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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
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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).
02-24-2004
Georgian President Mikheil Saakashvili is in Washington for talks with top-level Bush administration officials on expanding strategic and economic cooperation. The Georgian leader’s US visit is coming at a time of geopolitical uncertainty in the Caucasus, with Moscow and Washington potentially on a collision course.
Georgia is shaping up as a key venue in the building US-Russian competition for regional influence, a fact that is forcing Saakashvili into a delicate balancing act in the foreign policy sphere, while at the same time trying to restore order on the domestic front. [For additional information see the Eurasia Insight archive]. Georgian-Russian relations have long been marked by tension, but during an early February visit to Moscow, Saakashvili appeared to stabilize Tbilisi’s relationship with the Kremlin. [For background see the Eurasia Insight archive].
Saakashvili arrived in Washington on February 22 and is expected to seek stronger US security cooperation, along with an expansion of economic assistance. In addition to meeting with Bush administration officials, Saakashvili is scheduled to meet with representatives of the World Bank and International Monetary Fund, as well as US business executives.
Since Saakashvili led the protest movement last November that succeeded in forcing former president Eduard Shevardnadze’s resignation, the United States has strongly backed his stated desire to place Georgia on a fast track towards integration with Western security and economic structures. [For background see Eurasia Insight archive].
At the same time, Russian leaders are loathe to lose any influence in what they consider to be their strategic backyard. Despite Saakashvili’s widely praised performance in Moscow, many in Russia’s policy-making community remain suspicious of his intentions. Specifically, there is still strong doubt about Saakashvili’s pledge that he would not permit the United States to establish a military base in Georgia after Russian forces pull out from the country. [For additional information see the Eurasia Insight archive].
By all appearances Russia is preparing to wage a vigorous struggle to keep Georgia within its sphere of influence. An indication that Russian President Vladimir Putin is planning to get tough on CIS states came February 24, when, in a televised address, he announced that he was firing his cabinet. Putin stressed that his decision was not driven by dissatisfaction with the government’s performance. "It is dictated by a wish once again to set down a position on how policy will develop in the country after [Russia’s presidential election] on March 14," Putin said. Putin’s re-election is considered a virtual certainty.
Putin provided some insight into his thinking during a February 12 televised speech, in which he characterized the 1991 collapse of the Soviet Union as a "national tragedy on an enormous scale" in which "only the elites and nationalists of the republics gained." The underlying assertion of Putin’s comments was that the Kremlin needed to do more to defend Russia’s national interests, and, accordingly, would be justified in adopting tougher policies towards other CIS states.
Dmitry Sidorov, Kommersant bureau chief in Washington, said that Putin really believes what he says. "His popularity allows him not to make any statements and win handily in March," he said.
Putin’s statements sent ripples around CIS capitals and beyond. "What does this mean – that Russia is going to correct the ‘mistakes of the past?" a senior Central Asian leader visiting Washington asked rhetorically.
Already, Russian rhetoric is toughening. At an early February security conference in Munich, Germany, Defense Minister Sergei Ivanov announced that Russia might opt out of the Conventional Forces in Europe Treaty, alleging that the pact is an outdated "legacy of the Cold War." Such an argument is mimics the US contention that the ABM treaty is outdated, and thus should no longer be binding.
Russia’s potential withdrawal from the CFE pact could have significant ramifications for Tbilisi. Moscow’s obligations under the CFE treaty are perhaps the most significant source of pressure on Russia to pull out from its two remaining bases in Georgia.
In his speech at the Munich conference, Ivanov complained that Western leaders were ignoring Russian security needs. "NATO should -- in deed, not only in words -- take into account Russian concerns," Ivanov said.
The Russian threat to withdraw from CFE comes at a time when the United States is planning a wide-ranging re-deployment of its forces in Europe, much of it related to the ongoing war on terrorism. For example, the United States is planning to deploy more troops in Romania and Bulgaria to enhance its ability to project power in the Middle East and Central Asia. Small-scale forward bases in the Caucasus and Central Asia are also under consideration by Pentagon planners, although US diplomats have stressed that Washington has no firm plans to establish bases in the region.
Ivanov attacked Georgia twice in his Munich policy speech. Georgia allows terrorists from the Middle East to enter Chechnya from its territory, Ivanov claimed. He also stated that Georgia has been lax in controlling terrorists along its borders with Russia. Georgi Baramidze, the Georgian Interior Minister, has rejected Russian claims. "The Interior Ministry has written to the Acting Interior Minister of Russia and suggested a number of concrete cooperation projects, and so far received no response," he told EurasiaNet.
US Senator John McCain, speaking at the same panel as Ivanov, provided a ringing rebuttal. The Arizona Republican said, that "undemocratic behavior and threats to the sovereignty and liberty of her neighbors will not profit Russia -- but will exclude her from the company of Western democracies."
In a message to President Bush published February 11, Putin tried to smooth over tension. "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," Putin said. "Russia will remain a stable, reliable and predictable partner."
A majority in Washington policy-making circles believe that Russia will ratchet up its involvement in the Caucasus and Central Asia after presidential elections. This may include further acquisitions of energy, transportation, and other industrial assets. It may also take the form of pressure on CIS states for more favorable trade conditions, and more military and security cooperation under the umbrella of the war on terrorism.
Regardless of any Russian policy shift, Washington will remain intent on supporting Georgian democratization efforts and pushing for the completion of the Baku-Tbilisi-Ceyhan pipeline. [For additional information see the Eurasia Insight archive].
US officials privately doubt that Russia would formally pull out of the CFE Treaty. Both Russia and the NATO members are well below CFE ceilings along the Western and Southern flanks, and Baltic states are unlikely to deploy significant NATO or own forces. Many in Washington also do not expect a massive Russian campaign to destabilize Georgia, as Russia has no alternative candidate who could assume control of the country’s government. One American official characterized the prognosis for the Caucasus as a "status quo plus".
While Georgia is firmly in the US and Western camp, Azerbaijan is a more difficult case. According to a senior CIS official who spoke on condition of anonymity, President Ilham Aliyev has been stung by criticism in Washington of his human rights record, and may be gravitating towards the Russia. [For additional information see the Eurasia Insight archive]. Nevertheless, US officials are not concerned about "losing" Azerbaijan, citing the fact that Baku will always require a diplomatic partner to balance its relations with Russia and Iran.
Whether Putin will remain a reliable partner for Bush, who is proving increasingly vulnerable in an election year, remains to be seen, Washington insiders say. As the Bush Administration is facing escalating violence in Iraq, a power hand-over in Baghdad on June 30, and a hotly contested presidential elections campaign, it can only hope for no additional foreign policy surprises.
01-23-2004
On January 25, US Secretary of State Colin Powell will attend Mikhail Saakashvili’s inauguration as president of Georgia. The transition of power there has some Washington strategists imagining ways to export Georgia’s "revolution" to other post-Soviet states. It has also led to consternation in Moscow which could further erode the spirit of partnership that the Kremlin forged with US President George W. Bush in late 2001.
From Tbilisi, Powell will go to Moscow for meetings with Russian president Vladimir Putin and other key officials. Insiders expect that Powell will not mince words in expression of support for Saakashvili, whom the Kremlin considers (according to a Moscow political scientist) "too pro-American and too unknown." This is delicate geopolitical territory. Russia commands four military bases in Georgia.
During a December 2003 visit to Georgia, US Defense Secretary Donald Rumsfeld called for Moscow to withdraw its troops from Georgia in line with agreements signed at the 1999 Organization for Security and Cooperation in Europe Istanbul summit. [For background see the Eurasia Insight archive]. This call prompted concern in Russia’s Foreign and Defense Ministries that the Bush administration seeks to use Saakashvili’s ascent to extend its own military presence in Georgia. [See the Eurasia Insight archive].
Saakashvili marked his campaign with promises to tackle Georgia’s internal corruption and its endemic poverty. He has tried to placate Russia in speeches but has been firm about his insistence on keeping breakaway provinces from seceding to Russia. Powell’s spokesman has said that the secretary will deliver an unstinting message to Putin on this issue. Powell also seems likely to demand that Russia expedite its troop withdrawal.
Why would Powell be so firm? In the past he has negotiated more gently with Uzbekistan’s Islam Karimov and Kazakhstan’s Nursultan Nazarbayev, both of whom have invoked antiterrorist rhetoric to blanket their misdeeds. [For background see the EurasiaNet Insight archive]. The answer may have to do with the fact that Saakashvili represents something new in post-Soviet politics: the leader of a massive, well-organized effort to peacefully render a sitting president illegitimate.
The Bush administration cannot afford to let Russia undermine Saakashvili’s story. A confident Georgia can deliver many benefits. It could stabilize the South Caucasus, shielding American access to the Baku-Tbilisi-Ceyhan oil pipeline and other valves on the Caspian Sea. It could weaken separatist rhetoric in Abkhazia and South Ossetia, which might discourage Russian intervention. And it could become a more effective partner in tracking, stopping and punishing terrorists. [For background on these issues, see EurasiaNet’s package on the Pankisi Gorge].
Indeed, some in the Bush administration doubt that Saakashvili’s "rose revolution," so dubbed because celebrants clutched roses after Shevardnadze stepped aside, will necessarily foster stability. Proponents of the Realpolitik school, primarily at the State Department, point out that a rush to overhaul Georgia could weaken Russia’s membership in Bush’s antiterrorist coalition and jeopardize American access to Caspian energy sources.
Analysts at the National Security Council and the United States Agency for International Development (US AID) understand that Georgia’s entrenched corruption is just one of the symptoms keeping the country poor. It also lacks competitive industries and sound models for capitalist ethics. Moreover, Russian interests control critical chunks of Georgia’s economy.
During 2003, state-controlled Russian companies RAO UES and Gazprom acquired the vital electric and natural gas grids in Georgia. [For background, see the Eurasia Insight archive]. Migrants sending money home from Russia contribute meaningfully to Georgia’s annual output. In this context, if Russia encourages the breakaway provinces of Abkhazia, South Ossetia and Ajaria to fully secede, it could sap Georgia’s already anemic economy.
Washington understands how many challenges the untested Georgian leadership faces. These include conducting legitimate parliamentary elections in the spring, battling organized crime, and rebuilding public institutions that became sinecures under Shevardnadze. Temur Yakobashvili of the Georgian Foundation for Strategic and International Studies www.gfsis.com suggests that Saakashvili will have to scale down unrealistic expectations, generated in November’s rush of events, in order to thrive. The president’s inaugural address may try to cool the popular mood.
According to Yakobashvili, the new regime will struggle to attract honest, competent and educated people to the government, deliver pensions, salaries and other social safety payments on time and restarting economic growth and foreign investment amid deep economic crisis. Finally, Mr. Saakashvili will face a difficult relationship with Russia while attempting territorial reintegration in the face of Moscow-supported separatist opposition. Because conditions in Georgia are so fragile, Russia could swiftly claim that the country needs Russian troops.
Powell and his colleagues will have to advance Washington’s goals while staying friendly to a Kremlin that balks at the idea of Georgian initiative. Especially after nationalists made strong gains in Russia’s parliament in December, the idea that Georgia can act against the Kremlin’s wishes is growing especially sensitive. While the Bush administration and European Union figure to encourage institutional development through privatization in Georgia, they will also have to manage Russia’s concerns about security and hegemony.
In this context, Powell might be wise to press Saakashvili to make conciliatory gestures to Moscow. The State Department should foster Tbilisi’s official contacts with the leaderships of Abkhazia and South Ossetia to develop a jointly workable political model. This could federalize Georgia or otherwise protect minority rights. At the same time, since Ajaria’s Abashidze is likely to play provocateur, Powell should manage a dialogue between Tbilisi and Moscow on the withdrawal of Russian troops and the end of Russian support to South Ossetian and Abakhzian separatists. In addition to the regular diplomatic channels, such dialogue should include the two countries’ National Security Councils and departments of defense.
Saakashvili’s country is as fragile as his victory was emphatic. If Georgia grows violent, or poorer, or darker, it could deteriorate to bloody anarchy. That prospect should keep Powell somber at the inauguration and careful in Moscow.
01-09-2004
US official are warily monitoring a policy debate in Russia over how Moscow should deal with its former Soviet neighbors. Many in Washington believe that the strong showing by nationalists in the recent Russian parliamentary election could prompt the Kremlin to toughen its stance towards states in the Caucasus and Central Asia.
Developments in Georgia – where a pro-Western administration has come to power -- has prompted policy makers in Moscow to reexamine Russian foreign policy towards its neighbors. The fact that nationalists will exert considerable influence in the Russian legislature appears to sharply reduce the chances of a softening of Russian policy.
In all, four political parties gained sufficient electoral support to win seats in the Russian parliament, led by United Russia, which serves as President Vladimir Putin’s powerbase. The other three – the Communist Party, Vladimir Zhirinovsky’s Liberal Democrats and Rodina, (Motherland) – all embrace nationalist-oriented foreign policy views.
There are two competing policy viewpoints in Moscow today. The first, articulated by the Chairman of the Federation Council’s Foreign Affairs Committee, Mikhail Margelov, maintains that Russia does not stand to benefit from the geopolitical competition with the United States in the Caucasus and Central Asia. This faction wants Russia to be more accommodating towards its neighbors.
In Georgia’s specific case, Russia’s confrontational stance risks causing renewed conflict between Tbilisi and Georgia’s separatist-minded regions of Abkhazia, Ajaria and South Ossetia. Such tumult could create "another Chechnya," some believe. It would thus be better for Moscow’s own security aims to use its influence to promote rapprochement among the Georgia government and the three autonomous regions.
The other approach, as described by a senior policy expert with close ties to the Kremlin, holds that Georgian President-elect Mikhail Saakashvili is an implacable opponent of Russia. Accordingly, Moscow should do nothing that helps to stabilize his administration.
"Saakashvili is an unknown quantum in Moscow, and he’s not made efforts to build relations here. There is no way Abkhazia and South Ossetia will return to Tbilisi’s fold," the expert said.
While on a visit to Armenia on January 8, Saakashvili repeated his call for improved Russian-Georgian ties. At the same time, he said a new approach was needed in Moscow. Bilateral relations "should not be based on previous relations when Russia itself instigated conflicts, tried to resolve them and never succeeded," the Arminfo news agency quoted Saakashvili as saying.
For the United States, the implications of a rise in instability in Georgia are clear. Tumult could easily spill over Georgia’s border into neighboring states, and threaten to delay, or even prevent completion of the Baku-Tbilisi-Ceyhan Pipeline.
A senior U.S. diplomat in Moscow believes that the "reservoir of imperial nostalgia" will lead to a "more muscular approach" in Russian policy towards Central Asia and the Caucasus.
If Russian policy makes a right turn, a key political figure will be Dmitri Rogozin, one of the leaders of the Rodina party. Rogozin’s nationalist rhetoric has repeatedly sparked controversy. Most recently, he called for the creation of a Russian land corridor across Lithuanian territory linking Russia proper to the exclave of Kaliningrad, which Rogozin represents in parliament. Rogozin has also called for the expansion of Russia’s borders to include areas – such as northern Kazakhstan – that have heavy concentrations of ethnic Russians.
US analysts do not expect Russia to make any significant moves in the Caucasus or Central Asia until after the Russian presidential election, which is scheduled for May.
At the same time, the rhetoric of some Russian MPs indicates that an influential policy-making segment is disinclined to adopt a more cooperative tone with Russia’s neighbors, in particular Georgia.
Georgia’s "over-reliance on Western countries in the solution of these issues [the separatist struggles of the country’s autonomous regions] was the previous Georgian leadership’s [i.e. former president Eduard Shevardnadze’s] great mistake," Andrei Kokoshin, current chairman of the Russian Duma Committee on CIS Affairs, told the NTV television channel on January 8.
In a separate interview with Ekho Moskvy news agency, Kokoshin insisted Russia needed to maintain military bases in neighboring states. Georgia and Russia have long haggled over a timetable for the withdrawal of Russian forces still housed at two bases in Georgia.
"To win its place under the sun, Russia must not only speed up its economic development, but also show military muscle," Ekho Moskvy quoted Kokoshin as saying. "In a number of post-Soviet areas, we need either permanent bases, or agreements enabling us to deploy our military contingents rapidly."
12-23-2003
Russia and Israel have formally agreed to ship oil from the Russian oil terminals in the Black Sea via the Israeli Eilat-Ashkelon pipeline, to Asian markets. This pipeline has the potential to greatly decrease the transit time for oil exports from the Mediterranean to the Far East. This development signals a new level of cooperation between Russia and Israel in the energy field, and emergence of the Jewish state as a player in Russian and Eurasian pipeline politics.
BACKGROUND: During November 3-5 summit in Russia, Israeli Prime Minister Ariel Sharon and Russian president Vladimir Putin have signed a historic agreement making Israel the first Middle Eastern transit country for Russian oil. The 158-mile (254 km) pipeline from the Red Sea port of Eilat on the Gulf of Aqaba to Ashkelon was constructed in the 1960s, to ship Iranian oil to European and U.S. markets. Thus, the direction of the pipeline was South-North. After the collapse of the Shah regime in 1979, the pipeline was used to ship small amounts of Egyptian oil from Abu Rudeis field to Israel. According to the Director General of the Ashkelon pipeline company Emmanuel Sakal, Israel has accomplished improvements to reverse the flow of the pipeline over the last two years, to accommodate shipping of the Russian and Eurasian oil to Asian markets.
Meanwhile, Russia has been experiencing an important infrastructure bottleneck while shipping its oil to the fast-growing and highly lucrative Asian markets. Russian energy officials have realized that the plans for pipelines from Siberia to China and the pacific port of Nakhodka may be years and billions of dollars away. After YUKOS oil company ran afoul of the Kremlin in Spring and summer of 2003, the Russian government has decided not to pursue a pipeline to the Northern Chinese city of Daiking – the YUKOS-preferred route. Instead, Moscow has opted for a much more expensive project – the pipeline to the Russian Pacific port of Nakhodka, from which Russian companies can ship oil not just to China, but also to Japan, Korea and the West Coast of the U.S.
IMPLICATIONS: As Russian oil exports to Europe have stagnated due to slow rates of economic growth there, Russian companies have decided that an alternative root to ship oil to China and India must be found. The oil major LUKoil, and the government-controlled Rosneft are prime candidates to ship oil via Israel as they control pipelines and terminals along the Black Sea Coast. From the ports of Novorossiisk and Tuapse, Russian tankers will pass via the Bosphorus-Straits and unload at the slip dock at the port of Ashkelon, from which it will be pumped across the Negev desert to Eilat. Mosst importantly, this significantly shortens the shipping time and decreases costs: a Very Large Tanker (VLT) with 300,000 tonnage travels for 35-30 days from the Mediterranean to China, and only around 10-14 days from Eilat to Shanghai.
The Israeli ports can accommodate tankers larger than those capable of passing through the Suez Canal. And while the tariffs in the Israeli pipeline amount to $.40 a barrel, Egyptians are charging higher rates for transit through the canal, which is a major target of terrorism.
The Israelis, as well, may worry about threats to pipeline security from radical Islamist organizations, such as Al Qaeda, Hamas, and Islamic Jihad. Today, oil routes are no longer safe. The attack on the French supertanker the Limbourg in October 2003, and the Al Qaeda attempts to penetrate the information technology department of Saudi Aramco, the national oil company, demonstrate that terrorists are targeting high ‘emotional value’ economic targets. Moreover, while Hamas and Jihad go after human-rich targets, such as buses and restaurants, they so far targeted Israeli infrastructure only occasionally and unsuccessfully. Al Qaeda does not seem to care about Israel enough to endanger its somewhat depleted force. Moreover, oil burns, but does not explode, and pipelines can be patched up relatively easily.
In this sense, the Israeli North-South pipeline from the Mediterranean to the Red Sea with a capacity of 1.1 million barrel a day offers a significant shortcut for Russian and Eurasian oil, which targets fast-growing Asian markets. It will be an ideal outlet also for the Kazakh and Azerbaijani fields, which are coming online. The pipeline’s capability may be boosted to 1.6 mbd by installing additional pumping stations. As it is aiming to provide Very Sweet Light Crude (VSLC) from the Caspian, additional supply may come from the Baku-Supsa and from Baku-Tbilisi-Ceyhan pipelines when the latter is completed around 2005-2006.
Israel has excellent relations with Azerbaijan and the administration of President Ilham Aliyev, as well as with the Government of Georgia, so that political pressure from Arab countries is unlikely to undermine Israel’s oil transit role. While the immediate economic impact is modest (about $140 million a year), an increase in volume of shipping, more demand for Israel’s own needs, and provision of stock for Israel’s petrochemical industry are additional benefits. As a result, the project is likely to be sustainable and profitable.
CONCLUSIONS: Israel is likely to increase its profile in the Caspian area, and the energy politics of Russia and the Caucasus. It is likely, as it did in the past, to play a mediator’s role in conflicts between Moscow and Washington. Ariel Sharon in particular, together with the leader of Russian-speaking Israel Our Home Party Avigdor Lieberman are keen to see the project implemented. Sharon has taken time to cultivate Putin and try to balance the Russian foreign policy and security elite’s traditional tilt towards the Arab world. Moreover, Sharon has championed in the past a spur to Israel of the Russian Gazprom natural gas pipeline Blue Stream to Turkey. That project was derailed in favor of an Egyptian gas pipeline which never happened. At this point, however, the Eilat-Ashkelon pipeline shows that Israel is becoming an actor in the regional energy field as well.
11-26-2003
Eduard Shevardnadze has done his country of Georgia one last, important service—resigning as president. While the resignation avoided the bloodshed of the use of force against demonstrators in the streets, it leaves the country in a volatile situation, which the United States can help to stabilize.
Brewing Unrest
Besieged by his handpicked successors-turned-opposition leaders, abandoned by his soldiers and policemen, Shevardnadze resigned the Georgian presidency rather than giving an order to shoot his own people.
Shevardnadze rose in the ranks of the Soviet Communist Party since joining in 1948 at the height of Stalin’s rule and then played a key role in the dissolution of the Soviet Union. The question now is, what’s next?
Georgia conducted badly flawed parliamentary elections on November 2, 2003. International observers reported massive fraud, and the U.S. State Department issued a stern rebuke of the vote counting procedures. The 1999 parliamentary elections had been equally faulty. The team that eased Shevardnadze out of power used the populace’s frustration with that election fraud and the accumulated dissatisfaction with the old regime as a fulcrum to topple Shevardnadze.
The first post-post-Soviet transition team in Georgia is decidedly pro-Western:
The most popular politician in Georgia is Columbia-educated former Justice Minister Mikhail Saakashvili (35);
The current President pro-tem (until the elections, which will take place in early January 2004) is the former Speaker of the Parliament Nino Burdjanadze (39);
Former Parliamentary Speaker Zurab Zhvania (40).
All of these leaders are well-known faces in Washington: they are bright, English speaking, and pro-American. However, the economic and security challenges before the new leadership are more difficult to surmount than the 18,000 feet mountain snow-capped peaks of the Caucasus.
Crucial Challenges
Shevardnadze leaves behind a number of tough problems that will be difficult for his young successors to solve. The economic and security situation is depressing, and the population is falling. Three autonomous republics—coastal Abkhazia and Adjara and the mountainous South Ossetia—are in various stages of secession from the central government in Tbilisi. The separatists are supported by the Russian government and military, who still have not evacuated four Georgian military bases, despite a 1999 decision by Organization for Security and Cooperation in Europe (OSCE) summit that they do so.
Georgia’s economic performance remains anemic, with GDP growth around 2 percent per year from 1997-2002, official unemployment over 17 percent, and underemployment even higher. Hundreds of thousands have left the country for neighboring Russia or greener pastures in the West. Corruption is rampant, and Shevardnadze’s relatives and cronies control the choicest morsels of the economy. Saakashvili’s earlier efforts to fight corruption and to reform the judiciary and the State Prosecutor’s office were stalled.
Armed militias, who in the past contributed to the country’s chaos and fought Shevardnadze, as well as the autocratic and pro-Russian leader of Adjara, Aslan Abashidze (a former nemesis of Shevardnadze), have already voiced opposition to the new leadership. And while the Russian Foreign Minister Igor Ivanov mediated between Shevardnadze and the opposition, Russia is cautious about the emerging government, which many in Moscow view as pro-American. The geopolitics of Georgia’s future will be tough for Washington to manage.
Geopolitical Importance
Georgia, with its Christian, largely pro-Western population, was an independent kingdom in the Middle Ages and has dreamt of freedom ever since losing it to a succession of imperial masters, including the Ottomans, Persians and Russians. The country wants to be part of the Euro-Atlantic zone and is located between Russia and Turkey and in proximity to Armenia, Azerbaijan, and Iran. Georgia controls land access to the oil riches of the Caspian, and is a transit country for the Main Export Baku-Ceyhan Pipeline from Azerbaijan to Turkey, which will be completed by 2005.
What the United States Should Do
U.S. support of Georgian independence is bipartisan. Since 1992, the Clinton and Bush Administrations expended as much as $1 billion in assistance. Georgia also received IMF and World Bank credits, loans, and technical assistance. To keep Georgia free and democratic, and to ensure the stability of the Southern Caucasus, the United States should:
Ensure that Eduard Shevardnadze and his family are treated with dignity and that he is allowed an honorable retirement. He should be guaranteed immunity from criminal prosecution.
Enhance democratic development and the rule of law, including the provision of technical assistance for anti-corruption measures and the development of institutions of the law and law enforcement.
Support new parliamentary and presidential elections, including sending U.S. observers for OSCE missions.
Boost thetrain-and-equip program, administered by the Pentagon, to institutionalize Georgian anti-terrorist capabilities.
Help restore the territorial integrity of Georgia by maintaining dialogue with all local parties and Moscow and promote the reintegration of Abkhazia and South Ossetia, by assisting in the development of cultural autonomy models for them, as well as the return of Adjara back under Tbilisi’s full control.
The United States should acknowledge the historic role Eduard Shevardnadze played in the dissolution of the Soviet Union, while supporting the new Georgian democratic leadership. Beyond that, it should renew efforts to ensure Georgia that it can open a new page in its history by strengthening democracy, sovereignty, territorial integrity, rule of law, and economic reforms.
11-14-2003
Al Qaeda’s massive November 8 attack in Riyadh, Saudi Arabia, killed 17 and wounded over 120. This attack targeted the Saudi royal family as well as foreign presence in this kingdom, which is vital to the oil economy. It also gave a boost to the ultimate goals of Osama bin Laden: driving the “infidels” from the Land of Two Mosques and toppling the monarchy. As the result, Western oil supply is at risk.
Three devastating scenarios may endanger the flow of oil:
In any such event, oil prices are likely to skyrocket.
Terror Economics
Bin Laden and his henchmen understand well political economy of terror. They aim for maximum ripple effect: banking and insurance losses for the 9/11 attacks have exceeded $55-60 billion. Bin Laden has proclaimed that if he takes over his native land, the oil price will hit $125 a barrel, while his deputy, Ayman Al Zawahiri stated that U.S. economic targets are high on the Al Qaeda’s hit list.
In October 2002, the Limbourg, a French super-tanker, was hit by a suicide Zodiac boat in the Persian Gulf – just like USS Cole was in 2000. Four incidents of “pirates” taking over large tankers and piloting them for four hours have been reported in South East Asia. Tim Spicer, the British terrorism expert has called this a maritime equivalent of a pre-9/11 flight school. Blown up tankers can paralyze vital waterways, such as the Panama and Suez canal, or the Bosphorus Straits. A tanker full of Liquified Natural Gas (LNG) blown up at port can devastate an oil terminal in the Gulf.
Bin Laden’s engineering and managerial skills and his familiarity with his country’s infrastructure will serve him well in staging a mega -attack on the Kingdom’s oil fields. For example, a radiological weapon (dirty nuke) could paralyze vital nodes of the Gulf oil infrastructure. Such an attack may neutralize the Saudi two million barrel a day surplus oil producing capacity vital for price stability. If this occurs, gas price may hit $6 a gallon for several months, and a deep economic recession will be then triggered by expensive energy, which may be worse than the 1973 and 1979 oil embargoes. This may have devastating results to President Bush’s economic recovery strategy.
Boosting Anti-Terror Cooperation
Since May 2003, Saudi government has improved its anti-terrorism efforts. However, according to Secretary of State Colin Powell, it must do more to fight terrorism and halt funding to Al Qaeda and other terrorists. Many in Washington remain critical of the 1996 investigation of the Khobar Towers attack on U.S. soldiers, which was stalled by the Saudi Interior Ministry. In May 2003, Saudis ignored pleas for additional security before the first attack from Deputy National Security Advisor Stephnen J. Hadley and U.S. Ambassador’s Robert W. Jordan.
Oil is a highly emotional and political issue in the Middle East. In many monarchies, transparency and accountability are lacking. Opulent lifestyles of rulers are becoming unsustainable as the population explodes. Today, the Jihadi chickens are coming home to roost. It was Saudi-sponsored foundation, supervised by members of the Saudi royal family, which funded terrorism from Miami to Manila. The oil bonanza funded the largest expansion of the radical Wahhabi Islam, which bred Al Qaeda, the Taliban, Hamas and Yasir Arafat’s Al Aqsa Martyrs Brigades, which have blown up the Oslo process and the Roadmap.
Israel, however, is just a target of opportunity, a substitute for the Great Satan, which is the U.S. The “root cause” of violence against America is not the Arab-Israeli confrontation, but the ideology of Jihad, which allows the blood of the “infidels.” For the Islamists, born and bred in Arabia, however, it is also permitted to murder “apostate” rulers, such as the Saudi royal family.
What the Bush Administration Should Do
It is only the matter of time when the blow against the oil fields’ Saudi royal guardians – or the fields themselves -- may come. As the oil is endangered, the U.S. needs to prepare comprehensive energy and security responses. Specifically, it should:
The threat today is not just to America and the West, but to the very survival of the Saudi regime and its blood supply -- oil. The United States should be ready to counter it.
11-07-2003
The Kremlin’s attack on YUKOS, the major Russian oil company--including the arrest of Chairman and Chief Executive Officer Mikhail Khodorkovsky, seizure of his shares of YUKOS, and his subsequent resignation--is a watershed event in post-communist Russia. This development has negative implications on several levels, and its ripple effects are far from over. Obviously, President Vladimir Putin has been listening to those who do not care about Russian integration into the global economy and who are undermining his stated goal of doubling Russian gross domestic product by 2008.
The Kremlin’s attempt to dismantle YUKOS will have several long-range consequences:
Drying up domestic and foreign investment,
Undermining the rule of law,
Increasing the power of unelected bureaucrats from secret police and law enforcement,
Withering sources of funding to democratic parties and charities, and
Weakening civil society.
Seizing Complete Control
Through an orchestrated campaign of leaks and accusations, the Kremlin has accused Khodorkovsky of preparing for a constitutional coup by inundating the Duma with his loyalists, financially supporting opposition political parties, and harboring presidential aspirations for 2008. The Kremlin was miffed that YUKOS supported several political parties but did not support the pro-Putin United Russia party. Furthermore, Khodorkovsky was considered a part of the Yeltsin-era "crony capitalism"--a freewheeling combination of politically active billionaire "oligarchs" and Boris Yeltsin’s family members, who are now being purged. Alexander Voloshin, Yeltsin’s chief of staff, whom Putin retained until his resignation on October 30, 2003, was a political leader of the Yeltsin "family."
The St. Petersburg KGB men with whom Putin is siding ("chekists" or siloviki--men of force) and their associates from the business world differ with the Yeltsin "family" in their view of politics. While wrapping themselves in the flag and patriotic rhetoric, they do not hesitate to misuse law enforcement and the courts to achieve their goals. Their main goal is to translate power into wealth. To that end, some in the St. Petersburg faction want to chop up YUKOS.
YUKOS has become Russia’s most successful oil company. Just a month ago, it merged with Sibneft to form the world’s fourth largest oil company. It introduced Western accounting standards and management, pioneered shipping Russian oil to the U.S. market, and launched a private consortium to build a pipeline from western Siberia to the arctic port of Murmansk. It has also bought hundreds of millions of dollars worth of U.S. oil equipment. Over the years, YUKOS paid billions of dollars in taxes and gave hundreds of millions to charity. It was also the company most independent from the government, and the attack on YUKOS suggests that other companies may soon be on the chopping block.
Abuse of the Legal System
Politically well-connected businessmen, associated with government-dominated oil companies and banks, have conspired to dismantle YUKOS by bringing apparently trumped-up charges of past irregularities against YUKOS’s principal shareholders. In the 1990s, the Russian economy was plagued with lawlessness, and any consistent retroactive application of today’s law would threaten a majority of Russia’s current politicians, bureaucrats, and businesspeople with long jail terms. Such abuse of the law, however, causes irreparable damage to the Russian economy, its court system, and Western and Russian investors.
The attack on YUKOS has already done multibillion-dollar damage to the Russian stock market, causing the Moscow RTS index to plunge by over 20 percent and triggering a massive capital flight. YUKOS shares plunged 10 percent on the news of Khodorkovsky’s arrest alone. Moreover, by jailing Khodorkovsky and his partner Platon Lebedev, Putin is sending a clear signal that the Russian state can be hijacked and its legal system subverted by unscrupulous bureaucrats, businessmen, prosecutors, and law enforcement officers. The positive investment climate that Russia had enjoyed since 1998 has evaporated overnight.
What the U.S. Should Do
The Bush Administration is facing a dilemma: It wants to keep Russia as a strategic partner in the war on terrorism and an alternative source of oil. However, as Russia is moving toward the destruction of independent centers of power and increasing authoritarianism, and as the future of economic reform is at stake, decisive measures may be necessary. Specifically, the Bush Administration should:
Re-evaluate its energy dialogue with Russia until Khodorkovsky is released and an impartial investigation examines the charges. U.S. companies should not endanger their stockholders by investing in an unstable Russia.
Temporarily suspend U.S. Export-Import Bank and Overseas Private Investment Corporation financing of Russian oil and gas projects with state-owned entities, such as the oil monopoly Gazprom. This will send a signal that the state cannot abuse its power when dealing with private-sector competitors.
Issue a joint statement by the U.S. Secretaries of Commerce, Energy, and State expressing concern over the crackdown on the private sector and abuse of the legal system.
Provide U.S. government funding for democracy, free media, and rule of law projects through National Endowment for Democracy and U.S. Agency for International Development contractors--activities supported by YUKOS charities until now--and encourage private charitable giving to these programs. Support of democracy and an open society in Russia should not be allowed to die.
Conclusion
With the attack on YUKOS, the ex-KGB faction in the Kremlin has reverted to state-led repression against private capital and independent power centers. A crackdown on the independent media has been going on for three years. The U.S. should send a strong signal to President Putin that such policies may cost Moscow America’s good will and cause damage in tens of billions of dollars.
Restarting the Flow: Restoring Iraqi Oil Production
10-01-2003
The Iraqi people desperately need to have their oil flowing again to the global market. Restarting the flow of Iraqi oil would be a win-win proposition, as not only the Iraqis, but also consumers around the world would benefit from bringing the Iraqi oil supply back on line.
The main impediment to increasing Iraqi oil production at this point is lack of security--terrorist sabotage and looting. The recent attacks on pipelines and power stations are disrupting the flow of Iraqi oil and are clearly aimed at further impoverishing the Iraqis and even further disrupting their lives.
Since the end of major hostilities, saboteurs have bombed Iraqi pipelines more than eight times, causing $7 million per day in lost revenue.1 The culprits, including the remnants of Saddam Hussein’s Ba’ath party and Islamic radicals, are following the old Leninist adage, "the worse, the better." They are betting on an upsurge in resistance to the U.S. presence in Iraq if they can severely disrupt the country’s gasoline, electricity, and cooking gas supply. Saddam loyalists, local Islamist militants, and foreign jihadis who come to Iraq to fight the "infidels" believe that by escalating Iraq’s suffering they can drive the Americans back across the ocean.
It is also true that the lack of security, the scarcity of gasoline and other fuels, and the intermittent supply of electricity are impeding the post-war reconstruction. Today, Iraq is producing less than half as much oil as it pumped before the war.
Saving Iraqi Oil Production
The attacks on the oil infrastructure are part of a premeditated campaign by the remnants of Saddam’s regime and radical Islamist mujahideen organizations to stop the flow of Iraqi oil, harm the people of Iraq, and disrupt global oil markets. A secret memo dated January 23, 2003, reportedly issued by Saddam’s security services, found in Iraq after the war, and published in the London-based Saudi daily Al-Hayat, directs pro-regime elements to destroy power generating stations and the water supply.2 It is likely that Saddam supporters and other terrorists are applying the same tactics to the oil industry.
Iraq is pumping 900,000 barrels per day--considerably less than the pre-war production level of 2.2 million-2.4 million barrels per day. The target of achieving pre-war production by the end of 2003 is in jeopardy, with further increases also in question. While Halliburton subsidiary Kellog, Brown and Root (KBR) and the U.S. Army Corps of Engineers are rehabilitating the Iraqi oil infrastructure, their mandate does not include providing pipeline security.3
The Iraqi oil ministry has begun paying tribal leaders in the south to keep saboteurs and thieves away from the pipelines.4 However, in at least one case, Sheikh Hatem Al Obeidi, an influential tribal leader who was on the government payroll to prevent attacks, instead abetted sabotage and was arrested by U.S. troops.5 Without security, neither the U.S. nor the Iraqis can repair the damage caused to Iraq’s oil industry by the war or rehabilitate Iraq’s infrastructure, which had fallen into a state of grave disrepair under Saddam.6
Meanwhile, the continued attacks are hurting both the Iraqi and Western economies. The West is still suffering from relatively high oil prices, as the economic recovery remains tenuous, and the Organization of Petroleum Exporting Countries has cut production by 900,000 barrels a day.7 As a result of the drop in Iraqi oil production and the Iraqi fiscal shortfall, U.S. taxpayers will need to subsidize 50 percent of the $6 billion Iraqi budget for fiscal year (FY) 2004.
On September 7, President Bush announced that he would request $87 billion for assistance to Iraq and Afghanistan for FY 2004, with the lion’s share going to Iraq.8 A boost in oil production would remedy the Iraqi economic crisis, give the Iraqi people hope, and decrease levels of needed U.S. assistance funding.
Sabotage and Looting
The key impediments to reconstructing the Iraqi oil industry and raising its oil revenues are attacks on the 4,350-mile-long pipeline system and the 11,184-mile-long electric grid.9 The northern pipeline, which runs from Kirkuk to the Turkish port of Ceyhan, was attacked twice in June,10 twice in August, and twice again in September. After an attack on August 16, the pipeline burned for more than 48 hours. The pipeline from the giant Rumeila field in the south has also been bombed twice.
Security analysts divide these attacks into two distinct categories. The first is looting and plunder of the oil infrastructure, including fields, pumping stations, pipelines, and refineries. Organized crime is also raising its head, as demonstrated by the recent interception of a barge with 1,000 tons of stolen Iraqi oil.11 Smugglers usually ship oil to Iran, which reflags and re-exports it.
A much more serious threat, however, comes from groups opposing the U.S. and coalition presence, U.N. involvement, and the elements of Iraqi society participating in the Governing Council.
Thus far, senior U.S. officials, the Coalition Provisional Authority (CPA), and the the U.S. military have not publicly identified the main culprits in the pipeline attacks, which suggests that intelligence is insufficient.12 The ferocious terrorist bombings against personnel and the infrastructure continue.
The main threat comes from three types of groups:
Networks of the old regime operating underground, such as Ba’ath party officials, Iraqi intelligence officers, and Fedayeen Saddam militia.
Radical Sunni groups, such as the predominantly Kurdish Ansar al-Islam; Vanguard of Muhammad’s Army; and others whom President Bush has characterized as "Al-Qaeda type fighters" and who are part of the international jihad movement.13 In his September 7 address to the nation, President Bush called Iraq "the central front of the war against terrorism."14 Anti-Western fighters are crossing into Iraq from Syria and the adjacent Gulf states, including Saudi Arabia.15 Funding for their movements comes from rich individuals and foundations in these same Gulf states and from the global radical Islamic community.
Extremist Shi’a groups, affiliated with Mullah Muqtada Sadr, suspected of attacks on leading Shi’a clerics.16 As the result of the assassinations, a militia called the Badr Brigade--the armed wing of the Supreme Council for the Islamic Revolution in Iraq--was allowed to operate after attempts to ban it by the coalition. Elements of the Lebanon-based Hizballah, an organization on the U.S. terrorism list, and other radical pro-Iranian groups and agents are also present in Iraq.
Key Iraqi pipelines have been paralyzed repeatedly by terrorism. On August 13, the day Iraq started pumping oil to the Turkish port of Ceyhan, terrorists attacked the Northern Kirkuk-Ceyhan pipeline. The same pipeline was attacked again on August 30.17 The pipeline, with a throughput capacity of 1 million barrels of crude per day, was attacked four times between May and September.18 Attacks occurred near the towns of Haditha and Hawja, which are close to the largest Iraqi oil refinery at Bayji.
Iraqi oil production is also suffering from years of centralized, state-run management of the oil sector, long-term lack of investment, and inadequate technical maintenance of the oil fields under Saddam. The absence of hard currency reserves to repair and restart the oil industry is slowing production. However, no investment and expansion are possible unless the physical security of the vast Iraqi oil infrastructure can be assured.
Pipeline Security: Planning and Execution
The military component of seizing Iraq’s oil infrastructure during the war was brilliantly planned and executed. Unlike during the Gulf War, when Saddam succeeded in setting hundreds of Kuwaiti oil wells on fire, fewer than 10 wells were ignited in Iraq. U.S. and British troops seized and secured the oil fields, refineries, and pipeline infrastructure with minimal casualties and material damage. The final draft of an internal post-war report for the Joint Chiefs of Staff gave high marks for pre-war gaming and combined operations during the time of combat.
However, the post-war planning received the lowest grade, with "capabilities that fell short of expectations or needs, and need to be readdressed through new initiatives."19 CPA Administrator Paul Bremer has admitted that the U.S. forces are "stretched thin."20 Securing the oil infrastructure was an important part of post-war objectives, but the plans for post-war occupation of Iraq were not ready when the war started, and the Pentagon was forced to alter its original plan as the post-war violence escalated.21 Thus, it is not surprising that 80 percent of the damage to Iraq’s oil infrastructure occurred after the war ended.22
Five months after the war, the U.S.-led coalition force in Iraq consists of 140,000 American troops and 20,000 international troops, including one British division and one Polish-led division. They are aided by over 54,000 Iraqi security personnel, including 37,000 police, 12,000 facility guards, and 5,000 border police and civil defense corps.
On September 4, in Baghdad, Secretary of Defense Donald Rumsfeld called for putting up to 75,000-100,000 former Iraqi officers and soldiers back in uniform to protect their country and fight its enemies. He also criticized Saudi Arabia and Syria for not doing enough to seal Iraq’s borders.23
Faced with attacks on oil pipelines, the CPA is working to expand the Iraqi force charged with infrastructure protection. During this past summer, it discussed the provision of training to this security force with Kroll Associates and other private U.S. companies.24 With more international troops coming to Iraq, they can also assume responsibility for guarding the pipelines and infrastructure and training the Iraqi security forces, which will be tasked with protecting the pipelines in the future. As long as security is not restored, however, the American taxpayer will pay for this security force.
Criticism on the Hill and Beyond
Senators and Representatives, including prominent Republicans, as well as retired senior military officers have criticized the planning, numbers, and troop deployments in Iraq. Senator Richard Lugar (R-IN), chairman of the Senate Foreign Relations Committee, stressed his criticism of the planning done for post-war deployment but called on his colleagues to "rejoice" that the plan has been corrected. Representative Curt Weldon (R-PA), vice chairman of the House Armed Services Committee, expressed reservations about the planning for the war last winter.25
Senator Kay Bailey Hutchison (R-TX), Senator John McCain (R-AZ), columnist George Will, and Weekly Standard editor William Kristol--all outspoken proponents of Saddam’s removal--have criticized the Administration for post-war mishaps.26 It is less surprising that Democrats, including Senators Joseph Biden (D-DE), ranking Democrat on the Senate Foreign Relations Committee, and Jack Reed (D-RI), a West Point graduate who served with the 82nd Airborne, are also criticizing the Administration for mistakes in post-war planning and deployment.
Among senior generals critical of the post-war performance in Iraq is General Anthony Zinni, the former head of the U.S. Central Command who has extensive experience in the Middle East and serves as a consultant to the U.S. State Department.27 The most prominent proponent of a bigger Army and a greater deployment in Iraq is General Eric Shinseki, the recently retired Army Chief of Staff, who called for "several hundreds of thousands of soldiers on the ground" and warned against a "twelve division strategy for the ten division army."28
Even if the actual size of the U.S. Iraqi deployment is not increased, it has to be refocused on intelligence and training of the Iraqi forces, while the number of coalition troops from other countries must go up, according to General John Abizaid, the current head of Central Command.29 This is also the opinion of the pre-eminent British military historian, John Keegan.30 Increased intelligence collection, anti-terrorist operations, and training should become the focus of the U.S.-led force in Iraq.
Protecting Iraqi Oil Revenue
The Bush Administration has issued an executive order barring claims in U.S. courts against Iraqi oil or proceeds from it.31 It has also coordinated with other permanent U.S. Security Council members--the United Kingdom, France, China, and Russia--on the imposition of a moratorium on Iraq’s national debt.
The U.S. should further coordinate its actions with companies and sovereign claimants (states) to delay reparations for Gulf War damages and other claims. Iraq needs breathing space in order to restart its cash flow and get its oil industry up and running again.
Providing Security for the
Iraqi Oil Infrastructure
Iraq’s oil reserves are the third largest in the world after Russia and Saudi Arabia. However, only 15 of its 73 discovered giant and large fields have been developed.32 Vast parts of the country remain unexplored.
According to current estimates, the investment needed to bring Iraqi production to about 3 million barrels a day will exceed $3 billion over the next two to three years. Over the next 10 years, $35 billion-$40 billion will be needed to boost production from the current 1.2 million-1.4 million barrels per day (MBD) to the pre-1979 production level of 5-6 MBD.
Before serious reconstruction work can begin, however, the physical security of the infrastructure needs to be achieved. To this end, the Bush Administration, including the CPA, and the Iraqi Cabinet should:
Conduct an assessment of security needs to provide for infrastructure protection in conjunction with the Iraqi oil ministry. Before serious reconstruction of the oil industry can begin, the coalition and the Iraqi cabinet must be able to assure physical security of Iraqi energy infrastructure.
Increase the number of Iraqi guards as needed to provide security. However, the rank-and-file and all officers must be adequately screened to root out Saddam’s hard-core supporters and Islamic radicals.
Utilize coalition forces, especially the British, to train Iraqi security forces, including pipeline security units. British instructors have earned high marks the world over providing security and military training.
Hire an international security company to administer pipeline security and train the Iraqi security forces tasked with protecting the pipelines to complement military training.
Train the guards for the task at hand; deployment without training is self-defeating. The CPA has cut the training time for Iraqi police from 12 weeks to eight, and the quality of this force leaves much to be desired.33 Similar shortcuts in training for pipeline protection forces could lead to undesirable results.
Develop and conduct a public information campaign explaining to the Iraqis the importance of pipeline security and the resultant oil revenue. Such a campaign should emphasize the direct link between oil revenue and the provision of basic services and the growth in living standards.
Design a technological package to enhance infrastructure security, using satellite imaging, unmanned aerial vehicles/drones, video cameras, and sensors. This package would be integrated with the security provider (state or private).
Provide additional funding to repair the oil infrastructure. The rundown state of the oil infrastructure will require significant investment: up to $3 billion per year to get it up and running again. These funds can be provided on credit to the Iraqi Governing Council or the oil ministry, to be repaid from future oil revenues.
Work with the Iraqi oil ministry leadership appointed by the Coalition Provisional Authority and the Council to intensify the purge of former Ba’ath officials from the oil ministry and the oil industry.
Conclusion
Without adequate security, Iraqi oil will not reach global markets. Rebuilding the Iraqi oil sector through Western investment will not work as long as terrorists and looters are able to target technical personnel, pipelines, power lines, and other assets necessary for restarting oil production.
By liberating Iraq, the U.S. undertook an immense responsibility. Without Iraqi oil, the U.S. taxpayer will have to foot the bill for the occupation and reconstruction of Iraq. U.S. consumers will pay higher prices at the pump, and the U.S. and global economies will endure an indirect tax by paying higher energy prices. The alternative to restoring Iraqi oil production--misery for the Iraqi people and victory for the terrorists--is not an option.34
1. Radio Free Europe/Radio Liberty, "Iraq: Pipeline Fire Costing $7 Million a Day," August 18, 2003, at www.rferl.org/nca/features/2003/08/18082003075830.asp. See also Walter Rodgers, Nic Robertson, and Jason Bellini, "3 U.S. soldiers killed in ambush near Tikrit," CNN.com, September 18, 2003, at www.cnn.com/2003/WORLD/meast/09/18/sprj.irq.main. The most recent explosions occurred on September 8 and 18.
2. This document was translated by the Middle East Media Research Institute in its Special Dispatch Series No. 538, July 17, 2003. Available at http://memri.org/bin/articles.cgi?Page=archives&Area=sd&ID=SP53803
3. Energy Intelligence Group, "Oil Flows at Kirkuk as KBR Begins Damage Assessment," Eye on Iraq, May 1, 2003, at www.energyintel.com/EyeOnIraq.asp (subscription required).
4. Bassem Mroue, "Oil Ministry and U.S. Troops Take Measures to Protect Iraq’s Main Pipeline from Thieves and Saboteurs," Associated Press, July 4, 2003, at www.enn.com/news/2003-07-04/s_6207.asp.
5. "Iraq Tribal Sheikh Arrested Over Oil Blasts," Agence France-Presse, August 31, 2003, at www.ptd.net/webnews/wed/cs/Qiraq-oil-blast-sheikh.RMbd_DaU.html.
6. Energy Intelligence Group, "Oil Flows at Kirkuk as KBR Begins Damage Assessment." War damage included the bombing of the K3 pumping station at Haditha and a number of pipelines that crossed the Tigris around Tikrit.
7. John W. Schoen, "OPEC Cuts May Crimp Economy," MSNBC, September 24, 2003, at www.msnbc.com/news/
971120.asp?0sl=-23.
8. George W. Bush, "President Addresses the Nation," September 7, 2003, at www.whitehouse.gov/news/releases/2003/09/
20030907-1.html.
9. Pamela Hess, "CPA Speeding Police Training in Iraq," The Washington Times, September 2, 2003, at www.washtimes.com/
upi-breaking/20030902-012831-9370r.htm.
10. Lamia Radi, "Fires Blaze on Iraq Oil Pipeline After Twin Bomb Attacks: Residents," Agence France-Presse, June 13, 2003, at iafrica.com/news/worldnews/244870.htm.
11. Pacific Disaster Management Information Network, "Iraq Humanitarian Assistance Report," August 11, 2003, p. 3, at www.who.int/disasters/repo/10470.pdf.
12. Douglas Jehl and Dexter Filkins, "Rumsfeld Eager for More Iraqis to Keep Peace," The New York Times, September 5, 2003, at www.nytimes.com/2003/09/05/international/middleeast/05RUMS.html.
13. See also Genaro C. Armas, "Troops Called Not an Answer," Associated Press, August 25, 2003.
14. George W. Bush, "President Addresses the Nation."
15. Secretary Donald H. Rumsfeld and General John Abizaid, "DoD News Briefing," August 21, 2003, at www.defenselink.mil/
transcripts/2003, /tr20030821-secdef0604.html. See also Stephen Schwartz, "Reading Najaf," The Weekly Standard, September 3, 2003.
16. Aparisim Ghosh, "Terror at a Shrine," Time, September 8, 2003, p. 30. See also Tarek Al-Issawi, "Previously Banned Militia Patrols Iraqi Holy City, with Coalition’s Blessing," Canadian Press, September 6, 2003, at www.canada.com/news/world/story.asp?id=517B3E75-E27D-42A2-BD33-E47782C941A6. The Badr Brigade was previously disbanded by the coalition, but after the murder of Ayatollah Muhammad Bakr al-Hakim and an earlier attack on his uncle, it is now being allowed to function again.
17. "Iraqi Oil Pipeline Ablaze," News24, at www.news24.com/News24/World/Iraq/0,,2-10-1460_1409548,00.html, and "Iraq Council Makes Security Demands," MSNBC News, August 30, 2003, at www.msnbcnews.com/news/959639.asp?cp1=1.
18. "Iraqi Oil Pipeline Sabotaged," Agence France-Press, August 13, 2003; see also Joseph Logan, "Bomb, Tech Problems Hit Iraq Pipeline," Reuters, August 16, 2003, and Celcan Hacaoglu and Bruce Stanley, "Iraq Resumes Pumping Oil from Northern Oil Fields through Turkish Pipeline," Canadian Press, August 13, 2003, at www.canada.com.
19. Rowan Scarborough, "Joint Chiefs Report: U.S. Rushed Post-Saddam Planning," The Washington Times, September 3, 2003,
p. 1.
20. Armas, "Troops Called Not an Answer."
21. Ibid.
22. Bruce Stanley, "Security the Top Priority for Iraqi Oil Industry As Looting Continues," Oil and Gas Reporter, May 27, 2003, at www.oilandgasreporter.com/stories/052703/ind_20030527006.shtml.
23. Douglas Jehl and Dexter Filkins, "Rumsfeld Eager for More Iraqis to Keep Peace," The New York Times, September 5, 2003.
24. Douglas Jehl, "U.S. Considers Private Iraqi Force to Guard Sites," The New York Times, July 18, 2003, at query.nytimes.com/gst/abstract.html?res=F30C17FC3B580C7B8DDDAE0894DB404482.
25. Amy Fagan and Rowan Scarborough, "Post-Saddam Planning Failures `Unforgivable,’ Democrats Say," The Washington Times, September 4, 2003, at washingtontimes.com/national/20030903-115853-1572r.htm.
26. Sig Chrstenson, "Some Republicans Doubt Progress on Iraq," San Antonio Express-News, August 31, 2003, at
news.mysanantonio.com/story.cfm?xla=saen&xlb=180&xlc=1048090.
27. Thomas E. Ricks, "Ex-Envoy Criticizes Bush’s Postwar Policy," The Washington Post, September 4, 2003, at
www.washingtonpost.com/wp-dyn/articles/A27846-2003Sep4.html.
28. Mark Thompson and Michael Duffy, "Is the Army Stretched Too Thin?" Time, August 24, 2003, at www.time.com/time/magazine/printout/0,8816,477891,00.html.
29. Rumsfeld and Abizaid, "DoD News Briefing."
30. Jack Kelley, "Troop Strength Debate Ranging," Pittsburgh Post-Gazette, August 23, 2003, at www.post-gazette.com/pg/03235/214252.stm.
31. George W. Bush, "Executive Order Protecting the Development Fund for Iraq and Certain Other Property in Which Iraq Has an Interest," May 22, 2003, at www.whitehouse.gov/news/releases/2003/05/20030522-15.html.
32. Emma Clark, "Iraq `Needs Foreign Oil Companies,’" BBC News, July 24, 2003, at news.bbc.co.uk/2/hi/business/3075521.stm.
33. Pamela Hess, "CPA Speeding Police Training in Iraq," The Washington Times, September 3, 2003, at www.washtimes.com/
upi-breaking/20030902-012831-9370r.htm.
34. The author would like to thank William Schirano, Research Assistant in the Kathryn and Shelby Cullom Davis Institute for International Studies, and Anita Greco and Irene Gorelik, interns at The Heritage Foundation, for their assistance with researching this paper. The author also wishes to thank Heritage Foundation colleagues Peter Brookes, James Phillips, and Jack Spencer, as well as Ed Badolato, Executive Vice President of the Shaw Group, and Dr. Gal Luft, Director of the Institute for Analysis of Global Security, for discussing concepts contained herein and commenting on the paper.
09-26-2003
At the Camp David summit which started on September 25, Presidents George W. Bush and Vladimir Putin should put the recent U.S.-Russian differences over the Iraq war behind them and close ranks on rebuilding Iraq and defeating al Qaeda. The senior leadership of both countries recognize that global terrorism is a strategic threat to their countries and to the West in general, whether in New York, the Caucasus, Moscow, or Baghdad.
At his August 30 press conference in Sardinia, Italy, Putin signaled a willingness to put past differences aside and negotiate an acceptable formula for Moscow’s support of a U.N. Security Council resolution on sending U.N. peacekeepers to Iraq under U.S. command. Progress in such negotiations — and in the overall U.S.-Russian strategic relationship — will depend on the quid pro quo that the U.S. offers.
Restoring the U.S.-Russian antiterrorism alliance may also spur other major powers, such as Germany, India, and possibly Turkey, to support U.S.-led efforts to shore up security in Iraq and restore the Iraqi economy.
Improving the Balance of Interests. Two years after the September 11 attacks, disagreements over Iraq — combined with the perception of the Moscow elite that Russia has little to show for its unprecedented cooperation with Washington — have marred U.S.-Russian solidarity in the war on terrorism. This resulted in Russia’s siding with France and Germany in opposition to the U.S.-led war in Iraq. As early as the fall of 2001, high-level officials in Moscow had signaled that recognition of Russian economic interests in Iraq could secure Moscow’s support of the war, but the U.S. ignored their overtures.
Russian policymakers have also criticized the relationship as skewed against Moscow. Russia’s acquiescence in the U.S. withdrawal from the ABM Treaty, to NATO enlargement, and to the U.S. deployment of forces in the Southern Caucasus and Central Asia are often cited as examples of the United States taking advantage of Russia. There is also dissatisfaction in Moscow because Congress has not lifted the obsolete 1974 Jackson-Vanick Amendment, which continues on a symbolic level to restrict U.S. Permanent Normal Trade Relations with Russia — despite Bush administration pledges that the amendment would be repealed.
The Russian criticism that the U.S.-Russian relationship is a one-way street may have some validity. But to be fair, since September 11, the United States has taken steps toward Moscow by declaring some Chechen extremists international terrorists and by pursuing cooperation with Russian companies on ballistic-missile defense.
Some of Putin’s political allies, especially from the secret police, nuclear power, and defense circles, still harbor anti-American sentiments and insist on Russia’s "special path." This path includes building military presence and political influence in the former Soviet republics and coordinating Moscow’s policies with China and Iran, and selling arms to them.
Russian nuclear-technology transfer to Tehran is particularly dangerous and destabilizing. The new Russian overtures to Saudi Arabia are also a signal that Russia is keeping open the option of cutting a "separate deal" with the Islamic world, to attract massive investment and prevent the financing of terrorist operations on Russian soil.
While all politics are local, all foreign policy is domestic: Future Russian foreign policy will be influenced by the continuing political struggle in Moscow between the Westernizers and authoritarians.
What Should the Bush administration Do? Improving antiterrorism cooperation and pulling Russia closer to the U.S. side on Iraq may trigger competition between other powers to offer peacekeepers and support for the U.S. on Iraq, Iran, and the war on terrorism. At Camp David, President Bush should request Russian support for the U.S. draft of the U.N. resolution authorizing U.N. peacekeepers for Iraq under U.S. military command while rejecting the French demands for a hasty transfer of power to the Iraqis. Putin and Foreign Minister Igor Ivanov have signaled that Russia will support U.N. peacekeepers under U.S. command in Iraq.
Bush should also invite Russian participation in the U.N. peacekeeping force for Iraq. While Russian U.N. Ambassador Sergey Lavrov has ruled out Russian troops in Iraq, peacekeepers could provide training, emergency relief, and oil-pipeline security. Russia currently has up to 10,000 experienced peacekeepers, who adequately cooperated with American troops in Bosnia and Kosovo.
Bush should offer expansion of Russian participation in the reconstruction of Iraq. Russian companies have up to $1 billion in contracts to rebuild Iraq. The USSR constructed the Iraqi power grid, which is in need of major refurbishing. Russian oil companies have contracts to increase production in the depleted Iraqi oilfields. Doubling the value of contracts for Russian participation in the reconstruction of Iraq would provide Moscow with an incentive to cooperate.
Bush should request Russian cooperation in preventing further development of the Iranian uranium-enrichment and nuclear-weapons program. On August 26, the International Atomic Energy Agency (IAEA) announced that it had found traces of weapons-grade uranium in Iran. Russia has expressed support for intrusive inspections under the IAEA’s "additional protocol" and expects to conclude a spent-fuel repatriation agreement with Tehran. However, as Iran is threatening to follow North Korea and withdraw from the Nuclear Non-proliferation Treaty, President Bush should encourage Russia to coordinate its position with Washington and stress that a nuclear-armed Iran will pose a strategic threat to Russia.
Finally, Bush should explore further cooperation on missile defense. The president has signed a policy directive calling for missile defense cooperation with Russia, and he should use this summit to further this policy. Boeing and a major Russian military-electronics manufacturer have recently signed a contract to build a sophisticated radar for a joint missile-defense program.
The Camp David summit is a strategic opportunity to put U.S.-Russian relations back on track. If successful, Presidents Bush and Putin will contribute to achieving security and peace in Iraq and strengthening struggle against international terrorism.
09-18-2003
A US corruption case that has implicated top Azerbaijani officials is not expected to substantively alter Bush administration policy towards Baku, experts in Washington believe. At the same time, the case stands to deepen Washington’s conundrum over its short- and longer-term interests in resource-rich Azerbaijan.
An early September indictment unsealed in a New York federal court alleges that Swiss lawyer Hans Bodmer "paid bribes and authorized the payment of bribes" to four unnamed "senior officials" in Azerbaijan in a scheme to influence the privatization of the state oil company, SOCAR.
Western media, including the Financial Times, have reported that two of Azerbaijani officials involved in the scheme were President Heidar Aliyev, and his son, Ilham, who is a former deputy head of SOCAR and is currently the ruling New Azerbaijan Party’s candidate for president in the upcoming October 15 election. Azerbaijani government officials have vigorously denied that either Aliyev received illicit payments from Bodmer.
Opposition media outlets in Azerbaijan have seized on the indictment, hoping the bribery probe can boost the electoral chances of opposition presidential candidates. So far, though, the response to the case in Azerbaijan has been somewhat muted. State-run media has largely ignored news about the indictment. Meanwhile, the limited reach of opposition-controlled media hampers their ability to spread their message.
In Washington, the indictment hasn’t generated much concern over the near-term policy implications. Zeyno Baran, Director of International Security and Energy Programs at the Nixon Center and a Caucasus expert, indicated the corruption allegations cannot be considered a shocking development. "The United States knows that Azeri officials are corrupt." Indeed, the group Transparency International ranks Azerbaijan as among the most corrupt countries in the world in its 2002 Corruption Perceptions Index.
Realpolitik ensures that the Bush administration will largely maintain its current policy course. Azerbaijan has emerged as a key ally in the strategically important Caucasus region. More importantly, the country is the central player in US-backed efforts to export Caspian Basin energy via the Baku-Tbilisi-Ceyhan pipeline. Washington built a close working relationship with President Heidar Aliyev, and top Bush administration officials have sought to foster similar ties with Ilham, who is widely perceived as the likely presidential election winner.
The main consequence of the indictment could be that US-Azerbaijani relations, while remaining strong, will assume a lower profile. Some observers in Washington dub this phenomenon as "Nazarbayevization," a reference to Kazakhstani President Nursultan Nazarbayev, who is reputedly linked to an ongoing corruption probe involving New York merchant banker James Giffen. Under Nazarbayevization, US leaders effectively maintain a policy status quo while distancing themselves from a leader tainted by allegations of impropriety.
An indicator that US-Azerbaijani relations may be undergoing Nazarbayevization is that while Ilham Aliyev received a warm reception from Bush administration officials during a recent visit to Washington, both President George W. Bush and Vice President Dick Cheney refrained from meeting with the Azerbaijani heir apparent. According to a source familiar with the Bodmer investigation, the White House had advance knowledge of the pending indictment against the Swiss lawyer.
As is the case in the US corruption probe reportedly involving Nazarbayev, legal and political experts in Washington expressed doubt that prosecutors in New York would seek to reveal the identities of the bribe-taking Azerbaijani officials. David Rivkin, a former White House and Justice Department official during the former Reagan and first Bush administrations, said there was no legal basis to prosecute Azerbaijani officials for accepting illicit payments. "As they cannot be prosecuted, they should not be named," he said. "That’s why we have a category of un-indicted co-conspirators."
In general, US officials would prefer that the Bodmer case not receive wide publicity. The mere allegations of corruption have the potential to alienate Azerbaijani leaders, prompting them to downgrade US relations. Such a trend is noticeable in Kazakhstan, where Nazarbayev in recent months has taken steps to improve relations with Russia and China in what he has described as a "multi-vectored" policy.
Ultimately, the Bodmer indictment brings into sharper profile a conundrum that surrounds US policy towards Azerbaijan. Washington’s immediate interests appear to clash with its long-term preferences.
Over the near term, Bush administration officials are convinced that maintaining strong ties with the Aliyevs is in the best interests of the United States – both in strategic and economic terms. The Aliyevs are widely seen in Washington as offering the best option for the maintenance of stability in Azerbaijan in the coming months and years.
Over the longer haul, however, the Aliyevs association with corruption, which has been enhanced by the Bodmer indictment, can prove a liability for US goals. The United States remains interested to promoting the democratization of the countries of the former Soviet Union, and many American observers believe civil society, the development of which can be painstakingly slow, is the best guarantor of stability in any given country. Ongoing Bush administration support for the Aliyevs may be undermining Azerbaijan’s gradual democratization process, some policy analysts believe.
Opposition leaders in Baku have sharply criticized recent US behavior, saying that the overt Bush administration preference for Ilham Aliyev is tantamount to meddling in the election outcome. Some observers believe that such a perception could prompt the opposition to embrace confrontational methods if they feel the presidential election is rigged. Others suggest that Washington’s embrace of Ilham could encourage vote rigging by conveying the impression that the United States is not prepared to take punitive action in response to a falsified election tally.
While visiting Baku to monitor election preparations, Andreas Gross, the head of a Council of Europe Parliamentary Assembly (PACE) delegation, expressed concern about the possibility of fraud. At the same time, Gross expressed hope that authorities would take action to rectify current electoral shortcomings.
"Azerbaijan needs strong leaders and a strong president," Gross was quoted as saying by the Ekho newspaper on September 17. "However, the strength of the president lies not in his authoritarianism, but in his legitimacy. It is the legitimacy of power that makes the statesman strong."
09-17-2003
Geopolitical tectonic plates have shifted as the de-facto ruler of Saudi Arabia, Crown Prince Abdullah, completed his recent visit to Russia.
No longer sure of its prior close relationship with Washington, the Saudi monarchy is reaching out to the former empire it helped America to defeat in Afghanistan only 15 years ago.
In the aftermath of the Iraq war, Riyadh is looking to balance U.S. influence in the Persian Gulf. It also hopes to diversify its sources of weapons and signal to Washington that it keeps all geopolitical options open.
Russia is the third largest weapons exporter after U.S. and Great Britain. It leads the world in selling large weapons systems like tanks and aircraft. Its military sales topped $6 billion in 2002, according to the Stockholm-based International Peace Research Institute.
In the 1990s, Russia sold a $4 billion state-of-the-art, multi-layer air defense system to the United Arab Emirates, and would like to open the large and lucrative Saudi weapons market to its rusting but once-formidable arms industry.
The Saudis also recognize that Russia -- as the largest producer of oil outside of Organization of Petroleum Exporting Countries (OPEC) and the largest producer of natural gas -- packs a lot of punch in the global energy markets. While the U.S. is interested in diversifying its energy supply to include Russia, Saudi Arabia wants its own direct energy dialogue with Moscow.
Russian oil exports have grown 8-10 percent a year since 1998. Its increasing oil market share started to worry the Saudi kingdom. Riyadh traditionally considers itself the market-maker of energy and wants others to follow. It is also worried that the more efficient Russian private sector oil model may become contagious. The Saudi royal family would like to keep controls of the "spice."
The five-year oil-and-gas cooperation agreement signed in Moscow by the energy ministers will allow the two fuel giants to coordinate supply of oil to the global markets. Russia will not even need to join OPEC, although the U.S. State Department sources told TCS that Washington "will not be excited" if Moscow consider joining the cartel.
Moscow is driven towards a partnership with Saudi Arabia for a combination of geopolitical and geo-economic reasons. It is looking to compensate itself for the loss of influence in the Gulf with the demise of Saddam Hussein, the old Soviet client.
Russia’s traditionally warm relations with other secular Arab countries, Syria and Libya, have stagnated for years. While Damascus has no cash to pay for Russian weapons, Riyadh has plenty. And Russian energy companies, flush with cash, are looking for joint ventures in the Middle East, including in Saudi Arabia.
The desert kingdom is a perfect partner for giant natural gas development schemes under the umbrella of Prince Abdullah’s much-touted "gas initiative," which would include power generation, liquid natural gas (LNG) production for export, and gas-powered desalination.
Most importantly, though, Moscow believes that Saudis and other rich Gulf states hold the keys to the 9-year-old war in Chechnya. One of the most radical and audacious Islamist commanders in Chechnya, known by Nome-de-guerre Hattab, was a Saudi. The Russian special forces killed him after a long hunt. Another top commander, Shamil Basaev, on the U.S. Department of State terrorism list, is known to have military and financial support from the Gulf, as well as a flow of jihadi recruits.
In October of last year, the Russian security services alleged in the media that the Chechen suicide bombers who took 1,000 people hostage in a Moscow theater made phone calls to the Gulf. Their commander, they said, has negotiated to make a "snuff movie" featuring hostage executions for a rich Gulf sponsor -- for US $1 million.
The Kremlin was livid. In the last summit with President Bush in St. Petersburg in June, President Putin stressed that 15 out of 19 hijackers were Saudi. President Bush nodded in agreement. This was an intentional jab to signal to Saudi Arabia that Russia is willing to join forces with the United States in prosecuting the war against terrorism if the Saudis don’t reign the radical Chechens in.
Al Qaeda’s terrorist attacks in Riyadh, in which over 30 Saudis died, seemed to have changed the tone in the desert kingdom. Now Saudi leaders claim that they view Chechen separatism as an internal Russian affair, and that their assistance was always exclusively humanitarian. While nobody in Moscow believes that, the Putin Administration, which is facing parliamentary elections in December and presidential elections in March 2004, is hoping for drying up of financing to terrorism, and significant decrease in hostilities.
Russian-Saudi relations have known their share ups and downs. The Soviet Union was the first state to recognize the desert Kingdom of Hijaz in 1926, hoping to upset the British. In the great purge of 1937, however, Stalin recalled the Soviet Ambassador and had him shot.
Saudi Arabia paid billions of dollars and thousands of mujahideen to fight the Soviet Union in Afghanistan in the 1980s. It also crashed the oil prices down, denying Leonid Brezhnev, the Soviet General Secretary, his principal source of foreign cash. The conflict that brought Riyadh and Washington to the pinnacle of their friendship, allowed the Saudis to propagate the Wahhabi school of Islam worldwide, and hastened the demise of the Soviet Union. Saudi foundations and rich individuals have poured over $100 million to support Chechen separatism. According to George Engelhardt, a Moscow-based expert on radical Islam, the Saudis are spending up to $100 million a year to support Wahhabi indoctrination and anti-Western lobbying. This amount is likely to increase if more Saudi companies will become engaged in Russia.
Dr. Sergey Karaganov, the Chairman of the Russian Council on Foreign and Defense Policy and a consultant to the Russian government and to energy companies, was instrumental in bringing Prince Abdullah to Moscow. Karaganov says that the visit was "very productive." This means Saudi-Russian cooperation both on energy and on Chechnya.
As Moscow and Riyadh discover their newfound common agenda, and pursue cooperation, the bear-and-camel rapprochement demonstrates the old adage: countries do not have permanent friends. They only have permanent interests.
09-12-2003
The Bush Administration needs to monitor a new geopolitical shift that is taking place following the visit of de-facto ruler of Saudi Arabia, Crown Prince Abullah to Russia on September 1-2. Moscow and Riyadh, old rivals, now claim to have found a common agenda, which spans oil, terrorism, and arms sales.
Moscow wants to intercept money flowing to the Chechen rebels from the Persian Gulf, sell arms and attract Saudi investment. No longer sure of their close relationship with Washington, the Saudis are reaching out to the Russians. In the aftermath of the Iraq War, Riyadh is looking to balance U.S. influence in the Persian Gulf. The Saudis also hope to diversify their sources of imported weapons. They have signaled to Washington that they want to keep all geopolitical options open.
Weapons and Oil
Russia is the world’s third largest weapons exporter after the United States and Great Britain, with military sales topping $6 billion in 2002. In 1997, Russia sold $4 billion, SA-10 air defense system to the United Arab Emirates, and would like to open the lucrative Saudi weapons market to its formidable arms industry.
Saudis also recognize that Russia, as the largest producer of oil outside of Organization of Petroleum Exporting Countries (OPEC) and the largest producer of natural gas, packs a lot of punch in the global energy markets. Saudi Arabia, like the United States, wants its own “energy dialogue” with Moscow.
Russian oil exports grew 8-10 percent a year since 1998. The Saudis are concerned that the more efficient Russian private sector-driven oil industry development model may spread to the Middle East.
The five-year oil-and-gas cooperation agreement signed between Russian and Saudi Arabia will allow the two fuel giants to coordinate supply of oil to the global markets. Russia will not even need to join Organization of Petroleum Exporter Countries (OPEC) to do so, although the U.S. State Department sources believe that Washington “will not be exited” if Moscow considers joining the cartel.
The Kremlin Agenda
Moscow, for its part, is driven towards a partnership with Saudi Arabia for a combination of geopolitical and geo-economic reasons. It is looking to compensate itself for the loss of influence in the Gulf with the demise of Saddam Hussein, the old Soviet client.
Russia’s traditional influence and markets in secular Arab countries: Iraq, Syria and Libya, have been in decline.
Russian energy companies, flush with cash, are looking for joint ventures in the Middle East, including in Saudi Arabia, while Saudis may invest in the Russian natural resources sector, including energy, in real estate and aerospace. The desert kingdom is a perfect partner for giant natural gas development schemes under the umbrella of Prince Abdullah’s “gas initiative” that includes power generation, liquid natural gas (LNG) export facilities, and gas-powered desalination of seawater.
The Chechen Connection
Most importantly, though, Moscow believes that Saudis and other rich Gulf states keep the keys to the 9-year-old war in Chechnya. One audacious Islamist commander in Chechnya, now dead, Hattab, was a Saudi. Another top commander, Shamil Basaev, on the U.S. Department of State terrorism list, receives financial support and a flow of jihadi recruits from the Gulf. Saudi foundations and rich individuals have out poured over $100 million to support Chechen separatism between 1997-1999 alone, according to a State Department official who requested anonymity. Radical Chechen leaders, such as Movladi Udugov and Zelimkhan Yandarbiev, found asylum in Saudi Arabia.
However, Al Qaeda’s May 12 terrorist attacks in Riyadh, in which over 35 people died, seemed to change the tone. The Putin Administration is now hoping to stem the financing, and decrease hostilities in and around Chechnya.
Russian-Saudi relations knew its ups and downs. The kingdom paid billions of dollars and sent thousands of moujahedeen to fight the Soviet Union in Afghanistan in the 1980s. It also crashed the oil prices down, denying the USSR its principal source of foreign cash. That conflict has provided the Saudis with U.S. acquiescence to spreading the Salafi (Wahhabi) school of radical Islam worldwide.
What to do
The Bush Administration should be aware that Russian-Saudi rapprochement may affect U.S. energy security and may diminish Russia’s enthusiasm in support of U.S. war on terrorism. If successful, these ties may lessen U.S. clout in the Middle East and boost Moscow’s impact.
The National Security Council should instruct the U.S. Department of State and the intelligence community to monitor and analyze the possible new developments between Moscow and Riyadh, including:
As Moscow and Riyadh discover their newfound common agenda, and pursue cooperation, the Bush Administration should remember the old adage: countries do not have permanent friends. They only have permanent interests.
09-10-2003
Geopolitical tectonic plates have shifted as the de-facto ruler of Saudi Arabia, Crown Prince Abullah completed his visit to Russia last week. Oil-exporting Caspian states should watch with concern how the two largest energy producers are beginning their elephantine dance. In the process, smaller oil exporters on Russia’s periphery, such as Kazakhstan and Azerbaijan, may suffer if collusion between the major players results in pressure to limit oil production in order to keep global supply down.
BACKGROUND: The apparent rapprochement between Russia and Saudi Arabia during Crown Prince Abdullah’s visit to Moscow is likely to have large implications for global energy markets, and especially for Caspian producers. There are significant forces which push Saudi Arabia and Russia into each other’s embrace. Oil, weapons and geopolitics drive their newly found common agenda. Moscow, on its part, is driven towards a partnership with Saudi Arabia for a combination of geopolitical and geo-economic reasons. It is looking to compensate itself for the loss of influence in the Gulf with the demise of Saddam Hussein, the old Soviet client. Russian companies connected to Moscow high-flying insiders used to do brisk business – up to $1 billion a year -- in Iraqi oil under the U.N.-sponsored oil-for-food programs. Most importantly, though, Moscow believes that Saudis and other rich Gulf states keep the keys to the 9-year-old war in Chechnya.
One of the most radical and audacious Islamist commanders in Chechnya, known by Nom de guerre Khattab, was a Saudi. The Russian special forces killed him after a long hunt. Another top commander, Shamil Basaev, on the U.S. Department of State terrorism list, is known to have military and financial support from the Gulf, as well as a number of foreign Jihadi recruits.
Moscow has consistently blamed Saudi Arabia for sponsoring extremism and terrorism in Chechnya and, thereby, keeping the conflict alive. During the horrific hostage taking in October of last year, the Russian security services alleged in the media that the Chechen suicide bombers who took 1,000 people hostage in a Moscow theater made phone calls to the Gulf. The Kremlin was livid. In the last summit with President Bush in St. Petersburg in June, President Putin stressed that 15 out of 19 hijackers were Saudi. President Bush nodded in agreement. This was an intentional jab to signal to Saudi Arabia that Russia is willing to join forces with the United States in prosecuting the war against terrorism if the Saudis don’t reign the radical Chechens in.
Al Qaeda’s terrorist attacks in Riyadh, in which over 30 Saudis died, seemed to have change the tone in the desert kingdom. Now Saudi leaders claim that they view Chechen separatism as an internal Russian affair, and that their assistance was always exclusively humanitarian. While nobody in Moscow believes that, the Putin Administration, which is facing parliamentary elections in December and presidential elections in March 2004, is hoping for drying up of financing to the Chechen rebels, and thereby achieve a significant decrease in hostilities.
Putin also wants Saudi Arabia to assist Russia to join Organization of Islamic Conference (OIC), as an observer. The OIC is an assembly of such Muslim stalwarts as Iran, Indonesia, and Saudi Arabia, and the Russian foreign policy establishment believes that an open channel of communication to these countries after 9/11 is in Russia’s national interest.
Saudi Arabia, meanwhile, recognizes that Russia, as the largest producer of oil, the second largest exporter of oil, as well the largest producer of natural gas outside of the Organization of Petroleum Exporting Countries (OPEC), packs a lot of punch in the global energy markets.
While the U.S. is interested in diversifying its energy supply to include Russia, Kazakhstan and Azerbaijan, Saudi Arabia wants its own direct energy dialogue with Moscow. And, as this author’s experience with Gulf oil industry experts demonstrates, Gulf States traditionally viewed the Caspian states, with their ample oil reserves and free of restraints of the Organization of Petroleum Exporter Countries (OPEC), as potential competitors to their cheap, but politically unstable, oil.
Russian oil exports have grown at a rate of 8-10 percent a year since the financial crisis of 1998. Its increasing oil market share has in recent years begun to worry the Saudi monarchy, which saw signs of Moscow emerging as a rival on the horizon. Riyadh has traditionally considered itself the market-maker of energy and wants others to follow – and wants to keep it that way.
IMPLICATIONS: The five-year oil-and-gas cooperation agreement signed in Moscow by the two energy ministers, Igor Yusufov and Ali al Naimi, will allow the two fuel giants to coordinate the supply of oil to the global markets. This will doubtless help them keep the oil price at a level desirable to both. But in addition to obvious mutual interests in the energy sector, there are reasons beyond influence in energy markets, which drive the Russo-Saudi relations.
No longer sure of its prior close relationship with Washington, the Saudi monarchy is reaching out to the former empire it helped America to defeat in Afghanistan only 15 years ago. In the aftermath of the Iraq war, Riyadh is looking to balance U.S. influence in the Persian Gulf. It also hopes to diversify its sources of weapons, and signals to Washington that it keeps all geopolitical options open.
Russia, the world’s third largest weapons exporter after the U.S. and Great Britain, leads the word in the number of large weapons systems, like tanks and aircraft, sold. Its military sales topped $6 billion in 2002, according to the Stockholm-based International Peace Research Institute. In the 1990s, Russia sold $4 billion worth of state-of-the-art multi-layer air defense systems to the United Arab Emirates, and would like to open the large and lucrative Saudi weapons market to its rusting, but once-formidable arms industry.
CONCLUSIONS: Russia’s improved ties with Saudi Arabia and other Islamic states will give Moscow ever-increasing freedom of maneuver in the Caucasus and Central Asia. If the Islamic world mutes its criticism of Moscow’s policy in Chechnya, some in the Kremlin may interpret it as an implicit green light to neo-imperial behavior in the former imperial space. Dr. Sergey Karaganov, the Chairman of the Russian Council on Foreign and Defense Policy, and a consultant to the Russian government, was instrumental in bringing Prince Abdullah to Moscow. Karaganov says that the visit was “very productive”. This means Saudi-Russian cooperation both on energy and on Chechnya.
Karaganov, however, is known as an advocate of a more robust Russian policies toward Georgia and Azerbaijan. His buoyancy on the Saudi-Russian ties may indicate a “new thinking” in the Kremlin: to make Russia indispensable to the U.S., Iran, as well as to Saudi Arabia, and in turn demanding their acquiescence to Russia’s assertive policies in the “near abroad.”
07-14-2003
The September 11 terrorist attack taught the United States government a painful lesson — it must be alert to emerging threats, including terrorism against its military assets, citizens and allies. Some of these emerging threats, combined with the actions of terrorist Jihadi organizations, such as al Qaeda, may also generate political instability in key geographic areas and threaten pro-American regimes, such as in Central Asia.
U.S. government should be taking a close look at Hizb ut-Tahrir al-Islami (Islamic Party of Liberation). A clandestine, cadre-operated, global radical Sunni political organization that operates in 40 countries around the world, with headquarters apparently in London, Hizb was in the headlines recently, when Germany banned its activities and Russian Federal Security Service (FSB) arrested 55 alleged members and over 60 "supporters."
Is Hizb ut-Tahrir an emerging threat to American interests in Central and South Asia and the Middle East? Analysts note the increasingly militant rhetoric, participation of Hizb fighters in the coups in the Arab world and on the side of the Taliban in Afghanistan, and explosives and weapons found when Hizb members are arrested.
Hizb’s proclaimed goal is Jihad against America and the overthrow of existing political regimes and their replacement with a Califate (Khilafah in Arabic), a theocratic dictatorship based on the Sharia (religious Islamic law). The model for Hizb is the "righteous" Califate, an Islamic state that existed in the seventh and eighth centuries under the Prophet Mohammed and his first four successors, known as the "righteous Califs."
Hizbut-Tahrir’s spread around the globe over the last five decades, in Western Europe and often in authoritarian states with strong secret police organizations, is an impressive feat of beating security. It could only be accomplished by applying 20th century totalitarian political "technology" melded with Islamic notions of the seventh and eighth centuries, as interpreted by medieval Islamic scholars. Only a cell commander knows the next level of leadership, ensuring operational security. "Representatives" in Great Britain and Pakistan claim to speak for the organization, but have no official address or legal office. Its leadership for large regions (e.g., the former Soviet Union), countries, and local areas is kept secret. The achievement of Hizb founder Tariquddin an-Nabhani was marrying Orthodox Islamist ideology to Leninist strategy and tactics.
Hizb ut-Tahrir is a totalitarian organization, akin to a disciplined, Marxist-Leninist party, in which internal dissent is neither encouraged nor tolerated. Because its goal is global revolution, Hizb is similar to the Trotskyite wing of the international communist movement. Its candidate members become well-versed in party literature during a two-year indoctrination course in a study circle, supervised by a party member. Women are organized in cells supervised by a woman cadre or a male relative. When a critical mass of cells is achieved, according to its doctrine, Hizb may move to take over a country to establish the Califate. Such a takeover would likely be bloody and violent. Moreover, its strategy and tactics show that, while the party is currently circumspect in preaching violence, it is already justifying its use — just as Lenin and the Bolsheviks did — when "circumstances" dictate that.
Hizb’s platform and action fits in with "Islamist globalization" — an alternative mode of globalization based on radical Islam. This ideology poses a direct challenge to the Western model of a secular, market-driven, tolerant, multicultural globalization. Where radicalization has taken hold in the Islamic world, Hizb gains new supporters in droves.
Hizb’s primary characteristics include the fiery rhetoric of Jihad, the murky funding sources, rejection of existing political regimes, and shared outlook and goals with al Qaeda and other organizations of the global jihadi movement.
Hizb has called for a Jihad against the U.S., its allies, and moderate Muslim states. Hizb claimed that the U.S. accused Osama bin Laden of being responsible for the September 11 attacks "without any evidence or proof." The party attempted to use its influence by calling upon all Muslim governments to reject the U.S. appeal for cooperation in the war against terrorism.
To prevent Hizb ut-Tahrir from destabilizing Central Asia and other areas, the Bush administration may pursue a number of policy options. U.S. is considering expanding intelligence collection on the organization. This is likely to be done both in Western Europe and in outlying areas, such as Central Asia, Pakistan and Indonesia. A recent visit to Washington of the German Interior Minister Otto Schile may be a step in this direction.
Washington is also getting irritated with the glacial pace of economic reform in Central Asia, particularly in Uzbekistan. U.S. may condition security assistance to Central Asia on economic reform. Hizb is growing in Central Asia due to the "revolution of diminishing expectations," increasing despair, and the lack of secular political space and economic opportunity in the region.
To jump-start economic development, the Bush administration may condition security assistance provided by the Pentagon on the adoption of free market policies, strengthening property rights and the rule of law, encouraging transparency, and fighting corruption.
U.S. will further encourage democracy and popular participation. The scarcity of secular and moderate Islamic democratic politics and credible nongovernmental organization (NGO) activities and the lack of freedom of expression may be driving thousands of young recruits to join Hizb in Central Asia.
U.S. will expand cooperation with moderate and secular governments in the Muslim world to discredit radicals and encourage moderates. The U.S. should encourage local governments to not only crack down on radical Islam (as they already do), but also encourage alternatives.
The United States has important national security interests at stake in Central Asia, Indonesia and Pakistan, including access to the military bases used to support operations in Afghanistan, preventing the proliferation of weapons of mass destruction and technologies for their production, and securing access to natural resources, including oil and gas. A Hizb takeover of any key state could provide the global radical Islamist movement with a geographic base and access to the expertise and technology to manufacture weapons of mass destruction. The U.S. and its allies will do everything possible to avoid such an outcome.
07-02-2003
In the aftermath of the Iraqi war, leaders and countries in the Caspian littoral are competing to obtain maximum geopolitical and economic advantage by attracting investors through lower bureaucratic barriers and reduced political risk. The Iraq war has generated rethinking on the part of regional governments, who now have to adapt to a more competitive situation. Iran’s stance is still ambiguous with contradicting hard and soft lines, while some Balkan operators are beginning to involve in the pipeline discussion.
BACKGROUND: The Iraq war has raised concerns regarding the political environment and profitability of Caspian oil, with some arguing that it fundamentally changes the situation there. Fear are that large multinational companies will shift resources for Iraqi exploration, thus slowing down Caspian development and transit projects, and delaying the flow of the Caspian oil to the international markets. Question that arise are what role the U.S. is planning to play in the region in view of continuing instability in Iraq, while the Iranian regime is pursuing development of weapons of mass destruction and may be coming under increasing U.S. pressure to stop its nuclear program? These concerns, among other, reverberated through a number of conferences which took place in Turkey recently.
On the one hand, Iran’s stance is, at least outwardly, moderating. Mehdi Safari, Iranian Deputy Minister of Foreign Affairs, expressed a relatively moderate position on the Caspian boundary delineation issue, putting his country’s claims in the context of international law. While Iranians have in the past demanded an equal share of all Caspian oil, today their claims are being scaled down. Iranian representatives also made a pitch to become a transit country for abundant Kazakhstani oil through a proposed North-South oil pipeline – a suggestion supported by a number of participants, from the French TotalFinaElf, to a small Georgian company which currently specializes in rail transport of Kazakh oil to Iran. However, in less official settings Iranian contradict their message with accusations and claims against the U.S. The Iranian rhetoric, articulated among other by senior officials of the Energy Ministry, stick out as a sore thumb in a generally cooperative atmosphere, justifying suicide bombers and claiming that U.S. policy is ruled by a two percent minority of the population, which includes the international Zionist conspiracy and arms manufacturers. Iranian officials’ statements that Bin Laden is a tool of American intelligence agencies have not helped, either. French and Russian sympathy for the Iranian views are also a problematic element.
Meanwhile, Kazakhstan is stepping up efforts to work with TotalFinaElf, Phillips and ENI to develop a pipeline which will allow the export of oil from the giant Kashagan field to the CPC pipeline, as noted by Uzakbay Karabalin, president of the government-owned KazMunaiGaz. A trunk to Baku-Tbilisi-Ceyhan (BTC) is also under consideration. Kazakhs representatives have, however, warned that a decline in Western investments could force Kazakhstan to “turn to the East”, giving a priority to a pipeline to China. It may also increase oil swaps with Iran, already underway.
While BP is moving aggressively to finalize the construction plans for BTC pipeline, the Balkan countries and Ukraine are only beginning to lay down the framework for transit pipelines which will bypass the congested Bosphorus straits. Presentations of the Burgas-Vlore (Albania) pipeline by Albanian-Macedonian-Bulgarian (AMBO) corporation, which claimed to offer at some future point a considerably cheaper transit price due to the ability of the deep water port in Vlore to accommodate large tankers, have caused some interest. So has a Romanian scheme called Constanta-Pancevo-Omisalj-Trieste to build a pipeline via Romania, Yugoslavia and Croatia, presented by Andrei Razvan Grigorescu, Romanian Secretary of State.
Dr. Mejid Kerimov, Minister of energy of Azerbaijan, in the concluding keynote speech focused on expanding natural gas exports to already gas-inundated Turkey, which currently receives gas from Russia and Iran. The Shah-Deniz giant field, one of the largest in Eurasia, is planned to supply 6.6 billion cubic meters. A Shah Deniz-Erzurum pipeline with its 14 wells will be constructed with financing of $3.2 billion, good part of it coming from the European Bank for Reconstruction and Development.
IMPLICATIONS: Policy makers and oil companies in the region are concerned that the opening of Iraq to new oil and gas development will make the investment climate and geopolitical reality for pipeline transit more competitive, possibly taking a bite at profitability and available financing. U.S. policy is grounded on the goal of helping the Caspian countries use their oil resources to develop their economies and societies; that is a long-term strategy that will not change because of Iraq. A senior U.S. diplomat, however, has recently called on Caspian countries to liberalize their economies and fight corruption, warning that unless that takes place, the flow of Western investment may diminish.
Private investors and financing institutions face political risks, such as a potential flare-up of Nagorno-Karabakh or other local conflicts, but they clearly have sufficient comfort that projects such as the Baku-Ceyhan pipeline will not be disturbed. On the other hand, there is no question that Iraq will compete with the Caspian for western financial resources. The U.S. policy is likely to increasingly focus on encouraging Caspian governments to develop a more favorable investment climate. But oil companies view projects such as AIOC and BTC as designed with a long time horizon, which includes price scenarios far below the current levels.
Financing for the BTC pipeline has been delayed by about three months. According to some observers, this is time well spent as it has been used by the developers to ensure that the project meets the most stringent environmental and social standards. International Financial Institutions now seem more than comfortable with these aspects of the project.
CONCLUSIONS: The Iraq war and its aftermath is changing the geopolitical and geo-economic outlook in Iran, Turkey, Russia and the Caspian states. Interviews with officials and experts from the region indicated that policy adjustments are taking place across the region to integrate into the new reality. The new post-war environment is characterized by the need for greater competitiveness for oil and gas projects in terms of both profitability and available financing. Another elements is the need to make both green field extraction projects and pipelines more attractive for foreign investors through deregulation and lower tariff and taxation regimes. Most importantly, however, there has been a change in the regional thinking on U.S. policy. In fact, an understanding that American power is here to stay in the region for the foreseeable future has developed into a consensus in recent months.
06-23-2003
While student demonstrations continue growing in Iran, Tehran is relentless in defiance of the Great Satan -- America. The mullahs are betting on a blend of nationalism and military technology that will secure the regime’s survival. Nuclear weapons and missiles technology from Russia, North Korea, and Pakistan are supposed to shore up the 24 year old Shari’a rule and protect it from a U.S.-led regime-change operation. However, Tehran is coming under geopolitical pressure from the increased U.S. presence in the Persian Gulf and Iraq. As such, the hard-liners may be miscalculating: American technological superiority in military and intelligence fields, and the spread of global communications may be the trends that will overpower the Islamic regime in the near future.
In a recent conversation at an energy conference in Istanbul, Turkey, a senior Iranian official offered this author no excuses for the Iranian support of Hizbollah, the Lebanon-based radical Muslim movement. Moreover, the Iranian claimed that U.S. has supported Al Qaeda, and that Usama bin Laden is a tool of American intelligence services. "The U.S.", the Iranian official said, "went to war in Iraq for oil... America is run by a small, two percent minority of arms merchants and Zionists," the official claimed. Ironically, two representatives of TotalFinaElf, a French oil company, and a Russian journalist, also present, mostly agreed with the Iranian.
Despite this, the tone of official Iranian statements has been changing. U.S. technological superiority and proliferation of satellite TV and radio broadcasts beamed into Iran are scaring decision-makers in Tehran. In an interview to the national news agency IRNA on May 1, Foreign Minister Kamal Kharrazi announced that Teheran wants to promote a regional defense system in the Caucasus, to include all three Caucasian countries, as well as Iran, Russia and Turkey. Kharrazi further declared that "the Caucasus is an integral part of Iran’s national interests."
On Saturday, May 10, M. Javad Zarif, Iranian Ambassador to the United Nations, in an op-ed in The New York Times ("A Neighbor’s Vision of the New Iraq") revived the mid-1980s idea of a regional security and cooperation framework for the Gulf. The idea, later endorsed by the U.N. Security Council resolution brought the 1980-1988 Iran-Iraq war to the end, but the regional security provisions foundered. If implemented, Zarif argued, the region would be spared the Iraqi invasion of Kuwait, a decade of sanctions, and the second Gulf War.
What is this newly found Iranian penchant for regional security? It is a part of a new defensive strategy most comprehensively outlined in a recent interview by the Iranian Defense Minister Ali Shamkhani to the conservative Iranian newspaper Siaset-e Rouz.
The Iranian Defense Minister called the current period a "turning point" in the Middle East. After the 1979 victory of the Islamic revolution, Iran came under a broad spectrum of threats, including espionage, terrorism, low intensity conflict, and outright conventional attack by Iraq. Some threats, Shamkhani said, had domestic roots, such as left-wing movements which came to oppose the Islamic Republic, while others had "regional" causes, such as Iraqi and Saudi hostility. Iran views the U.S., which supported Saddam Hussein in his attack against Iran, as the main hostile superpower over the last two decades.
The strategic answer of Iran to this array of threats was to create a "deterrent defense", which does not mean Iran will take offensive measures, Shamkhani said, in a language eerily reminding of mutually assured destruction rhetoric of the 1950s Cold War between the U.S. and the Soviet Union. "We are in struggle to sustain the enemy’s first strike. The first strike will not lead to surrender, but it should be seen as a warning… If there is the capability to sustain a first strike, there is a basis for Iranian second strike against the threats. Thus, Iran’s objectives are of a defensive nature… Defensive deterrence causes the enemy to relinquish the threats. Because under such circumstances every country must take into consideration the risk it runs if it takes offensive measures against Iran," Shamkhani said. The Defense Minister’s rhetoric indicates that Iran already possesses or is close to obtaining nuclear weapons and it is betting its future on building and maintaining a nuclear arsenal.
Shamkhani was proud of the Iranian policy of self-reliance, which boosted conventional military-industrial capabilities. Today Iran is manufacturing helicopters, submarines, warships and Shihab missiles. The Iranian Defense Minister, however, did not expand on the nuclear program the Bush administration believes Tehran is pursuing.
Secretary of Energy Spencer Abraham stated in Moscow on August 1, 2002, that Iran is aggressively pursuing nuclear weapons as well as other weapons of mass destruction. On February 9, 2003, Iranian President Mohammad Khatami announced that Iran was mining its own uranium and would process its own spent fuel, raising concerns of a robust Iranian nuclear weapons program.
Last December 13, CNN published commercial satellite imagery of two secret Iranian uranium enrichment installations in Arak and Natanz. State Department spokesman Richard Boucher stated that "Iran is actively working to develop nuclear weapons capability" and declared, in the CNN interview on December 13, that Iran’s energy needs do not justify these nuclear facilities. Moreover, Boucher said that Iran flares more natural gas annually than the equivalent energy its future reactor could produce. Thus, the alleged power-generation applications of the$800-million Bushehr nuclear plant and the two follow-up nuclear reactors seem neither economically justified nor truthful.
According to U.S. intelligence and defense officials quoted in The New York Times on December 16, Iran is actively working on a nuclear weapons program -- with Russian help -- and like North Korea, Iran seems to be pursuing both enriched uranium and plutonium options for its nuclear weapons.
In an interview with CNN’s Christiane Amanpour, International Atomic Energy Agency (IAEA) Chairman Mohammed ElBaradei said late last year that the alleged uranium enrichment plant could produce highly enriched uranium for nuclear bombs and the heavy water plant could be used in the production of weapons-grade plutonium. Most recently, ElBaradei said that Iran has violated the IAEA regime by hiding Chinese-supplied uranium. Moreover, Iranians paid for lessons from North Korean experts on how to hide from international inspectors, Korean newspapers reported.
Henry Sokolski, former Deputy for Nonproliferation Policy at the Department of Defense during the first Bush administration, suggested at an American Enterprise Institute panel that IAEA safety measures are not sufficient to prevent Iran from building nuclear weapons.
Iranian rhetoric about collective security while apparently building nuclear weapons and a ballistic missile arsenal indicates that the supreme leadership in Tehran has analyzed "correlation of forces" and understands futility of frontal confrontation with Washington. Tehran is also trying to split Europe and the United States by promising Europeans lucrative energy deals.
Unlike North Korea, which is escalating both rhetoric and posture, Iran is playing for time while keeping a low profile. Its trump card is operational nuclear weapons deployed on ballistic missiles. Washington, however, understands that a combination of military, intelligence and mass communication technological superiority may bring the Iranian regime down. If not, a nuclear-armed, terrorism-exporting Iran may drop collective security rhetoric overnight.
05-23-2003
Al Qaeda’s recent attacks in Riyadh, Saudi Arabia, and the closure of the U.S. Embassy there, have exposed the weaknesses of the kingdom’s security apparatus. These developments also further one of Osama bin Laden’s goals — to drive the "infidels" from the "Land of the Two Mosques" and topple the monarchy.
Clearly, the global economy and the United States are at risk. If the Saudi regime falters, if the kingdom’s vast oil infrastructure is damaged, or if a prolonged civil war erupts, oil prices are likely to skyrocket.
A deep economic recession would be triggered by the high cost of energy, with devastating consequences, particularly in an election season. The United States must draw the obvious conclusions and take precautions, and it has to act now.
Thus far, Saudi security cooperation has been unimpressive. The FBI investigation of the 1996 Khobar Towers attack by Iranian-sponsored Hezbollah, which killed 19 U.S. servicemen, was stalled by the Saudi Interior Ministry, requiring multiple interventions by then-FBI Director Louis Freeh and phone calls from President George H.W. Bush to Crown Prince Abdallah. This time, U.S Deputy National Security Adviser Stephen J. Hadley’s and U.S. Ambassador Robert W. Jordan’s desperate pleas for extra security went unheeded, as was reported in the media. This must change.
Oil is a highly emotional and political issue in the Middle East. In many monarchies, state budgets are opaque, and the population often has no idea how the petrodollars are spent. The opulent — and sometimes distinctly "un-Islamic" — lifestyles of the rulers are becoming increasingly unsustainable as the populations explode. It is not just the welfare economics of the Middle Eastern oil-producing states, but their demographics, corruption, incompetence and democratic deficit that are undermining the regimes’ legitimacy. And there is more.
The oil bonanza funded the worldwide export of radical Wahhabi Islam, the ideological breeding ground of al Qaeda and the Taliban, over the last three decades. Government-sponsored foundations, supervised by members of the Saudi royal family, fueled Jihad from New York to Kabul, and from Miami to Manila, by funding brainwashing for violence in Wahhabi academies (madrassahs), and terrorism training under the guise of charity.
Hamas and Yasser Arafat’s Al Aqsa Martyrs Brigades, which undermined the Oslo process and now are busily blowing the roadmap to bits with their weapon of choice — brainwashed Palestinian suicide bombers — are partially funded through Saudi telethons and hailed by preachers in Saudi government-supported mosques worldwide.
The "root cause" of violence against the United States is not the Arab-Israeli conflict, but the ideology of jihad against the West, which exhorts the "faithful" to shed the blood of "infidels." Israel is just a target of opportunity, a substitute for the Great Satan. For Islamist radicals, born and bred in Arabia, however, it is also quite permissible to murder "apostate" rulers, including the Saudi royal family. Hence the attacks in Riyadh. The jihad chickens have come home to roost.
Bin Laden understands both economics and the politics of terrorism. He has proclaimed that if he takes over his native land, he will drive oil to $125 a barrel, while his deputy, Ayman al Zawahiri, stated that U.S. economic targets are high on al Qaeda’s hit list. In October 2002, the Limbourg, a French super-tanker, was hit by a suicide Zodiac boat in the Persian Gulf — just as the USS Cole was in 2000. And bin Laden’s engineering and managerial skills can conceivably suffice to stage a super-attack on the kingdom’s oil infrastructure, one that could neutralize Saudi Arabia’s 2 million barrel a day surplus oil producing capacity, vital for price stability.
The sand in the hourglass is running out for U.S. energy security in the Persian Gulf. Bin Laden is riding high, claiming successes in striking at the heart of the "infidels" in the United States; taking credit for the announced withdrawal of U.S. troops from Saudi bases; and now, shutting down the embassy. His allies are striking almost daily from Morocco to Jerusalem. It is only a matter of time before a blow comes against the oil fields — or their Saudi royal guardians.
As Saudi oil is endangered, the United States needs to prepare comprehensive military and energy responses. It is important to diversify the U.S. supply, bringing more oil from such sources as West Africa and Eurasia. The energy basket must be more diverse, and should include more domestic oil and gas, coal, liquid natural gas and renewables.
It is vital to "get Iraq right." Iraq has reserves second only to those of Saudi Arabia — and a great need to rebuild after Saddam’s misrule and three wars. It needs law and order, and rapid economic reform, including privatization and attraction of foreign investment. Securing Iraq must also include deterring Iran from destabilizing it.
The U.S. military must have contingency plans to rapidly secure the Persian Gulf oil infrastructure if al Qaeda attempts to severely disrupt it. Top U.S. policy-makers must ensure that the intelligence community and law enforcement agencies receive full cooperation from their Saudi colleagues in tracking down terrorist organizations, their financiers and supporters.
Saudi Arabia must become a force for peace in the Middle East, cutting funding to any and all jihad organizations around the world. Most importantly, the kingdom must dismantle its homegrown jihad infrastructure, with its anti-American clergy, anti-Western academies and hostile state-run media. This apparatus breeds terror, a terror that today threatens not just the United States and the West, but the very survival of the Saudi regime and its very blood — oil. President Bush said that Saudi Arabia is a friend. Friends don’t let friends commit suicide through terrorism.
04-01-2003
The Bush Administration has accused Moscow of selling sensitive military equipment to Saddam Hussein in violation of U.N. Security Council sanctions. During a March 24th telephone conversation, President George W. Bush discussed the sales of night vision goggles, anti-tank Kornet missiles, and Global Positioning System (GPS) jamming equipment with Russian President Vladimir Putin. All information regarding Russian sales was based on U.S. intelligence reports.
Putin not only denied sales to Iraq, but also went on to accuse the U.S. of selling deadly military equipment to countries that may support international terrorism. The Associated Press and other media reports described the exchange as “tense.” These accusations are just a symptom of the state of U.S.-Russian relations, which have been deteriorating since Moscow sided with Paris in the U.N. Security Council, opposing a resolution that would have authorized use of force to disarm Saddam.
Secretary of State Colin Powell and his Russian counterpart, Igor Ivanov, also exchanged tough words, but stated that both countries have a broader agenda to pursue. Before the matter became public, U.S. officials repeatedly raised the issue with their Russian colleagues, who typically stonewalled, often with the most ridiculous explanations. In some cases, they claimed that the company in question did not exist.
There was little new in the fact that Russian companies were accused of selling high tech equipment to Iraq. FOX News reports, coming as early as January 2003, indicated that Russia had sold GPS jammers, and that Saddam would use the civilian casualties, which could mount as a result of stray bombs or missiles, for his own propaganda purposes. And, according to Paul J. Saunders and Nikolas K. Gvosdev, writing In the National Interest, a Kuwaiti newspaper disclosed a sale of this type by the Russian military equipment company Aviakonversiya as far back as 2000. Night goggles, which are readily available for sale in Russia, are even more dangerous, as they give the Iraqi military the ability to operate at night.
U.S. officials are careful to point out that they do not view the sales under dispute as officially authorized by the Russian government. The question is, did the Kremlin give the sale a wink and a nod, or just shut its eyes and look elsewhere?
As the U.S. provided the Russian authorities with names, addresses, telephone numbers and even shipping details, and went to a great lengths to declassify its intelligence information in a good-faith effort to gain Russian cooperation to stop the sales, the Kremlin cannot feign surprise.
The dispute highlights the bag of tricks military hardware companies and the Iraqi government use to acquire forbidden technology and circumvent the U.N. sanctions. According to the Los Angeles Times, by exporting “components” --not finished goods -- and their assembly in Iraq, Aviankonversia President Oleg Antonov claimed, his company circumvented both the U.N. sanctions and Russian government regulations. If this is the case with Iraq, what about Iran, North Korea, or even terrorist organizations, which may be interested in military systems from the former Soviet Union or even Western Europe?
The case demonstrates how a Russian company can be penny-wise (the whole transaction, which involved six GPS jammers was under $500,000) but the Russian state can become pound-foolish, losing the goodwill of the U.S. government, which could translate into in the loss of billions of dollars in Overseas Private Investment Corporation (OPIC) and Export-Import (ExIm) bank credits.
This flap over arms sales demonstrates how fragile the relationship between Moscow and Washington has really become after Moscow sided with Paris, Berlin, and most of the Arab world, in opposition to the war against Saddam. Three small and shady arms deals are threatening a broad, multi-faceted matrix of ties, repeatedly termed “strategic” by Presidents Bush and Putin. Numerous security, diplomatic, and business relationships, from multibillion dollar Cooperative Threat Reduction programs, which deal with non-proliferation of weapons of mass destruction, to abrogation of the Jackson-Vanick Amendment, which denied Normal Permanent Trade Relations (NPTR), currently under consideration by the U.S. Congress, to billions of energy investment dollars may be jeopardized if U.S.-Russian relations go south.
It is in the interest of both countries to stop acrimony over Iraq and focus on the future. To achieve this, the Putin Administration must “clean house” and take the culprits who sold banned weapons to Saddam to task. Moscow should expand cooperation with the United States on prevention of sales of dual-use and military technologies to countries on the U.S. State Department terrorism watch list.
Moscow should also reflect on how breaching the U.N. Security Council sanctions banning weapons sales to Iraq make its own accusations of violating “international law,” heaped on the United States by the Russian Foreign Ministry, ring hollow.
Most importantly, the two countries should not lose sight of the strategic imperative of fighting global radical Islamist terrorist networks. In that struggle, the survival of tens of thousands of Russians and Americans is at stake.
03-25-2003
The future of Iraq depends not only on the ouster of the repressive regime of Saddam Hussein but also on the ability of the new Iraqi leaders to develop policies that will spur real economic growth and reverse the damage to the economy caused by 40 years of gross mismanagement.
The Bush Administration should help Iraqi opposition leaders to develop an economic reform package for their country. A double strategy of ensuring security and enabling economic growth will need international support.
For the Iraqi people, structural economic reform and comprehensive privatization of government assets is necessary to stimulate recovery and provide stability. The winning strategy of structural reform and privatization would also benefit the industrial world, the United States and its allies, countries of the Middle East, and the developing world.
Iraq’s return to global markets would allow for a more abundant and stable energy supply, a higher cash flow for the Iraqi people, and numerous business opportunities for the region and the world. Iraq’s restructuring and privatization of its oil and gas sector could become a model for oil industry privatizations in other OPEC states as well, weakening the cartel’s influence over global energy markets.
What the New Iraqi Government Should Do
Specifically, the new post-Saddam Iraqi government should:
Develop a modern legal system that recognizes property rights and is conducive to privatization;
Create a public information campaign that prepares the people for structural reform and privatization;
Hire expatriates and Western-educated Arabic speakers with financial, legal, and business expertise for key economic positions;
Deregulate prices, including prices in the utility and energy sectors;
Prepare state assets in the utility, transportation, pipeline, energy, and other sectors for privatization;
Keep the budget balanced and inflation, taxes and tariffs low;
Liberalize and expand trade and initiate an effort to join the World Trade Organization.
How the United States Can Help
The Bush Administration should provide leadership and guidance.
U.S. political commitment will be needed to motivate international organizations to provide appropriate expertise and technical assistance. Inter alia, these organizations could include international financial institutions, such as the International Monetary Fund and the World Bank, and would likely encompass such diverse non-governmental organizations such as the National Endowment for Democracy, the Center for International Private Enterprise, the American Bar Association, and the AFL-CIO. Such groups should begin to advise the future leaders of Iraq’s three primary ethnic groups to establish policies that will lead to a thriving, modern economy.
In particular, the Bush Administration should convince the future federal government of Iraq to come to an agreement on how oil revenues will be taxed and proceeds will be distributed to the country’s three ethnic regions—Shiite Arabs, the Kurds, and the Sunni Arabs. Successfully privatizing the country’s oil fields, refining capacity, and pipeline infrastructure will mean greater efficiency and higher tax revenues in the oil sector.
Though the costs of rebuilding the country will be high, if proper structural economic reforms are undertaken, Iraq’s vast oil reserves are more than ample to provide the funds needed to rebuild and boost economic growth.
Outlook for Iraq and World Energy Markets
Following the demise of Saddam Hussein, it is unlikely that the Saudi kingdom would transfer a fraction of its production quota under the Organization of Petroleum Exporting Countries (OPEC) regime to Iraq to compensate for lost profits and facilitate its rebuilding. Iraq will need to ensure cash flow for reconstruction regardless of OPEC supply limitations. Combined with the potential privatization of the oil industry, such measures could provide incentive for Iraq to leave the OPEC cartel in the future, which would have long-term, positive implications for global oil supply.
An Iraq outside of OPEC would find available from its oil trade an ample cash flow for the country’s rehabilitation. Its reserves currently stand at 112 billion barrels, but according to the U.S. Energy Information Administration, it may have as much as 200 billion barrels in reserve. Estimates by Iraqi oil officials are even higher: According to Oil Minister Amir Muhammad Rashad and Senior Deputy Oil Minister Taha Hmud, the reserves could be as high as 270 billion to 300 billion barrels, making them equal to Saudi Arabia’s.
Iraq’s 1990 output prior to the beginning of the Gulf War stood at 3.5 million barrels a day, while oil discovery rates on a few new projects in the 1990s were among the highest in the world: between 50 percent and 75 percent. Given Iraq’s own output projections, it may be capable of pumping as much as 6 million barrels (by 2010) to 7 million barrels (by 2020) a day, more than doubling current production levels.
Such a surge in production may be opposed by OPEC countries, which would like to keep its quota around the current 2.8 million barrels per day, while historic market share is taken by the Kingdom of Saudi Arabia, which currently is pumping close to 8 million barrels per day. Depending on the dynamics of global economic growth and world oil output, Iraq’s increase in oil production capacity could bring lower oil prices in the long term.
An unencumbered flow of Iraqi oil would be likely to provide a more constant supply of oil to the global market, which would dampen price fluctuations, ensuring stable oil prices in the world market in a price range lower than the current $25 to $30 a barrel. Eventually, this will be a win--win game: Iraq will emerge with a more viable oil industry, while the world will benefit from a more stable and abundant oil supply.
This WebMemo is excerpted from the authors’ Backgrounder: The Road to Economic Prosperity for a Post-Saddam Iraq, full footnotes and analysis are available there.
03-19-2003
The resignation of Charlotte Beers, undersecretary of state for public diplomacy, calls for a reexamination of how the U.S. is waging a war of ideas against Islamist terrorism. Beers’s resignation comes as the State Department is facing increasing difficulty marshalling international public opinion in support of the coming war against Iraq. The battle for hearts and minds is not a short-term campaign but a protracted conflict that will last decades, if not generations. It should be guided by an integrated strategy of public diplomacy and political covert action, something that the United States has not attempted for half a century, since the early stages of the Cold War.
The concept of the war of ideas should not be confused with psychological operations (psyops), which are a tactical instrument deployed on the battlefield specifically to undermine the morale of an enemy fighting force. Plenty of psyops will be launched against Saddam’s troops.
The campaign in the information and media battlefields is another story; it will be fought not so much against another superpower (as was the case with the USSR), as against an array of radical organizations and the governments that support them.
Since 9/11, the U.S. has found itself engaged in an ideological war against those who wish to destroy American society and its core values. Terrorism has deep roots in the modern radical - indeed totalitarian - interpretations of Islam that gave birth to al Qaeda and other Islamist terrorist organizations.
Secular regimes, such as Iraq, Syria, and Libya, also create terrorist groups and use them to further their political ends. Totalitarian ideologies of terrorism - both the Islamist and secular varieties - have to be discredited and eventually destroyed. This is one war that our country cannot afford to lose.
The nature of the enemy, the spectrum of the threats, and the environment in which the conflict is waged makes the battle overt where possible, and covert where necessary. Al Qaeda and other terrorist organizations operate by stealth. So do funders who subsidize radical Islamic brainwashing in the guise of religious "education." Persian Gulf moneybags, Iranian ayatollahs, and jihadi fundraisers from mosques in Brooklyn, N.Y. to Finsbury Park, London, and from Florida to the Philippines, have poured hundreds of millions of dollars into this war.
Today, most Westerners are not allowed into religious seminaries in Pakistan and the Gulf. Thus, penetration by U.S. and friendly agents is required. And, regimes in Iran, Iraq, Libya, and Syria do not welcome U.S. foreign service officers on public-diplomacy missions. Thus, the Central Intelligence Agency’s political-action capabilities, eviscerated in the 1970s, need to be rebuilt.
The key to victory in the battle of ideas will be leadership from the top - clear policy guidance and perseverance from the White House, as well as support from the American people.
The main American weapon in the battle of ideas should be the truth - truth about the societies, their rulers, and terrorist leaders. The truth should be disseminated through open channels where possible, and covertly where necessary, but the promotion of individual freedom and respect for others’ life, faith, and property must remain at the heart of any strategy. Other countries want to join the U.S.-led effort, as participants in a conference organized with U.S. support at the parliament of Finland have recently declared. Their participation should be welcomed: In the Cold War, U.S., British, and German international broadcasters coordinated their activities. A similar cooperation should be developed today.
The mixed successes, and in some cases the outright failure, of recent attempts to engage in the battle of ideas - such as State’s international media initiatives, featuring religious tolerance and a sunny attitude towards Islam in America; the Pentagon’s short-lived Office of Strategic Influence; and the newly-launched Radio Farda in Farsi and Radio Sawa in Arabic - demonstrate how difficult it is to regain massive public-diplomacy capabilities in a new theater only twelve years after the end of the Cold War. These efforts will require humility, patience, and realism: Changing the way people think is hard.
Victory in the war of ideas will require developing and mobilizing cultural, geographic, and linguistic expertise, all of which in turn require a long-term commitment of resources and stamina. This is a battle in which it is necessary to understand audiences and engage them, including women, youth, the business community, artists, academics, intellectuals, and ethnic minorities.
To win, Washington and its allies should pursue the following policies:
Initiate diplomatic action against the state-supported incitement to violence prevalent in mosques, education systems, and Islamist media. Develop and maintain databases tracking violent preachers and madrassa principals. Monitor school and university curricula, demanding reform of countries’ educational systems where necessary. Radical mosques and madrassas have become, in some places, little more than Jihad factories indoctrinating hundreds of thousands of potential terrorists. Often, weapons training is provided alongside the Koranic studies.
Expand the capability for political covert action at the CIA, not just against terrorist cells, but also against the mass movements and political parties that spawn them, and regimes that support them.
Identify and recruit talent for the new war of ideas. Utilize the talents of people from the Islamic world residing in the U.S., Europe, and Asia. This war can and should be fought primarily for Muslims, by Muslims.
Prepare managers and experts to administer public information operations. The best Cold War-era operations, such as Radio Liberty-Radio Free Europe, and today’s global broadcasting, demonstrate that mixing teams of Westerners and locals has proven most effective.
Reform and reexamine funding for Middle Eastern studies programs at Western universities, some of which are hijacked by the Left, as Michael Kramer’s recent book, Ivory Towers on Sand: The Failure of Middle Eastern Studies in America, amply demonstrates. Some Middle Eastern academics busy themselves with "explaining," if not outright justifying, the "root causes" of terrorism. Politically mobilized sympathizers and fellow travelers often claim expertise in the area, and oppose a robust effort against international terrorism.
Pursue inter- and intra-confessional religious dialogue. It is necessary to identify and support moderate Islamic clergy and lay leaders - to initiate and encourage debate within Islam about the corroding and dangerous role of terror and fostering or harboring terrorists.
Further develop Radio Farda and Radio Sawa as surrogate broadcasting, similar to Radio Liberty-Radio Free Europe; carefully monitor feedback from their target audiences. Begin a feasibility study for Western satellite TV channels in Arabic, Pashtu, and Farsi.
Expand the publication of books, journals, and newspapers that promote views opposing radical Islam and provide the truth about America and the West. The Middle East is one of the most Internet-starved regions of the earth. Thus, the population has to have access to printed materials. State’s Bureau of Public Diplomacy should revive the book-translation program formerly run by the U.S. Information Agency.
Reevaluate and restructure cultural-exchange programs. It is necessary, but expensive, to expose a larger number of Middle Eastern and Islamic current and future leaders to the United States and the West.
Only twelve years after the end of the Cold War, the U.S., the West, and a large number of allies are facing a new threat to their ultimate survival. The military successes in the war in Afghanistan and the coming war against Saddam should not distract policymakers from the ideological nature of the conflict.
This is not a war against Islam, but against vicious militants who are trying to hijack Islam and topple moderate governments throughout the Islamic world. Ideas have consequences, and this battle has to be joined through words, symbols, and pictures, not just bullets and missiles. The creation of effective institutions and mechanisms, and the formulation of key messages to fight this war of ideas has become one of the greatest foreign policy challenges for the Bush administration.
As in wars against 20th-century totalitarians, this struggle must be fought as a war of ideas, not just a battle of military tactics and equipment. As many a world leader said, the swamp has to be drained.
03-17-2003
As the threat of the war in the Middle East is driving the oil prices up, and the demand for energy is growing due to the Asian economic recovery and a cold winter, Eurasia is flush with oil and gas revenue. However, absent active government policy, long term economic consequences of the Eurasian oil bonanza may lead to crowding out investment in the non-petroleum sectors and appreciation of currencies, known in the economic circles as the Dutch disease. Moreover, lack of the "trickle down effect" may lead to increase in poverty and underdevelopment, and, especially in the case of the poorest Eurasian states, such as Kyrgyzstan, Tajikistan, and possibly in Turkmenistan, result in political instability due to inflation of expectations. So far, governments in the region are doing little to prevent the Dutch disease, which strikes oil economies around the world with uncanny regularity.
Russia, the largest oil exporter, is less likely to become the hardest-hit victim due to its size and diversity of its economy. Russian companies are planning to export more oil in 2003, though the export volume will be limited by the current state-run pipeline throughput. According to the Interfax Oil and Gas Report, Russia will export 43 million tons of oil in the first quarter of this year, while Deputy Prime Minister Victor Khristenko promised further expansion of the Russian pipeline capability.
This may include the government decision in March whether to build the first pipeline in Eastern Siberia. The options include a 2, 247 km pipeline to China, which will export 20 million ton crude a year, or a more expensive and lengthy pipeline to the port of Nakhodka, which has attracted interest from Japan. That pipeline would export up to 50 million ton a year, would be 3, 884 km in length, and cost over $5 billion. The China option may be built by late 2005, while the Nakhodka pipeline will take until 2008 to complete.
Kazakhstan may be interested in working with the Italian state-owned ENI, the operator of Agip-led consortium in the Kazakh sector of Northern Caspian, and of the giant Karachanganak field, to export oil via Iran.
Oil revenues are projected to remain in record territory for 2003. LUKoil is planning that, for 2003, oil prices will be in the range of $21 a barrel; Sibneft is forecasting $16.5 a barrel, while TNK is envisaging $18.5 for Brent crude. Western estimates are higher: so far the prices floated in the $35-39 range for January-March, and Goldman-Sachs is forecasting oil prices in the $30 range for 2004. With prices this attractive, Russian companies are planning to increase production between 6.8 percent a year for the government-owned Rosneft, to 12-13 percent a year for aggressively growing private companies.
Other regional exporters, such as Kazakhstan, have boosted oil production by 16.6 percent in 2002, to 42 million tons, while Azerbaijan’s overall production grew more modestly - in single digits.
Natural gas production and downstream production will also grow: Kazakhstan has increased natural gas exports by 13.2 percent to 13. 136 cubic meters, and produced 30 percent more of gas condensate. Kazakhstan will be developing the Phase Three of the Karachaganak gas condensate field, which will require a $2 billion investment. The Amangeldy field in southern Kazakhstan will be expanded, and ChevronTexaco will open a polyethylene plant in April 2003.
Russian gas exports grew only by 2.4 percent in 2002, because Russian state-owned gas monopolist, GAZPROM, is subject to artificially low prices at home; suffers from opaque and politicized management; and is not effectively attracting Western investment in order to revamp its aging infrastructure.
The oil and gas revenue bonanza is the strategic window of opportunity to address four structural defects of energy-driven economies of Eurasia: the value-subtracting (money losing) nature of the non-natural resources sectors of the economy; corruption and capital flight; dysfunctional social safety net; and manpower inefficiencies.
First, it is time for Eurasian governments to bring internal energy prices, including natural gas and coal, to the world levels. High oil prices will allow to provide subsidies to retired or laid off workers, while closing down inefficient, energy-guzzling enterprises and hiking railroad tariffs. The energy, especially artificially cheap natural gas, which is used today by the state as a hidden subsidy, can be exported to increase revenue. Some of the workers in remote "company towns" can be relocated to more livable venues.
Second, corruption and capital flight may be the most difficult to resolve. Most often perpetrated or aided and abetted by the top government officials, it is a net loss to regional economies. Police measures by themselves are not efficient, while local economies remain too inhospitable - and bureaucracies too corrupt - to make investment in non-energy sector attractive. Governments need to crack down on organized crime and corruption which plague the economy, while prosecuting most odious "exporters" of capital, even if they are politically connected insiders.
Third, social sector reform is long overdue. While salaries are higher in the energy sector -- by a factor of two in Kazakhstan - most of the gigantic profits are not invested back home to create jobs outside of the oil and gas sector, nor tax proceeds are efficiently distributed to support the elderly, sick and poor. Governments can battle the Dutch disease by stimulating non-energy business development and job creation by simplifying registration for new business and reducing corporate taxes and employment payments for these newly created entities. Finally, as USAID and a number of NGOs repeatedly demonstrated around the world, micro-lending to boost entrepreneurship is yet another way to decrease unemployment and poverty.
Finally, regional cooperation is likely to alleviate some of the structural asymmetries and stimulate growth, as Johannes F. Linn, Vice President of the World Bank has suggested in his Situation and Outlook in Russia and Central Asia - a 2001 keynote address to the Berlin Financing Conference. Clearly, cooperation on water utilization, pipelines, transport, and commerce is the most logical. In addition, some of the structural unemployment (20 percent in Kazakhstan, even higher in energy-poor Kyrgyzstan and Tajikistan) can be alleviated by opening the doors of the oil and gas sectors to workers from the areas with particularly high unemployment. This can be achieved by loosening severe interior ministry residence registration rules, which are a hick-up of the old Soviet era "propiska" system, and by providing better living conditions in the company towns owned by the extracting industries.
A three tier structure of income distribution in Eurasia, with Russia close to $4,000 a year per person; Kazakhstan, with over $1,000 and Kyrgyzstan and Tajikistan with only $200-$300 per capita per annum, may lead to economic dislocation, social conflict, and uncontrolled migration. Government leaders and international financial institutions will do well if they address these challenges while the energy windfall lasts.
03-14-2003
With the winds of war blowing over the Middle East and Venezuela’s oil production down by over 30 percent due to labor protests against President Hugo Chбvez, the United States is considering diversifying its sources of oil away from politically unstable regions. To achieve this, the U.S. should support development of a privately owned oil pipeline from Western Siberia to Murmansk, Russia. The U.S. government should make this project a top priority in bilateral security, economic policy, and business frameworks.
A Top Priority
In their November 2002 Joint Statement on Development of U.S.-Russian Energy Dialogue, Presidents George W. Bush and Vladimir Putin designated energy cooperation as a major bilateral priority. They launched the Energy Dialogue--a forum run by energy industry leaders from the two countries with their respective governmental energy and trade counterparts--to "strengthen the overall relationship" between the U.S. and Russia and "enhance global energy security, international strategic stability, and regional cooperation." As part of this effort, President Putin has agreed in principle to supply the U.S. with Russian oil.
Russia, which produces over 7 million barrels of oil per day, could easily supply 10-13 percent of U.S. oil imports, approximately the amount imported from Saudi Arabia. However, Russian infrastructure, including ports and pipelines, must be upgraded and expanded. First, a private pipeline should be built from the oil fields in Western Siberia to Murmansk--an Arctic port that is ice-free year-round--along with a deepwater oil terminal in Murmansk capable of servicing tankers with deadweight capacities of 500,000 tons. Through the Murmansk terminal alone, Russia could export 1-2 million barrels per day. Russia could also export oil to the U.S. through several Baltic Sea terminals or from Sakhalin Island (near Japan) via Nakhodka, a port on the Pacific Ocean.
A private consortium could build a Siberia-Murmansk pipeline and oil terminal faster--within three to four years--and would serve U.S. and Russian interests better than pipelines developed by the government. The pipeline would also be far from hot spots of ethnic and religious conflict, and the ocean route from Murmansk to Houston is half the length of the route from the Persian Gulf, making transport less expensive.
Industry Leaders Threatened by the State
In an unprecedented display of unity, four private Russian oil companies--LUKoil, Yukos, Sibneft, and TNK-Sidanko (half of which was acquired by British Petroleum-Amoco in December 2002)--have agreed to form a consortium to build a private Siberia-Murmansk pipeline. However, to maintain government control of the lucrative oil infrastructure, the Russian Cabinet, including Prime Minister Mikhail Kasyanov and the powerful state bureaucracy, have opposed private ownership of the pipeline. The state-owned Transneft pipeline monopoly will likely interfere--as it has with the pipeline from the Tengiz oil field in Kazakhstan to the Russian port of Novorossiysk, owned and operated by the private Caspian Pipeline Consortium, which includes Chevron-Texaco and LUKoil--by attempting to impose harsh regulations and tariffs. Transneft has also attempted to repudiate contracts signed before the Tengiz-Novorossiysk pipeline became operational.
The U.S. has a strategic interest in maintaining a robust Russian private sector, especially in energy. The private sector both disperses political power and drives economic growth. Private oil companies represent the most dynamic sector of Russia’s economy, with annual growth rates of 7-12 percent for the past four years. They enjoy high capitalization growth and have infused Russia with state-of-the-art technology and imported Western expertise. The post-communist state ownership and management is incapable of providing the necessary investment and growth rates in capital-intensive sectors, such as the energy infrastructure.
There are broader strategic implications as well: If Russia successfully implements a large, privately driven pipeline project, it will demonstrate yet again that the OPEC model of state-owned oil production is anachronistic and should be replaced by private ownership.
U.S. Energy Policy and a Russian Oil Pipeline
As President Bush declared in his State of the Union address, the U.S. government has an interest in increasing energy independence. This includes diversifying sources of oil and securing the oil supply. Top U.S. and Russian trade and energy officials and bilateral business councils should cooperate with the Russian oil company consortium to secure government authorization and expedite construction of the pipeline. Specifically, they should:
Conclusion
Russia should become a major exporter of oil to the U.S. The political commitment is already in place. The best way to accomplish this goal is by harnessing private-sector expertise and financing to build the Siberia-Murmansk pipeline and the oil terminal in Murmansk.
