas, which it characterizes as an annexation of the region to the United States.10
Opening a rival front, Ch?vez inaugurated the first Peoples Bolivarian Congress on November 25, 2003, in Caracas. It reportedly brought together 400 representatives from 20 Latin American countries expressly to condemn the policies of the United States, U.S. Southern Command, the International Monetary Fund, and the World Bank. 11
Oil Politics and Mismanagement
When the United States became a net oil importer in the 1970s, friendly Venezuela was a founding member of the Organization of Petroleum Exporting Countries (OPEC) and a top supplier to the American market. Even though it nationalized its oil industry in 1975, creating the state oil company Petr?leos de Venezuela, S.A. (PDVSA), reform-minded politicians proposed giving back shares to every Venezuelan family while exploration and production was reopened to foreign participation in 1996.
Ch?vez put further reforms on hold and set a precedent by expropriating foreign assets. His 1999 constitution prohibited future PDVSA privatization, while his 2001 Hydrocarbon Law doubled royalties on foreign operators from 16.67 percent to 30 percent and required a majority government stake in future joint ventures.12 During the December 2002 national strike, the Venezuelan military seized an information technology company jointly owned by PDVSA and the U.S.-based Science Applications International Corporation (SAIC).13 Such expropriations could jeopardize the investments of international major oil companies--such as Mobil, ChevronTexaco, and ConocoPhillips--in oilfield development projects like those in Venezuela’s Orinoco basin. According to its 2004-2009 development plan, PDVSA projects $37 billion in new investment, including $10 billion from international companies.14
For the moment, PDVSA is dependent on U.S. refineries, which partially supply its CITGO gas station chain. PDVSA owns refining facilities located in Louisiana, Illinois, Texas, New Jersey, and Georgia as well as several installations in Europe.15 Irresponsible tampering with U.S. and international company activities by the Ch?vez government could prompt legal proceedings against Venezuelan holdings in the West.
Using Oil as a Political Tool
Ch?vez uses oil as a political tool to advance his hemispheric and global ambitions. He played a key role in the 1999 and 2003 OPEC decisions to cut production and coordinate policy aimed at driving oil prices higher. In 2000, Ch?vez visited Iran, Iraq, Libya, and Saudi Arabia, further agitating for production cuts and quota enforcement. The same year, he promised Fidel Castro 53,000 barrels of oil a day on concessionary terms in exchange for the services of Cuban doctors, teachers, and intelligence experts.
Besides supplying the United States with 1.5 million barrels of oil a day (mbd), Venezuela provides most of the petroleum consumed by U.S. allies in the Caribbean and Central America. Their leaders know that opposing Ch?vez in any significant fashion could result in less favorable sales terms or cuts in deliveries. In September 2003, President Ch?vez accused the Dominican Republic of harboring Venezuelans--like former President Carlos Andr?s P?rez--who allegedly might conspire against his government. He then stopped oil deliveries, prompting a temporary energy crisis while Dominican officials scrambled for new suppliers.
Beyond the hemisphere, Ch?vez is preparing to shift PDVSA’s customer base toward Asia and an increasingly oil-thirsty China, making Venezuela less dependent on petroleum sales to immediate neighbors. A deal signed on July 14, 2004, to build oil and gas pipelines between the Maracaibo Basin in Venezuela and the Caribbean and Pacific coasts in Colombia may seem innocuous, but it would enable Venezuela to ship petroleum to China without using the Panama Canal. This would make it more critical than ever for Ch?vez to secure a pliant government in Colombia to keep this facility operating in Venezuela’s interest.16 Ch?vez would thus have the luxury of cutting deliveries to those who opposed him, forcing them to seek other sources at greater cost. By destabilizing and replacing democratic governments in hydrocarbon-rich Bolivia, Colombia, and Ecuador, he also could achieve a regional energy monopoly that could support rogue regimes and frustrate U.S. interests in the hemisphere.
Mismanagement Threatens the Future
During its 20-year history before Ch?vez, PDVSA built a reputation for smooth operation and competence, but the 2002-2003 national strike devastated the oil giant. Some 35,000-40,000 skilled workers, including fire fighters, walked out while spillage and fires ensued. Production capacity dropped from three mbd to 600,000 barrels. Ch?vez fired 18,000 skilled managers and workers, further undermining PDVSA’s precarious situation.17 To regain and maintain pumping capacity at an estimated 2.5 mbd, PDVSA engineers reportedly "goose" wells by pumping air and water into them to coax Venezuela’s viscous petroleum to the surface, endangering the long-term viability of existing fields.
Despite recent high oil prices that have provided a fresh infusion of cash, PDVSA remains in disarray. Venezuelan economist Gustavo Garc?a calculates that this year’s internal investment fell from $5 billion to $4.3 billion while salaries went up 60 percent despite no apparent increase in productivity or number of employees.18 Without reinvestment in equipment and maintenance, PDVSA will not be able to maintain current production levels. Moreover, Ch?vez has reportedly channeled between $1.6 billion and $3.7 billion from PDVSA into a special account that he is using to finance social programs to influence voters in the upcoming referendum on his presidency.19
Recall and Prospects
President Ch?vez’s Bolivarian Constitution contemplates a referendum process for recalling public officials. Fortunately, opponents of various political stripes--including some former Ch?vez allies--have agreed to settle differences with the president at the ballot box. The bad news is that Ch?vez has tried to intimidate and divide opponents or otherwise block a vote.
Two months after President Ch?vez’s brief departure from office in 2002, the government invited former U.S. President Jimmy Carter and later the Organization of American States (OAS) to broker talks between the administration and the opposition, leading to a binding referendum as an alternative to civil conflict. Shortly thereafter, the National Electoral Council (CNE) was packed with Ch?vez allies who blocked several efforts for a recall.
Finally, the CNE allowed an official period for gathering signatures--known as the firmazo--in late 2003. Once organizers collected names on government forms, it changed the rules on how the forms should have been filled out and then dragged out a review process to "repair" or rehabilitate some of the disqualified signatures.
In May 2004, under pressure from the OAS and the Carter Center, Ch?vez grudgingly allowed a re-examination, known as the reafirmazo, of nearly a million signatures thrown out by the partisan CNE. It turned out that petition organizers had 2.56 million names--130,000 more than were needed to trigger a recall. As a result, the CNE scheduled a referendum for August 15, 2004.
For its part, Venezuela’s opposition umbrella group--the Democratic Coordinator--has united to support a 10-point platform to create jobs, attract investment, fight poverty, strengthen local government, institute checks and balances, rebuild public institutions, and open the government to citizen participation. Moreover, if Ch?vez loses the referendum, opponents promise to hold a primary to select their candidate. Ch?vez has declared that he will run again for his Fifth Republic Movement party even though the constitution is unclear on whether he can do so.
Despite the opposition’s willingness to play by the rules, many signs point to possible fraud by the government, even though some polls show the president with a 50-50 chance of winning the referendum. Specifically:
The CNE will use new touch-screen voting machines from a company of which it is part owner. Technical glitches and power outages could disenfranchise thousands, thus producing fewer votes than needed to recall the president.20 Rigged software could alter vote totals. Similar touch-screen systems without paper trails are under fire in the United States.21
Government teams in military trucks have circulated in pro-Ch?vez neighborhoods, credentialing new voters. No such efforts have been made in opposition barrios. The regime also has been naturalizing foreign residents at a frantic pace--some 236,000 from May through June in a program called "Misi?n Identidad."22
Ch?vez continues to intimidate opponents. On numerous occasions, he has accused them of trying to assassinate him. National police claim they found fake ID cards, computers, and printers in raids on offices of an opposition party in June 2004, but witnesses say they saw agents carry in suspicious bundles. The government even charged the directors of Sumate, a non-governmental organization (NGO) that helped organize the referendum, with conspiracy to commit treason for accepting a $53,000 grant for electoral observation from the U.S.-funded National Endowment for Democracy even though the Ch?vez administration has accepted thousands of doctors, teachers, and intelligence agents from Cuban dictator Fidel Castro.
Ch?vez has earmarked from $1.6 billion to $3.7 billion worth of state oil income to spend on poor voters during the campaign. He commands radio and TV stations to broadcast his speeches without equal time for opponents. In June, he revealed plans to enlist millions of "patriotic" electoral patrols to surveil neighborhoods under the authority of a campaign committee of high government officials known as the Comando Maisanta.
Curbing Mischief
Hugo Ch?vez is no democrat. At home, he has concentrated the powers of the state in his presidency, expropriating budgets from municipal governments, strengthening the national police, and packing the Supreme Court with cronies.23 Abroad, he appears to be in the initial stages of creating a confederation of nations opposed to the United States that is sustained by oil and united by an improvised nationalist ideology. History suggests a future of conflict and poverty, both for those under his rule and for all those who are allied with him.
Other countries in Latin America share some of Venezuela’s economic characteristics--abundant resources and high rates of poverty that make them easy prey for populist demagogues. A bloc of states united in leftist authoritarianism and oil extortion could ignite the flames of armed confrontation again in the Western Hemisphere. To avoid needless conflict as well as a possible energy crisis, the United States should help direct Venezuela back toward democracy, develop alternate sources of petroleum, and engage Latin America more effectively to help allies strengthen democratic institutions and market economies.
Specifically, the United States must:
Encourage a free and fair electoral process in Venezuela’s August 15 referendum. The Organization of American States, the Carter Center, and observers from other countries and international organizations sympathetic to Ch?vez have been invited to witness the vote. It is in America’s interest to support the OAS observer mission and to urge all impartial monitors to uphold electoral standards that protect Venezuela’s citizens from partisan intimidation, ensure equal party representation at the polls, guarantee fair opportunity to vote, permit equal access to broadcast and print media by all sides, allow observers freedom to monitor and report on all aspects of the vote, and ensure an independent audit and paper trail for any voting machines used.
The United States should urge allies to condemn fraud by any party, but if fraud is committed by the government and the outcome is altered as a result, OAS members should be ready to invoke the OAS Democratic Charter to pursue a rectification or suspension of Venezuela’s membership. The World Bank should be poised to suspend loans to Venezuela as well. However, if a fair vote results, all parties and observers should respect the outcome.
Constrain mischief if Ch?vez remains in office. Whether or not he wins the referendum, wins a follow-on election, or manipulates the process to remain in office, the United States, the OAS, and democratic neighbors must not relent in applying pressure on Venezuela to abide by norms contained in the Democratic Charter. U.S. Members of Congress should increase visits with counterparts in the National Assembly to advocate legislative oversight to curb executive branch excesses. The U.S. National Endowment for Democracy should continue funding election observers and local NGOs committed to strengthening democratic institutions. The United States and democratic allies should insist that Ch?vez dismantle and disband armed partisan groups such as the Bolivarian Circles, which clearly violate democratic principles. The same community should resist any attempt by Ch?vez to subvert democracy in neighboring countries.
Encourage timely political and economic reforms . If Ch?vez’s opponents win the referendum and subsequent presidential elections, the United States should support the OAS in continuing to monitor human rights and civil liberties to prevent reprisals by violent loyalists. Washington and allies such as the Group of Friends (Brazil, Chile, Mexico, Portugal, and Spain)24 should be willing to support reforms to roll back Chavez’s police state and jump start a new market economy. The task will be daunting: to reverse decrees allowing expropriation of private property, repeal unduly restrictive business laws, restore local authority over municipal budgets and services, retire partisan generals, strengthen separation of powers, and rewrite Venezuela’s convoluted socialist constitution.
Through diplomacy, the United States should encourage Venezuelans to safeguard PDVSA from presidential pilfering and put it in the hands of Venezuelan citizens through stock offerings. The creation of a transparent national oil fund fed by royalties would provide a social cushion without state mismanagement of the industry. A majority stake ownership by the private sector would be more likely to attract the capital needed to meet PDVSA’s 2009 production target of 5 mbd and develop super-heavy oil fields and offshore natural gas fields.
Develop alternate sources of petroleum and gas to avoid energy extortion. Besides increasing domestic exploration, America should be prepared to shift oil purchases to Brazil, Canada, Ecuador, and Mexico to compensate for potential cuts in Venezuelan production. Moreover, the U.S. Department of Energy (DOE) should help dependent Latin American and Caribbean nations diversify their energy sources.
Promote property rights. The DOE should also encourage consultations between energy coporations, Latin American governments, and NGOs with expertise in property rights, such as Peru’s Institute for Liberty and Democracy, to establish, guarantee, and enforce private and corporate property rights, including rights to subsurface minerals and hydrocarbons. Enhancing such rights could even help the rural poor, some of whom may own land with petroleum deposits, and could also diminish exploitation of energy industries by self-serving politicians.
Increase support for democratic institutions and market economies throughout Latin America. The United States must increase support for the countries neighboring Venezuela, many of which--like Bolivia and Ecuador--have fragile democracies and weak economies. It must strive to improve peoples’ representation in political parties, enhance separation of powers, and promote equal treatment of all citizens before the law in order to increase confidence in democratic institutions as opposed to demagogues. Congress should ratify recently concluded trade pacts with Central and South American countries, and the White House should support regional economic reforms to enable entrepreneurs to start new businesses and the poor to accumulate wealth. Better integrated societies with accountable governments and abundant economic opportunities are more able to resist the spell of charismatic dictators.
Conclusion
On August 15, 2004, Venezuela’s citizens will go to the polls to decide whether to retain or recall President Hugo Ch?vez. During the five years he has been in office, he has divided the nation through demagoguery, destroyed an already anemic private sector through bad economic policy and conflict, caused 12 percent of the population to slip into extreme poverty,25 and created a climate of fear by dispatching partisan political gangs advised by Cuban intelligence officers. Logic would suggest that he be recalled, but fraud or fear that personal security depends on loyalty to Ch?vez could well keep him in office.
In view of its political and economic instability, as well as its evolving anti-American policies, Venezuela should no longer be considered a reliable supplier of oil. Moreover, mismanagement, diversion of funds, and shifting alliances to match the political goals of President Ch?vez could keep PDVSA from raising enough capital to stay competitive and maintain production levels. Both the United States and neighbors that depend on Venezuela’s oil should diversify their sources of energy imports. They should also guard against any efforts by Ch?vez to use oil revenues to support revolution beyond his country’s borders.
Above all, the United States must not abandon Venezuelans who seek a democratic and free-market renewal. All their leaders, including Ch?vez, should be actively discouraged from populist rule and guided toward institutions of public service by a combination of policy incentives and sanctions. To a lesser degree, similar problems exist elsewhere in Latin America. There too, the United States should redouble efforts to ensure that pluralism and free choice defeat authoritarianism and misery.
Stephen Johnson is Senior Policy Analyst for Latin America and Ariel Cohen, Ph.D., is Research Fellow in International Energy Security and Russian and Eurasian Studies in The Kathryn and Shelby Cullom Davis Center for International Studies at The Heritage Foundation. The authors wish to thank Intern Santiago Pinz?n for his assistance with this research.
--------------------------------------------------------------------------------
1. An informal consultative body formed in 1986.
2. The junta made uncharacteristically rapid and peculiar decisions, suggesting it was under pressure from the officers. The military also summoned Venezuelan civic leaders to the palace to sign a pledge supporting the junta. This may have been a ruse to draw out Ch?vez’s adversaries in order to discredit them. One of the participants in the insurrection, General Lucas Rinc?n, escaped punishment and is now the Minister of Interior and Justice. In a similar strange incident in May 2004, Ch?vez claimed that on a farm outside Caracas, his police had captured Colombian paramilitaries who were plotting to assassinate him. Eventually, 102 were charged and shown to reporters in Venezuelan army fatigues. A National Assembly deputy called it a publicity stunt to distract attention from the referendum drive to recall Ch?vez from office. See James Menendez, "Chavez Foils `Assassination Plot,’" BBC News, May 9, 2004, at news.bbc.co.uk/1/hi/world/americas/3699245.stm (August 2, 2004). See also Carlos Chirinos, "Venezuela: `Bluff Paramilitar,’" BBC Mundo News, June 29, 2004, at news.bbc.co.uk/hi/spanish/latin_america/newsid_3852000/3852047.stm (June 30, 2004).
3. Cuban insurgents initially tried to recruit Venezuelan collaborators, but pro-Soviet Venezuelan communists resented the Cuban intrusion, while other supporters left to develop a concept that embraced indigenous pride and sought an alliance between radicals and soldiers eager to re-establish military rule. It was called la Revoluci?n Bolivariana after Sim?n Bol?var, a hero of South American independence. As a junior officer, Hugo Ch?vez was undoubtedly influenced by this ideology. See Alberto Garrido, "El Eje Revolucionario Ch?vez-Castro," El Universal, June 22, 2004.
4. According to former Ch?vez personal pilot Major Juan D?az. See Casto Ocando, "Organismo demanda a Ch?vez en Miami," El Nuevo Herald, January 30, 2003, at www.miami.com/mld/elnuevo/news/world/americas/5060974.htm (January 31, 2003).
5. "Chavez Says Ties Make Venezuela, Cuba `One Team,’" Reuters, September 6, 2001.
6. "Venezuela Asks U.S. Military to Leave Base Offices," Reuters, May 12, 2004.
7. "Ch?vez califica de `perros de la guerra’ a congresistas de EE.UU.," Associated Press, June 27, 2004.
8. "Colombia evaluar? supuestos nexos entre Farc y militares venezolanos," El Tiempo, January 31, 2002, at www.terra.com.co/actualidad/internacional/31-01-2002/nota47739.html (March 27, 2002), and Javier Ignacio Mayorca, "740 de las FARC en Venezuela," Venezuela Anal?tica, March 11, 2002, at www.analitica.com/va/vpi5521076.asp (April 1, 2002).
9. Giaconda Soto, "El Salvador se retracta y permite permanencia de militares venezolanos," El Nacional, May 3, 2001, at www.el-nacional.com/eln03052001/pa2s1.htm (May 3, 2001).
10. "Resolu??o a favor da revolu?ao bolivariana da Venezuela," Foro de S?o Paulo, 10th Encounter, Havana, Cuba, December 7, 2001, at pt.uol.com.br/site/teste/textos/10venezuelap.asp (March 27, 2002).
11. "Primer Congreso Bolivariano de los Pueblos," Final Declaration, Web site Rebeli?n-Resistencia Global, November 30, 2003, at www.rebelion.org/sociales/031130congreso.htm (June 30, 2004).
12. Energy Information Agency, An Energy Overview of Venezuela, Privatization Status, p. 2, at www.fe.doe.gov/international/venzover.html (July 27, 2004).
13. Established in 1996, Inform?tica, Negocios y Tecnolog?a, S.A. (Intesa) provided computer services to the state oil giant, SAIC exercising a 60 percent share. In May 2002, the Venezuelan government notified SAIC that it wanted to terminate the partnership and made a buyout offer. Before the parties could come to an agreement, PDVSA president Ali Rodr?guez ordered a lockout and the army seized Intesa’s assets. The U.S. Overseas Private Investment Corporation granted SAIC $6 million in compensation, while its spokesman declared it would not support future investments in Venezuela. See Bruce V. Bigelow, "SAIC to Recoup Some Losses in Venezuela Deal," The San Diego Union-Tribune, July 20, 2004, at www.signonsandiego.com/uniontrib/20040720/news_1b20saic.html (July 30, 2004).
14. "Venezuela Says OPIC Ruling Won’t Hurt Investment," Reuters, July 21, 2004.
15. Ibid.
16. Ch?vez might then shift tactics from aiding Colombia’s FARC guerrillas to backing revolutionaries in Colombian elections.
17. Frances Robles, "Oil Accidents Mount in Venezuela," Miami Herald.com, January 21, 2002 (July 27, 2004).
18. Victor Salmeron, "PDVSA aument? partida de salarios en 60%," El Universal, July 30, 2004, at http://www.eluniversal.com/2004/07/30/eco_art_30158C.shtml (July 30, 2004).
19. Matthew Robinson, "PDVSA Spending May Hit Venezuela Oil--Analysts," Reuters, July 12, 2004 (July 27, 2004). Lower estimate is from Economist Intelligence Unit, 2004 Country Report.
20. Some 3.8 million are required to exceed the number that re-elected Ch?vez president in the 2000 contest following the adoption of his new constitution.
21. See Jon E. Dougherty, "`Reformers’ Now Attack Costly Election `Reform’ of E-Voting," NewsMax.com, July 30, 2004, at www.newsmax.com/archives/articles/2004/7/29/115913.shtml (August 2, 2004).
22. "Nacionalizados 236 mil extranjeros en dos meses," El Nuevo Siglo, July 6, 2004, at www.elnuevosiglo.com.co/noticia.php (July 6, 2004).
23. On May 18, a slim majority of pro-Ch?vez deputies in the National Assembly passed a law expanding the Supreme Justice Tribunal from 20 to 32 justices and made it possible to approve and remove appointees by a simple majority vote. See "Venezuela: Judicial Independence Under Siege," Human Rights Watch, June 17, 2004, at www.hrw.org/english/docs/2004/06/17/venezu8855.htm.
24. Organized by Brazil and the United States in January 2003 to hold President Ch?vez accountable for promises to abide by electoral procedures outlined in his own constitution.
25. Jackson Diehl, "A Missile from the South," The Washington Post, August 2, 2004, p. A17.
03-18-2004
When a U.S. presidential candidate contends the struggle against terrorism is only a matter for "justice and intelligence," the events in Madrid demonstrate this is not the case. Today’s justice, law enforcement and secret services — even in Europe — do not seem up to snuff.
The brutal March 11 attacks in Madrid might not have occurred if Spanish justice were quicker to do its job. The Spanish authorities failed to apprehend 30-year-old Jamal Zougam, an unindicted co-conspirator and an al Qaeda operative now blamed for the Madrid massacre.
According to a Spanish Judge Baltazar Garzon’s 700-page report, which indicts Osama bin Laden and others for the September 11, 2001 attacks, Zougam was a part of the Spanish al Qaeda cell that facilitated the attacks against the United States.
According to Spanish Interior Minister Angel Acebes, three Moroccans — Zougam, Mohamed Bekkali, 31, and Mohamed Chaoui, 34 — were known to the authorities because of their past criminal records in Spain. A Moroccan government source said Zougam had been under surveillance since terrorist bombings in the coastal city of Casablanca last May. The al Qaeda network in Spain included Al Jazeera journalist Tayseer Allouni, arrested in September 2003.
This is not the first time blind justice and cautious law enforcement has threatened the war on terrorism. In Great Britain, five al Qaeda terrorists from Guantanamo, released by the Bush administration after repeated appeals by Tony Blair, have become an inspiration to radical Islamist youth.
Touted as heroes by the British human-rights community, Ruhal Ahmed, Asif Iqbal and Shafiq Rasul want to sell their Gitmo stories to the tabloid press for as high as $450,000. The media refer to them as exemplary students, computer enthusiasts and devoted Muslims.
The newspapers accept at face value their explanations that just after September 11 they "left Britain to study Islamic culture" in Pakistan, or "strayed into Afghanistan while on a trip to Turkey"(despite lack of a common border between the two).
The Birmingham Central Mosque’s leader, Mohmmed Naseem, compared the U.S. administration with Nazi Germany and Stalin’s U.S.S.R., and the Gitmo detainees with concentration camp victims. The families — and their lawyers — now threaten to sue the U.S. and British governments for "moral damages."
The Bush administration has expressed disappointment that the Blair government failed to communicate to the British public the true nature of the British detainees in Gitmo.
Germany also is allowing September 11 co-conspirators to walk. Earlier this month, a five-judge panel of the German Federal Court of Justice set the case of a 30-year-old Moroccan national, Mounir el Motassadeq, for a retrial. Earlier, a Hamburg court released another Moroccan, Abdelghani Mzoudi, from detention. Both were part of the Hamburg cell that prepared and launched the deadly attacks against the United States.
The terror suspects demanded testimony from al Qaeda members in U.S. custody, such as Ramzi bin al-Shibh. They didn’t get them, and they were allowed to walk. The U.S.-held suspect Zacharias Moussaoui is pursuing a similar tactic.
The presiding German Judge Klaus Tolksdorf claimed "under the German law, all available evidence must be made available ... the justice system could not bend to accommodate security concerns stemming from international efforts to fight terrorism." Speaking of the United States, he added "the fight against terrorism cannot be a wild, unjust war."
This comes from the same justice system that recently convicted a confessed cannibal to eight years in prison, which means the man-eater walks after 41/2 years — if he does not eat anyone else in jail.
There is nothing at all "unjust" in recognizing that procedural requirements appropriate to civilian criminal courts are not appropriate for war criminals . Applying that standard would have prevented the Nuremberg trials.
In Indonesia, the Supreme Court has announced the May 2004 release of Jama’ at Islamiya leader Abu Bakar Bashir, the inspiration behind the attacks in Bali and Jakarta that killed more than 200 people. Tom Ridge, U.S. secretary for homeland security, Singapore’s foreign minister and Australian officials have all expressed disappointment over the hastened release after only 18 months in custody. Bashir snarled: "It is clear that [the U.S.] government is dishonest because it has killed innocent people in Iraq, Afghanistan and Palestine." Attacking Australia, he added, "They have the mentality of colonialists. All white people are like that."
In the past, neither courts nor cops have managed to stop totalitarian movements alone. The Bolsheviks and the Nazis repeatedly said they would use democracy to defeat democracy. Russian juries in the 19th century acquitted terrorists who murdered government officials and innocent bystanders. The German courts let Nazis walk.
Similarly, Islamo-totalitarians are using every procedural trick in the book to gain freedom and public support. Unfortunately, some in the legal profession often care more about the rules of evidence than about security and survival. As Thomas Powers has written: "In a liberal republic, liberty presupposes security; the point of security is liberty."
In the war on terrorism, courts and legislatures have to take a different tack. The last chapter of Justice William Rehnquist’s book, presciently published in 1998 and titled "All the Laws But One: Civil Liberties in Wartime," is called "Inter Arma Silent Leges" — "in times of war, the laws are silent."
Justice Renhquist believes in wartime the government’s power to limit civil liberty is greater than in peacetime, and presidents are justified in pushing their legal authority to the limit — or beyond. Legal authorities elsewhere should apply this notion, including modification of procedural rules, such as the right to call and cross-examine witnesses from across the ocean, to account for the unique circumstances of terrorism.
Democratic governments may opt to set up tribunals, which would consist of military and intelligence officers, to deal with mass murderers, so long as many judges are unfamiliar with terrorist practice and ideology.
It is ironic the Europeans and others who draw their legal tradition from the Continent seem to have forgotten the Roman wisdom. Unfortunately, thousands of people in Madrid, New York, Washington, Jerusalem and elsewhere, have paid the price for the errors of blind justice.
Recent Changes in Russia and Their Impact on U.S.-Russian Relations
03-09-2004
As President Vladimir Putin awaits re-election for a second term with no significant challenges, U.S.-Russian relations are in limbo. The revival of statism and nationalism has seriously diminished Russia’s chances of being regarded as a close and reliable partner that is clearly committed to democratic values. Nevertheless, there are ways by which the United States and Russia can restore their cooperation on the basis of pragmatism and the pursuit of compatible national interests, including enhancing each other’s security, economic ties, democracy, and human rights.
In 2003, the U.S.-Russian relationship was fraught with multiple complications. Russia resisted the U.S. military action in Iraq, continued its military cooperation with Iran, developed multifaceted ties with China, attempted to play the anti-American card in its relations with Western Europe, and stepped up political pressure on the independent nations of the post-Soviet space.
Moreover, a joint war on terrorism and large-scale exploration of natural resources, especially in the energy sector, are yet to become a focal point of the bilateral relationship. At the same time, backtracking on democratic politics could change the nature of the Russian state and challenge America’s national interests unless both sides can find a common ground and reconcile their mutual concerns.
In a fundamental difference between Russia and Central Europe, the Russian political establishment underwent little reform after the collapse of communism and has yet to complete the transition from the centuries-old Soviet and czarist worldview. The legacy of Russia’s imperial and totalitarian past deeply affects Moscow’s foreign policy rhetoric and performance. Anti-Americanism, exaggeration of differences between the United States and Western Europe, heavy-handedness toward smaller Central and Eastern European nations, attempts to recreate a sphere of influence in the former Soviet republics, and continuing relations with Iran, North Korea, and Cuba all continue to frustrate bilateral ties.
The Moscow elite finds America’s global leadership overbearing and continues to view its own country as a great power, at times capable of competing with the United States for regional, if not global, dominance. Russian leaders, while recognizing their country’s weakness, strive to maximize their freedom of maneuver. They believe in a "multi-polar world" model in which Russia forms part of the great concert of powers, including the U.S., China, and eventually India and a united Europe. Russia also is anxious to maintain good relations with the Islamic world, as both the September 2003 visit of Saudi Crown Prince Abdullah and Putin’s speech at the Organization of the Islamic Conference have demonstrated.1
Back to the "Old Think"?
The "old think" among Russia’s foreign and security policy elites has caused the country to return to a strategic posture that is both prickly and at times anti-U.S. In military policy, despite low-intensity radical Islamist threats from the South, arms sales to countries that threaten international stability, including Iran and Syria, have been on the rise.
In February, Moscow conducted its largest military exercise in the past 25 years, which culminated in intercontinental ballistic missile firings. Though many missile strikes toward an "unspecified" enemy failed, the exercises were a throwback to the Cold War.2 So was the surrounding propaganda: Putin announced that the maneuvers were successful, and government TV channels reported only successful launches. By contrast, NTV, which is owned by the Russian gas monopoly Gazprom, also mentioned failures.3
The New Authoritarianism
Russia’s domestic policy has been marked by the consolidation of President Putin’s authoritarian rule, including the control of all TV channels and manipulation of the news media. In addition, there is reason to suspect that the new government appointee at the largest Russian public opinion research organization, known as VTsIOM, will open doors for the manipulation of polling results. The Kremlin has intensified its manipulation of mass media, political parties, and vital financial flows in the economy.
The fairness of the State Duma elections last December, in which pro-Putin parties secured an absolute majority in the Duma, is suspect as the Kremlin exercised its powerful "administrative resources" through which it sways mass media outlets, regional governments, the military, the police, and control over the Central Elections Commission. The outcome of the elections led some in Washington to call for reassessment of the whole paradigm of the U.S.-Russian strategic partnership.4
Subsequently, the Bush Administration made an effort to smooth over relations while speaking frankly to Moscow. U.S. Secretary of State Colin Powell’s visit to Moscow on January 26 is evidence of those efforts.
Secretary Powell sent clear messages to the Kremlin on issues such as withdrawal of Russian troops from Georgia, securing the independence and territorial integrity of Moldova and Ukraine, and U.S. concerns about backtracking on democratic development in an op-ed published on the front page of Izvestia’s January 26 issue, writing that "Russia’s democratic system, it seems to us, has yet to find the necessary balance between the executive, legislative and judicial branches of power."5 Powell also hailed the strength of the bilateral relationship, adding that the two countries should continue developing relations while taking into account their national interests. Powell’s op-ed was the shot across the bow, expressing the Bush Administration’s concerns with the direction Russia has chosen for Putin’s second term.
A Russian Sphere of Influence in the CIS?
The U.S. has expressed concerns about the emerging Russian sphere of influence in the former Soviet Union area. Russia’s attempts to entrench its military presence from Moldova to Georgia to Kyrgyzstan, and its efforts to impose a regional free trade zone, all cause insecurity in the capitals of the Commonwealth of Independent States (CIS).6
A significant U.S. concern is the future of Georgia and, more broadly, the Caucasus and CIS at large. Continuous Russian pressure on Ukraine, Moldova, and other countries could undermine bilateral U.S.-Russian ties. At the same time, as the U.S. focuses on the war on terrorism, primarily in the Middle East and South Asia, confrontation with Russia is counterproductive. Without clarification of strategies on both sides, and without policies constructed to pursue cooperation and avoid confrontation, Moscow and Washington this year could find themselves--unnecessarily--on a collision course from the Black Sea to the Pamir Mountains.
The tension escalates particularly in relations with Ukraine and Belarus, both of which are ethnically, religiously, and linguistically close to Russia and home to millions of Russian-speakers. Russia hampers their rapprochement with the West. To this end, it has given backing to Alexander Lukashenko’s authoritarian regime in Belarus.7 In Ukraine, Moscow employs political and economic pressure to solidify the pro-Russia forces and weaken the pro-Western, democratic, and nationalist opposition ahead of elections this October.8
Tensions are also rampant in Russian-Georgian ties. Georgian President Mikheil Saakashvili made sincere attempts to improve relations with Russia during his February 2004 trip to Moscow, including a suggestion of a trans-Georgian oil pipeline to Russia. These steps were positively received in Moscow.9
Washington hopes that Russia will not launch a massive campaign to destabilize Georgia, as Russia should have no interest in turmoil along its southern border, in addition to which it has no alternative candidate to lead the country.
While the U.S. plans to continue to support the Saakashvili administration and to back completion of the Baku-Tbilisi-Ceyhan pipeline, it is likely that internal policy disagreements over Georgia within the Russian establishment will continue until the summer, when a new Putin government is firmly in place. Ideally, Washington would like to see quick progress for reunification of Georgia, but without Moscow’s support, such a development is unlikely.
There is a risk that Russia, which during 2003 has retreated from many global commitments, after this year’s presidential elections may focus on its immediate neighborhood, scaling up its involvement in the CIS. This may include further acquisitions of energy, transportation, and other industrial assets; pressures to expand a free trade area; and more military and security cooperation under the umbrella of the CIS Mutual Defense Treaty.
U.S. Interests in Eurasia
As elsewhere, the U.S. has to pursue its national interests in its relationship with Russia and Eurasia. These interests can be divided into two categories: "vital" and "important."10
Vital Interest #1: The war on international terrorism.
As the U.S. projects power on a global scale to fight the war on terrorism, the attitude of regional powers, elites, and public opinion toward cooperation in combating terrorism becomes important.
Objectively, the United States and Russia are allies in fighting international terrorism. Forces linked to al-Qaeda are financing acts of terrorism in Russia. The Chechen conflict, which began as resistance to the Russian imperial occupation at the end of the 18th century, has evolved into a separatist movement for national self-determination. Stalin subjected the Chechens to a genocidal deportation in 1944, and they were allowed to return to their homeland only in 1956.
Radical Wahhabi Islam, a recent import into this war, has hijacked the nationalist movement and spread to Daghestan and other regions of the Northern Caucasus. The radical forces aim to build an Islamic state on the doorstep of Europe between the Black Sea and the Caspian, expanding into Tatarstan and Bashkortostan and eventually Islamizing Russia. While Russia could have split the Chechens by conducting talks with non-radical separatists, so far it has chosen not to do so.
Theoretically, Russia and the U.S. should coordinate anti-terrorist policy and work closely to derail the economic foundation of international terrorist networks. The intelligence communities of both countries should interact, exchange information, and in certain cases stage joint operations designed to eliminate terrorists. These actions would engender a renewed partnership in combating terrorism and strengthen confidence in bilateral relations between the two nations. Instead, cooperation between Moscow and Washington was at its peak during the initial phases of the war in Afghanistan and has diminished ever since. While NATO reconnaissance flights along Russian borders irritated the Kremlin, Moscow’s anti-American posture over the Iraq war in the U.N. similarly annoyed the White House.
The shifting geopolitical priorities in the global war on terrorism are dictating change. For example, the U.S. is planning to deploy more troops in Romania and Bulgaria to provide power projection capabilities into the Middle East and Central Asia. Small-scale forward bases in the Caucasus and Central Asia are under discussion among Pentagon planners. In the absence of a confidence-building dialogue between the U.S. and Russia, these moves may cause an adverse reaction in Moscow.
On February 10, Putin’s Chief of Staff Dmitry Medvedev had talks in Washington with National Security Adviser Condoleezza Rice, Secretary of State Colin Powell, and other officials. The CIS was featured in the talks, along with Iraq and other global issues. In a message to President Bush published February 11, however, Putin tried to smooth over any disagreements:
I am convinced that it is in our common interest to cherish the positive things that have been accumulated, and I think by practical actions we shall be able convincingly to show everyone that the partner foundations of our relations remain immutable and that any speculations about a "cooling-off" between Russia and the United States are far removed from reality. Russia will remain a stable, reliable and predictable partner.11
Yet there are other stresses, despite Putin’s words. Ongoing Russian-Iranian nuclear cooperation is a highly sensitive issue, especially after supporters of theocratic totalitarianism rigged parliamentary elections in February. Efforts by the International Atomic Energy Agency to prevent Iran from acquiring nuclear weapons may not be sufficient. Iran’s acquisition of nuclear weapons can become a major security threat to the U.S. and its allies, and threaten stability in the Persian Gulf. All these developments in the area of terrorism and terrorist-sponsoring states should lead Washington to recognize that partnership in this sphere might have clear-cut limits.
Vital Interest #2: Development of energy resources.
Since the U.S. relies heavily on imports of foreign oil, the development of energy resources in the Caspian Sea basin and joint exploitation of Russian oil and gas deposits have become an important aspect of U.S.-Russian relations. However, the two countries’ interests over these resources may not always coincide. If Moscow pursues an aggressive policy in the South Caucasus and Central Asia, it could derail U.S. plans to establish a reliable pipeline system in these regions. However, a policy of cooperation would benefit both parties.
Western companies are invited to participate in development in Russia only where difficult geological and geographic conditions, such as deep water, permafrost, or extreme climates, necessitate technologies that the Russian companies lack. As long as oil prices remain high, the Russian companies are likely to have access to credit and not to need Western financing, even of larger projects.
The prospects for U.S.-Russian energy cooperation have been endangered by the recent withdrawal of the license previously granted to ExxonMobil and ChevronTexaco to explore and develop the oil and gas fields of the Sakhalin-3 block, as well as by extortionate demands from the energy ministry for a $1 billion fee to pursue the project.12 The Sakhalin-3 experience could put the future of the total $6 billion-$10 billion U.S. investment in Russian oil at risk. U.S. Ambassador to Russia Alexander Verschbow said that this decision by the Russian government could impede a U.S.-Russian energy dialogue.13 It is likely that, in the future, the U.S. will react more strongly to hostile Russian actions against American companies. As Russian oil, steel, and software companies increasingly enter the U.S. market, they may become subject to similar hardball tactics.
The situation in the natural-gas industry is even more difficult, principally because the state-controlled Gazprom remains a monopoly. Until that changes, U.S. access to gas fields will remain limited.
The Bush Administration has sent Moscow a clear message that America’s energy security priorities, including lowering energy dependence on the Middle East, are among its vital interests. Russia’s respect for its American investors’ access to markets, and protection of the companies’ property rights, will go a long way to improve relations.
Vital Interest #3: Averting a strategic threat to Europe, East Asia, and the Persian Gulf.
At present, Russia does not pose a genuine military threat to American interests in Europe and Asia. However, it seeks at times to complicate U.S.-European relations. Russia backed the French and German opposition to the U.S. military action in Iraq. For a few years, it waged a harsh but ineffective campaign against NATO enlargement that was designed to weaken the Atlantic alliance--one of the pillars of U.S. security.
Russia opposes the relocation of U.S. military bases eastward. At the international security conference in Munich, Germany, in February 2004, Defense Minister Sergei Ivanov stated that Russia may scrap the CFE Treaty limiting conventional weapons and troop deployments in Europe unless it is changed to include Baltic militaries and rule out NATO forces in the Baltic States.14
At the same time, Russia refuses to pull its military out of Georgia and Moldova, even though it vowed to do so in an agreement signed at the 1999 Istanbul summit of the Organization for Security and Cooperation in Europe.
Moscow’s efforts to improve relations with the European Union (EU) were rebuffed, and enlargement of the EU is proceeding to Moscow’s detriment. Russia’s accession to the World Trade Organization (WTO) has been virtually stalled due to EU members’ opposition to Russian cheap domestic energy prices, which constitute a hidden subsidy to the Russian economy.
The Schengen visa regime, which governs travel into the EU from non-EU nations, is making travel tougher for Russians seeking to go to the EU. This causes the Kremlin’s disenchantment with Russia’s prospects in Europe and ratchets up the elite’s anti-Western attitudes. Instead of backing Russia’s wish to join the WTO, the United States could encourage Russia to move toward membership in the Global Free Trade Association (GFTA).15 GFTA is a proposed global free trade area for which any country would qualify provided it reached a sufficiently high level of economic freedom.
Vital Interest #4: Protecting America, its borders, and its airspace.
Intercontinental ballistic missiles armed with nuclear warheads are a major threat to the United States. Russia and China are the only states potentially capable of a massive nuclear attack against the United States. Russia’s state-of-the-art intercontinental ballistic missile, Topol-M, is entering service.
Since the end of the Cold War, Russia has pursued a buildup of strategic missile forces, including research and development of new systems allegedly capable of defeating U.S.-built ballistic missile defenses. Putin stated that the new program would not be a threat to the U.S.16 Yet Russian military doctrine has become increasingly offensive, clearly aimed at repelling the kind of "air-space attack" that only the U.S. and its allies are capable of staging. Russia’s doctrine is also allowing pre-emptive use of force, including nuclear weapons, and the development of mini-nukes.17
In addition, the Russian military still has vintage ICBMs in service that are armed with multiple, independent re-entry vehicles (MIRVs). These are known as RS-20 "Satan" missiles18 As both Russia and the U.S. are likely to abide by the START-III arms control ceilings, the U.S. has called for the destruction of these weapons. Recently, however, Sergei Ivanov unexpectedly made an announcement that the Satan would remain in service until 2016.19 This definitely boosts the strength of Russia’s strategic nuclear forces.
This challenge demands that the United States and its allies deploy a reliable missile defense system in the near future. The emerging missile defense system, however, would be incapable of defending America from a massive Russian attack.
Important Interest #1: Stability in the post-Soviet space.
The political pressure that Russia applies to its neighbors to the west and south could impede their development along a democratic and market-oriented model, step up social tensions, endanger territorial disintegration, and instigate armed conflicts. The "big brother" syndrome is ingrained in Russia’s dealings with the former Soviet Republics, and the Russian elite continues to look upon the countries of the former Soviet space as its sphere of influence. This leaves open an imperial option or, at least, a scenario of border revisions in the future. Realizing that these nations are truly independent and sovereign is difficult for Moscow.
That is, in part, why Russia concentrates on its military presence in the former Soviet space, including through CIS "peacekeeping missions." Russian military bases and units in the Trans-Dniester (Moldova), Georgia (Abkhazia and Adjara), Kyrgyzstan, and Tajikistan are tools of Russia’s political pressure on the governments of these states.
The Russian state is relying too much on its military presence as a political tool in the post-Soviet space. It is also overreacting to U.S. military deployments in the adjacent regions for the purpose of combating international terrorism. Many in the Russian elite are concerned that the Americans have established a permanent presence in the region. "They [the United States] will never go away, we are witnessing a long-term American presence in Central Asia, and possibly, in the Caucasus," says a senior Russia expert who requested anonymity.20
Such speculations are broadly used by Russian nationalists to revive the "enemy image" of the U.S. Some experts maintain, though, that "Russia is as yet undecided: should it perceive the United States presence on the broad sweep of the former `Soviet Motherland’ as an ally, partner, rival, or enemy."21
The results of the December 2003 parliamentary elections demonstrate that nationalists such as Vladimir Zhirinovsky’s Liberal-Democratic Party, Dmitry Rogozin’s Motherland Party, Communists, and others have consolidated their position in Russia’s political life. They are engendering increased xenophobia. Under the pretext of fighting terrorism, Russian nationalist policymakers call for the deportation of non-Slavic people, primarily Caucasus-born, from Moscow and other large cities.
Russian nationalists are also lobbying for "protecting Russian speakers" and the Russophone population in the post-Soviet space. The selectivity of their complaints exposes a deeper, more sinister agenda, however: While they protest the "violations of Russian speakers’ rights" in the Baltic nations, they choose to disregard the infringement of these rights by the Central Asian authoritarian regimes whose anti-democratic worldview they share.
Important Interest #2: Progress of democracy abroad.
The increasing authoritarian trends in Russia challenge the fundamental U.S. mission to consolidate freedom. In 2003, democracy and the rule of law were declining in Russia. Since 2000, all independent television channels have been shut down under powerful administrative pressure or taken over by the government’s allies. Radio stations and print media are also being gradually brought under control. Self-censorship is used across the board: The authorities "guide" journalists on what to report and what to withhold, and are quick to clamp down on dissenters.
Moscow has stepped up its control over regional administrations through the extra-constitutional institution of unelected presidential envoys (four out of seven of whom are former military or security-services generals) and through its power to recall elected governors. This is at odds with the basic principles of federalism and abuses the rights of legitimately elected governors and regional legislatures.
The conduct of last December’s State Duma elections provoked discontent among many Russians. Federal, regional, and local administrations have spent vast resources to secure the victory for pro-government parties, primarily United Russia. To back "the party of power," government-run television channels aired elaborate programs on the candidates while denying equal access to the opposition. David Atkinson, head of the Council of Europe Parliamentary Assembly delegation to Russia, described Russia’s recent parliamentary elections as "free but unfair."22
Only a high level of respect for individual freedom and property rights would guarantee Russia’s political stability, economic growth, and integration into a democratic international community. Russia’s authoritarian regime is likely to engineer "foreign threats" for domestic consumption, including pursuit of anti-Americanism, to justify its own existence. Authoritarianism and anti-Americanism in Russian public opinion and policies threaten further progress toward the rule of law, civil society, and a market economy. Neutralizing Russian anti-Americanism should also be on the U.S. public diplomacy priority list.
What Should Be Done
The United States and Russia should restore their cooperation on the basis of pragmatism and pursuit of their compatible national interests, including enhancing each other’s security, economic ties, democracy, and human rights. Specifically, the Bush Administration should:
Offer to cooperate with Russia to end the global terrorist finance networks’ bankrolling of Chechen militants and to assist Russia in monitoring and countering the increased threat from radical Islamist terrorism in the North Caucasus. Expand cooperation between intelligence services, customs, police, immigration services, and banking regulators of the two countries in the war on terrorism.
Enhance the development of nuclear, chemical, and biological controls to prevent development of weapons of mass destruction (WMD). The U.S. should insist that Russia end all nuclear fuel and equipment deliveries to Tehran and cooperate with other countries to bar such deliveries. Continue the Nunn-Lugar Program, set up to dismantle and monitor ex-Soviet WMD and the technology and personnel used to manufacture WMD, with a special emphasis on monitoring technology transfers to states supporting terrorism, such as Iran, Syria, and North Korea, and to non-state actors.
Develop a joint Russian-American, market-oriented energy policy in which Russia both protects the integrity of deals already struck with U.S. energy firms and provides American oil and infrastructure companies access to hydrocarbon reserves in Eurasia. Call on Russia to minimize government regulation and ensure U.S. market access to Russian companies. Focus on specific projects, such as the Murmansk pipeline, Sakhalin-3, and Bosphorus European bypass, to facilitate direct shipping of Russian oil to the U.S.
Support Russian membership in the WTO by offering mediation between European states and Russia on internal energy price issues, and begin discussions between the U.S. Trade Representative and the Russian Ministry of Economy and Trade on Russian accession to a Global Free Trade Association, if and when a GFTA is established.
Defend the independence, sovereignty, territorial integrity, and democratic development of the newly independent states, especially Georgia, Moldova, and Ukraine. Send Moscow a clear message that the U.S. will regard intervention in the domestic affairs of sovereign countries in a most negative light. Expand dialogue with Russia on issues related to the political development of Eastern Europe, South Caucasus, and Central Asia.
Broaden public diplomacy efforts in Russia, including outreach to Moscow-based and regional elites, independent media, and academia, both through the public diplomacy apparatus at the U.S. Embassy in Moscow and through the nonprofit and academic sectors. Expand education exchanges to facilitate bringing 10,000 degree-seeking Russian students to U.S. universities. To compare, 80,000 Chinese students are currently studying in the U.S.
Raise democracy and human rights issues in contacts with Moscow and in non-governmental organization (NGO) forums. The U.S. Administration should be unwavering in raising questions about violations of press and political freedoms in Russia. Establish close working relationships with political and public-policy organizations that struggle against the threat of authoritarianism in Russia. Expand material assistance to democratic and free-market NGOs and continue political training of democracy-oriented parties through the National Endowment for Democracy (NED), International Republican Institute (IRI), and National Democratic Institute for International Affairs (NDI).
Conclusion
Russia and the United States are facing a choice: They can build a constructive relationship based on joint repelling of mutual threats and recognition of each other’s relative power, capabilities, and limitations or they can revert to Cold War-style confrontation. Put another way, they must choose between respecting each other’s national interests and engaging in petty fights over status; developing lucrative economic partnerships or playing power games that benefit third parties; fostering 21st century norms of democracy, human rights, and the rule of law or retreating to heavy-handed authoritarianism and risk international opprobrium.
The U.S. has chosen a path of productive partnership with Russia and should encourage Moscow to choose well. People of both countries want freedom, security, stability, and prosperity. It is up to their leaders to deliver the goods.
Yevgeny Volk, Ph.D., is The Heritage Foundation’s Moscow Office Coordinator.23
--------------------------------------------------------------------------------
1. "Saudi Prince’s Visit Draws Moscow, Riyadh Closer," People’s Daily (English), September 5, 2003, at http://english.peopledaily.com.cn/200309/05/eng20030905_123765.shtml (February 26, 2004); "Putin’s Asia Pacific Trip," RFE/RL Analytical Report, Vol. 4, No. 42 (October 22, 2003), at http://www.rferl.org/reports/securitywatch/2003/10/42-221003.asp.
2. Anna Dolgov, "Russian Exercises Flex Military Muscle," The Boston Globe, February 21, 2004, at www.boston.com/news/world/europe/articles/2004/02/21/.
3. Vladimir Isachenkov, "Russia’s Putin Oversees Military Maneuvers," Atlanta Journal-Constitution, February 17, 2004, at http://www.ajc.com/news/content/news/ap/ap_story.html/Intl/AP.V3501.AP-Russia-Military.html (February 26, 2004).
4. "US Senator McCain Slams Russia Violations Under Putin," Agence France-Presse, February 7, 2004, at http://coranet.radicalparty.org/pressreview/print_right.php?func=detail&par=8219 (February 26, 2004).
5. Colin Powell, "The Relations of Partnership: Work Is Underway," Izvestia, January 26, 2004, p. 3.
6. Ariel Cohen, "U.S. Should Promote WTO as Substitute to Eurasian Common Economic Space," Heritage Foundation WebMemo No. 349, October 16, 2003.
7. Ariel Cohen, Ph.D., "The Last European Dictator," February 23, 2004, at http://www.techcentralstation.com/022304C.html.
8. Olena Horodetska, "Ukraine-Russia Tensions Grow in Dam Dispute," Reuters, October 23, 2003, at http://www.enn.com/news/2003-10-23/s_9697.asp (February 26, 2004).
9. Jean-Christophe Peuch, "Georgia: Saakashvili in Moscow, Looking to Start Ties with a Clean Slate, RadioLiberty-Radio Free Europe, February 10, 2004, at http://www.rferl.org/featuresarticle/2004/02/d56922de-8b78-490f-bb52-590117ab4426.html. See also "Moscow Finds a Partner in Georgia’s Saakashvili," Gateway to Russia, February 12, 2004, at http://www.gateway2russia.com/st/art_210305.php (February 26, 2004).
10. Kim R. Holmes and Thomas G. Moore, eds., Restoring American Leadership: A U.S. Foreign and Defense Policy Blueprint (Washington, D.C.: The Heritage Foundation, 1996).
11. Russian Ministry of Foreign Affairs, February 12, 2004, at http://www.ln.mid.ru/bl.nsf/0/88d3b53efe61e44fc3256e3800439d8a?OpenDocument (February 26, 2004).
12. Valeria Korchagina, "Energy Minister Says State Is Seeking $1Bln for Exxon Sakhalin-3 License," St. Petersburg Times, February 6, 2004, at http://www.sptimes.ru/archive/times/941/news/b_11600.htm.
13. Ibid.
14. Greg Walters, "Ivanov Says Russia May Pull Out of Arms Treaty," The Moscow Times, February 10, 2004, p. 4.
15. John C. Hulsman, Ph.D., and Aaron Schavey, "The Global Free Trade Association: A New Trade Agenda," Heritage Foundation Backgrounder No. 1441, May 16, 2001.
16. Ibid.
17. Nikolai Sokov, "Russian Ministry of Defense’s New Policy Paper: The Nuclear Angle," CNS Reports, Monterrey Institute of International Studies, at http://cns.miis.edu/pubs/reports/sok1003.htm (February 26, 2004). See also Colonel (Ret.) Mikhail Pogorely, " Russia’s New Military Doctrine," Global Beat Syndicate, October 28, 2003, at http://www.nyu.edu/globalbeat/syndicate/pogorely102803.html (February 26, 2004).
18. SS-18 in NATO classification.
19. Alexander Babakin, "Strategic Rocket Forces Tap into `Dry’ Emergency Rations," Nezavisimoye Voyennoye Obozreniye (Independent Military Review), January 23, 2004, p. 5.
20. Svetlana Babayeva, Yekaterina Grigoryeva, and Nikolai Khorunzhiy, "They Have Come to Stay," Izvestia, January 26, 2004, p. 1.
21. Ibid.
22. Alexander Bratersky and Mikhail Vinogradov, "The Lords from PACE Disliked United Russia," Izvestia, December 9, 2003, p. 2.
23. The authors wish to thank Irene Gorelik for her valuable help with the research for and production of this paper.
Models and Policies for Oil Production, Revenue Collection, and Public Expenditure: Lessons in Iraq
03-04-2004
Countries in both the developed and the developing worlds rely on a stable and secure supply of oil. However, abuses and misallocations of oil revenues often lead to social and political instability and, at times, armed conflict. The broader the political cooperation and public consensus, and the greater the transparency in the management of oil revenues, the greater the chance that the supplier will remain stable.
The challenge of devising optimal models and policies for oil production in developing or transitional economies is formidable. Resource-rich countries tend to fall behind non-oil economies in economic development, rate of growth in gross domestic product (GDP), GDP per capita, and human development.1 Oil often derails democratic development and causes civil strife and civil war. Other problems such as graft and "rent-seeking behavior" regularly accompany oil exploration and exploitation.
Many have noted that lagging institutional development, democratic deficiencies, and rampant corruption are the downside of the windfall profits from large-scale oil production. Political control of those natural resources makes political power paramount. Thus, politics becomes a competition for a near total control of wealth, resulting in a zero-sum game with devastating results for democratization and civil society.2
Simply put, unstable countries make poor oil suppliers. The examples abound, from Iraq to Iran to Venezuela.
Moreover, experience and research demonstrate that private ownership of any industry increases production and reduces costs anywhere in the world.3 Thus, consumers of energy should advocate privatization of the oil and gas sector worldwide. However, because of the industrial economies’ thirst for oil, it is likely that Western governments and international institutions will remain quiet on privatization while denouncing the excesses of producers and abuses of natural resource property rights and revenue.
This paper analyzes current models of ownership and revenue management in the hydrocarbon sector, as well as their political implications, and suggests policies on property rights, tax collection, and public expenditure. The achievements in making the rule of law and transparency a paramount public policy and business value in the oil and gas industry have been limited at best.
Finally, this paper addresses some challenges that the Coalition Provisional Authority (CPA) and the Iraqi Governing Council (IGC) face in restoring and managing Iraqi oil production. It also offers recommendations for the Iraqi oil industry and public sector.
Production Mode: Privatization Versus State Management
The Iraqi oil industry is a case in point. Saddam’s predatory dictatorship succeeded in bankrupting the country with the world’s second largest oil reserves (after Saudi Arabia). The oil sector formerly provided more than 60 percent of Iraq’s GDP and 95 percent of its hard currency earnings. Yet Iraq’s GDP for 2001 was estimated at only about one-third its 1989 level. Iraq is also hobbled by $200 billion in foreign debt and reparation claims. This fiscal devastation is the result of a number of factors, including nationalization of the country’s oil sector in the 1970s, extensive central planning of industry and trade, the 1982-1988 war with Iran, the 1990 invasion of Kuwait and subsequent Gulf War, and the U.S.-led war in 2003.
According to senior Iraqi Oil Ministry officials, Saddam ran the oil industry as his private kitty--with devastating results for the infrastructure and the treasury.4 Moreover, Saddam’s disastrous policies led to Iraq’s OPEC quota being taken over by other producers, primarily Saudi Arabia and Venezuela.
Importance of Privatization
Critics point out that centralized, state-owned industrial capacity in the oil sector is less successful than wholly owned private industry or public-private partnerships in attracting investment, integrating new technology, introducing international accounting standards and practices, boosting productivity, and observing environmental standards.5
Moreover, as many of the OPEC members exceed their production quotas, leading to a greater supply of oil and lower prices, it is not clear whether the countries that follow the centralized planning model are indeed maximizing their oil revenue.
Political Factors
Political underpinnings are crucial in forging a workable political model for oil exploration and exploitation. In the Iraqi case, the future model will probably need both to be popularly accepted and to be incorporated into the new constitution. Otherwise, civil strife may develop.
Oil disputes played a large part in the Biafra war in Nigeria in the 1960s, in which 1 million-3 million civilians were starved to death or bombed.6 Recently, tribal unrest in Nigeria resulted in Western and local oil workers being taken hostage.7 Secession movements in Indonesia parallel the distribution of oil, as the country’s smaller and potentially oil-rich islands attempt to secede from overpopulated Java.8 Such conflicts should be avoided in Iraq, which is a relatively new political entity created by the British Empire after the defeat of the Ottoman Empire in World War I.
Since the creation of Iraq, relationships between the Kurds, the Sunni Arabs, and the Shi’a Arabs have been uneasy at best and murderous at worst. The Sunni Arabs have dominated Iraq since the Ottoman and British eras.
Beyond ethno-religious strife, clans and families are the smallest political units, and their interests may need to be taken into account in devising a stable political solution that allows equitable and sustainable sharing of oil revenues. Thus far, the process involved in drafting an Iraqi constitution has been a painful one, and there is no date certain by which agreement will be reached and the document will be ready.9 As Iraq develops its own constitution, principles of protection of private property must be extended to the oil industry and oil reserves.
Property Rights in Iraq
The launch of the Iraqi oil industry in 1925 was undertaken by a private consortium, the Iraq Petroleum Corporation, owned in equal shares (23.75 percent) by British Petroleum and Shell, Companie Francaise de Petroles, and two constituent parts of Exxon Mobil. Nubar Gulbenkian, the famous "Mr. Five Percent," owned the remaining 5 percent. The consortium was expropriated in 1964 and fully nationalized in 1972.10
Theoretically, if the property rights of the original consortium were restored, new companies would participate in bids for new field projects and the rehabilitation of existing oil infrastructure. In addition, the future government of Iraq might recognize some of the contracts concluded by the Saddam Hussein regime, such as the Russian Lukoil West Qurna concession, as valid. The Iraqi government could also examine other production-sharing agreements that Saddam’s regime signed with China, France, and other countries.
Economic Efficiency
Partial privatization, which the CPA and the Provisional Council are pursuing, and low taxation are the right policies to follow. However, more needs to be done to achieve eventual privatization of reserves and extraction. As Iraqi needs for reconstruction are high, one way to increase the cash flow up-front is to sell off the reserves and tax the future oil revenues. This would better address the immediate needs of the Iraqi people without giving up natural resource royalties and rents.
The United States--through its senior representatives of the Departments of State and Defense in the CPA and its advisers on the ground, with the assistance of the International Monetary Fund (IMF), World Bank, and other international and non-governmental organizations (NGOs)--should begin advising the leaders of Iraq’s three primary ethnic groups to establish policies that would lead to a thriving modern economy. These policies should be based on "best practices" developed around the world during the largest government privatizations in history, during the 1980s and 1990s.
Institutional Development and Controls
One of the greatest challenges in privatizing Iraqi oil and attracting foreign investment (in addition to building political consensus and building the institutions to implement it) will be ensuring equity, transparency, and the rule of law. To accomplish these goals, Iraqi political and government institutions, donor representatives, and international agencies should coordinate their activities while each plays its distinct role.
Courts, parliamentary committees, commissions, government accounting offices, ombudsmen, and chief prosecutors’ offices may have competing jurisdictions on privatization. (Regrettably, this was often not the case in the great 1990s privatization in post-communist countries.) Legal and administrative challenges may increase public control while simultaneously miring the process in numerous court hearings and investigations. While such involvement, especially of Iraqi institutions, may increase transparency and public "buy-in," it may also slow down the process and open it to frivolous challenges. Indigenous NGOs and media also have a role. However, it is all too easy for politicians and unprofessional journalists to denounce and undermine privatization through demagoguery.
The Eastern European experience demonstrates that a strong executive branch with political commitment and a public mandate for privatization, combined with meticulous insistence on open and competitive bidding, can carry the day. In that respect, the process could be facilitated by inviting private foreign companies and officials with experience in the German Privatization Agency (Treuhandanstaldt), Estonian Privatization Agency, and similar organizations to serve as advisers to the Iraqi government.
Revenue Collection and Distribution Mode
Best management practices and financial controls in the taxation and expenditure stages of oil revenue accrual and disbursement are essential. The history of oil-rich states, from Saudi Arabia to Nigeria, provides ample evidence of a cycle of high revenue/high expectations/high expenditure followed by an oil market slump, a decline in revenue, and social unrest caused by fiscal and budgetary adjustments.11
These states, however, failed to use centrally managed oil revenues to jump-start development and prevent precipitous declines in their GDP per capita. Saudi GDP per capita peaked in 1981, when both the U.S. and Saudi Arabia had a per capita GDP of about $28,600. In 2001, U.S. GDP per capita was $36,000, while Saudi Arabia’s was less than $7,500. According to the U.S. Embassy, "Per capita income [in Saudi Arabia] will continue to decline unless economic growth increases significantly and/or the birth rate drops."12
Political Factors
Iraqi policymakers should be aware of a "dual hazard" in politics of revenue taxation and expenditure. On the one hand, Iraq has a large, growing, and impoverished population whose basic needs are still unmet. Their representatives are likely to press for higher tax rates and deficit budgets and to lobby for borrowing against future oil receipts. Even with projected increases in oil production and revenue growth, Iraq will still be in the poor category or in the low end of the medium-income developing countries. However, if the Iraqi poor, especially the Shi’a, are excluded from budgetary decisions, such factions as Islamist Shi’a radicals (often connected to Iran), Sunni Islamists connected to al-Qaeda, and Ba’athists can be expected to use this exclusion as a pretext for agitation against the Iraqi Government Council and its pro-American successor.13
Iraq’s challenge is to educate the political and technocrat classes, and the elites in general, on the dangers of high taxation and unbridled expenditure. Macroeconomic instability and a negative investment climate can be as damaging in the long term to a national economy as corruption.
Institutional Development and Controls
As Terry Lynn Karl wrote:
When states do not have to depend on domestic taxation to finance development, governments are not forced to formulate their goals and objectives and the scrutiny of citizens who pay the bills.... Excessive centralization, remoteness from local conditions, and lack of accountability stem from this financial independence.14
Under Saddam, Iraq was a good case in point. The dictator and the Ba’ath elites in Baghdad made all the economic decisions, such as nationalizing oil assets and using revenues to pay for the military, including programs to build weapons of mass destruction.
In post-Saddam Iraq, institutional controls on the revenue stream are vital. These should include creation of competent and independent central fiscal and budgetary bodies; a strong police force, including organized and white-collar crime divisions to prevent oil smuggling; and a tax collection agency sophisticated enough to prevent and investigate tax evasion. Such services need to be strong enough to stand up to the Iraqi national oil company and the international oil companies, which will handle an increasing number of exploration and extraction projects.
Since the Iraqi state most likely will remain weak and fractious after the U.S. transfers sovereignty on July 1, 2004, it should divest itself from providing most nonessential services, which can be delivered by the privatized non-government sector. Market demand, not government programs, is more likely to reflect the needs of the Iraqi people. Since government revenues can be generated up-front from privatization, keeping tax rates low (around the current 15 percent) is advisable.
The government can shift provision of services to the private sector while building a constitutional barrier to keep budget deficit spending below a certain level, such as 3 percent of GDP. Such a safeguard would keep the budget within reasonable limits, make the Iraqi dinar more stable, and instill both fiscal and budgetary discipline among the elite. Without such discipline, the state will attempt to use expenditures to buy its legitimacy.
Given the fragility of the Iraqi state--the combined result of Saddam’s regime, the current conflict, and deep ethno-religious fissures--state dependence on oil revenues should be avoided. As in many other countries that have experienced cyclical oil wealth, windfall oil revenues can be stored in non-dinar, off-shore accounts--an Iraqi oil fund.
What Should Be Done
The Coalition Provisional Authority and the Iraqi Governing Council should:
Initiate a broad public debate about development of the rule of law and property rights, including mineral rights. This debate should include Western economists, Iraqi officials, and the public and should cover the future of oil production, taxation, and the distribution of income. As part of the debate, the CPA and IGC should conduct a comprehensive public campaign aimed at privatization of oil and gas industry assets and reserves, as well as broad institutional reform. Many Iraqi officials and other members of police and media elites are not aware of the macroeconomic factors that support privatization, keeping the oil revenue out of government’s hands, and instituting publicly accountable and transparent decision-making processes on oil production.
Bolster property rights and the rule of law, including enabling legislation and regulations on oil and gas production that allow private ownership of all productive assets and minerals. This includes fostering an independent judiciary, training judges to handle complicated civil litigation such as energy law, and allowing international arbitration, including enforcement of arbitral awards.
Conduct a comprehensive audit of state-of-the art techniques of oil privatization, revenue generation, and management. This information should then be disseminated to the Iraqi political leadership, management of the oil and financial sectors, and broader elites. U.S. institutions (e.g., the CPA and U.S. Agency for International Development), major oil companies, nonprofit organizations, the IMF, and the World Bank should all be involved in this undertaking.
Ensure that the privatization process is transparent and perceived as being conducted in the interests of the Iraqi people.
Develop safeguards to prevent smuggling and diversion of oil and refined products from "well to wheel" and create a law enforcement climate in which the diversion for private use and theft of crude oil, refined products, or revenue is reported, prosecuted, and punished.
Improve revenue collection, such as taxation of oil sales, by establishing independent audit procedures, supporting public supervision by bona fide NGOs, and developing an independent media.
Assist in creation of a national, private, professionally and independently managed oil fund. A modified version of the Alaska arrangement, allowing for direct deposits of revenues into the private bank accounts of the Iraqi people, would go a long way toward legitimizing the future Iraqi government and privatization of oil assets.
Develop political legitimacy and transparency of oil revenue expenditure through open budgetary and legislative processes. As part of the open budgetary process, budgetary drafts prepared by legislative and governmental budgetary offices should be publicly available and discussed openly in the legislature before the final vote. Budget-watching indigenous NGOs should be allowed to participate in such discussions, thus enhancing the development of civil society in Iraq. Once the security situation improves, both the government and non-government sectors should be provided international technical assistance on budgetary issues.
Oil Revenue Management and International Energy Security
A private and transparently managed oil and gas sector is vital to global energy security and thus in the national interest of the United States. Returning Iraq to the international oil markets is important for the Iraqi people, the United States and other Western countries, and the global economy. This would provide locally generated revenue to finance post-war reconstruction, provide an additional 2 million-4 million barrels per day to the oil market, and relieve the U.S. of the financial burden of Iraqi reconstruction.
Iraq’s output prior to the Gulf War was 3.5 million barrels per day, while the oil discovery rates (50 percent to 75 percent) on new projects in the 1990s were among the highest in the world. 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) per day--more than double current production levels. In view of demand projections, especially increased demand from the large Asian economies such as India and China, the global market can easily absorb such an increase. The U.S. Energy Information Administration forecasts that oil consumption in Asia will grow by 55 percent from 2003 to 2025 and that natural gas consumption will increase by 100 percent.15
Generating, accounting for, managing, and expending this revenue for the Iraqi people is a huge responsibility that is complicated by the state-owned and state-managed infrastructure, poorly defined property rights, absence of a functioning legal system, a shattered public service, lack of consensus on how to own and exploit the oil reserves, and the large number of Iraqi poor with pressing needs.
Privatization should be undertaken only after a public education campaign and a good-faith effort to build a consensus among the Iraqis that private ownership of industrial assets, including commodities, is economically more efficient than a government-owned system.
Oil revenue from Iraqi oil should be transparently managed, adequately taxed, and protected from government abuse and corruption. To facilitate this process, creating a professionally managed oil fund should be seriously considered. Such a fund would protect oil revenues from the long hands of the Iraqi politicians. As in the Alaska model, part of the revenue should be distributed directly to the bank accounts of every Iraqi.
These are only some of the answers and challenges facing state oil revenue management. Those tasked with solving these problems owe the people of Iraq their best efforts not to repeat the abuses of the past.
NOTES:
1. Svetlana Tsalik, "The Hazards of Petroleum Wealth," in Caspian Oil Windfalls: Who Will Benefit? (New York: Open Society Institute, 2003), p. 1.
2. Benn Eifert, Alan Gelb, and Nils Borje Tallroth, "Managing Oil Wealth," Finance and Development, Vol. 40, No. 1 (March 2003), at www.imf.org/external/pubs/ft/fandd/2003/03/eife.htm (November 11, 2003). According to the authors, "Work on the theory of rent-seeking behavior illustrates how rent reorients economic incentives toward competition for access to oil revenues and away from productive activities, especially in nontransparent environments characterized by political discretion and unclear property rights."
3. World Bank, "Privatization: Eight Lessons of Experience," Policy Views from the Country Economics Department, July 1992.
4. Interviews with Mutasam Akram Hasan and Dr. Mussab H. Al-Dujayli, Istanbul, Turkey, January 29, 2004. Thus, for example, forcing high production levels without investment in modern technology and maintenance has resulted in massive penetration of water into the Kirkuk oil fields.
5. Ariel Cohen and Gerald P. O’Driscoll, Jr., "The Road to Economic Prosperity for Post-Saddam Iraq," Heritage Foundation Backgrounder No. 1633, March 5, 2003, at www.heritage.org/Research/MiddleEast/bg1633.cfm.
6. Federation of American Scientists, "The Biafra War," at www.fas.org/man/dod-101/ops/war/biafra.htm (November 11, 2003).
7. Oronto Douglas, Von Kemedi, Ike Okonta, and Michael Watts, "Alienation and Militancy in the Niger Delta: A Response to CSIS on Petroleum, Politics, and Democracy in Nigeria," FPIF Special Report, July 2003, at www.fpif.org/papers/nigeria2003.html (November 16, 2003). See also "Hostages from 4 Countries Head Home from Nigerian Oil Rigs," CNN.com, August 5, 2000, at www.cnn.com/2000/WORLD/africa/08/05/nigeria.hostages.reut (November 11, 2003), and "Nigeria: Forces Head for Oil Rigs," Africa Online, May 1, 2003, at www.africaonline.com/site/Articles/1%2C3%2C52870.jsp (November 11, 2003).
8. "Aceh’s Rebel Chief Demands Full Independence from Indonesia," CNN.com, November 10, 1999, at 216.239.41.104/search?q=cache:G-37xS6574wJ:www.cnn.com/ASIANOW/southeast/9911/09/indonesia.aceh.03/
+aceh+independence+oil&hl=en&ie=UTF-8 (November 11, 2003). See also Embassy of Indonesia (Ottawa), "Rebels Urge Mobil Oil to Leave Aceh Province for Safety Reasons," January 4, 2001, at www.indonesia-ottawa.org/news/Issue/Aceh/010401_IO_01.htm.
9. "Iraqi Constitution Delayed," BBC World, October 1, 2003, at newsvote.bbc.co.uk/mpapps/pagetools/print/news.bbc.co.uk/2/hi/middle_east/
3153732.stm (November 12, 2003).
10. Martin Hutchinson, "What to Do with the Oil," United Press International, March 24, 2003.
11. Tsalik, "The Hazards of Petroleum Wealth," p. 7.
12. Embassy of the United States (Riyadh), "Saudi Arabia 2002 Economic Trends," May 2002, at riyadh.usembassy.gov/wwwhet02.html (November 16, 2003).
13. Herbert Docena, " No Money, No Play: US on the Brink in Iraq," Asia Times, October 10, 2003, at www.atimes.com/atimes/Middle_East/EJ10Ak01.html (November 16, 2003).
14. Terry Lynn Karl, The Paradox of Plenty: Oil Booms and Petro-States (Berkeley: University of California Press, 1997), p. 190, quoted in Tsalik, "The Hazards of Petroleum Wealth," p. 7.
15. Indo-Asian News Service, "India, China Will Drive Global Energy Use Increase," Asian Tribune, May 2, 2003, at www.asiantribune.com/show_news.php?id=4059 (November 16, 2003).
