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12-11-2002
As the U.N. Security Council is caught up in a chain of events that is likely to end up in removal of Saddam Hussein’s regime, the Bush administration should plan for the future of a post-Saddam Iraq. Economic issues will loom large. Iraq’s economy has been grossly mismanaged, and its people brutally repressed, for 40 years. Iraq desperately needs an alternative to the failed policies of its dictator. Sound economics are needed to help the Iraqi people rebuild their lives and their country after two decades of wars and four decades of repression under the current regime.
Saddam’s regime has succeeded in bankrupting the country even though it boasts the world’s second-largest oil reserves after Saudi Arabia. The oil sector provides more than 60 percent of the country’s gross domestic product (GDP) and 95 percent of its hard-currency earnings. Yet GDP for 2001, at the market-exchange rate, is estimated to be only about one-third what it was in 1989. Iraq also is hobbled by its $140 billion foreign debt. This devastation was wrought by such policies as the nationalization of the country’s chief export commodity, oil; extensive central planning of industry and trade; the 1982-1988 war against Iran; and the invasion of Kuwait, which precipitated the 1991 Gulf War.
According to the U.S. General Accounting Office and British intelligence sources, oil smuggling and illegal surcharges of 25 to 50 cents on a barrel of legal oil are providing the funds to bolster Saddam’s regime. Saddam’s unaccounted revenues are between $6.6 billion and $10 billion — money that he has been free to spend to develop WMD and support terrorism in spite of economic sanctions imposed by the United Nations on Iraq after the Persian Gulf War to force him to give up his WMD.
The road to economic prosperity in Iraq will not be easily paved, but the Bush administration can help the new Iraqi government achieve fundamental structural reform with massive, orderly, and transparent privatization of various sectors of the economy, including the oil industry. The U.S. should offer its guidance on establishing sound economic and trade policies to stimulate growth and recovery.
After Saddam’s brutal and repressive regime is ended, the new government established by the people of Iraq should represent all the major sub-national groups — the Shiite Arabs, the Sunni Arabs, and the Kurds. To succeed, Iraqi opposition leaders will need a political commitment from the United States and international organizations to furnishing the necessary expertise and technical assistance. To gain that commitment, Iraq will need to abandon statist policies of the past and become fully committed to the principles of a market economy.
Privatization efforts in other countries demonstrate that privately held infrastructure, oil, and oil service companies generate greater efficiency, improved production, and higher revenues than do centrally planned and state-owned industries. The same can be achieved in Iraq, whose oil industry cannot thrive without access to global capital markets.
In particular, the administration should work with opposition leaders in Iraq to convince them now that a future Iraqi federal government must develop mechanisms for privatizing these industries and taxing oil sales, and for sharing the proceeds equitably with the three major ethnic regions — the Shiite Arabs in the South, the Kurds in the North, and the Sunni Arabs in the central region.
The Bush administration, its allies, and international organizations should prepare, encourage, and support the future leaders of a post-Saddam Iraqi government in developing a comprehensive economic reform package. Specifically, the next Iraqi government must take steps to create a modern legal environment that recognizes property rights and is conducive to privatization. Furthermore, it should educate and prepare the Iraqi people for structural economic reform and privatization through a public-information campaign.
To bring modern economic expertise and management skills to Iraq, the government will have to hire Iraqi expatriates as well as other Western-educated Arabic speakers with financial, legal, and business backgrounds to fill key government positions on economic reform and privatization. To improve fuel efficiency of the Iraqi economy, the future regime will have to deregulate prices internally, including in the utilities and energy sector. Most importantly, it will have to prepare state assets, including industries, utilities, transportation, ports and airports, pipelines, and the energy sector, for privatization. It will have to keep the budget balanced and inflation, taxes, and tariffs low. Finally, it should liberalize and expand trade and launch an effort for Iraq to join the WTO.
Economic growth will be an important contribution to the stabilization of Iraq, allowing the United States and other forces stationed there to depart after assuring that Iraq’s WMD threat and repressive regime have ended. Structural reform and comprehensive privatization is a winning strategy for the people of Iraq, its future government, the region, and the United States.
Furthermore, such a strategy will prove beneficial for the industrial world, the countries of the Middle East, and the developing world. Iraq’s return to the global markets would allow a more abundant and stable energy supply and a greater revenue flow for the Iraqi economy, foster a higher living standard for the Iraqi people, and provide numerous business opportunities for the region and the world. If successful, Iraq’s privatizations of its oil sector, refining capacity, and pipeline infrastructure could serve as a model for privatizations by other OPEC members, thereby weakening the cartel’s domination of the energy markets.
11-15-2002
When President George Bush and Russian President Vladimir Putin meet for their historic summit later this month, the agenda should focus on the growing number of foreign policy and security challenges in which closer cooperation is necessary, if not crucial. These challenges include war against Iraq; the war on terrorism; North Korea’s nuclear and ballistic missile programs; Russia’s proliferation of weapons of mass destruction (WMD) and related technologies to countries like Iran; and energy security.
Relations Since September 11
Russia’s track record since the terrorist attacks on the United States has been mixed. On the one hand, Russia has cooperated with the United States in the war on terrorism. On the other, it worked diligently to water down the new U.N. Security Council resolution on Iraq and continues to build a nuclear reactor in Iran.
Putin supported the United States in the campaign against al-Qaeda and its state sponsor, the Taliban regime in Afghanistan. He overruled his senior officials to allow the United States to deploy troops and build infrastructure in Georgia and Central Asia--areas Russia influences through the Commonwealth of Independent States Mutual Defense Treaty. Today, the U.S. military uses Russian ports and railroads to re-supply expeditionary forces in Afghanistan.
Putin also muted Moscow’s objections to U.S. abrogation of the 1972 Anti-Ballistic Missile (ABM) Treaty and enlargement of the North Atlantic Treaty Organization (NATO). The latter, to take place next week in Prague, will bring the Baltic States and the former Warsaw Pact countries of Bulgaria, Romania, and Slovakia into the alliance. The May 2002 creation of the NATO-Russia Council effectively buried the legacy of the Cold War.
The Putin administration has framed the recent hostage crisis in Moscow involving radical Islamist terrorists from Chechnya in terms of the global war on terrorism. While some officials may have adopted such rhetoric to justify Russia’s military atrocities against innocent civilians in Chechnya, Osama bin Laden stated in a tape released this week that the attack in Moscow was part of his jihad against the West. Thus, Moscow correctly stressed that the same Persian Gulf terror masters who funded the theater attack are behind acts of terrorism in the United States, Bali, and elsewhere.
Moscow and Washington differ fundamentally, however, on Russia’s relations with Iraq, Iran, and North Korea. In addition to trying to keep language authorizing the use of force against Iraq out of the U.N. Security Council resolution on weapons inspections, according to the Iraqi Embassy in Moscow, Russia may sign a $40 billion, 10-year trade agreement with Saddam Hussein’s regime. Moscow announced plans to build five nuclear reactors in Iran in addition to the one under construction in Bushehr, even though Tehran made clear that it intends to acquire nuclear weapons and is building and testing ballistic missiles with increasingly longer ranges. North Korea and Russia are assisting Iran in this program. In August, Putin met with North Korean leader Kim Jong-il in Vladivostok to discuss economic cooperation. Such ties to these rogue states are driven primarily by economic motives, as Russia seeks to profit from oil and gas deals and arms sales and to recover billions of dollars in outstanding Soviet-era debt. Certain members of its political, military-industrial, and security establishment also support the ties because they still harbor Soviet-era anti-American sentiments.
Historic Opportunity
President Bush should stress to President Putin that both countries’ security interests lie in global stability, access to energy resources, and economic growth, not in supporting rogue regimes, and that the United States, not the European Union, best understands the threat that radical Islamic movements pose to Russian security. In pursuing a U.S.-Russian strategic partnership at the summit, President Bush should:
The U.S.-Russia summit provides President Bush and President Putin an historic opportunity to collaborate to make the world more secure. They should focus on policies that would allow the two countries to fight radical Islamic terrorism and limit the ability of dangerous regimes to obtain the world’s most dangerous weapons. Russia and the United States should also work to improve energy security while expanding Russia’s share of the world oil market.
10-30-2002
The antiwar movement is trying to stage a comeback. It may be back with a whimper rather than with a bang — but back it is.
Many in the media believe that the demonstrations held last Saturday in Washington, San Francisco, London, and other cities around the world are bona fide expressions of mainstream public sentiment. They are not. Many of the groups behind the demonstrations are the remnants of the Cold War-era radical Left. Others have connections with hostile regimes in the Middle East and North Korea. The administration, the media, and the intelligence community should be looking into them.
Among the demonstration supporters are groups ranging from the sinister to the hilarious (Dogs for Democracy/Paws for Peace) to the just plain silly (the Institute of Xenomorphosis). None, however, make any attempt to hide their shared hatred of capitalism and U.S. foreign policy. Participants include activists from the extreme Old and New Left — from Stalinists to Maoists — as well as such "blasts from the past" as the Revolutionary Communist Party (RCP) and the Trotskyite Socialist Workers Party. Other worthies include pro-Saddam mouthpieces; Palestinian propagandists; North Korean front organizations; and 1960s "flower children" who never grew up.
It’s hard to say which group takes the prize for weirdness. Funny — or funky — participating organizations include Hip Mama (which publishes articles on such subjects as "raising a draft dodger"); the Fruitarian Network; or the aptly named Neville Chamberlain Society. Mad Grandparents for Peace, Truth and Justice, and Dogs for Democracy/Paws for Peace rub shoulders (noses?) with the Mad Anarchist Bakers League of Brady Lake, Ohio, and the U.S. Raelians. Let a hundred flowers bloom, indeed.
Of course, it’s easy to dismiss the antiwar coalition. It’s clear that — with the exception of some trade-union locals — most of the participants in these protests hail from the far-out fringe. President Bush will be right to disregard them. But there are other players involved here who are far less innocuous.
A key player in organizing this weekend’s soiree is Ramsey Clark, former attorney general under Lyndon Johnson, who never met a dictator he didn’t like. Clark justified Ayatollah Khomeini’s hostage-taking in the U.S. embassy in Tehran. He hobnobbed with Libya’s Muammar Qaddafi after President Reagan bombed him in 1986. And he is connected with Lyndon LaRouche, the head of a radical, cult-like political movement which some consider to be pro-Nazi.
For over twelve years Clark has been affiliated with the Workers World Party (WWP), which also appears on the list of "Endorsers of the October 26th March on Washington." WWP splintered from the Trotskyite movement in the 1950s and became — of all things — Orthodox Stalinist. It supported China’s repression of Tibet, North Vietnam’s war against the South and the U.S., the Tiananmen Square massacre, and the coup against Gorbachev. Clark represented Radovan Karadzic, an indicted Bosnian Serb war criminal, and met with Slobodan Milosevic when he was a wanted man in Belgrade, calling him "brave, objective, and moral." In 1990, Clark led a WWP effort to prevent Bush I from going after Saddam. And he has never ceased advocating for the mustachioed dictator.
Also committed to the antiwar movement is the National Lawyers League, which founded by the Communist Party USA (CPUSA) in 1936. Its president, Pierre Cot, was awarded the Lenin Peace prize in 1953. Other Communist groups — from the Maoist Revolutionary Communist Party USA to the Young Communist League to the Trotskyites — are cooperating in the demonstration as well. And the Nicaragua Network and Nicaragua Solidarity Committee (a leading pro-Sandinista organization) are among the organizers, as is Jesse Jackson’s Rainbow/PUSH coalition.
Arab organizers are the easiest to figure out, of course: Their websites blast Israel as a "settler state," call for an economic boycott — just like that of White South Africa — and justify terrorist bombings. Many of these organizations are connected to radical Palestinian organizations and some Arab governments. And then there’s the Polish-American Public Relations Committee, which highlights an alleged secret memo entitled "The Power and Aims of International Jewry." The memo, dated 1919, discusses at length the authenticity of the Protocols of the Elders of Zion. Breaking news!
The antiwar movement’s ties to North Korea are also quite pronounced. Besides the Pyongyang-inspired Korea Truth Commission, there are also the Congress for Korean Reunification, Korean Immigrant Workers Association, and Nodutdol for Korean Community Development. Is the North Korean dictatorship providing political direction and material support to these organizations — just as their older Soviet brother did to similar groups for 70 years?
Moreover, just as in the Cold War (and especially during the Vietnam era), foreign governments may seek to manipulate and finance U.S. war protesters. Former KGB general Oleg Kalugin — who now lives in Washington, D.C. — used to smuggle bagfuls of greenbacks to finance full-page antiwar and disarmament ads in the New York Times. An entire KGB division was dedicated to running dezinformatsiya (disinformation) campaigns, and to recruiting and operating agents of influence. Efforts of this kind were staged against U.S. MX and Pershing missile deployments and in favor of a unilateral "nuclear freeze."
Herb Romerstein, for decades a congressional investigator of Soviet penetration of the United States, and author of Venona Secrets: Soviet Espionage and America’s Traitors, noticed the Iranian Fedaeen Organization among the participants. "They were trained by the Iraqis under Soviet supervision to topple the Shah. They participated in Khomeini’s revolution, but later were decimated by him," he says. The Soviets may be out of the strategic-influence intelligence-operations business, but others — among them Palestinians, Iraqis, Iranians, and North Koreans — are not.
When the Cold War ended, Soviet intelligence ceased their "influence" operations against the U.S. But some of their organizational and other assets were likely transferred from the Soviet KGB to other "friendly" intelligence agencies — possibly including Iraqi, Iranian, Cuban, and North Korean. The U.S.S.R. and Russia trained Iraqi and Iranian intelligence agencies for years.
Romerstein and Paul Joyal — the former director of security for the Senate Intelligence Committee — agree that the FBI is highly unlikely to investigate foreign penetration of the U.S. solely on the basis of a demonstration: "There are plenty of well-meaning people who are being enticed to demonstrate. [The FBI] needs to see who is footing the bill, and then investigate," Joyal says.
Just knowing that the bulk of these protesters come from the radical Left, old and new — and not from the U.S. mainstream — and having some sense of who may be behind the antiwar protesters is important. Romerstein believes that the U.S. counterintelligence capabilities in the area of "active measures" and influence operations have been weakened for years. This has to change. In the new war against rogue states and radical Islamic terrorism, this important aspect of warfare can no longer be neglected.
10-18-2002
The Europeans’ near-hysteria on Iraq is but one more symptom of a growing rift between America and its allies. That gap stems from increasingly divergent perceptions of the nature of the international framework, of security threats, and of desired outcomes. Even as the U.S. lays plans to make the world safe from Saddam’s menace, European analysts, academics, and diplomats are voicing shrill criticism of American values and President Bush’s policies.
Europe’s leftist elites — and some not-so-lefties as well — have articulated a number of guidelines for future European foreign-policy engagements which, if attempted, may put the future of Euro-Atlantic partnership in jeopardy. This strain of European thinking might be labeled "multilateral utopianism."
It boils down to differing perceptions of the foreign-policy tools necessary and permissible for dealing with security threats, including terrorism and weapons of mass destruction. Put broadly, the U.S. and Europe hold different views on the role of a nation state in the international system, and the necessity of using force for defense.
Most Europeans and some Canadians I encountered in a number of policy conferences last month have assailed President Bush’s strategy of regime change in Iraq. Their attack was four-pronged: First, they claim that it’s wrong to use force to change a regime, whatever its nature. This position was articulated both by a senior German policy planner working for the Green Foreign Minister Joschka Fischer, and by a Green member of the European parliament.
Second, multilateralists insist that it is plain wrong to take unilateral action. They are saying, in effect: "You cannot maintain peace (in Iraq and Afghanistan) on your own. So you cannot decide on regime change on your own… We demand the right of co-determination for the Middle East, because it is closer to us than to you."
Critics also claim that the timing of U.S. action is wrong: Saddam has been there for decades, after all, and he’s tried to develop WMD for years — why take him out now? German representatives further claimed that economic sanctions and containment work to defeat Saddam (they don’t).
Fourth, the reasons for the U.S. action on Iraq are alleged to be sinister: According to a Brussels-based think-tank chief, U.S. policy is dictated by "a combination of old Zionists, new Conservatives, and special interest groups," or "the Jewish Lobby." Former German defense minister Rudolf Scharping and a Canadian political-science professor voiced similar sentiments.
America was also criticized for "disregarding" the political and economic roots of 9/11. The attack came — it was said — because of what America does, not because of what it is. The critics used Zbigniew Brzezinski’s op-eds and interviews articulating this point to bolster their case. "A strong civic society is the answer to terrorism," one German participant claimed, suggesting the futility of any military action: "Al Qaeda are martyrs. We cannot stop martyrs."
Europeans have also recommended policy prescriptions to "improve" U.S. foreign and defense policy. They demand to be allowed to subject the U.S. to multilateral foreign and defense policy, on the grounds that nobody should be in the position of establishing world order unilaterally. Some Europeans equate the threat from al Qaeda (which is generally not perceived as a threat to Europe) with the threat from the United States. A senior Italian analyst quoted industrialists in his country who had said, "It is not our war." Others added that Afghanistan (and Iraq) "is not about fighting al Qaeda and Saddam Hussein. It is about establishing the U.S. as a ’hyper-power’ in a U.S.-dominated mono-polar world."
Germans diplomats are especially fond of characterizing the "multilateralization" of foreign policy as an unstoppable historic process — from the adoption of the U.N. Charter and Bretton Woods, to GATT, to the WTO, to the creation of the International Criminal Court (ICC). They hail NATO as a "denationalization of defense." They criticize the narrow-mindedness of those who don’t think about changing the international system in accordance with such issues as globalization and environmentalism.
But, in open contradiction of the multilateral approach, these diplomats and politicians also insisted that under no circumstances will Germany use force against Saddam, even if regime change is authorized by the U.N. They likewise rejected criticism of "war-by-committee" in the Balkans. "E.U. policy in the Balkans was a success," they insisted.
Moreover, Europeans are demanding that economic sanctions and diplomacy, not force, be used to pressure parties to conflicts. Some claim that, since ethnic conflicts erupted as a result of the dissolution of various empires (British, Soviet, etc.), the E.U. must now assume the role of peacemaker in their stead. Most aggressive multilateralists also recommend building zones of European influence along Europe’s periphery — an area to include the Black Sea, the Caucasus, Russia, Ukraine and Belarus, the Middle East, and North Africa — on the basis of multilateralism, cooperation, and the rule of law.
European advocates of multilateralism also tend to be anti-Israel. "Israel is wrong because it uses force," they claim. They would impose a settlement which will return Israel to 1967 borders, dividing Jerusalem, and would "address" the issue of Palestinian refugees in order to appease Arab criticism of the West. They boldly advocate pressuring Israel in spite of the ongoing terrorist violence; in spite of the pro-terrorist indoctrination being carried out in the mosques, the schools, and the Palestinian media; and in spite of the continued commitment of large segments of the Palestinian polity to the outright destruction of the Jewish state.
Fortunately, not everyone is buying this line. At least anecdotally, many of Europe non-elites are more sympathetic with Americans than are the Euro-pundits, academics, and diplomats. A detailed public-opinion survey may go a long way to clarify the segmentation of attitudes toward the U.S. and its policy.
To counter these corrosive trends, Europeans need to be more exposed to the mainstream U.S. views on these subjects. A broader range of contacts and media activities is necessary to define our differences and find areas for future cooperation — if the Euro-Atlantic partnership is to survive.
Since the end of the Cold War, a wide gap has developed between the U.S. and its Europeans allies on issues as basic as the right of a nation state to act unilaterally to protect itself. Indeed, we are now involved in a war of ideas not just with our radical Islamist foes, but also with our "enlightened" European allies.
10-11-2002
The start of construction on the Baku-Tbilisi-Ceyhan pipeline in September marked the conclusion of the latest round in the new Great Game over Caspian Basin energy resources. Less than a month later, the major competitors in the contest for regional economic and political influence are already jockeying for position in the next stage.
At a September conference off the coast of Greece sponsored by the Hellenic Foundation for European and Foreign Policy (ELIAMEP) the consensus among participants was that the Caspian Basin could probably only support one main export pipeline beyond the one that has begun construction, and that a second pipeline could complement a major natural gas pipeline to create a stable transport system for the region’s fossil fuels. The direction of such a pipeline remains in question, and thus holds the potential for fierce competition among regional and global powers.
Many experts rule out construction of a pipeline connecting the Caspian Basin with China’s Pacific Coast. John Roberts, an editor with the Platts Global Energy information service, said such a pipeline would need to extend to 5,500 kilometers and cost upwards of $8 billion. (The proposed Baku-Tbilisi-Ceyhan route runs 1,760 kilometers.) According to Roberts, available oil in Kazakhstan could pump 400,000 barrels of oil a day through such a pipeline, but it would take a million barrels a day to make the project enticing for investors. He calculates that Russia would have to participate to deliver this volume, necessitating a three-way pact among Russia, Kazakhstan and China. Such multilateral projects, Roberts says, are difficult to negotiate and implement.
Among potential north-south routes, it remains hard to see where feasible routes will arise. Roberts says that as long as the United States opposes France’s TotalFinaElf North-South pipeline from Kazakhstan via Turkmenistan to Iran, Kazakhstani oil can flow either North, to Russia, or West, to the Black Sea and the Mediterranean. Washington is not averse to pipelines via Russia: In the past, the United States strongly supported a Tengiz-Novorossiisk major pipeline, and a smaller Baku-Novorosiisk one (about 100,000 b/d or less). Yet, although the Russian state-owned pipeline operator Transneft has invested in capacity upgrades, unrest in Chechnya and elsewhere in Northern Caucasus make this pipeline limited.
At the Greek conference, Russia’s Caspian oil envoy Viktor Kalyuzhny said Russia wants to expand its transit options around the Caspian. Kalyuzhny endorsed the idea of constructing a pipeline from Burgas, Bulgaria to Alexandroupolis, Greece. Such a route would link the Black Sea with the Mediterranean and carry Russian and Kazakhstani oil (delivered by tanker from the source) to Western Europe. However, according to senior Bulgarian diplomats at the conference, there are no discernible sources of financing for such a pipeline. Kalyuzhny also talked up eastern and southern routes for both oil and gas, such as the oft-invoked route across Afghanistan, but many experts doubt Afghanistan or South Asia could offer investors assurances of political stability.
The cases of Afghanistan and Pakistan underscore a dilemma that dominates pipeline strategy: the need for transnational security. Roy Allison, a Russia expert and Senior Research Fellow at Oxford University’s Center for International Studies at University of Oxford, calls on international bodies to lead the way in conflict resolution. He offered the optimistic view at the September conference that Georgia could become more secure and tamp down some conflicts with breakaway provinces if it gets sustained help from the United Nations, Organization for Security and Cooperation in Europe, and the North Atlantic Treaty Organization. Allison noted that many players, including the fledgling GUAM group uniting Georgia, Ukraine, Azerbaijan and Moldova, had at least endorsed regional security cooperation since the terrorist attacks on the United States.
Many experts suspect that modifications of existing routes, like the established Druzhba system, may satisfy investors and importers. Russian pipeline monopoly Transneft has announced plans to begin merging the Druzhba system, which runs from Russia to Slovakia, with a pipeline called Adria that terminates in Croatia. Russian media quotes Transneft as promising to begin this project within a year. In the meantime, Kazakhstani oil may access the Druzhba system to facilities on the Baltic Sea, unless those terminals handle only Siberian supply. Another merger in the offing might link Kazakhstan’s and Turkmenistan’s fields to the Baku-Tbilisi-Ceyhan route and a gas pipeline from Baku to Erzurum, Georgia. Experts say Kazakhstan and Turkmenistan can fill the pipelines when Azerbaijani fields begin to show declines in output early in the next decade.
The market for natural gas, while growing, may be more complex than the one for oil. Turkey reportedly stopped importing gas from Iran in autumn 2002, responding to alleged price cuts in Russian supply. [For more background, see the Eurasia Insight archives] Moscow faces tougher challenges ahead, as future pipelines could carry Turkmen, Azerbaijani and conceivably Kazakhstani gas while leaving Gazprom, Russia’s enormous gas company, out of the action.
Finally, international strategists must place new pipelines in the context of an expanded European Union. The EU is taking steps towards expansion. Once this expansion is complete, the center of Europe will lie much closer to the Black Sea. That means that it will have to learn to manage regional conflict and poverty issues in the former Eastern bloc while figuring out a way to slake the thirst of its developed members for energy. This is no game, of course. But Europe and other players will probably take full advantage of available energy from the Caspian in whatever solutions they pursue.
10-10-2002
Senator Conrad Burns (R-MT), Representative Curt Weldon (R-PA), and other Members of Congress plan to introduce a concurrent resolution calling for further cooperation with the Russian Federation on energy development. They have a strong case. Among their concerns are over-dependence on oil from Saudi Arabia and imports from Iraq and other rogue states. Over 20 percent of America’s foreign oil comes from the highly unstable Persian Gulf. Even before September 11, the United States faced the untenable possibility that some of these imports could be, in Senator Burns’ words, "rogue oil"--that is, oil from countries that use the proceeds to support terrorism or to purchase or develop weapons of mass destruction.
U.S. consumers would be outraged to find out they could be financing al-Qaeda and other radical Islamist terrorist organizations every time they filled their gas tanks. U.S. oil imports should not in any way fund Islamic academies that provide pseudo-religious brainwashing and weapons training of youth for jihad (holy war) against Americans. Substantial supplies of oil are available from other countries and regions that do not sponsor terrorism, such as Russia, the Caspian Sea littoral states, Africa, and Latin America. The United States should gradually replace its oil imports from rogue regimes such as Iraq’s with oil from these areas. Doing so would have the additional beneficial effect of undermining the power of the Organization of Petroleum Exporting Countries (OPEC) to dictate supply and prices in the oil market.
Congress should fully support U.S.-Russian cooperation on energy development. Significantly, members of both houses of the Russian parliament--the Duma and the Council of the Federation--are willing to vote simultaneously with their American colleagues to show their support for the concurrent resolution.
Cooperation with Russia. Russian President Vladimir Putin has supported the United States in the war against the Taliban and al-Qaeda, even overruling his own senior officials to allow U.S. troop deployment and logistical infrastructure in Georgia and Central Asia. Moreover, after September 11, 2001, Putin muted his country’s objection to the U.S. abrogation of the 1972 Anti-Ballistic Missile (ABM) Treaty and NATO enlargement to include the former Soviet Baltic republics and the Warsaw Pact states of Bulgaria, Romania, and Slovakia. Such unprecedented actions have helped to bury the legacy of the Cold War.
Russia also has moved from a planned to a market economy. In the past decade, it has come a long way toward privatizing its economy in general and the energy sector in particular. Today, as its oil production and export levels grow, Russia is developing a capacity that would enable the United States to offset some of its Persian Gulf oil imports. Russian companies such as YUKOS and LUKoil have begun to sell their oil and gasoline to U.S. markets. However, Russia will need U.S. private-sector investment and government cooperation to develop its pipeline and port infrastructure to meet increased demands. In particular, Russia will seek U.S. private-sector and government assistance to:
Facilitating Energy Cooperation. On June 6, President George Bush granted market economy status to the Russian Federation, a step that will promote its adoption of market principles and assist in its integration into the world economy. But more needs to be done by the Administration and Congress. Any energy policy that the United States pursues vis-?-vis Russia should be in both countries’ interests. In particular, as the proposed concurrent resolution suggests, the United States should:
Conclusion. The war on terrorism has dictated a vital strategic re-orientation of U.S. oil imports away from "rogue oil." As an important first step on the road to U.S. energy security, Congress should support a concurrent resolution that calls for expanding energy cooperation with Russia.
The Road to Economic Prosperity for a Post-Saddam Iraq
09-25-2002
As the Bush Administration and Iraqi opposition groups plan the future of a post-Saddam Hussein Iraq without its menacing arsenal of weapons of mass destruction (WMD), economic issues loom large. Iraq’s economy has been grossly mismanaged for 40 years, and its people desperately need an alternative strategy to supplant the failed policies of its dictator. Sound economics are needed to help them rebuild their lives and their country after two decades of wars and four decades of repression under the current regime.
Saddam Hussein’s regime has succeeded in bankrupting the country even though it boasts the world’s second largest oil reserves after Saudi Arabia. Gross domestic product (GDP) for 2001, at the market exchange rate, is estimated to be only about one-third the level in 1989.1 Iraq also is hobbled by its $140 billion foreign debt.2 This devastation was wrought by such policies as the nationalization of the country’s chief export commodity, oil; extensive central planning of industry and trade; the 1982-1988 war against Iran; and the invasion of Kuwait, which precipitated the 1991 Gulf War. And Saddam still stubbornly refuses to meet the terms for lifting the economic sanctions that the United Nations has imposed on his regime.
Saddam also has succeeded in diverting at least $6.6 billion--primarily in revenues from smuggled oil and kickbacks--to his program to develop nuclear, chemical, and biological weapons and platforms for their delivery. He continues to support terrorist organizations, such as Hamas and the Popular Front for the Liberation of Palestine (PFLP), which the U.S. Department of State includes on its list of state sponsors of terrorism.3 Presumably, a post-war U.S. military presence in Iraq and Iraq’s future security forces will ensure that the new Iraqi government does not continue to develop WMD and support terrorism.
The future of Iraq depends not only on the ouster of the repressive regime, but also on the ability of the new Iraqi leaders to reverse the damage through policies that will spur real economic growth. The sooner the threat from Saddam’s WMD programs ends and the Iraqi economy recovers, the sooner the United States and the other security forces will be able to depart.
A double strategy of ensuring security and enabling economic growth will need international support. The Bush Administration should help Iraqi opposition leaders to develop an economic reform package for their country. The new post-Saddam federal government should develop a modern legal system that recognizes property rights and is conducive to privatization; create a public information campaign that prepares the people for structural reforms and privatization; hire expatriates and Western-educated Arabic speakers with financial, legal, and business expertise for key economic positions; deregulate prices, including prices in the utility and energy sectors; prepare state assets in the utility, transportation, pipeline, energy, and other sectors for privatization; keep the budget balanced and inflation, taxes, and tariffs low; liberalize and expand trade; and launch an effort to join the World Trade Organization (WTO).
The Tough economic Road Ahead
Iraq’s Lifeblood: Oil
As Chart 1 and Chart 2 show, the Iraqi economy is dominated by the oil sector, which provides more than 60 percent of Iraq’s GDP and 95 percent of its hard currency earnings.4 The economic sanctions imposed by the U.N. in the past decade to try to force Saddam to give up his weapons of mass destruction not only have not worked, but have helped to depress foreign trade.
According to the U.S. General Accounting Office (GAO), however, oil smuggling and illegal surcharges of 25 cents to 50 cents a barrel on legal oil purchases bolster Saddam’s regime. These illegal activities during 1996-2002 have provided unaccounted revenues of at least $6.6 billion,5 which Saddam has been free to spend to develop WMD and support terrorism.6 How much Saddam is actually spending on his deadly arsenal is hard to tell. The lack of information is so pervasive that the international financial institutions (IFIs), foreign government agencies, and private businesses that provide country economic analysis and data do not publish any official economic statistics or estimates for Iraq.7
This means that no recent data on Iraqi government consumption of GDP are available. In 1993, the most recent year for which data are available, government consumption amounted to 13.9 percent of GDP. According to the Economist Intelligence Unit,
Oil revenue has been the mainstay of government income since the 1950s. In 1968 the oil-based nature of the economy was reinforced by the introduction of a centralized socialist system, with the government regulating all aspects of economic life other than peripheral agriculture, personal services and trade.... Meanwhile, the state’s centrality to the economy has increased because the vast majority of imports and foreign exchange have been controlled by the government.8
The socialist Ba’ath government has demonstrated gross mismanagement of the oil sector. During the 1960s, exploration stopped and the sector was nationalized, which bred corruption and mismanagement. Oil production has barely increased since 1980. In 2001, oil production stood at approximately 2.8 million barrels a day. Today, Saddam’s regime controls oil exploration, extraction, refining, pipelines, ports, and all utilities, but oil export prices are set by the U.N. sanctions regime.
Taxing Imports, But Not Smugglers
The Economist Intelligence Unit notes that direct taxation has never been a preferred means of raising revenue in Iraq.9 As the International Monetary Fund (IMF) reports, "imports are restricted by [U.N.] sanctions. All imports subject to import duty are also subject to a customs surcharge.... Imports of commodities are normally handled by the public sector."10 Although the government of Iraq inspects and regulates all imports, a small private sector is involved in considerable smuggling and black market currency exchange activities.
Tough Investment Environment
Even though Iraq has permitted some foreign investment in its oil industry and private sector, mainly to help it rebuild from the damage of the Gulf War, it discourages most capital inflows. The legal system does not guarantee contracts. Inflation in Iraq remains high. From 1994 to 2001, Iraq’s weighted average annual rate of inflation was 80.4 percent; for 2001-2002, the rate has ranged from 60 percent to 70 percent.11
The government controls almost all prices, and rationing is the norm for items like food. The regime continues to distribute imported goods in what is essentially a highly centralized command economy structure, although it does retain the ability to skew the distribution of food and other items as a way to favor cronies.
There is no application of modern property rights protected by legislation and enforced through the courts. The Revolutionary Command Council (RCC) of Iraq holds all executive, legislative, and judicial authority. The RCC’s chairman, Saddam Hussein, appoints a council of ministers who are theoretically vested with executive authority, but in fact they are able only to rubber-stamp the decisions of the RCC and its chairman. The judiciary is not independent; consequently, there is no check on Saddam’s power to override any court decision.
AFTER Saddam: The outlook for Iraq and World Energy Markets
One thing is clear: Saddam’s regime, obsessed with control and coercion, is destroying the wealth of the Iraqi people. After liberation from this regime, it will be important for the Iraqi people to rebuild their economy, especially the oil sector, increase GDP and improve the standard of living, attract foreign investment, and improve government services through privatization.
The Cost of Rebuilding
The cost of rebuilding the country will be high. If Operation Desert Storm reconstruction costs are used as the basis for estimation, the cost of rebuilding Iraq after Saddam’s regime falls will be in the $50 billion to $100 billion range.12 Together with repaying the Iraqi foreign debt, the more realistic figure is $200 billion.13 However, as long as structural economic reforms are undertaken, Iraq’s vast oil reserves are more than ample to provide the funds needed to rebuild and boost economic growth.
The United States, through its executive directors at such IFIs as the IMF and World Bank, and other international governmental and non-governmental organizations, should begin to advise the future leaders of Iraq’s three primary ethnic groups to establish policies that will lead to a thriving modern economy. These policies should be based on "best practices" developed around the world in the 1990s, when the largest government privatizations in history occurred.
During the Iran-Iraq War and the post-Gulf War sanctions period, Iraqi petroleum production declined significantly. Saudi Arabia filled the void, generating a net profit of $100 billion. The funds it generated represent monies that should have benefited the Iraqi people.14 (See Chart 3.)
Following the demise of Saddam Hussein, it is unlikely that the Saudi kingdom would transfer a fraction of its production quota under the Organisation of Petroleum Exporting Countries (OPEC) regime to Iraq to compensate for those lost profits and facilitate its rebuilding. Iraq will need to ensure cash flow for reconstruction regardless of OPEC supply limitations. Combined with the potential privatization of the oil industry, such measures could provide incentive for Iraq to leave the OPEC cartel down the road, which would have long-term, positive implications for global oil supply.
Potential Benefits of Leaving the OPEC Regime
An Iraq outside of OPEC would find available from its oil trade an ample cash flow for the country’s rehabilitation. Its reserves currently stand at 112 billion barrels, but according to the U.S. Energy Information Administration, it may have as much as 200 billion barrels in reserve.15 Iraqi officials estimate even more: According to oil minister Amir Muhammad Rashad16 and Iraqi Senior Deputy Oil Minister Taha Hmud, the reserves can be as high as 270 billion to 300 billion barrels, making them equal to Saudi Arabia’s.17
Iraq’s 1990 output prior to the beginning of the Gulf War stood at 3.5 million barrels a day, while oil discovery rates on a few new projects in the 1990s were among the highest in the world: between 50 percent and 75 percent. Given Iraq’s own output projections, it may be capable of pumping as much as 6 million barrels (by 2010) to 7 million barrels (by 2020) a day, more than doubling current production levels.18 (See Chart 4.)
Depending on the dynamics of global economic growth and world oil output, Iraq’s increase in oil production capacity could bring lower oil prices in the long term. An unencumbered flow of Iraqi oil would be likely to provide a more constant supply of oil to the global market, which would dampen price fluctuations, ensuring stable oil prices in the world market in a price range lower than the current $25 to $30 a barrel. Eventually, this will be a win-win game: Iraq will emerge with a more viable oil industry while the world will benefit from a more stable and abundant oil supply.
PRIVATIZATION:
Learning from the past
Boosting oil exports and oil industry privatization by itself still may not be sufficient for growth over the long haul. To rehabilitate and modernize its economy, a post-Saddam government will need to move simultaneously on a number of economic policy fronts, utilizing the experience of privatization campaigns and structural reforms in other countries to develop a comprehensive policy package.
Several lessons from other countries’ privatization experiences are particularly relevant to Iraq’s situation. Specifically:
LESSON #1: Privatization works everywhere
Between 1988 and 1993, 2,700 state-owned businesses in 95 countries were sold to private investors.19 In 1991 alone, $48 billion in state assets were privatized worldwide.20 Privatizations led to higher productivity, faster growth, increased capacity, and cheaper services for consumers.
In one study, the World Bank reviewed 41 firms privatized by public offerings in 15 countries. This review demonstrates that privatization will increase the return on sales, assets, and equity. As privatized firms grow, they often increase their workforces. In another study, the World Bank reviewed 12 privatization efforts in four countries, and its findings also demonstrate why privatization is good for the economy as a whole, no matter where it is implemented.21
LESSON #2: Privatization works best when it is part of a larger structural reform program
Privatization needs to be accompanied by reforms to open markets, removal of price and exchange rate distortions, reductions in barriers to entry, and elimination of monopoly powers. In addition to these policies, governments should enact legislation that protects consumer welfare.22 Such successful structural reform and privatization programs were implemented in the 1990s in Poland, Hungary, the Czech Republic, and the three Baltic States, particularly Estonia.
LESSON #3: Privatization of large enterprises requires preparation
Successful privatizations of large enterprises may necessitate such advance actions as breaking them into smaller competitive units, recruiting experienced private-sector managers, adopting Generally Accepted Accounting Principles (GAAPs), settling past liabilities, and shedding excess labor.23
LESSON #4: Transparency and the rule of law are critical
Opaque privatization and allegations of corruption and cronyism provide political ammunition to the opponents of market-based policies. To eliminate those problems and be successful in its privatization efforts, the government must adopt competitive bidding procedures, objective criteria for selecting bids, and protocols for hiring independent privatization management firms, and establish a privatization authority with minimal bureaucracy to monitor the overall program.24
LESSON #5: A minimal safety net is necessary to support laid-off workers and prevent social unrest
Buyouts of the state-owned enterprise’s management and labor force, as well as distribution of some of the privatized firm’s shares to its management and labor force, can go a long way toward alleviating social tensions that might undermine public support for privatization.
LESSON #6: Privatization is taking place in the Middle East
Privatization is no longer an affair of affluent or middle-income countries. From Margaret Thatcher’s Great Britain, privatizations of state-owned assets and structural reform policies spread to many countries in Africa, Asia, and Latin America, including the Philippines, Malaysia, Jamaica, and Sri Lanka. An internal study of World Bank managers in the Middle East and North African department found that many were enthusiastic in supporting privatization efforts in their regions.25 A number of Middle Eastern states, including Iraq’s neighbors Turkey26 and Kuwait,27 are pursuing privatization of their telecommunications, transportation, utilities, and oil sectors and services, while others, such as Iran and Saudi Arabia, have declared their intentions to privatize assets and are in the policy discussion stage.28
Lessons from Oil and Gas Privatizations
Oil privatization remains a politically painful issue in many countries. Economic nationalists claim oil is a "national patrimony,"29 whereas socialists and radical Islamists call private and foreign ownership of natural resources "imperialist" and other such pejoratives. Such rhetoric has one goal: to keep a precious and profitable resource in the hands of the ruling elite, be it a communist party politburo, a dictator, or a group of mullahs.
In fact, oil is a commodity and should be managed according to the laws of economics and best business practices. Even a country as fiercely nationalist as Russia recognizes this and is undertaking the largest oil sector privatization in history. The lessons from past experience in oil privatizations are also positive. Specifically:
ENERGY SECTOR LESSON #1: First "entitize," then privatize
The Conservative government of Margaret Thatcher successfully privatized some British oil assets in the 1980s. In the early 1990s, Russia carved up its state-run oil ministry into regional monopolies. It created joint stock companies, later selling stock to the Russians, first, and then to foreigners. The Ministry of Privatization distributed some stocks to managers and workers in order to smooth the path to privatization. Since privatization, many of these stocks, such as in LUKoil, Tyumen Oil Co. (TNK), and Yukos, have risen in price considerably.
The Russian government did not go all the way, however. For example, it did not privatize Transneft, a company that controls its pipeline infrastructure, or fully privatize some oil companies, such as Slavneft and Zarubezhneft and GAZPROM, the giant natural gas monopoly that boasts the world’s largest natural gas reserves and controls a 90,000 km pipeline network.30 The partial privatization effort has led to friction between state-controlled entities and the privatized-publicly held companies over pipeline access.
ENERGY SECTOR LESSON #2: Oil privatization generates high economic efficiency and market capitalization
The results of Russian oil privatization are fascinating: While the privatized Russian oil companies significantly expanded their production and exports and significantly increased market capitalization, GAZPROM did not. The government-controlled pipeline operator also has had difficulty providing adequate pipeline capacity to the quickly developing oil sector.
Meanwhile, privatized Russian companies not only have attracted Western portfolio investment, but also have been more successful than GAZPROM in attracting capital for foreign direct investment. Several leading Russian publicly traded oil companies also transformed their antiquated, Soviet-era accounting practices to the GAAP standard, hired Western managers, and became centers for dissemination of Western management and accounting skills across Russia’s industrial sectors. Moreover, Russia’s largest oil companies, such as LUKoil and Yukos, are fast becoming major global oil players. LUKoil recently purchased 1,300 Getty gas stations in the United States, and LUKoil and Yukos are selling American Depository Receipts (ADRs) on the New York Stock Exchange.
ENERGY SECTOR LESSON #3: Keep it clean, and keep it profitable
The major problem with the Russian oil privatization effort has been its relative opacity, especially in the early 1990s. Scandals included the oil-for-shares debacle in which Boris Yeltsin’s government took loans from banks in exchange for shares of the oil companies. The government never repaid the loans, and the companies became the property of politically connected banks.31 The insider dealing provoked a political row that discredited privatization in the public’s eyes.
Other problems in Russia have been privatization through vouchers and the denial of access to foreigners in early privatization stages in order to assuage nationalists in the parliament. These policies resulted in much lower revenues (by as much as a factor of 10) than the government could have received for the privatized assets.
AN ECONOMIC REFORM PLAN FOR POST-SADDAM IRAQ
The Bush Administration should provide leadership and guidance for the future Iraqi government to undertake fundamental structural economic reform. This process should include a massive, orderly, and transparent privatization of state-owned enterprises, especially the restructuring and privatization of the oil sector. These steps would greatly enhance needed access to global capital markets.
U.S. political commitment will be needed to motivate international organizations to provide appropriate expertise and technical assistance. Inter alia, these organizations could include IFIs such as the International Monetary Fund and the World Bank, and would likely encompass such diverse non-governmental organizations (NGOs) as the National Endowment for Democracy, the Center for International Private Enterprise, the American Bar Association, and the AFL-CIO.
In particular, the Bush Administration should convince the future federal government of Iraq to come to an agreement on how oil revenues are taxed and proceeds are distributed to the country’s three distinct ethnic regions--Shiite Arabs, the Kurds, and the Sunni Arabs. Successfully privatizing the country’s oil fields, refining capacity, and pipeline infrastructure will mean higher efficiencies and higher tax revenues in the oil sector.
What a New Iraqi Government Must Do
The Administration, the IFIs, and other economic decisionmakers should prepare and provide support for a future federal Iraqi government to:
Develop a modern legal environment that recognizes property rights and is conducive to privatization. Protection and enforcement of property rights and access to successful alternative dispute resolution mechanisms are vital policies for fostering economic growth and foreign investment. Iraq also will need to build modern and well-functioning regulatory and supervisory frameworks and institutions in the oil and gas, banking, securities, and financial services areas. Such a legal and business environment should be equitable and non-discriminatory, and it should not distinguish between Iraqi-Arab nationals and foreigners.
The U.S. government, its allies, and international organizations should be ready to provide technical assistance in the legal, economic policy, and public administration areas. Working cooperatively with the United States, the European Union, and the IFIs, the post-Saddam government of Iraq will need to boost the court system and the rule of law. It will need to provide legislation to allow the use of broad alternative dispute resolution mechanisms outside of Iraq, as the local laws may change too quickly (and the local court system too slowly) for local judges to be able to follow and apply new legislation. Education for judges about the latest legal developments in the economic area will also be important. The courts will have to boost the enforcement of court rulings independent of the executive branch. The central government will need to pay judges and court employees adequate salaries to keep corruption in check.
Educate and prepare the Iraqi population for structural reform and privatization through a public information campaign.
Only when the public, including key stakeholders, elites, and the population at large, understand the goals of economic reform will they become more receptive to change and less likely to succumb to the anti-Western demagoguery that undoubtedly will emanate from the remnants of the discredited Ba’ath establishment and Islamic fundamentalists. The new Iraqi government will need to use the media and the educational system to explain the benefits of privatization and the changes to come in order to ensure broad public support.
Hire Iraqi expatriates, as well as other Western-educated Arabic speakers with financial, legal and business backgrounds, for key positions in government.
Examples of this approach in Eastern Europe demonstrate that Western-educated experts can implement economic reforms better than a former socialist bureaucracy can. Younger, well-educated technocrats have an advantage in their ability to communicate effectively with both locals and Westerners, including international providers of technical assistance. In implementing structural reform, the best results are achieved by teams of local and Western experts working together.
Deregulate prices in Iraq, including prices in the utilities and energy sector.
Quick price deregulation will be key to ensuring an adequate supply of goods for consumers and ending rationing. It will contribute to increased exports of oil and gas, which in turn will provide additional earnings and tax revenues for the government to share among the regional and local governments.32
Prepare to privatize assets in the industrial, utility, telecommunications, banking, transportation, port and airport, and pipeline and energy sectors.
The post-Saddam Iraqi government should prepare to privatize government assets by creating government-held companies instead of ministries, issuing stock for these companies, and implementing guidelines that allow for the introduction of modern management practices and GAAP standards. The central government should hire consulting firms to execute comprehensive assessments of companies it wishes to privatize in order to itemize inventory, to take stock of assets and liabilities, and possibly to settle some of their debts in preparation for privatization.
In particular, the Oil Ministry and regional oil companies should be restructured to transform them into attractive government-owned oil companies as an intermediary stage before initial public offering (IPO). For example, one company may focus its work in the southern portion of the country, another in the central region (around Baghdad) and the Western desert, and the third around Kirkuk in the North. Three more companies may be created, one to operate the pipelines, the second to operate the refineries, and the third to develop natural gas.
The stages of preparation for privatization could include:
Taking inventory of assets and liabilities;
Exercising necessary efficiency-improvement steps, such as retraining and layoffs (with compensation);
Introducing GAAP and other modern financial and management practices;
Signing international conventions against nationalization of foreign investments, such as the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the Washington Convention), the World Bank’s Convention on the Multilateral Investment Guarantee Agency (MIGA), and the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (1958);
Issuing company stock;
Running the companies under new, transparent, and efficient management for at least two years; and
Taking companies on road shows and completing IPOs in major financial centers such as New York and London, and floating stock in international markets.
Given adequate implementation of each of these stages, the time frame for this privatization effort could be four to five years after the new government is installed by the people of Iraq. During this time, the U.S. government and the IFIs would have to ensure that the political will for privatization remains intact. Management and accounting consultants hired by the new Iraqi government would have to ascertain that the program is transparent and on track.
Moreover, after privatization, Iraq must demonstrate that it is not losing tax revenue and that the government’s oil revenue is distributed among the regions equitably and efficiently, allocated to the worthy causes, and not wasted, looted, or abused, which could undermine the entire economic reform program.
Keep the budget balanced and inflation, taxes, and tariffs low.
International experience demonstrates that lower and flatter taxes (in the range of 20 percent or less), applied uniformly and in a non-discriminatory fashion, are an important investment magnet, especially for a country like Iraq that is rich in natural resources. Moreover, oil revenues will allow Iraq to keep the budget balanced and import tariffs low. Such a stable macroeconomic policy is likely to attract massive investment from a variety of sources, including the Middle East and Asia, not just the West, and boost income and employment.
Liberalize and expand trade, and launch an effort to join the World Trade Organization.
A study by the Council on Foreign Relations has demonstrated that a majority of Middle Eastern countries suffer from high import tariffs, red tape, and corruption--problems that depress GDP growth.33 Elimination of import taxes and tariffs and implementation of trade liberalization would provide an additional economic development engine for Iraq. The Bush Administration should provide technical assistance for trade liberalization and support Iraq’s eventual membership in the WTO.
Conclusion
For the Iraqi people, structural economic reform and comprehensive privatization of government assets is necessary to stimulate recovery and provide stability after years of disastrous economic policies under Saddam Hussein. The winning strategy of structural reform and privatization also would benefit the industrial world, the United States and its allies, countries of the Middle East, and the developing world.
Iraq’s return to global markets would allow for a more abundant and stable energy supply, a higher cash flow for the Iraqi people, and numerous business opportunities for the region and the world. Iraq’s restructuring and privatization of its oil and gas sector could become a model for oil industry privatizations in other OPEC states as well, weakening the cartel’s influence over global energy markets.
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1. U.S. Department of Energy, Energy Information Administration, "Iraq: Country Overview," at http://www.eia.doe.gov/emeu/cabs/iraq.html.
2. Ibid.
3. U.S. Department of State, Office of the Coordinator for Counterterrorism, "Appendix B: Background Information on Terrorist Groups," Patterns of Global Terrorism-2000, April 30, 2001, at http://www.state.gov/s/ct/rls/pgtrpt/2000/2450.htm.
4. Energy Information Administration, "Iraq: Country Overview."
5. U.S. General Accounting Office, U.S. Confronts Significant Challenges in Implementing Sanctions Against Iraq, GAO-02-625, May 2002, at http://www.gao.gov/atext/d02625.txt.
6. Alix Freedman and Steve Stecklow, "Secret Pipeline: How Iraq Reaps Illegal Oil Profits," The Wall Street Journal, May 2, 2002.
7. Gerald P. O’Driscoll, Jr., Edwin J. Feulner, and Mary Anastasia O’Grady, "Iraq," in 2003 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., forthcoming).
8. Ibid.
9. Economist Intelligence Unit, "Country Report, July 2002."
10. O’Driscoll et al., "Iraq," 2003 Index of Economic Freedom.
11. Ibid.
12. Bill Gertz, "Tab to Rebuild Iraq, Kuwait Estimated at $100 Billion," The Washington Times, March 4, 1991. More recent estimates confirm this range.
13. Julian Borger, "Post-Saddam Iraq Will Cost You, U.S. Warned," The Guardian, August 2, 2002, at http://www.guardian.co.uk/bush/story/0,7369,767755,00.html. Lawrence Lindsey, Director of the National Economic Council, is quoted as estimating a cost for the Iraq war of between $100 billion and $200 billion. It is unclear what is included in that figure. See Bob Davis, "Bush Economic Aide Says Cost of Iraq War May Top $100 Billion," The Wall Street Journal, September 16, 2002, p. 1.
14. "Round Table on Declining Oil Prices and Its Political Consequences in the Middle East," Middle East Studies, Vol. 6, No. 1 (Spring 1999), pp. 5-36, at http://www.netiran.com/Htdocs/Clippings/Economy/990322XXFE01.html.
15. Energy Information Administration, "Iraq: Country Overview," p. 14.
16. "Iraq’s oil reserves bigger than Saudi Arabia, Minister Says," BBC Monitoring, August 6, 2001, Al-Jumhuriyah Web site in Arabic, August 4, 2001.
17. "Iraq’s Oil Industry: An Overview," Platts, at http://www.platts.com/features/Iraq/oiloverview.shtml.
18. "Iraq Building E&D Project List for Post-U.N. Sanctions Period," The Oil and Gas Journal, Vol. 95, No. 15 (April 14, 1997).
19. Energy Information Administration, "Privatization and the Globalization of Energy Markets," Energy Plug, at http://www.eia.gov/emeu/plugs/plpgem.html.
20. Madsen Pirie, "Privatization," Concise Encyclopedia of Economics, at http://www.econlib.org/library/encl/privatizaiton.html.
21. World Bank, "Privatization: Eight Lessons of Experience," Policy Views from the Country Economics Department, July 1992, at http://www.worldbank.org/html/prddr/outdeach/or3.htm. For the latest annual update on global privatizations, see Reason Public Policy Institute, "Privatization 2002: Putting the Pieces Together," at www.rppi.org/apr2002.pdf.
22. World Bank, "Privatization: Eight Lessons of Experience."
23. Ibid.
24. Ibid.
25. Ibid.
26. See information at Republic of Turkey, Office of the Prime Minister, Ministry of Privatization Administration, http://www.oib.gov.tr/.
27. Dr. Shafiq Ghabra, "The View from Kuwait," The Middle East Forum, March 18, 2000. For more on Kuwait, see U.S. Department of Commerce, "Commercial Overview," at http://www.arabchamber.com/arab-coutnries/Kuwait/commercial_overview.htm. See also International Monetary Fund, "IMF Concludes Article IV Consultation with Kuwait," Public Information Notice No. 00/27, April 4, 2000, at http://www.imf.org/external/np/sec/pn/2000/pn0027.htm.
28. See Energy Information Administration, "Saudi Arabia," January 2002, at http://www.eia.doe.gov/emeu/cabs/saudi.html. On Iran, see "Round Table," Middle East Studies, at http://www.netiran.com/Htdocs/Clpppings/Feconomy/990322XXFE01.html.
29. Mary Jordan, "Drilling Stakes at Mexico’s Heart," The Washington Post, January 25, 2002.
30. The Russian government retained 38 percent of GAZPROM shares.
31. Energy Information Administration, "Russia," at http://www.eia.doe.gov/emeu/pgem/ch4a.html.
32. John C. Hulsman, Ph.D., and James Phillips, "Forging a Durable Post-War Political Settlement in Iraq," Heritage Foundation Backgrounder No. 1593, September 24, 2002.
33. Bernard Hoekman and Patrick Messerlin, "Harnessing Trade for Development and Growth in the Middle East," Council on Foreign Relations, 2002.
The Road to Economic Prosperity for a Post-Saddam Iraq
09-25-2002
As the Bush Administration and Iraqi opposition groups plan the future of a post-Saddam Hussein Iraq without its menacing arsenal of weapons of mass destruction (WMD), economic issues loom large. Iraq’s economy has been grossly mismanaged for 40 years, and its people desperately need an alternative strategy to supplant the failed policies of its dictator. Sound economics are needed to help them rebuild their lives and their country after two decades of wars and four decades of repression under the current regime.
Saddam Hussein’s regime has succeeded in bankrupting the country even though it boasts the world’s second largest oil reserves after Saudi Arabia. Gross domestic product (GDP) for 2001, at the market exchange rate, is estimated to be only about one-third the level in 1989.1 Iraq also is hobbled by its $140 billion foreign debt.2 This devastation was wrought by such policies as the nationalization of the country’s chief export commodity, oil; extensive central planning of industry and trade; the 1982-1988 war against Iran; and the invasion of Kuwait, which precipitated the 1991 Gulf War. And Saddam still stubbornly refuses to meet the terms for lifting the economic sanctions that the United Nations has imposed on his regime.
Saddam also has succeeded in diverting at least $6.6 billion--primarily in revenues from smuggled oil and kickbacks--to his program to develop nuclear, chemical, and biological weapons and platforms for their delivery. He continues to support terrorist organizations, such as Hamas and the Popular Front for the Liberation of Palestine (PFLP), which the U.S. Department of State includes on its list of state sponsors of terrorism.3 Presumably, a post-war U.S. military presence in Iraq and Iraq’s future security forces will ensure that the new Iraqi government does not continue to develop WMD and support terrorism.
The future of Iraq depends not only on the ouster of the repressive regime, but also on the ability of the new Iraqi leaders to reverse the damage through policies that will spur real economic growth. The sooner the threat from Saddam’s WMD programs ends and the Iraqi economy recovers, the sooner the United States and the other security forces will be able to depart.
A double strategy of ensuring security and enabling economic growth will need international support. The Bush Administration should help Iraqi opposition leaders to develop an economic reform package for their country. The new post-Saddam federal government should develop a modern legal system that recognizes property rights and is conducive to privatization; create a public information campaign that prepares the people for structural reforms and privatization; hire expatriates and Western-educated Arabic speakers with financial, legal, and business expertise for key economic positions; deregulate prices, including prices in the utility and energy sectors; prepare state assets in the utility, transportation, pipeline, energy, and other sectors for privatization; keep the budget balanced and inflation, taxes, and tariffs low; liberalize and expand trade; and launch an effort to join the World Trade Organization (WTO).
The Tough economic Road Ahead
Iraq’s Lifeblood: Oil
As Chart 1 and Chart 2 show, the Iraqi economy is dominated by the oil sector, which provides more than 60 percent of Iraq’s GDP and 95 percent of its hard currency earnings.4 The economic sanctions imposed by the U.N. in the past decade to try to force Saddam to give up his weapons of mass destruction not only have not worked, but have helped to depress foreign trade.
According to the U.S. General Accounting Office (GAO), however, oil smuggling and illegal surcharges of 25 cents to 50 cents a barrel on legal oil purchases bolster Saddam’s regime. These illegal activities during 1996-2002 have provided unaccounted revenues of at least $6.6 billion,5 which Saddam has been free to spend to develop WMD and support terrorism.6 How much Saddam is actually spending on his deadly arsenal is hard to tell. The lack of information is so pervasive that the international financial institutions (IFIs), foreign government agencies, and private businesses that provide country economic analysis and data do not publish any official economic statistics or estimates for Iraq.7
This means that no recent data on Iraqi government consumption of GDP are available. In 1993, the most recent year for which data are available, government consumption amounted to 13.9 percent of GDP. According to the Economist Intelligence Unit,
Oil revenue has been the mainstay of government income since the 1950s. In 1968 the oil-based nature of the economy was reinforced by the introduction of a centralized socialist system, with the government regulating all aspects of economic life other than peripheral agriculture, personal services and trade.... Meanwhile, the state’s centrality to the economy has increased because the vast majority of imports and foreign exchange have been controlled by the government.8
The socialist Ba’ath government has demonstrated gross mismanagement of the oil sector. During the 1960s, exploration stopped and the sector was nationalized, which bred corruption and mismanagement. Oil production has barely increased since 1980. In 2001, oil production stood at approximately 2.8 million barrels a day. Today, Saddam’s regime controls oil exploration, extraction, refining, pipelines, ports, and all utilities, but oil export prices are set by the U.N. sanctions regime.
Taxing Imports, But Not Smugglers
The Economist Intelligence Unit notes that direct taxation has never been a preferred means of raising revenue in Iraq.9 As the International Monetary Fund (IMF) reports, "imports are restricted by [U.N.] sanctions. All imports subject to import duty are also subject to a customs surcharge.... Imports of commodities are normally handled by the public sector."10 Although the government of Iraq inspects and regulates all imports, a small private sector is involved in considerable smuggling and black market currency exchange activities.
Tough Investment Environment
Even though Iraq has permitted some foreign investment in its oil industry and private sector, mainly to help it rebuild from the damage of the Gulf War, it discourages most capital inflows. The legal system does not guarantee contracts. Inflation in Iraq remains high. From 1994 to 2001, Iraq’s weighted average annual rate of inflation was 80.4 percent; for 2001-2002, the rate has ranged from 60 percent to 70 percent.11
The government controls almost all prices, and rationing is the norm for items like food. The regime continues to distribute imported goods in what is essentially a highly centralized command economy structure, although it does retain the ability to skew the distribution of food and other items as a way to favor cronies.
There is no application of modern property rights protected by legislation and enforced through the courts. The Revolutionary Command Council (RCC) of Iraq holds all executive, legislative, and judicial authority. The RCC’s chairman, Saddam Hussein, appoints a council of ministers who are theoretically vested with executive authority, but in fact they are able only to rubber-stamp the decisions of the RCC and its chairman. The judiciary is not independent; consequently, there is no check on Saddam’s power to override any court decision.
AFTER Saddam: The outlook for Iraq and World Energy Markets
One thing is clear: Saddam’s regime, obsessed with control and coercion, is destroying the wealth of the Iraqi people. After liberation from this regime, it will be important for the Iraqi people to rebuild their economy, especially the oil sector, increase GDP and improve the standard of living, attract foreign investment, and improve government services through privatization.
The Cost of Rebuilding
The cost of rebuilding the country will be high. If Operation Desert Storm reconstruction costs are used as the basis for estimation, the cost of rebuilding Iraq after Saddam’s regime falls will be in the $50 billion to $100 billion range.12 Together with repaying the Iraqi foreign debt, the more realistic figure is $200 billion.13 However, as long as structural economic reforms are undertaken, Iraq’s vast oil reserves are more than ample to provide the funds needed to rebuild and boost economic growth.
The United States, through its executive directors at such IFIs as the IMF and World Bank, and other international governmental and non-governmental organizations, should begin to advise the future leaders of Iraq’s three primary ethnic groups to establish policies that will lead to a thriving modern economy. These policies should be based on "best practices" developed around the world in the 1990s, when the largest government privatizations in history occurred.
During the Iran-Iraq War and the post-Gulf War sanctions period, Iraqi petroleum production declined significantly. Saudi Arabia filled the void, generating a net profit of $100 billion. The funds it generated represent monies that should have benefited the Iraqi people.14 (See Chart 3.)
Following the demise of Saddam Hussein, it is unlikely that the Saudi kingdom would transfer a fraction of its production quota under the Organisation of Petroleum Exporting Countries (OPEC) regime to Iraq to compensate for those lost profits and facilitate its rebuilding. Iraq will need to ensure cash flow for reconstruction regardless of OPEC supply limitations. Combined with the potential privatization of the oil industry, such measures could provide incentive for Iraq to leave the OPEC cartel down the road, which would have long-term, positive implications for global oil supply.
Potential Benefits of Leaving the OPEC Regime
An Iraq outside of OPEC would find available from its oil trade an ample cash flow for the country’s rehabilitation. Its reserves currently stand at 112 billion barrels, but according to the U.S. Energy Information Administration, it may have as much as 200 billion barrels in reserve.15 Iraqi officials estimate even more: According to oil minister Amir Muhammad Rashad16 and Iraqi Senior Deputy Oil Minister Taha Hmud, the reserves can be as high as 270 billion to 300 billion barrels, making them equal to Saudi Arabia’s.17
Iraq’s 1990 output prior to the beginning of the Gulf War stood at 3.5 million barrels a day, while oil discovery rates on a few new projects in the 1990s were among the highest in the world: between 50 percent and 75 percent. Given Iraq’s own output projections, it may be capable of pumping as much as 6 million barrels (by 2010) to 7 million barrels (by 2020) a day, more than doubling current production levels.18 (See Chart 4.)
Depending on the dynamics of global economic growth and world oil output, Iraq’s increase in oil production capacity could bring lower oil prices in the long term. An unencumbered flow of Iraqi oil would be likely to provide a more constant supply of oil to the global market, which would dampen price fluctuations, ensuring stable oil prices in the world market in a price range lower than the current $25 to $30 a barrel. Eventually, this will be a win-win game: Iraq will emerge with a more viable oil industry while the world will benefit from a more stable and abundant oil supply.
PRIVATIZATION:
Learning from the past
Boosting oil exports and oil industry privatization by itself still may not be sufficient for growth over the long haul. To rehabilitate and modernize its economy, a post-Saddam government will need to move simultaneously on a number of economic policy fronts, utilizing the experience of privatization campaigns and structural reforms in other countries to develop a comprehensive policy package.
Several lessons from other countries’ privatization experiences are particularly relevant to Iraq’s situation. Specifically:
LESSON #1: Privatization works everywhere
Between 1988 and 1993, 2,700 state-owned businesses in 95 countries were sold to private investors.19 In 1991 alone, $48 billion in state assets were privatized worldwide.20 Privatizations led to higher productivity, faster growth, increased capacity, and cheaper services for consumers.
In one study, the World Bank reviewed 41 firms privatized by public offerings in 15 countries. This review demonstrates that privatization will increase the return on sales, assets, and equity. As privatized firms grow, they often increase their workforces. In another study, the World Bank reviewed 12 privatization efforts in four countries, and its findings also demonstrate why privatization is good for the economy as a whole, no matter where it is implemented.21
LESSON #2: Privatization works best when it is part of a larger structural reform program
Privatization needs to be accompanied by reforms to open markets, removal of price and exchange rate distortions, reductions in barriers to entry, and elimination of monopoly powers. In addition to these policies, governments should enact legislation that protects consumer welfare.22 Such successful structural reform and privatization programs were implemented in the 1990s in Poland, Hungary, the Czech Republic, and the three Baltic States, particularly Estonia.
LESSON #3: Privatization of large enterprises requires preparation
Successful privatizations of large enterprises may necessitate such advance actions as breaking them into smaller competitive units, recruiting experienced private-sector managers, adopting Generally Accepted Accounting Principles (GAAPs), settling past liabilities, and shedding excess labor.23
LESSON #4: Transparency and the rule of law are critical
Opaque privatization and allegations of corruption and cronyism provide political ammunition to the opponents of market-based policies. To eliminate those problems and be successful in its privatization efforts, the government must adopt competitive bidding procedures, objective criteria for selecting bids, and protocols for hiring independent privatization management firms, and establish a privatization authority with minimal bureaucracy to monitor the overall program.24
LESSON #5: A minimal safety net is necessary to support laid-off workers and prevent social unrest
Buyouts of the state-owned enterprise’s management and labor force, as well as distribution of some of the privatized firm’s shares to its management and labor force, can go a long way toward alleviating social tensions that might undermine public support for privatization.
LESSON #6: Privatization is taking place in the Middle East
Privatization is no longer an affair of affluent or middle-income countries. From Margaret Thatcher’s Great Britain, privatizations of state-owned assets and structural reform policies spread to many countries in Africa, Asia, and Latin America, including the Philippines, Malaysia, Jamaica, and Sri Lanka. An internal study of World Bank managers in the Middle East and North African department found that many were enthusiastic in supporting privatization efforts in their regions.25 A number of Middle Eastern states, including Iraq’s neighbors Turkey26 and Kuwait,27 are pursuing privatization of their telecommunications, transportation, utilities, and oil sectors and services, while others, such as Iran and Saudi Arabia, have declared their intentions to privatize assets and are in the policy discussion stage.28
Lessons from Oil and Gas Privatizations
Oil privatization remains a politically painful issue in many countries. Economic nationalists claim oil is a "national patrimony,"29 whereas socialists and radical Islamists call private and foreign ownership of natural resources "imperialist" and other such pejoratives. Such rhetoric has one goal: to keep a precious and profitable resource in the hands of the ruling elite, be it a communist party politburo, a dictator, or a group of mullahs.
In fact, oil is a commodity and should be managed according to the laws of economics and best business practices. Even a country as fiercely nationalist as Russia recognizes this and is undertaking the largest oil sector privatization in history. The lessons from past experience in oil privatizations are also positive. Specifically:
ENERGY SECTOR LESSON #1: First "entitize," then privatize
The Conservative government of Margaret Thatcher successfully privatized some British oil assets in the 1980s. In the early 1990s, Russia carved up its state-run oil ministry into regional monopolies. It created joint stock companies, later selling stock to the Russians, first, and then to foreigners. The Ministry of Privatization distributed some stocks to managers and workers in order to smooth the path to privatization. Since privatization, many of these stocks, such as in LUKoil, Tyumen Oil Co. (TNK), and Yukos, have risen in price considerably.
The Russian government did not go all the way, however. For example, it did not privatize Transneft, a company that controls its pipeline infrastructure, or fully privatize some oil companies, such as Slavneft and Zarubezhneft and GAZPROM, the giant natural gas monopoly that boasts the world’s largest natural gas reserves and controls a 90,000 km pipeline network.30 The partial privatization effort has led to friction between state-controlled entities and the privatized-publicly held companies over pipeline access.
ENERGY SECTOR LESSON #2: Oil privatization generates high economic efficiency and market capitalization
The results of Russian oil privatization are fascinating: While the privatized Russian oil companies significantly expanded their production and exports and significantly increased market capitalization, GAZPROM did not. The government-controlled pipeline operator also has had difficulty providing adequate pipeline capacity to the quickly developing oil sector.
Meanwhile, privatized Russian companies not only have attracted Western portfolio investment, but also have been more successful than GAZPROM in attracting capital for foreign direct investment. Several leading Russian publicly traded oil companies also transformed their antiquated, Soviet-era accounting practices to the GAAP standard, hired Western managers, and became centers for dissemination of Western management and accounting skills across Russia’s industrial sectors. Moreover, Russia’s largest oil companies, such as LUKoil and Yukos, are fast becoming major global oil players. LUKoil recently purchased 1,300 Getty gas stations in the United States, and LUKoil and Yukos are selling American Depository Receipts (ADRs) on the New York Stock Exchange.
ENERGY SECTOR LESSON #3: Keep it clean, and keep it profitable
The major problem with the Russian oil privatization effort has been its relative opacity, especially in the early 1990s. Scandals included the oil-for-shares debacle in which Boris Yeltsin’s government took loans from banks in exchange for shares of the oil companies. The government never repaid the loans, and the companies became the property of politically connected banks.31 The insider dealing provoked a political row that discredited privatization in the public’s eyes.
Other problems in Russia have been privatization through vouchers and the denial of access to foreigners in early privatization stages in order to assuage nationalists in the parliament. These policies resulted in much lower revenues (by as much as a factor of 10) than the government could have received for the privatized assets.
AN ECONOMIC REFORM PLAN FOR POST-SADDAM IRAQ
The Bush Administration should provide leadership and guidance for the future Iraqi government to undertake fundamental structural economic reform. This process should include a massive, orderly, and transparent privatization of state-owned enterprises, especially the restructuring and privatization of the oil sector. These steps would greatly enhance needed access to global capital markets.
U.S. political commitment will be needed to motivate international organizations to provide appropriate expertise and technical assistance. Inter alia, these organizations could include IFIs such as the International Monetary Fund and the World Bank, and would likely encompass such diverse non-governmental organizations (NGOs) as the National Endowment for Democracy, the Center for International Private Enterprise, the American Bar Association, and the AFL-CIO.
In particular, the Bush Administration should convince the future federal government of Iraq to come to an agreement on how oil revenues are taxed and proceeds are distributed to the country’s three distinct ethnic regions--Shiite Arabs, the Kurds, and the Sunni Arabs. Successfully privatizing the country’s oil fields, refining capacity, and pipeline infrastructure will mean higher efficiencies and higher tax revenues in the oil sector.
What a New Iraqi Government Must Do
The Administration, the IFIs, and other economic decisionmakers should prepare and provide support for a future federal Iraqi government to:
Develop a modern legal environment that recognizes property rights and is conducive to privatization. Protection and enforcement of property rights and access to successful alternative dispute resolution mechanisms are vital policies for fostering economic growth and foreign investment. Iraq also will need to build modern and well-functioning regulatory and supervisory frameworks and institutions in the oil and gas, banking, securities, and financial services areas. Such a legal and business environment should be equitable and non-discriminatory, and it should not distinguish between Iraqi-Arab nationals and foreigners.
The U.S. government, its allies, and international organizations should be ready to provide technical assistance in the legal, economic policy, and public administration areas. Working cooperatively with the United States, the European Union, and the IFIs, the post-Saddam government of Iraq will need to boost the court system and the rule of law. It will need to provide legislation to allow the use of broad alternative dispute resolution mechanisms outside of Iraq, as the local laws may change too quickly (and the local court system too slowly) for local judges to be able to follow and apply new legislation. Education for judges about the latest legal developments in the economic area will also be important. The courts will have to boost the enforcement of court rulings independent of the executive branch. The central government will need to pay judges and court employees adequate salaries to keep corruption in check.
Educate and prepare the Iraqi population for structural reform and privatization through a public information campaign.
Only when the public, including key stakeholders, elites, and the population at large, understand the goals of economic reform will they become more receptive to change and less likely to succumb to the anti-Western demagoguery that undoubtedly will emanate from the remnants of the discredited Ba’ath establishment and Islamic fundamentalists. The new Iraqi government will need to use the media and the educational system to explain the benefits of privatization and the changes to come in order to ensure broad public support.
Hire Iraqi expatriates, as well as other Western-educated Arabic speakers with financial, legal and business backgrounds, for key positions in government.
Examples of this approach in Eastern Europe demonstrate that Western-educated experts can implement economic reforms better than a former socialist bureaucracy can. Younger, well-educated technocrats have an advantage in their ability to communicate effectively with both locals and Westerners, including international providers of technical assistance. In implementing structural reform, the best results are achieved by teams of local and Western experts working together.
Deregulate prices in Iraq, including prices in the utilities and energy sector.
Quick price deregulation will be key to ensuring an adequate supply of goods for consumers and ending rationing. It will contribute to increased exports of oil and gas, which in turn will provide additional earnings and tax revenues for the government to share among the regional and local governments.32
Prepare to privatize assets in the industrial, utility, telecommunications, banking, transportation, port and airport, and pipeline and energy sectors.
The post-Saddam Iraqi government should prepare to privatize government assets by creating government-held companies instead of ministries, issuing stock for these companies, and implementing guidelines that allow for the introduction of modern management practices and GAAP standards. The central government should hire consulting firms to execute comprehensive assessments of companies it wishes to privatize in order to itemize inventory, to take stock of assets and liabilities, and possibly to settle some of their debts in preparation for privatization.
In particular, the Oil Ministry and regional oil companies should be restructured to transform them into attractive government-owned oil companies as an intermediary stage before initial public offering (IPO). For example, one company may focus its work in the southern portion of the country, another in the central region (around Baghdad) and the Western desert, and the third around Kirkuk in the North. Three more companies may be created, one to operate the pipelines, the second to operate the refineries, and the third to develop natural gas.
The stages of preparation for privatization could include:
Taking inventory of assets and liabilities;
Exercising necessary efficiency-improvement steps, such as retraining and layoffs (with compensation);
Introducing GAAP and other modern financial and management practices;
Signing international conventions against nationalization of foreign investments, such as the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the Washington Convention), the World Bank’s Convention on the Multilateral Investment Guarantee Agency (MIGA), and the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (1958);
Issuing company stock;
Running the companies under new, transparent, and efficient management for at least two years; and
Taking companies on road shows and completing IPOs in major financial centers such as New York and London, and floating stock in international markets.
Given adequate implementation of each of these stages, the time frame for this privatization effort could be four to five years after the new government is installed by the people of Iraq. During this time, the U.S. government and the IFIs would have to ensure that the political will for privatization remains intact. Management and accounting consultants hired by the new Iraqi government would have to ascertain that the program is transparent and on track.
Moreover, after privatization, Iraq must demonstrate that it is not losing tax revenue and that the government’s oil revenue is distributed among the regions equitably and efficiently, allocated to the worthy causes, and not wasted, looted, or abused, which could undermine the entire economic reform program.
Keep the budget balanced and inflation, taxes, and tariffs low.
International experience demonstrates that lower and flatter taxes (in the range of 20 percent or less), applied uniformly and in a non-discriminatory fashion, are an important investment magnet, especially for a country like Iraq that is rich in natural resources. Moreover, oil revenues will allow Iraq to keep the budget balanced and import tariffs low. Such a stable macroeconomic policy is likely to attract massive investment from a variety of sources, including the Middle East and Asia, not just the West, and boost income and employment.
Liberalize and expand trade, and launch an effort to join the World Trade Organization.
A study by the Council on Foreign Relations has demonstrated that a majority of Middle Eastern countries suffer from high import tariffs, red tape, and corruption--problems that depress GDP growth.33 Elimination of import taxes and tariffs and implementation of trade liberalization would provide an additional economic development engine for Iraq. The Bush Administration should provide technical assistance for trade liberalization and support Iraq’s eventual membership in the WTO.
Conclusion
For the Iraqi people, structural economic reform and comprehensive privatization of government assets is necessary to stimulate recovery and provide stability after years of disastrous economic policies under Saddam Hussein. The winning strategy of structural reform and privatization also would benefit the industrial world, the United States and its allies, countries of the Middle East, and the developing world.
Iraq’s return to global markets would allow for a more abundant and stable energy supply, a higher cash flow for the Iraqi people, and numerous business opportunities for the region and the world. Iraq’s restructuring and privatization of its oil and gas sector could become a model for oil industry privatizations in other OPEC states as well, weakening the cartel’s influence over global energy markets.
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1. U.S. Department of Energy, Energy Information Administration, "Iraq: Country Overview," at http://www.eia.doe.gov/emeu/cabs/iraq.html.
2. Ibid.
3. U.S. Department of State, Office of the Coordinator for Counterterrorism, "Appendix B: Background Information on Terrorist Groups," Patterns of Global Terrorism-2000, April 30, 2001, at http://www.state.gov/s/ct/rls/pgtrpt/2000/2450.htm.
4. Energy Information Administration, "Iraq: Country Overview."
5. U.S. General Accounting Office, U.S. Confronts Significant Challenges in Implementing Sanctions Against Iraq, GAO-02-625, May 2002, at http://www.gao.gov/atext/d02625.txt.
6. Alix Freedman and Steve Stecklow, "Secret Pipeline: How Iraq Reaps Illegal Oil Profits," The Wall Street Journal, May 2, 2002.
7. Gerald P. O’Driscoll, Jr., Edwin J. Feulner, and Mary Anastasia O’Grady, "Iraq," in 2003 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., forthcoming).
8. Ibid.
9. Economist Intelligence Unit, "Country Report, July 2002."
10. O’Driscoll et al., "Iraq," 2003 Index of Economic Freedom.
11. Ibid.
12. Bill Gertz, "Tab to Rebuild Iraq, Kuwait Estimated at $100 Billion," The Washington Times, March 4, 1991. More recent estimates confirm this range.
13. Julian Borger, "Post-Saddam Iraq Will Cost You, U.S. Warned," The Guardian, August 2, 2002, at http://www.guardian.co.uk/bush/story/0,7369,767755,00.html. Lawrence Lindsey, Director of the National Economic Council, is quoted as estimating a cost for the Iraq war of between $100 billion and $200 billion. It is unclear what is included in that figure. See Bob Davis, "Bush Economic Aide Says Cost of Iraq War May Top $100 Billion," The Wall Street Journal, September 16, 2002, p. 1.
14. "Round Table on Declining Oil Prices and Its Political Consequences in the Middle East," Middle East Studies, Vol. 6, No. 1 (Spring 1999), pp. 5-36, at http://www.netiran.com/Htdocs/Clippings/Economy/990322XXFE01.html.
15. Energy Information Administration, "Iraq: Country Overview," p. 14.
16. "Iraq’s oil reserves bigger than Saudi Arabia, Minister Says," BBC Monitoring, August 6, 2001, Al-Jumhuriyah Web site in Arabic, August 4, 2001.
17. "Iraq’s Oil Industry: An Overview," Platts, at http://www.platts.com/features/Iraq/oiloverview.shtml.
18. "Iraq Building E&D Project List for Post-U.N. Sanctions Period," The Oil and Gas Journal, Vol. 95, No. 15 (April 14, 1997).
19. Energy Information Administration, "Privatization and the Globalization of Energy Markets," Energy Plug, at http://www.eia.gov/emeu/plugs/plpgem.html.
20. Madsen Pirie, "Privatization," Concise Encyclopedia of Economics, at http://www.econlib.org/library/encl/privatizaiton.html.
21. World Bank, "Privatization: Eight Lessons of Experience," Policy Views from the Country Economics Department, July 1992, at http://www.worldbank.org/html/prddr/outdeach/or3.htm. For the latest annual update on global privatizations, see Reason Public Policy Institute, "Privatization 2002: Putting the Pieces Together," at www.rppi.org/apr2002.pdf.
22. World Bank, "Privatization: Eight Lessons of Experience."
23. Ibid.
24. Ibid.
25. Ibid.
26. See information at Republic of Turkey, Office of the Prime Minister, Ministry of Privatization Administration, http://www.oib.gov.tr/.
27. Dr. Shafiq Ghabra, "The View from Kuwait," The Middle East Forum, March 18, 2000. For more on Kuwait, see U.S. Department of Commerce, "Commercial Overview," at http://www.arabchamber.com/arab-coutnries/Kuwait/commercial_overview.htm. See also International Monetary Fund, "IMF Concludes Article IV Consultation with Kuwait," Public Information Notice No. 00/27, April 4, 2000, at http://www.imf.org/external/np/sec/pn/2000/pn0027.htm.
28. See Energy Information Administration, "Saudi Arabia," January 2002, at http://www.eia.doe.gov/emeu/cabs/saudi.html. On Iran, see "Round Table," Middle East Studies, at http://www.netiran.com/Htdocs/Clpppings/Feconomy/990322XXFE01.html.
29. Mary Jordan, "Drilling Stakes at Mexico’s Heart," The Washington Post, January 25, 2002.
30. The Russian government retained 38 percent of GAZPROM shares.
31. Energy Information Administration, "Russia," at http://www.eia.doe.gov/emeu/pgem/ch4a.html.
32. John C. Hulsman, Ph.D., and James Phillips, "Forging a Durable Post-War Political Settlement in Iraq," Heritage Foundation Backgrounder No. 1593, September 24, 2002.
33. Bernard Hoekman and Patrick Messerlin, "Harnessing Trade for Development and Growth in the Middle East," Council on Foreign Relations, 2002.
Iran’s Claim Over Caspian Sea Resources Threaten Energy Security
09-05-2002
The need for Washington to focus its attention on energy security and diversification became clear as the war on terrorism began. The U.S. should strongly oppose Iran’s threatening military actions to claim a larger portion of the energy-rich Caspian Sea. The Caspian basin, a land-locked body of salt water bordered by Iran, Azerbaijan, Russia, Kazakhstan, and Turkmenistan, harbors billions of barrels of proven oil reserves and over 200 billion barrels of potential reserves.2 (See Table 1.) The market value of that oil could exceed $5 trillion, according to some estimates. The sea also may hold up to 325 trillion cubic feet of natural gas. Combined with Russia’s resources, by 2010 the region could supply up to one half of the energy resources now provided by the Middle East.
Last year, Iran--a known sponsor of terrorism--began an aggressive campaign to claim a greater portion of the Caspian Sea and its resources. Its leaders have asserted that Iran has territorial and treaty rights to as much as 20 percent of the Caspian Sea surface area and seabed, significantly more than its long-recognized sector comprising about 12 to 14 percent.3 (See Map 1.) Tehran’s use of air and naval forces to threaten a U.S.-British company exploring a field in Azerbaijan’s sector jeopardizes, in addition to energy production and energy security, Western investments and the economic development of the post-Soviet states in that region.
The Caspian Sea region is expected to produce and export more oil in the future. (See Table 2.) This would benefit not only Azerbaijan, Kazakhstan, and Turkmenistan, which depend almost exclusively on oil revenues, but also Russia and Iran, which have major oil deposits in their sectors of the seabed. For the West, oil from this region could bypass the politically risky bottleneck of the Persian Gulf, helping to lessen its dependence on OPEC nations.
Iran’s actions should not be tolerated. Washington should promote peace and security in the Caspian region to ensure the flow of foreign investments to energy resource development and transport to global markets. The Bush Administration should voice its strong opposition to Tehran’s attempts to bully its neighbors and expand Iran’s claims to Caspian Sea energy resources. It should support a U.S. Security Council resolution calling for the peaceful settlement of all Caspian Sea disputes. And it should work with its NATO allies to help Azerbaijan expand its military, coast guard, and border control capabilities.
Iran’s Threat to Peace in the Caspian Region
Iran’s use of military force to assert its claim to part of Azerbaijan’s sector of the Caspian Sea undermines energy security and the future of Caspian oil and gas development. Iran not only has violated its neighbor’s air space and territorial waters, but on one occasion even amassed ground troops on their border.4
These aggressive actions were a blatant violation of international law. On July 23, 2001, an Iranian warship and two jets forced a research vessel working on behalf of British Petroleum (BP)-Amoco in the Araz-Alov-Sharg field out of that sector. That field lies 100 kilometers (60 miles) north of Iranian waters. Due to that pressure, BP-Amoco immediately announced that it would cease exploring that field, which it did by withdrawing the research vessels.5
Iran’s leaders have stepped up their claims. Deputy Foreign Minister Ali Ahani has stated that no energy exploitation by bordering countries should take place in disputed parts of the sea.6 His superior, Foreign Minister Kamal Kharrazi, escalated the rhetoric and declared that no bordering country has the right to exploit the Caspian energy reserves "before a legal status is established for the sea."7 Senior Iranian politicians even remarked that Azerbaijan used to be an Iranian province, implying that Iran’s actions are therefore justified.8
Thus far, Azerbaijan has acquiesced to the pressure from Iran. During a May 2002 visit to Iran, Azerbaijani President Heydar Aliev agreed to stop exploration in the disputed oil field of Araz-Alov-Sharg until the border issue is settled--a small but significant achievement for Iran. As Aliev departed Tehran, Iranian President Mohammad Khatami reiterated Iranian claims for 20 percent of the territory and the shelf of the Caspian Sea, stating, "We have rights in the Caspian Sea and are determined to defend those rights."9 His statement cast a long shadow over the earlier Azerbaijani announcement that Baku and Tehran had agreed to the "median line" demarcation, which extends national borders to the middle line of the sea, giving Iran less than the one-fifth share it demands.10
While the Araz field holds but a small fraction of the total deposits in the sea, Iran’s action threatens all Caspian basin energy enterprises. U.S. and multinational oil companies have invested billions to develop the Caspian resources and are involved in a number of consortia in the region. This energy development has occurred without intervention from Iran in the past.
Iran’s military action against an international company, and its intransigence on maritime border issues, endanger the ability of companies like BP-Amoco to explore the Caspian basin for oil and therefore threaten U.S. investments. (See Table 3.) A threat to current or future oil supplies could drive up prices and scare off investors. Oil companies active in the region may decide to forgo exploration and therefore revenue--a sizeable sacrifice if the global economy recovers or demand starts rising because of anti-terrorist military actions. At stake are over 200 billion barrels of oil with a current market value of more than $5 trillion, as well as trillions of cubic feet of natural gas. (See Table 2 and Table 3.)
The Iranian action is particularly troubling in that it targeted a field explored by a major U.S.-British international oil company as well as companies from Norway (Statoil), Azerbaijan (SOCAR), and Turkey (TPAO). Iran has not, however, targeted any Russian or Arab interests. It is also significant that the attack came during the final stages of planning for construction of the strategically important Baku-Tbilisi-Ceyhan pipeline, which will make Turkey (not Iran) the main outlet for Caspian oil. The pipeline would reduce Iran’s control over oil exported from the Caspian.
Iran also is carefully expanding defense ties with Armenia, a country technically at war with Azerbaijan. With Iranian instigation, Armenia would be capable of disrupting and threatening the Baku-Tbilisi-Supsa and future Baku-Tbilisi-Ceyhan pipelines, since a part of their route is located less than 30 miles from the Armenian-Azerbaijani ceasefire lines.
Until Iran ends its support for terrorism, and its bullying, it should not be invited to participate in resource-sharing agreements in the Caspian beyond its territorial waters. The latest round of Iranian muscle-flexing endangers billions of dollars already invested in Caspian energy projects and could discourage billions more in future investments.
IRAN DISPUTES LEGAL STATUS OF CASPIAN SEA
Iran has disputed not only the maritime and seabed boundaries demarcating its sector of the Caspian Sea, but also the sea’s legal status since the collapse of the Soviet Union. The dispute focuses on the question of whether the Caspian is a sea or a lake and has implications for both the applicability of the U.N. Convention on the Law of the Sea and negotiation of the boundary demarcation regime affecting the littoral states’ rights to significant oil deposits.1
The Caspian Sea is the largest body of salt water on Earth with no natural connection to the ocean. Land borders between Iran and the Russian Empire-USSR were delineated and demarcated in the 19th century and remained unchanged until the Soviet Union collapsed in 1991. However, under 1921 and 1940 treaties between communist Russia and Iran, sea and seabed boundaries were not established.2 Moreover, those treaties defined the rules for shipping and fishing, not for oil or gas exploration. The USSR was able to explore the Caspian Sea for oil without interference from Iran.3 According to experts like Professor Bernard Oxman, the treaties also prohibited Iran from deploying naval assets in the Caspian Sea.4
After the Soviet Union’s collapse, the regime allowing unhindered oil exploration applied to the USSR’s successor states in the region--Russia, Azerbaijan, Kazakhstan, and Turkmenistan. These countries are involved in peaceful negotiations to determine the maritime boundaries for their sectors of the seabed. Most legal scholars agree that a combination of customary international laws of the sea and rules regulating lakes should guide decisions regarding the Caspian’s maritime boundaries.5 They base their determination on decisions made by the International Court of Justice regarding the boundaries of Lake Constance between Germany and Austria and in the Bay of Fonseca in the Pacific Ocean.
Iran’s long-recognized sector of the Caspian Sea covers 12 percent to 14 percent of its surface area. The collapse of the USSR has changed neither the size nor the status of the Iranian sector. However, Iran now demands either a condominium (or joint sovereignty) that would allow it to claim equal proceeds from all energy developed at the sea bed, regardless of its investment in that development,6 or the expansion of its sector to at least 20 percent of the surface area and seabed. That territory includes part of the oil-rich Azerbaijani sector. Many legal scholars agree that Iran’s claims are backed by neither legal precedent nor law.7
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1. Energy Information Administration, "Caspian Sea Region: Legal Issues," July 2002, at http://www.eia.doe.gov/emeu/cabs/casplaw.html.
2. Theodore C. Jonas, Esq., "`Parting the Sea’: Caspian Littoral States Seek Boundary Disputes’ Resolution," Oil and Gas Journal, May 28, 2001, p. 66.
3. For detailed treatment of the legal aspects, see Bernard H. Oxman, Professor of Law, University of Miami School of Law, "Caspian Sea or Lake: What Difference Does It Make," Caspian Crossroads, Vol. I, No. 4 (Winter 1996), at
http://www.usazerbaijancouncil.org.
4. Ibid.
5. Jonas, "`Parting the Sea’," and Oxman, "Caspian Sea or Lake: What Difference Does It Make."
6. BBC News, "Azerbaijan Protests Over Iranian Ship Interception."
7. See, for example, Brice M. Clagett, Esq., "Ownership of Seabed and Subsoil Resources in the Caspian Sea Under the Rules of International Law," Caspian Crossroads, Vol. I, No. 3 (Fall 1995).
Russia’s Equivocating Policy on Iran
During Iranian Deputy Foreign Minister Alhani’s hasty visit to Moscow in August 2001, the two countries reiterated that the Soviet-Iranian treaties signed in 1921 and 1940 remain in place.11(See text box, "Iran Disputes Legal Status of Caspian Sea.") Iran also remains an important buyer of Russian arms and military technology.12 Their relationship was buoyed under former Prime Minister Evgeny Primakov, who saw Iran as a potential partner in Moscow’s efforts to offset the influence of the United States in Central Asia and the Middle East. And both Moscow and Tehran have reason to try to block any trans-Caspian oil and gas pipelines that would go in an east-west direction, bypassing their territory.13 However, each would prefer diverting the energy flows either north or south to their own respective territory, creating a level of competition between them for those resources.
Russia is also now a part of the U.S.-led anti-terrorism coalition. At the August 2001 summit of leaders of the Commonwealth of Independent States (CIS), President Vladimir Putin called the land-locked Caspian "the sea of peace and tranquility" and the Iranian use of force in the Caspian "impermissible."14 His rapprochement with the United States and its European NATO allies in the war against terrorism signaled that the Kremlin would continue a multi-vector policy, remaining friendly to the West and multinational oil companies while attempting to direct the flow of Caspian oil and gas to its pipelines.
Some Moscow energy analysts believe that Russia--a country saddled with a large national debt where energy exploration is costly--would fare better in a tight energy market with oil prices above $20 per barrel. Former Russian Energy Minister Sergey Generalov believes this price is the point at which exploration in the Caspian Sea becomes profitable.15 Plans to expand the north-south transportation corridor between Europe and the Persian Gulf and to route Caspian oil through Russia and Iran could mean hundreds of millions of dollars in oil transit revenue for those two governments.16
The Kremlin faces a real dilemma following Iran’s use of naval power in the Caspian Sea last year. It must decide whether to side with the West and Azerbaijan, its CIS ally, or with its arms customer, Iran. Maintaining an equivocating policy will only encourage Iran’s intransigence, which would threaten the flow of future foreign investments in Caspian Sea exploration and production.
As U.S.-Russian ties develop, the Kremlin has done little to allay Tehran’s fears that the condominium hinted at by Presidents Putin and Khatami in March will turn out to be short-lived. At the same time, Russia has not fully supported the position of its CIS allies; it did not endorse, for example, Azerbaijani President Aliev’s statement that the post-Soviet Caspian littoral states should negotiate among themselves while excluding Iran.
In October 2001, Iranian Defense Minister Admiral Ali Shamkhani signed a multibillion-dollar contract with Russia for a supply of sophisticated weapons to Tehran.17 This may further Russia’s interest in engaging Iran as a potential strategic partner and keeping tensions in the region simmering, even though a 1995 secret agreement signed by then-Russian Prime Minister Victor Chernomyrdin and U.S. Vice President Al Gore called for limiting advanced arms sales from Russia to Iran.18 Putin renounced that agreement in fall 2000.19
The relationship developing between Russia and Iran is similar to the Sino-Russian attempt to construct a condominium in Central Asia with the June 2001 "Shanghai Six" agreement and the July 2001 Sino-Russian Treaty of Friendship. Moscow also was not happy with the demonstration of air power exhibited by Turkey on August 23, 2001, when 10 F-16s accompanied Turkish Chief of Staff General Hussein Kivrikoglu on a visit to Azerbaijan.20 The old Soviet and Primakov-era paradigms were based on the principle that it was in the interests of Iran and Russia to keep the United States and Turkey from expanding their influence in the area; but Russia now is positioned on the side of the United States and the antiterrorism coalition, and growing Turkish-Russian economic ties are helping to alleviate their historic rivalries. Turkey will be a major customer of the Russian gas company, Gazprom, when it starts receiving natural gas through the Blue Stream pipeline across the Black Sea.
Thus, Russia is attempting to juggle complex and often competing interests in this key geo-economic Caspian region. It wants to remain the predominant military power there and has begun flexing its muscles. For example, it has boosted the capabilities of its Caspian flotilla even while allowing the rest of the Russian Navy to deteriorate. The flotilla conducted live-fire maneuvers during Putin’s visit to Baku in February 2001, a demonstration of gunboat diplomacy predating Iran’s actions in the Caspian by six months.21
In May 2002, following a summit of Caspian states in Ashgabat at which Turkmenistan failed to produce an accord on dividing the sea’s resources, President Putin ordered Russia’s army, air force, and Caspian fleet on the largest maneuvers in the area in post-Soviet history. These maneuvers were conducted in August 2002 and involved 60 surface ships, 30 aircraft, and 10,000 troops. Russian, Azerbaijani, and Kazakhstani forces have participated.22 The exercise may be the strongest signal thus far that Russia will attempt to assert its own geopolitical interests in the energy-rich region. The maneuvers spread along the whole northern and central sections of the Caspian Sea and included combined operations and simulated interaction between the Caspian Fleet, the Caucasus Military District, and possibly elements of the newly created Urals military district.23
Internal CIS Realpolitik would appear to dictate that the Kremlin would protect its allies, even against Iran, while discouraging them from turning to the West. Its allies will judge Moscow based on its ability to guarantee stability to allow the effective demarcation of the Caspian Sea sectors. Significantly, Washington’s growing interest in the Azeri-Iranian conflict could lead Moscow to seek U.S.-Russian consultations, even cooperation, to ease tensions in the region.
Assuring Peace in the Caspian Region
The war against terrorism necessitates the protection of U.S. energy and security interests. The provocative actions by Iran against a U.S.-British international oil company exploring the Caspian basin jeopardize those interests. Iran is a state supporter of terrorism whose oil revenues are bolstering its ballistic missile and weapons of mass destruction programs. In order to keep the peace in the Caspian region and protect Western investments as well as access to vital energy resources, the Bush Administration should:
Call for the demarcation of the Caspian Sea territorial boundaries along the "median line" proposed by all CIS states. A senior U.S. foreign policy official should issue a statement calling for peace and security in the Caspian region and warning Tehran to refrain from using military force to threaten energy exploration projects in the other sectors. Such a statement also should promote the rapid and commercially viable development of Caspian energy resources based on current and future production-sharing agreements.
Seek a U.N. Security Council resolution calling for the peaceful settlement of Caspian Sea disputes. In this context, the Administration should seek support from U.S. allies in Europe, particularly Great Britain, which with its European Union allies (such as France and Germany) also should demand that Iran refrain from any and all use of force. President Bush should ask President Putin, who has called for the peaceful settlement of claims in the Caspian Sea, to involve Moscow in the drafting of the U.N. resolution.
Expand Azerbaijan’s military capabilities through its ties with NATO and the Partnership for Peace (PFP). Azerbaijan would benefit from the expertise of NATO and others in learning how to strengthen its capabilities to protect its own borders. Programs may be undertaken under the PFP umbrella and could include developing an integrated military-civilian air traffic control system; developing and training its coast guard and border guards; upgrading its command, control, communications, and intelligence (C3I) systems to NATO standards; and developing military interoperability with NATO. Azeri officers, especially border guards and coast guard-navy officers, should be invited to train at NATO war colleges, especially in Turkey since they would face little to no language barrier.
Expand political and economic ties with Armenia. The Armenian military is capable of disrupting the flow of oil from the Caspian Sea to ports on the Black Sea and the Mediterranean. Though the Bush Administration was correct in sanctioning Armenian companies for smuggling military and dual-use technology to Iran, Armenia now feels isolated, and its government is moving toward closer ties with Iran. The United States should work to expand relations with Armenia in economic and security areas in order to deny Iran an important ally in the Caucasus region.
CONCLUSION
Energy development in the oil- and gas-rich Caspian Sea basin would help ensure energy security, a key issue in the war against terrorism. It also would promote the independence and economic development of post-Soviet states in that region. But Iran’s gunboat diplomacy last year could threaten energy development by deterring foreign investment. The United States should call on Iran to stop its aggressive behavior, and it should mobilize its allies to work for a peaceful settlement of the territorial disputes over the maritime borders of the states bordering the Caspian Sea.
1. The author thanks Heritage Foundation interns Elena Simonova and Anar Akhmadov for their assistance with the research for this paper.
2. See, for example, Energy Information Administration, at http://www.eia.doe.gov/emeu/cabs/caspgrph.html#TAB1; International Energy Agency, at http://www.iea.org/pubs/studies/files/caspian/overview.htm; and Ray Leonard, presentation at Center for Strategic and International Studies, at http://www.csis.org/energy/020600_leonard_files/frame.htm.
3. Michael Lelyveld, "Russia: Iran Seeks Assurances on Caspian Division," Radio Liberty-Radio Free Europe Newsline, August 14, 2001, at http://www.rferl.org/nca/features/2001/08/14082001115154.asp, and "Russia: Moscow May Intervene in Caspian Dispute," Radio Liberty-Radio Free Europe Newsline, August 3, 2001, at http://www.rferl.org/nca/features/2001/08/03082001113745.asp.
4. Mahir Iskenderov and Tim Wall, "Caspian Sea Disputes Flare, Raising Doubts About Oil and Gas Exploration," Eurasianet.org, August 7, 2001, at http://www.eurasianet.org/departments/insight/articles/eav073101.shtml.
5. BBC News, "Azerbaijan Protests Over Iranian Ship Interception," July 24, 2001.
6. "Iran’s Deputy Foreign Minister to Arrive in Azerbaijan," Pravda Online, August 27, 2001, at http://english.pravda.ru/cis/2001/08/27/13387.html.
7. Lelyveld, "Russia: Iran Seeks Assurances on Caspian Division."
8. "Storm in the Precious Teacup," The Economist, August 2, 2001, at http://www.globalpolicy.org/security/natres/oil/centralasia/2001/0802casp.htm.
9. "Iran to Defend Rights in Caspian Rumpus," OGN Online, Vol. 19, No. 33 (August 26 - September 1, 2002), at
http://www.oilandgasnewsworldwide.com/News.asp?Article=6146.
10. Michael Lelyveld, "Caspian: Azerbaijan, Iran Seek New Phase in Border Dispute," Radio Liberty-Radio Free Europe, June 18, 2002, at http://www.rferl.org/nca/features/2002/06/18062002165038.asp. See also Ariel Cohen, "Iran’s Intentions on Caspian Issue Remain Unclear Following Azerbaijani Leader’s Visit," EurasiaNet.org, May 22, 2002, at http://www.eurasianet.org/departments/insight/articles/eav052202.shtml.
11. Lelyveld, "Russia: Iran Seeks Assurances on Caspian Division."
12. Ariel Cohen and James Phillips, "Russia’s Dangerous Missile Game in Iran," Heritage Foundation Executive Memorandum No. 503, November 13, 1997.
13. A. P. Guzhvin, "Dlia kogo-to Kaspii - bol’shaya igra, dlia astrakhantsev - zhisn’" (For some the Caspian is a Great Game, for Astrakhanites it is life itself ), Neftegazovaya Vertikal’, No. 4 (April 1998), pp. 22-25.
14. Michael Lelyveld, "Russia: Moscow May Intervene in Caspian Dispute," Radio Liberty-Radio Free Europe Newsline, August 3, 2001, at http://www.rferl.org/nca/features/2001/08/03082001113745.asp.
15. Georgy Osipov, "Neft’ vpadaet v Kaspiyskoye More" (Oil flows into the Caspian Sea), Segodnya, No. 167 (August 1, 2000), at http://www.segodnya.ru/w3s.nsf/Archive/2000_167_econom_text_osipov1.html.
16. Leonid S. Severtsev, "Rossia-Iran: Druzhba Navek?" (Russia-Iran: Friendship Forever?), Dipkurier Internet, at
http://world.ng.azimuth/2001-04-05/5 friendship.html.
17. "Russia, Iran to Step Up Military Cooperation," Agence France-Presse, October 5, 2001, at http://www.djinteractive.com.
18. Severtsev, "Rossia-Iran: Druzhba Navek?"
19. "USA Mulls Imposing Sanctions Against Russia," Pravda Online, November 23, 2000, at http://english.pravda.ru/main/2000/11/23/1094.html.
20. Michael Lelyveld, "Iran: Hurdles Remain in Improving Ties with Azerbaijan," Radio Liberty-Radio Free Europe Newsline, August 21, 2001, at http://www.rferl.org/nca/features/2001/08/21082001111410.asp.
21. Vladimir Socor, "The Guns of Summer: Iran Prowls the Caspian," Wall Street Journal Europe, August 3, 2001, p. 7.
22. Yevgeny Verlin, "We Won’t Surrender Our Caspian Sea," Expert, No. 30 (August 19, 2002), p. 51.
23. Ariel Cohen, "Caspian Fleet Flexes Muscles," EurasiaNet.org, May 11, 2002, at http://www.eurasianet.org/departments/insight/articles/eav051102.shtml.
09-04-2002
Russian Prime Minister Mikhail Kasyanov recently concluded a visit to China with unusual declarations concerning key strategic areas. Moscow and Beijing are trying to keep American security initiatives in check.
Kasyanov’s responsibilities normally include the economy, not defense, which is President Vladimir Putin’s purview. Nevertheless, the Russian premier and his Chinese counterpart, Zhu Rongji, have signed a declaration opposing the militarization of space and supporting a key role for the U.N. Security Council in the fight against terrorism.
"The declaration is a follow-up on the June 27 joint proposal before the U.N. Conference on Disarmament in Geneva for a new international treaty to ban weapons in outer space," says Col. Larry Wortzel (U.S. Army, Ret.), a former U.S. military attachй in Beijing. Wortzel points out that this treaty, if approved, will deny the Bush administration a key component for ballistic-missile defense: space-based interceptors, similar to the Reagan-era Brilliant Pebbles system. However, it is certain that the U. S. would veto the treaty, Wortzel says.
China and Russia are challenging U.S. predominance by highlighting the role of the U.N. — and their own veto power at the Security Council — in the war against terrorism. Moscow and Beijing also oppose space-based missile defense, which, from their point of view, would give Washington policymakers a great advantage.
Unlike the old days of Sino-Soviet friendship of the early 1950s, when Moscow led and Beijing followed, today China is no follower. And arms sales are the lifeblood of the relationship. After all, cash infusions from China (and Iran) are crucial to the ailing Russian military-industrial complex.
Sources in Moscow tell NRO that Kasyanov has signed arms-sales agreements with Beijing worth billions of dollars. But as of this past June, President Putin classified all arms-transfer statistics with China at the request of Beijing; so no official announcements were made during Kasyanov’s visit to China.
Today, China is Russia’s number-one arms buyer, responsible for close to 40 percent of the lucrative $4 billion-a-year trade. Last year alone China bought 40 Sukhoi fighters, and is now negotiating the purchase of eight Kilo-class submarines worth $1.6 billion, as well as building a helicopter-manufacturing joint venture in Harbin.
Russia is also selling China a wide array of technology needed to build up its nuclear arsenal, from warhead designs to uranium-enrichment technology. In addition, Russia is building two civilian nuclear reactors in China and hoping to sell more.
"The good news is that China is incapable of developing these military technologies and production on its own," Wortzel says. "Their own defense industry is incapable of sustaining a modern war… It is essentially a one-time-use military, which may be extremely dangerous at the start of a war, but will be unable to continue to fight."
Most of the systems that China buys extend her power-projection capability, enhancing the range and deadliness of her air force and navy, and protecting her military from American retaliation. For example, the AWAC planes Beijing wanted to buy from a Russian-Israeli joint venture would have given it command-and-control superiority against Taiwan, while Russian destroyers and subs armed with supersonic anti-ship missiles can be deadly against U.S. naval-battle groups in the South China Sea. It is highly symbolic that during his visit, Kasyanov voiced full support of China’s position on Taiwan and Tibet, positions that the U.S. does not share.
A Russian military analyst who requested anonymity tells NRO that the Russian military ran war games and concluded that China would win in any conventional war against Russia. And Moscow is not willing to contemplate a nuclear annihilation. As a result, Russia will sell China almost anything to appease Beijing.
However, this is a marriage of convenience, not a steamy romance. Russia and China have their share of disagreements. Moscow is concerned about the great numbers of Chinese migrants in the sparsely populated Russian Far East. It is also worried that China is aggressively linking its support of Russian membership in the WTO with free entrance of Chinese labor for Russian employers and access to Chinese goods and services in Russian markets. In addition, Beijing insists that Russia tie its Siberian oil exports exclusively to China by building a pipeline into Manchuria. Russia wants to build the pipeline to the Pacific port of Nakhodka, allowing it to diversify its customer base and export to Japan, Korea, and the U.S.
The bad news is, Russia still possesses a world-class military-industrial complex, inherited from the Soviet Union, and wants to sustain it by selling arms to China, India, Iran, and other countries. Russia’s military-security elite will try to keep it afloat at all costs regardless of Washington protests.
Thus, Russia is likely to continue to sell weapons to its neighbors, sowing the seeds of regional instability in the process. It sold to both sides during the Iran-Iraq war in the 1980s, and will supply the Vietnamese and North Koreans with modern aircraft and tanks, while selling the same to China and South Korea.
As the specter of 9/11 recedes into the past, business as usual takes over. Old mischief is here again.
08-23-2002
Is America’s honeymoon with Russia over? Last weekend Iraq’s ambassador to Moscow, Abbas Khalaf, announced that Russia will be signing a $40 billion, ten-year economic cooperation pact with Saddam. Does this mean Putin supports Iraq against the possible U.S. military operation? Only recently, Moscow declared that it will sell five more nuclear reactors to the mullahs in Tehran — and that the North Korea’s "Dear Leader," Kim Jong Il, will visit Russia.
Suddenly it almost looks like 9/11 never happened. Could Russia be returning to its position as patron saint of the axis of evil?
Not so fast. There’s no change of course.
The window of opportunity for the U.S. to develop a closer relationship with Moscow has not closed — at least not yet. But there are warning signs that America’s inability to deliver the goods for Putin — combined with the anti-Americanism of many of Russia’s ministers and bureaucrats — could derail the beginning of a beautiful friendship.
The Russian-Iraqi agreement had been in the works for two years. The Iraqi leader, realizing that he’s about to be sunk by a U.S. attack, is grasping at straws in hopes of finding shelter and support through his former patron. But the Iraqi-Russia economic pact is a fantasy.
The agreement was rammed through the Russian bureaucracy by one of Russia’s oil giants, LUKoil. The company, which is owned by Azeri billionaire Vagit (Wahid) Alekperov, has signed promising agreements with the Baath regime in Baghdad — including one to develop the giant West Qurna field. LUKoil, which recently purchased close to 1,300 Getty gas stations in the U.S., is hoping to preserve its strategic investment in Iraq. But lobbying for ties with Saddam today may backfire in postwar Iraq tomorrow.
Slavneft is another company with interests in Iraq, and that has been active on Saddam’s behalf in Moscow. Until recently the company had close ties to the fiercely anti-American, ultra-nationalist politician Vladimir Zhirinovsky. Duma and government sources in Moscow have repeatedly alleged that Zhirinovsky and his Liberal Democratic party (which, in reality, is neither liberal nor democratic) is supported by Saddam.
Pavel Felgengauer, a well-known Russian security analyst, told the BBC on Monday that it is not clear which Russian foreign policy is served by the recently announced agreement: that of President Putin, or that of LUKoil; as he put it: "We have several foreign policies." Other Moscow-based analysts, who asked not to be identified, told NRO that LUKoil has bought the Russian foreign ministry "lock, stock and barrel." Others were almost proud that private interests now influence Russian foreign policy — just like in any other state. "It is safer that companies influence our decision making. In the past it was all done behind the closed doors of the Politburo," said one observer.
The problem of articulating the new Russian foreign and defense policy is not new, however, and has long worried Putin’s advisers in Moscow as well as Russia watchers in Washington. Foreign Minister Igor Ivanov, for instance, reflects the anti-American and pro-Arab opinions of Soviet-era diplomats such as ex-prime minister Evgeny Primakov, who appointed him. Ivanov is not trusted by Putin’s inner circle, but he has also not been replaced, as Putin is delaying a purge of the foreign ministry.
The ministry of defense is now under the leadership of Putin’s confidante, ex-KGB general Sergey Ivanov. Ivanov is Russia’s first "civilian" cefense minister, but reforms have been slow in coming. When Bush and Putin seemed to have hit it off, the bureaucrats were not thrilled.
Today, the question is whether Putin’s foreign policy is being hijacked by companies and by the Soviet-era, anti-American elite. The figures certainly do not add up. If Russian-Iraqi trade now stands at about $1 billion a year, it would need to quadruple in order to meet that $40 billion mark during the ten-year period. This is simply not going to happen.
The astronomical figure may, however, be a signal to Washington that Russia wants to be compensated if Saddam is removed. At the recent G-8 summit, Putin told Bush that Moscow will shed no tears over Saddam provided Iraq repays the Soviet-era $7 billion debt formerly owed to the U.S.S.R. Adjusted for inflation, today Iraq’s debt comes to about $12 billion. Moreover, if Russia loses the oil concessions that have been signed off by Saddam, and if oil prices go down as Iraq starts to pump more oil to pay for postwar reconstruction, Moscow will lose some of its oil-export revenues — perhaps as much as $4 billion a year.
With Iran, the story is different. The huge Iranian nuclear contract was lobbied for by MinAtom, the Soviet-era nuclear ministry, which is trying to keep factories with tens of thousands of jobs afloat. MinAtom’s bureaucrats are not exactly Yankee fans. True, in the long term, a nuclear-armed Iran on Russia’s borders would make for a difficult neighbor. Tehran could stir up unrest in the Muslim areas of the Caucasus and in Central Asia. But it’s short-term greed — and millions of dollars in bribes — that are keeping the Iranian contract on track despite America’s loud protestations.
Finally, the take on North Korea in Moscow is that the former satellite is finally coming to its economic senses, and may provide an opportunity for Russian companies. The Russians believe Comrade Kim presides over a North Korean version of perestroika, which could bring elements of a market economy and foreign investment to Pyongyang. Russia does not want to lose out to China, Japan, South Korea — or to the U.S. — when the last business frontier opens up.
This is what the recent agreements are all about. The message of Putin’s advisers is that they’re willing to negotiate to address American security concerns. Both the Kremlin and the White House should seriously explore that window of opportunity to forge a strategic relationship. Russia needs to understand that it can’t entertain Iran and Iraq and still be considered a legitimate partner in the antiterrorism effort. And the Bush administration should give Russia’s economic interests a fair hearing, without compromising U.S. defense concerns. In the 21st century, it’s as much about geo-economics as about geopolitics.
06-20-2002
The U.S. has declared energy cooperation with Russia as one of the main points of a strategic framework the Bush administration is developing with the Kremlin. The May Bush-Putin summit declarations, as well as conversations with government energy officials in Moscow and senior managers of the major Russian oil producers, indicate the beginnings of a major energy-policy trend.
The U.S. has begun expanding Russia’s role in the global energy markets, and is turning turn the vast Eurasian landmass into one of the major oil suppliers to the U.S. - alongside Mexico, Nigeria, and other non-OPEC producers. These developments will reverberate beyond the bilateral U.S.-Russian relations in the years to come.
The joint declaration on the new strategic relations signed at the Bush-Putin summit focuses on "intensification" of cooperation in prospecting for energy and developing resources - especially oil and gas - "including in the Caspian region."
The strategic document also recognizes a "common interest" in promoting the stability, sovereignty, and territorial integrity of all states in Central Asia and the southern Caucasus. It mentions cooperation in resolution of regional conflicts, including Abkhazia and Nagorno-Karabakh. Thus, for the first time, policy coordination as well as energy cooperation have become an integral part of the mutual security agenda.
Beyond this framework, the joint statement on energy dialogue goes a long way to indicate the direction of the coming U.S.-Russian energy alliance. That alliance will include meetings between officials and high-level private-sector energy executives. The first such meeting will take place in Houston, Tex., in the fall of this year, Russian government sources in Moscow said.
The joint statement on energy mentions "reducing instability and increasing predictability and reliability" of the global energy markets. This means giving the Russian oil companies long-term contracts within pre-agreed price corridors, necessary to operate Siberian fields in conditions of extreme cold and to prevent the freezing of oil wells when energy prices drop and production is curtailed.
Furthermore, the joint statement envisages "joint projects" - including cooperation in developing oil fields in third countries. Russian oil companies may have an easier time raising capital in the global markets if they have the backing of U.S. partners and will get access to state-of-the-art technology.
The U.S. has expressed interest in assisting investment in the development and modernization of the Russian oil sector in east Siberia and the Far East (including the ocean shelf there). Russian and U.S. companies will be encouraged to invest in Russian deep ports, transportation infrastructure such as railroads and pipelines, and the modernization of electricity-generation capabilities and natural gas and oil refineries.
Creating a fleet of supertankers in the Pacific, as well as building modern ports and pipelines in Siberia and the Far East, will allow Russia to supply consumers on the West Coast directly. Russia will also be able to compete with the leading Middle Eastern producers in shipping oil to Japan, China, and Korea. Both presidents specifically mentioned the success of the Sakhalin-1 project, next to Japan’s shore. And China is planning to become a large importer of oil after 2005.
The cooperation in the Caspian region and the recognition of the multiple directions of pipelines there together indicate that Russia is on board in recognizing the geo-economic legitimacy of the Baku-Tbilisi-Ceyhan (BTC) pipeline, developed by a consortium led by British Petroleum (BP)-Amoco. Moscow is recognizing this in exchange for equity participation in the consortium and for future U.S. investments in the oil-rich Russian national sector of the Caspian.
The Russian oil majors are wasting no time moving into the U.S. energy market: Lukoil will start shipping gasoline to the 1,300 gas stations it acquired from Getty; and Yukos, the fastest-growing Russian oil company, is planning to start shipping crude oil to the U.S. this year. Yukos’s target is to reach three million tons a year in exports by the end of 2003.
It is often asked whether Russia has sufficient resources to become a significant supplier to the U.S. market. Russian officials admit the country has only 40 years’ worth of known reserves. However, there is a surprising answer. First, the Russian industry is extremely energy-inefficient, and the Russian energy prices are up to six times lower than the world market’s. Herein lies the waste. Russian companies use up to 30 percent more energy than their Western counterparts per unit of output, and sometimes more. As Russia negotiates its membership in the WTO, both the European Union and the U.S. are adamant that Russia bring up its prices in accordance with global rates, thus eliminating the $5 billion hidden subsidy to its industry, according to EU trade czar Pascal Lamy. Such a step will make more oil and gas available for sale abroad. Eventually, Russia will be forced to break up the government-controlled natural-gas monopoly Gazprom and to allow competition in the currently moribund natural-gas sector.
Second, the use of modern technologies in industry and for home heating - for instance, small power-generating facilities instead of the huge centralized ones Russian inherited from the Soviets - will make it possible to cut heating costs. Today, billions of dollars are wasted to heat the tens of thousands of miles of pipe buried underground. And consumers will be made to pay real prices to keep their houses warm: today they pay only 10 percent.
Finally, the Russian government should make its energy-tax legislation stable and predictable, and allow oil and gas companies to write off prospecting costs, encouraging the discovery of new sources of hydrocarbons. Yukos’s founder and CEO Mikhail Khodorkovsky believes Russia can boost production from the current 350 million tons a year to 450 million in 2005 and 500 million tons in 2010. Large deposits of oil can also be found along the Russian coasts of the Arctic and Pacific oceans.
Thus, Russia and Eurasia are poised to become major energy partners of the U.S. at a critical point of the war on terrorism. The Bush-Putin summit was the opening act of a major geo-economic realignment. The real question is whether the markets, oil companies, and government bureaucracies will support the two presidents’ vision.
06-07-2002
Russia is emerging as a key point on the US energy agenda. Washington is encouraging Moscow to assume a greater international role in energy markets. The US aim is to develop Russia and other Central Eurasian states into major oil suppliers, along with Mexico, Nigeria and other non-OPEC producers. However, energy-sector cooperation faces substantial obstacles, including lingering mutual suspicion and Russia’s inefficient energy network.
A joint declaration on strategic relations signed at the May summit of US President George W. Bush and Russian leader Vladimir Putin emphasized the potential for energy cooperation. The two sides expressed a desire for the "intensification" of joint development of resources, especially oil and gas - making a specific reference to the Caspian Basin. The document also recognized a "common interest" in promoting stability, sovereignty and territorial integrity of all states in Central Asia and the Caucasus. Thus, for the first time, policy coordination as well as energy cooperation has become an integral part of the mutual security agenda.
US policy makers and Russian oil executives expressed hope in conversations that the Bush-Putin summit would prove to be the first step of a major geo-economic realignment. At the same time, many acknowledge that implementation of the strategic cooperation plan will not be easy. Some wonder whether the markets, oil companies, and government bureaucracies will support the two presidents’ vision.
The Bush-Putin joint statement provides a clear road map for the development of the budding US-Russian energy alliance. It emphasizes contacts between top-level officials and the private sector energy executives. The first such meeting is expected to take place in Houston this autumn, Russian government sources in Moscow said.
The joint statement on energy mentions "reducing instability and increasing predictability and reliability" of the global energy markets. This means giving the Russian oil companies long term contracts within pre-agreed price corridors, necessary to operate Siberian fields in conditions of extreme cold and prevent freezing of oil wells when energy prices drop and production is curtailed.
Furthermore, the joint statement envisages cooperation in developing oil fields in third countries. Such cooperation could provide a big boost to Russian oil companies, which might have an easier time raising capital with the backing of US partners. It will also ease the ability of Russian conglomerates to obtain state-of-the art technology.
The United States has expressed interest in assisting investment in development and modernization of the Russian oil sector in East Siberia and the Far East, including the ocean shelf there. Russian and US companies will be encouraged to invest in Russian deep-water ports, transportation infrastructure, such as railroads and pipelines, and the modernization of the local energy infrastructure.
Boosting export capacity in the Pacific - including the creation of a supertanker fleet, and the construction of modern ports and pipelines in Siberia and the Far East - would help Russia supply the West Coast consumers in the United States directly. Russia would also be able to compete with the leading Middle Eastern producers in shipping oil to Japan, China and Korea.
Moscow’s willingness to cooperation in the Caspian region and recognition of the multiple directions of pipelines there indicates that Russia is on board in recognizing the geo-economic legitimacy of the Baku-Tbilisi-Ceyhan (BTC) pipeline, developed by a consortium led by British Petroleum (BP)-Amoco. Moscow is doing this in exchange for equity participation in the consortium and for future US investments in the oil-rich Russian national sector of the Caspian.
The Russian oil majors are also moving into the US energy market. Lukoilwill start shipping gasoline to its 1,300 gas stations it acquired from Getty, while Yukos, the fastest-growing Russian oil company, is planning to start shipping crude oil to the US this year. Yukos’s target is to reach 3 million tons a year in exports by the end of 2003.
Yukos’s Chairman and CEO Mikhail Khodorkovsky believes Russia can boost production from the current 350 million tons a year, to 450 million in 2005 and 500 million tons in 2010. Large deposits of oil can be found along the Russian coasts of the Arctic and Pacific oceans. Thus, there appears great potential for Russia to emerge as a major global supplier. Yet, in addition to the Cold War’s legacy of mutual suspicion, there are practical hurdles that might trip up the US-Russian partnership.
Some experts question whether Russia has sufficient resources to become a significant supplier to the US market. Russian officials say that the country has only 40 years worth of known reserves. But analysts hesitate to accept this estimate, citing the fact that the Russian energy industry is extremely energy-inefficient. Russian energy prices are up to six times cheaper than the world market, which has resulted in inefficient operation and waste. Russian companies, for instance, use up to 30 percent more energy than their Western counterparts per unit of output.
As Russia negotiates its membership in the World Trade Organization (WTO), both the European Union and the United States are adamant that Russia brings its prices into alignment with global rates, thus eliminating the $5 billion hidden subsidy to its industry, according to the EU trade czar Pascal Lamy. Such a step will make more oil and gas available for sale abroad. But such a move could be politically sensitive for Russia, as it would place pressure on Putin’s administration to break up the government-controlled natural gas monopoly Gazprom, and allow competition in the currently moribund natural gas sector.
Another domestic challenge facing Russia is the modernization of the country’s infrastructure. Today, billions of dollars are wasted for heating tens of thousands of miles of pipe buried underground. In addition, Russia consumers pay only about 10 percent of the real cost of heating their homes. Russia’s foreign partners would also like to see Moscow simplify tax legislation concerning energy development, allowing oil and gas companies to write off prospecting costs and encourage discovery of new sources of hydrocarbons.
05-22-2002
When President George W. Bush and Russian president Vladimir Putin meet for summits in Russia and Rome later this month, they will have an opportunity to define a new framework for U.S.-Russia strategic relations that extends beyond the Cold War. The meetings in St. Petersburg and Moscow on May 23-26 and at the NATO-Russia summit in Rome two days later will allow the two leaders to focus on matters of national security and economic policy. This can become a foundation for a new 21st-century security architecture.
Given Russia’s proximity to Western Europe, the Middle East, Central Asia, and the Far East, establishing closer cooperation with Russia will have significant benefits for U.S. national security and regional and economic interests. Closer cooperation with Moscow is vital, for example, to isolating such terrorism-supporting states as Iran, Iraq, Syria, Libya, and North Korea and for slowing the transfer of Russian military technology to China.
In Moscow, they will sign a formal treaty that calls for deep cuts in nuclear arsenals on both sides over the next ten years. Both leaders are committed to ending the legacy of the Cold War by reducing the strategic nuclear arsenals of their countries to around 1,700-2,200 deliverable warheads each. Such a commitment will also be required in cooperative efforts to reduce the threat posed by the proliferation of weapons of mass destruction (WMD).
The new treaty allows flexibility by limiting its duration to ten years, by pacing the reductions within the ten-year period, and by allowing either party to withdraw from the treaty with three months’ notice. Another welcome sign of this flexibility is the agreement not to require the destruction of the warheads or to impose limitations on missile defenses.
During his summit meetings with President Putin, President Bush should ask for Russia’s support for removing Saddam Hussein from power. Bush should also encourage Moscow to terminate Russian sales of conventional weapons to Iran and technological cooperation to produce WMD. In 2001, Russia and Iran signed a $300-million a-year, multi-year arms export agreement, making Iran the third largest customer for Russian weapons after India and China. Moscow is also building two nuclear reactors at Bushehr, from which the precursors to nuclear-bomb fissile material could be obtained, and is selling sophisticated anti-ship missiles and other destabilizing weapons to Iran.
If Russia follows through on these points, the administration should be ready to offer an economic quid pro quo, such as participation in building the components of ballistic missile-defense systems and expansion of civilian space-launch quotas.
Bush and Putin should move forward with NATO-Russia cooperation. On May 28, NATO and Russia will sign an agreement to establish the NATO-Russia Council. The agreement was finalized at the meeting between NATO and Russian foreign ministers in Reykjavik, Iceland. This agreement will allow for joint development of policy and the planning of mutual activities in such areas as the war on terrorism and operations against terrorist organizations and their financial supporters. Joint NATO-Russian action will be aimed at nonproliferation and WMD security, special-forces inter-operability, educational exchanges between officers on all levels, peacekeeping operations, and comprehensive military reform. Both President Putin and Defense Minister Sergey Ivanov would welcome such a development.
In the past, the forum provided by the 1997 Permanent Joint Council often turned into a venue for Moscow to air its frustrations with NATO actions, such as the Balkans operations. Today, the joint NATO-Russia peacekeeping activities in that region demonstrate how these two sides can cooperate. Top U.S. generals, such as NATO commander General Joseph Ralston and commander-in-chief of Central Command (CENTCOM) General Tommy Franks, routinely praise Russia’s cooperation with the United States and NATO.
President Bush might also consider inviting President Putin to address the NATO summit in Prague in November. Bush should encourage Russia to expand its energy sales in the global market. Russia could increase energy sales significantly by enhancing the transparency of Russian businesses and shareholder rights for Western investors. U.S. companies need assurances that their investments in Russian fields and infrastructure are secure.
Russia exports over 1.8 billion barrels of oil and 6.7 billion cubic feet of natural gas per year. It is the world’s largest exporter of natural gas and second largest exporter of oil. Together with the countries of Eurasia, it could catch up with Saudi Arabia as a leading oil exporter by 2010. U.S. export-development agencies and the international financial institutions could assist foreign investors by insisting that the rule of law be honored and contracts upheld. A boost in Russia’s energy exports also would provide its European and Far Eastern customers with additional energy security in the event that OPEC continues its policy of high prices and production cuts.
Bush should also express support for lifting U.S. barriers to trade with Russia. The administration supports Russia’s economic integration with the West, including its membership in the World Trade Organization. President Bush should declare U.S. support for Russia’s accession in 2004, provided the negotiations in all sectors are completed successfully.
The U.S. statute known as the Jackson-Vanik Amendment, which denies Russia permanent trade status, is a relic of the Cold War. It was passed in 1974 when the Soviet Union severely limited emigration. Congress suspended application of the amendment after the Soviet Union collapsed. At the Russia summit, President Bush should express his support for a permanent lifting of the Jackson-Vanik restrictions, which Congress could accomplish by attaching an amendment to upcoming trade legislation.
The forthcoming U.S.-Russia summits offer both countries a unique opportunity to launch a strategic partnership that would assure greater security in the 21st century. At the summit meetings, both President Bush and President Putin should deal with the baggage that has hampered U.S.-Russia relations in the past, such as Moscow’s ties with Iran and Iraq and other states that sponsor terrorism.
The two leaders will put to rest the legacy of the Cold War by signing a strategic treaty to reduce their nuclear arsenals. Most important, they should expand joint actions in the war on terrorism, as well as establish goals for NATO-Russian cooperation and support policies that further integrate Russia into the global market.
Why Russia’s Accession to the WTO Is in America’s Economic and Strategic Interests
05-22-2002
Among the important topics of discussion for President George W. Bush and Russian President Vladimir Putin at their May 23-25 summit meetings in Moscow and St. Petersburg will likely be Russia’s accession to the World Trade Organization (WTO). The issue richly deserves their attention. Since China’s accession to the WTO in November 2001, Russia is the largest economy that is not yet a part of this global trade forum. Given Russia’s growing importance as a strategic partner of the United States in the war on terrorism and the growth in its economy over the past three years, Russia’s accession to the WTO is clearly in America’s interest.
The objectives of U.S. trade policy include achieving more equitable and reciprocal market access for U.S. goods, services, and investment, and reducing and eliminating barriers to trade and other market-distorting policies and practices. American consumers and Russian businesses will benefit from lower trade barriers to Russian goods, such as steel, fuel for nuclear reactors, and certain types of aircraft. The negotiations over Russia’s membership in the WTO should clearly focus on such mutual interests.
To join the organization, however, Russia must implement several important economic adjustments in order to comply with WTO requirements. These include eliminating tariffs on certain goods; creating a non-discriminatory, transparent environment for foreign goods and services; reforming the financial and banking sectors; and introducing decisive measures to protect foreign investors and intellectual property rights. These requirements are part of the universal accession policy for all candidate countries, and Russia should not be subject to any special considerations or compromises. The United States should be clear and unwavering on this point: Russia must fully implement all of the WTO accession requirements.
In discussions and negotiations with Russia as well as in meetings of the WTO Quad Group--an advisory group that is taking a lead in the Russian accession talks and that includes the United States, the European Union (EU), Canada, and Japan--the United States should support Russia’s efforts to join the WTO and open its market further to trade and foreign investment. That is the best course, both to facilitate Russia’s integration into the community of democratic market-oriented states and to boost its role as an anti-terrorism partner of the United States.
While in Moscow, President Bush should publicly endorse Russia’s "graduation" from Jackson-Vanik Amendment restrictions that prevent it from enjoying permanent normal trade relations with the United States and prevent equal treatment of Russia as a trade partner, which the WTO rules require. Among the issues to discuss, the President should focus on tariffs that Russia may seek to maintain, such as those on pharmaceuticals, the aerospace sector, and steel, and ways for Russia to reform and open its banking, financial, and insurance services sectors. 2
America’s Stake in Russia’s Accession to the WTO
Economists and political thinkers have long recognized that free trade and the spirit of commerce promote international understanding and reduce hostility and mistrust among nations. The reality of the global economy today reinforces that principle. 3 Free trade is a U.S. foreign policy priority: an effective way to promote and protect America’s economic interests. Given Russia’s new role as a strategic partner in the U.S.-led campaign to end terrorism, expanding trade with Russia and helping it to become a full member of the community of developed democratic states is in America’s best interests. 4
Joining the World Trade Organization would help fulfill these objectives and enhance Russia’s latest rapprochement with America and its allies. It would create more favorable conditions for U.S. exporters and investors in Russia, and give U.S. consumers greater access to cheaper Russian goods.
Russia has been the largest market for U.S. poultry (until the recent but temporary ban) and a major market for U.S. beef and pork. Moreover, U.S. consumers buy 2 million gallons of vodka, over 3.6 million Arctic King crabs, and precious metals such as palladium from Russia. 5
According to the U.S. Department of Commerce, Russia has a massive potential for trade and investment and represents a ready market for a wide range of technologically sophisticated American products. 6
The 2002 World Economic Forecast of the International Monetary Fund (IMF) predicts that the global economic slowdown will be relatively less severe in Russia and Eastern Europe, which will continue to maintain viable markets for capital and consumer goods. 7
The Russian Federation is already the world’s second-largest oil-producing country.
Russia is quickly becoming an important "swing" oil producer for the global energy markets. The instability in the Middle East raises Russia’s importance as a reserve oil supplier for Europe and Japan, helping to keep oil prices down. President Putin, his cabinet, and the major Russian oil companies have demonstrated a readiness not to march in lockstep with the OPEC oil cartel, keeping Russian oil prices within the $21 to $25 per barrel price range rather than raise them with OPEC. 8
Accession to the WTO will help make Russia’s economy more transparent and predictable, increase the protection of minority shareholder rights, and strengthen the enforcement of contracts. Such reforms, for example, will create a strong incentive for foreign corporations to boost their investment dollars in the Russian oil and gas industry, which in turn would allow Russia to increase energy exports at moderate prices. As energy exports expand, Russia’s domestic output--or gross domestic product (GDP)--would grow, and demand for American goods and services would increase.
What WTO Membership Would Mean for Russia
The WTO is one of the largest and fastest-growing international organizations, with 144 member states and regions representing all the major world economies. 9 It has already admitted some former Soviet states, such as the three Baltic states of Estonia, Latvia, and Lithuania, as well as Georgia, Kyrgyzstan, and Moldova.
Joining the WTO would foster economic reform, which is important to Russia and to the global economy. President Putin’s recent State of the Federation speech demonstrated his commitment to implementing free-market policies aimed at achieving stable economic growth and a modernized economic system. 10 In his words,
[T]oday countries compete along all the parameters of economics and politics: the size of the tax burden, level of security of the country and its citizens, guarantees of protection of property rights. They compete as far as attractiveness of the business climate, development of economic freedoms, and quality of state institutions and effectiveness of the court and legal system. 11
Market Reforms Are Underway. In the past three years alone, Russia has begun to implement a coherent policy of economic reform, which includes lowering personal income taxes to 13 percent (a flat tax), the corporate tax rate to 24 percent, and small-business income taxes to 20 percent. Russia also is taking steps to privatize land, achieve a federal budget surplus, and introduce greater transparency in corporate governance.
Although Russia’s economy is far from being prosperous, its economic performance during that same period fosters moderately optimistic forecasts. The Russian economy grew 5.3 percent in 1999, 8.3 percent in 2000, and 5 percent in 2001. 12 The Ministry of Trade and Economic Development estimates that the GDP growth rate will continue to rise at about 3 percent to 5 percent each year from 2002 through 2004. 13 Industrial output is expected to have similar increases, and real disposable household income is expected to rise at a stable level of 4 percent to 5 percent.
In the long run, opening Russia’s economy to free trade through WTO accession would increase foreign competition and investment and allow Russia to reduce its indebtedness (currently about $137 billion). Russia would progress from one of the world’s largest debtors to an important economic partner of the United States and other Western economies. 14
Despite such benefits of joining the WTO, the issue is under debate in Russia. Proponents of quick accession view membership as a strong incentive for economic reform; opponents believe that the process is a way to pressure the government to make further economic reform. The financial industry in particular has been resisting accession, claiming that WTO membership would wipe out Russia’s banking sector.
Such arguments, however, are protectionism at its worst. Lack of competition in the financial sector imposes a heavy burden on the economy. There is no reason to expect that this sector, which has enjoyed protection for 10 years and which was an active enabler and participant in Russia’s 1998 financial crisis, will become more efficient in the foreseeable future without exposure to foreign competition and expertise.
In fact, the majority of Russian businessmen support Russia’s accession to the WTO as a way to open markets overseas to their products and increase their ability to defend Russian business interests abroad. According to Igor Yurgens, Vice President of the Russian Union of Industrialists and Entrepreneurs (the leading Russian business coalition), 70 percent of its members support WTO accession. 15 Besides giving Russia a unique chance to attract foreign capital, accession likely would improve the overall business and investment climate by introducing international product standards and making Russian goods more competitive globally.
WTO membership would protect the rights of both domestic and foreign investors. Russian economists predict that the overall decline in productivity following introduction of the WTO standards would be minimal--perhaps no longer than a year, and primarily in food production and the transportation industry. But the increased competition and the availability of high-quality inputs for domestic industries would stimulate growth, and growth in productivity would likely begin in the second year after accession. 16 If Russia does not join the WTO, however, it will find it harder to solve its serious economic problems and risk its best chance to integrate fully into world trade and investment flows.
Russia’s Efforts to Join the WTO. The history of Russia’s candidacy for membership began in 1990, when the USSR was granted observer status at the meetings of members of the General Agreement on Tariffs and Trade (GATT)--the precursor to the WTO. In 1992, Russia submitted a formal request to become a member of the GATT. A Working Party established by the General Council for conducting negotiations on Russia’s accession was created in 1993 and became a WTO body after implementation of the WTO Agreement on January 1, 1995.
Currently, 50 member states actively participate in the Working Party on Russian accession, which is open to all WTO members that wish to participate in the negotiation process. Since 1998, Russia has opened bilateral negotiations on tariffs and specific market access with 30 countries and has pursued negotiations on trade in goods and services with 10 countries. Since 1999, Russia has conducted negotiations on two tracks: bilateral negotiations with countries concerned about market access and policies in goods and services, and multilateral negotiations with the WTO regarding changes in Russia’s laws toward accession requirements.
Nevertheless, many Russian officials fail to understand that the rules of accession to the WTO are not subject to negotiation. These core requirements are standard for all countries seeking membership. What can be negotiated are the schedule of accession and the criteria and methodology of adjusting policies to certain universal requirements. Extensions, not exceptions, are subject to consideration. The timetables for tariff reductions in third countries, which affect Russia, are not even under Russia’s control. Not being a WTO member, and being outside the world trade negotiations, means that Russia cannot participate in such negotiations.
This lack of influence is a strong incentive for Russia to join the global trade organization. Minister of Economy and Trade German Gref said during testimony before the Russian Parliament that the country’s inability to join the WTO costs the economy $4 billion every year. He added that, in 2002, the government is planning to undertake a special program to prepare for membership. 17
An additional incentive for membership is supplied by the more than 120 various sanctions and trade restrictions currently applied to Russia by world markets. Some of these sanctions are the legacy of the Cold War, and some apply generally to all non-WTO countries. For the most part, Russia’s accession to the WTO would relieve this burden on its economy. A special committee on WTO accession was established within the Russian government in 2002 to coordinate the process.
Another difficulty is that accession is a consensus decision of all WTO members. It is difficult for a large economy like Russia’s not to affect other countries’ economic interests. It will be challenging for Russia and the other countries whose interests are at stake to compromise regarding trade rules.
A quick completion date for Russia’s accession to the WTO is difficult to envision. During the last World Economic Forum meeting in New York in January 2002, WTO President Michael Moore said that he expects Russia to join the organization in two years. 18 Gref has said that membership in WTO is not expected for at least the next 18 months. After the latest round of negotiations with the Working Party, which was viewed as relatively unsuccessful, Maxim Medvedkov, the head of the Russian delegation and Deputy Minister of Economic Development, made a more pessimistic forecast of three to four years. Although Russia’s leadership has demonstrated a strong commitment to accelerating the process, it now appears that 2003 or 2004 is more realistic for full accession. 19
While it would be beneficial for Russia to have access to the WTO’s dispute settlement process to protect its trade interests and provide foreign investors with a streamlined dispute resolution system, many obstacles remain to be overcome.
Obstacles to Accession
Like many other countries that aspire to WTO membership, Russia must overcome legislative hurdles. The Russian government has approved a list of legislative acts that are to be submitted to the Parliament in order to bring Russian laws in compliance with WTO rules. The list includes laws that regulate protective antidumping and compensatory measures for imports; licensing of exports and imports; government subsidies; customs tariffs and duties; standardization and certification of finished goods; foreign currency controls; and production of spirits and alcohol drinks. A new edition of Russia’s Customs Code must be enacted as well. 20
Moreover, there are several areas in which the Russian government disagrees with the WTO on economic policies. The main areas of dispute involve tariffs, protection of intellectual property rights, non-tariff barriers to trade like subsidies and red tape, and reform of the banking sector.
Tariffs. Russia currently has one of the lowest levels of trade barriers in the world. The nominal tariff rates vary between 7 percent and 15 percent, which is low by WTO standards. The effective (real) rate is estimated at only 5 percent, since 50 percent of overall imports are subject to various waivers and exceptions.
The adoption of WTO standards--despite fears among some Russian politicians and businessmen--would not decrease the overall level of protection for domestic businesses. To the contrary, it would allow the government to correct trade policy by shifting from ineffective, complex, and often contradictory and corrupt practices to more transparent ones. Under the influence of the WTO, Russia already has made a significant change to create more favorable conditions for external trade; it has consolidated tariffs into four major product groups (raw materials, semi-finished goods, foodstuffs, and finished products).
The Russian government disagrees with the WTO, however, on the length of the transition period for introducing new tariffs. Currently, all WTO candidates face a three-year period for introducing tariffs. Russian negotiators want an exception; they seek a seven-year extension to introduce tariffs in order to complete modernization of sectors that are most vulnerable to foreign competition. Resistance comes primarily from sectors that would be hurt by so-called sectoral initiatives, which assume zero tariffs for 10 groups of goods: pharmaceuticals, furniture, medical, construction and agricultural equipment, paper articles, steel, toys, beer, and strong beverages.
Other "sectoral initiative" requirements include harmonizing tariffs for chemical goods at the level of 5.5 percent to 6.5 percent; joining the Agreement on Trade in Civil Aircraft, which demands zero tariffs on a wide range of aircraft and related products; and signing the Agreement on Information Technology, which requires a gradual reduction of tariffs on 400 items, including computers and software.
Import tariffs also under negotiation between Russia and the WTO Working Party include those imposed on automobiles, non-ferrous metals, and furniture. In agriculture, four groups of products are under pressure for tariff reduction from other WTO members: meat, grain, fish, and butter. In addition, Russian tariffs for U.S. wood product exports are at the level of 20 percent, compared with the preferential rate of 5 percent for tropical hardwood logs, lumber, and veneer. 21 Russia should be looking to countries such as Chile to assuage its fears of how a decrease in tariff protection would affect such sectors. 22
Protection of Intellectual Property Rights (IPR). IPR is a major U.S. concern, especially regarding its software and entertainment industries. According to a 1991 U.S.-Russian bilateral trade agreement, Russia is required to provide adequate protection for intellectual property, and the Russian government took steps to create a legal framework that will approach international standards on intellectual property protection. After July 1998 amendments to Russia’s law "On Certification of Products and Services," approximately 30 percent of 22,000 Russian legal norms became compatible with international standards, making the system more transparent and less time-consuming. 23
Nevertheless, in 2001, Russia was mentioned in the U.S. Special 301 Priority Watch List along with 16 other countries that lack legislation to control pirate optical media (CD) production and exports of CDs and CD-ROMs. The adoption of a new regulation in May 2000 was another important step to protect property rights. However, the situation has not improved significantly. Millions of pirated music and software CDs and DVDs are being sold for $2 to $3 across the country. The inability of Russia to cope with the requirements of the bilateral agreement shows that it is still unprepared to meet more complicated obligations under the WTO Agreement on Trade Related Aspects of Intellectual Property Rights.
Another related concern is Russia’s court system, which is considered to be inadequately prepared to handle sophisticated patent and trademark disputes.
Subsidies and Red Tape. Special WTO regulations allow countries to employ some non-tariff measures, such as import quotas and subsidies in agriculture. The level and regulation of subsidies in Russia’s agricultural sector remains one of the main points of disagreement with the Working Party on Russian accession. There are two principal concerns: the level of subsidies and the inability to change this level after an agreement with the WTO. WTO regulations do not allow members to extend protectionist policies or change the overall amount of subsidies or tariffs once their level has been set and approved by the organization.
The currently negotiated threshold for overall Russian subsidies is $16 billion, which experts consider to be sufficient for effective protection. This level of subsidy constitutes a significant share of the current budget, and reaching it is unlikely to be feasible in the foreseeable future. Nevertheless, the Russian government insists on having decision-making power on the amount of agricultural subsidies in contradiction of the WTO standards. In addition, Russia has a wide variety of informal subsidies, primarily on the supply of cheap energy to producers as well as a system of barter trade.
The U.S. representatives in the Working Party have demanded that Russia join the WTO Agreement on Government Procurement, which stipulates a necessity for members to provide transparency and non-discrimination in bidding on government contracts. This would require the elimination of prohibitions against the purchase of foreign goods and services from foreign suppliers, as well as termination of set-asides and offsets for domestic producers or widely used red tape practices that prevent foreign products, services, and suppliers from entering the Russian market. Today, the government is engaged in vague tendering procedures, which allows use of single-source contracts and keeps vital technical specifications classified.
Reform of the Banking Sector. WTO membership will require Russia to have a more open and competitive financial sector. A few Russian banks that have a significant political influence on the government are among the major groups resisting WTO accession.
After the financial crisis of 1998, the Russian banking system collapsed. Today, the retail banking sector is dominated by a government monopoly, Sberbank (Savings Bank), which accounts for 73 percent of deposits and 20,000 branches. 24 Sberbank is a gargantuan and opaque institution. Similar to Russia’s tariff policy, it is not the formal protection in the sector but the overall negative environment for investment that prevents foreign banks from entering the Russian market. The government has already waived a legislative limitation of 12 percent ownership for foreign banks, since it has never been reached.
After the 1998 financial crisis, many smaller banks were closed by the Central Bank, and a more restrictive system of licensing was introduced. According to some analysts, this created a non-transparent environment that stifles competition and prevents the sector from developing. Without a significant foreign presence, Russia’s financial sector lacks the proper incentives to improve operations. Only sectors that are subject to strong foreign competition, such as investment, have seen competitive domestic financial firms emerge. Foreign financial institutions bring with them "best practices." At the same time, Russian institutions that are protected from foreign competition, such as the retail and commercial banks, insurance companies, and private pension funds, remain highly inefficient.
Implications for U.S.-Russia Policy
As Undersecretary of the Treasury John Taylor stated during a press conference in Moscow in October 2001, Russia’s accession to the WTO remains a priority for the United States. 25 Indeed, the United States will play an important role in Russia’s accession to the WTO as leader of the WTO Quad Group, which eventually will direct Russia’s accession process. The U.S. objectives in helping Russia become a WTO member include achieving more equitable and reciprocal access for U.S. goods, services, and investment in the Russian market, and reducing and eliminating barriers to trade and other trade-distorting policies and practices.
One of the remaining obstacles to Russia’s membership in the WTO is the lack of permanent normal trade relations (PNTR), which has been blocked by the restrictions in the Jackson-Vanik Amendment. This relic of the Cold War was passed in 1974 when the Soviet Union had severely limited emigration. Congress suspended application of the amendment after the Soviet Union collapsed, but it remains on the books, preventing Russia’s equal treatment as required by WTO rules.
Members of Congress, in stalling on efforts to grant Russia PNTR, raise issues that go beyond free emigration and human rights. For example, some have conditioned removing the strictures of Jackson-Vanik on resolving disputes with Russia over U.S. chicken imports and compliance with U.S. demands on WTO accession. 26
At the upcoming summit in Moscow, President Bush can make clear America’s support for Russia’s accession to the WTO by emphasizing several key priorities. Specifically, the United States should:
Support Russia’s efforts to open its economy to trade and investment. Joining the WTO will cause Russia to open its market further to foreign goods, services, and investment; reduce barriers to trade and other trade-distorting practices; and support transparency, accountability, and the rule of law. Open trade will facilitate Russia’s integration into the community of democratic states and boost its role as a strategic anti-terrorism partner of the United States. President Bush should publicly endorse Russia’s accession to the WTO to open its market, especially its oil and gas industry, to American investors. Russia’s growing economy, and especially the energy sector, represents a ready market for a wide range of technologically sophisticated American products. The United States should recommend that Russia create a non-discriminative and transparent environment to increase incentives for American entrepreneurs to develop its oil and gas sector. This would strengthen Russia’s position as an important energy supplier in the global market and improve the overall competitiveness and performance of the Russian economy.
Endorse Russia’s "graduation" from Jackson-Vanik restrictions that prevent it from enjoying permanent normal trade relations with the United States. Congress should assist Russia’s effort to become a member of the WTO by permanently lifting the Jackson-Vanik restrictions, which it could accomplish by attaching an amendment to trade legislation.
Focus discussions on the tariffs that Russia must eliminate or reduce, as required by WTO accession rules. The United States also should recommend to the WTO Quad Group that the Russian government eliminate or cut its tariffs, as required by the WTO accession rules, primarily on such products as pharmaceuticals; medical, construction, and agricultural equipment; aerospace; autos; and steel. The U.S. Trade Representative should insist on Russia’s full implementation of the WTO accession requirements within the universal time frame and without maintaining any protectionist policies.
Support Russia’s membership in the WTO Agreement on Government Procurement. The WTO Quad Group should include a requirement for accession that Russia sign this agreement, which stipulates that members provide transparency and non-discrimination in government procurement. This would mean both eliminating constraints on the purchase of foreign goods and services by the Russian government and clamping down on Russia’s well-known use of red tape.
Advise the Russian government and Central Bank on ways to reform and open the banking, financial, and insurance services sectors. Russia’s Ministry of Trade and Economic Development, Central Bank, and Ministry of Finance are in charge of the WTO negotiations and financial sector reforms. They should be encouraged to move forward with reforms of the banking and financial services sectors. Without significant foreign competition, Russian banks lack incentive to improve operations and achieve a transparent financial system based on international standards. Restructuring and modernizing the financial services sector also would create more support for WTO accession in the Russian business community.
Request that Russia’s Ministry of Trade and Economic Development implement the WTO’s intellectual property rights requirements. Intellectual property rights requirements (known as TRIPS) should be implemented prior to WTO accession. The failure to introduce policies that protect intellectual property rights will result in a reduction of investment in vital high-tech sectors. Russia’s inability to cope with the requirements of the 1991 bilateral U.S.-Russia agreement on protecting intellectual property rights in optical media shows that it is unprepared to meet the WTO standards on IPR. 27
Conclusion
Russian President Vladimir Putin understands that only the West has the capacity to become the principal source of investment capital for Russia and a substantial market for its energy resources. Putin and Prime Minister Mikhail Kasyanov have stated that Russia is eager to join the WTO and will become a reliable trade partner and energy supplier for the West, regardless of what may happen to the flow of oil from the Middle East. The lack of WTO membership slows both trade and investment activity in Russia.
At the May summit meetings with Putin, President Bush should publicly support Russia’s accession to the WTO by 2003 or 2004, provided its negotiations with the WTO in all sectors have been completed successfully. Russia’s accession will facilitate political and economic reforms and promote cooperation with the United States and its allies in the war against terrorism.
Given Russia’s increasing importance as a strategic partner of the United States in the war on terrorism and the growth in its economy over the past three years, Russia’s accession is clearly in America’s interests. The United States, however, should insist that Russia follow the universal requirements for WTO membership that all candidate countries must satisfy, including decisive measures to protect intellectual property rights, eliminate and reduce tariffs, create a non-discriminatory and transparent environment for foreign goods and services, and reform the banking sector.
1. The author thanks Gerald P. O’Driscoll and Aaron Schavey of the Center for International Trade and Economics (CITE) at The Heritage Foundation, as well as former interns Piotr Kaznacheev, Ph.D. candidate, Moscow State University, and Elena Simonova, a former Russian Economic Ministry official, for their contributions to this study.
2. "WTO Reviews Draft Accession Texts for Russia; Negotiator Details Contention," BNA Regulation, Law and Economics No. 81, April 26, 2002, p. A24.
3. See, for example, Immanuel Kant, "Perpetual Peace: A Philosophical Sketch," at http://www.mtholyoke.edu/acad/intrel/kant/kant1.htm; Richard Cobden, "Free Trade with All Nations," at http://www.geocities.com/Athens/Acropolis/5148/cobdenonfreetrade.html; "Richard Cobden," at http://www.spartacus.schoolnet.co.uk/PRcobden.htm; and Thomas J. DiLorenzo, "Frederic Bastiat (1801-1850): Between the French and Marginalist Revolutions," at http://www.mises.org/fredericbastiat.asp.
4. Ariel Cohen, "Russia and Eurasia," in Stuart M. Butler and Kim R. Holmes, eds., Issues 2002: The Candidate’s Briefing Book (Washington, D.C.: The Heritage Foundation, 2002), at http://www.heritage.org/issues/russiaandeurasia/russia_background.html.
5. Edward Gresser, "A View from Outside: Russia and the Case for the WTO," Progressive Policy Institute Policy Report, April 2002, pp. 3-4.
6. U.S. Commercial Services, "Country Commercial Guides for Russia," at http://www.usatrade.gov/website/ccg.nsf.
7. International Monetary Fond, "World Economic and Financial Surveys: World Economic Outlook: The Information Technology Revolution," October 2001.
8. "Oil Price Deal Sought with Russia," at http://www.cnn.com/2002/WORLD/europe/03/04/russia.opec/index.html.
9. For background information on the WTO, see Brett D. Schaefer, "The Bretton Woods Institutions: History and Reform Prosposals," Heritage Foundation Economic Freedom Project Report No. EFP 00-01, April 2000, at http://www.heritage.org/library/efp/efp00-01.html.
10. "Poslaniye Prezidenta Rossiyskoi Federatsii V. V. Putina Federal’nomu Sobraniyu Rosskiiskoi Federatsii (Message of the President Vladimir Putin to the Federal Assembly of the Russian Federation)," April 18, 2002, at http://president.kremlin.ru/events/510.html.
11. Ibid.
12. Evgeny Gavrilenkov, "Economic Growth and Crises: Evidence from Russia and Other Controversial Economies," Center for Strategic and International Studies, Washington, D.C., December 7, 2001, at http://www.csis.org/ruseura/pl011207.htm.
13. Ministry of Trade and Economic Development of Russia, "Main Economic and Social Indicators of Russia Federation Until 2004," at http://www.economy.gov.ru.
14. "Finance Ministry Sanguine About Foreign Debt," Yahoo International Finance Center, at http://biz.yahoo.com/ifc/ru/news/22602-4.html.
15. "70% of Russian Businessmen for Russia’s Early Accession to WTO," Pravda.ru, October 23, 2001, at http://english.pravda.ru/world/2001/10/23/18898.html.
16. "Russia in WTO: Myths and Reality ("Rossiya v WTO: Mify i Realnost"), A Report by the Center of Financial and Economic Research supported by Club 2015, 2001, at http://www.cefir.ru.
17. "Russia in WTO--Pluses and Minuses," Pravda.ru, February 13, 2002, at http://english.pravda.ru/economics/2002/02/13/26383.html.
18. "Russia to Become Full-fledged WTO Member by Mid-2003," at http://english.pravda.ru/world/2002/01/10/25186.html (May 2002).
19. "Focus: Russia’s WTO Accession Pace May Be Slowing," at http://www.prime-tass.com/news/66/opened/20020402/210262.asp (May 2002).
20. "On Approval of Plan of Action for Adduction of Russian Legislation in Conformity with the Norms and Rules of the World Trade Organization," Direction of the Government of the Russian Federation, No. 1054-p, August 8, 2001.
21. Office of the United States Trade Representative (USTR), "Foreign Trade Barriers: Russia’s Trade Summary," 2001, at http://www.ustr.gov/html/2001_russia.pdf.
22. Glenn W. Harrison, Thomas F. Rutherford, and David G. Tarr, "Trade Policy Options for Chile: A Quantitative Evaluation," World Bank Group Policy Research Working Paper No. 1783, June 1997, at
http://wbln0018.worldbank.org/research%5Cworkpapers.nsf/View+to+Link+
WebPages/5C3A69A7767E040B852567E000541C6C?OpenDocument.
23. USTR, "Foreign Trade Barriers: Russia’s Trade Summary."
24. Peter Aven, presentation at the U.S.-Russian Business Council 2002 Forecast Conference, Washington, D.C., April 17, 2002. Aven is president of Alfa-bank, the largest private bank in Russia.
25. Russian News Agency, Interfax, October 29, 2001.
26. Opening Statement of the Hon. Sander M. Levin, a Representative from the State of Michigan, in Hearing to Explore Permanent Normal Trade Relations for Russia, Committee on Ways and Means, U.S. House of Representatives, April 11, 2002, at http://waysandmeans.house.gov/trade/107cong/4-11-02/4-11levi.htm.
27. U.S. Department of Commerce, "NIS: Intellectual Property Rights--301 Watch List," at http://www.bisnis.doc.gov/bisnis/
country/000731BNAIPR301.htm.
U.S.-Russia Summit Priorities: The Strategic Framework, a Nuclear Arms Agreement, and Trade
05-14-2002
When President George W. Bush and Russian President Vladimir Putin meet for summits in Russia and Rome later this month, they will have an opportunity to define a new framework for U.S.-Russia strategic relations that extends beyond the war on terrorism. Such a framework could lay the foundation for a new 21st century security architecture while facilitating Russia’s integration into the European-North Atlantic security and economic environment.
Given Russia’s proximity to Western Europe, the Middle East, Central Asia, and the Far East, and in light of Putin’s decision to line up with the United States in the war on terrorism, 1 establishing closer cooperation with Russia will have significant benefits for U.S. national security and regional and economic interests. Closer cooperation with Moscow is vital, for example, for isolating such terrorism-supporting states as Iran, Iraq, Syria, Libya, and North Korea and for slowing the transfer of Russian military technology to China. 2
On the Summit Agenda
At the summit meetings in St. Petersburg and Moscow on May 23-26 and at the NATO-Russia summit in Rome on May 28, President Bush and President Putin will focus on matters of security and economic policies. In Moscow, they will sign a formal treaty that calls for deep cuts in nuclear arsenals on both sides over the next 10 years. Both leaders are committed to ending the legacy of the Cold War by reducing the strategic nuclear arsenals of their countries to around 1,700 to 2,200 deliverable warheads each. Such a commitment will also be required in cooperative efforts to reduce the threat posed by the proliferation of weapons of mass destruction (WMD), to increase security in regions of common interest, and to increase trade to strengthen economies.
The treaty to reduce U.S. and Russian offensive nuclear arsenals is compatible with currently projected U.S. security requirements. These requirements, however, could change with little warning. As a result, reductions should proceed cautiously and the process should permit flexibility. The treaty allows flexibility by limiting its duration to 10 years, by pacing the reductions within the 10-year period, and by allowing either party to withdraw from the treaty with three months’ notice. Another welcome sign of this flexibility is the agreement not to require the destruction of the warheads or to impose limitations on missile defenses.
Specifically, during his summit meetings with President Putin, President Bush should:
Ask for Russia’s support for removing Saddam Hussein and his regime from power. For Russia, the issues in Iraq are primarily the Soviet-era debt of $11 billion to $13 billion for arms sales during the Iran-Iraq war and how the oil deals secured by Russian companies in Iraq (worth $30 billion in cash flow for the life of the projects) would be grandfathered in under a new regime. In addition, Russia is concerned about the territorial integrity of Iraq. President Bush could secure Russia’s active diplomatic and military participation in an operation against Baghdad by guaranteeing that such concerns would be addressed in the post-Saddam Iraq in a manner that is satisfactory to Russia. 3
Encourage Moscow to terminate Russian sales of conventional weapons to Iran and technological cooperation to produce WMD. In 2001, Russia and Iran signed a $300 million a year, multi-year arms export agreement, making Iran the third largest customer for Russian weapons after India and China. Moscow is also building two nuclear reactors at Bushehr, from which the precursors to nuclear bomb fissile material could be obtained, and is selling sophisticated anti-ship missiles and other destabilizing weapons to Iran. 4
On May 6, Under Secretary of State John Bolton called for the United States and Russia to sign a political declaration on the New Strategic Framework that would cover not just strategic offense and defense systems, but also nonproliferation and counterproliferation. 5 Such a framework should promote cooperation to prevent Iran from becoming a nuclear state armed with ballistic missiles. The Administration should be ready to offer an economic quid pro quo for Russia’s actions, such as participation in building the components of ballistic missile defense systems and expansion of civilian space launch quotas.
Reject any limitations on strategic defenses. Although the treaty to reduce strategic nuclear arms does not include a provision limiting missile defense programs, the Russians may seek such limitations through other declarations to be issued during the summit. President Bush, as he has in the past, should continue to resist Russian pressure to limit missile defenses. According to the Nuclear Posture Review (NPR), strategic defenses--which include missile defenses--are a necessary leg of the new strategic triad that includes offensive strategic forces and responsive forces. Now that the 1972 Anti-Ballistic Missile (ABM) Treaty with the former Soviet Union is scheduled to lapse in mid-June, nothing should reimpose its limitations on missile defense.
Move forward with NATO-Russia cooperation. On May 28, NATO and Russia will sign an agreement to establish the NATO-Russia Council. This agreement should allow for joint development of policy and the planning of mutual activities in such areas as the war on terrorism; operations against terrorist organizations and their financial supporters; nonproliferation and WMD security; special forces interoperability; educational exchanges between officers on all levels; peacekeeping operations; and comprehensive military reform, 6 which President Putin and Defense Minister Sergey Ivanov would welcome.
In the past, the forum provided by the 1997 Permanent Joint Council often turned into a venue for Moscow to air its frustrations with NATO actions, such as the Balkans operations. 7 Today, the joint NATO-Russia peacekeeping activities in that region demonstrate how these two sides can cooperate. Top U.S. generals, such as Supreme Allied Commander Europe General Joseph Ralston 8 and Commander in Chief of Central Command (CENTCOM) General Tommy Franks, routinely praise Russia’s cooperation with the United States and NATO. 9 The NATO-Russia Council should be seen as a first step on the road to greater security integration between Russia and the North Atlantic alliance. The President also should invite President Putin to address the NATO summit in Prague in November.
Encourage Russia to expand its energy sales in the global market. Russia could increase energy sales significantly by enhancing corporate governance transparency and shareholder rights for Western investors. In addition, production could be increased by including 100 new oil and gas fields in the Production Sharing Agreement (PSA) legislation, which allows Western oil companies to be compensated by drawing oil for sale from the jointly developed fields. U.S. companies need assurances that their investments in Russian fields and infrastructure are secure. President Bush should ask Putin to support guarantees for Western companies through expanded PSA legislation and to ensure its passage in the Duma.
Russia exports over 1.8 billion barrels of oil and 6.7 billion cubic feet of natural gas per year. It is the world’s largest exporter of natural gas and second largest exporter of oil. 10 Together with the countries of Eurasia, it could catch up with Saudi Arabia as a leading oil exporter by 2010. 11 U.S. export development agencies, such as the Overseas Private Investment Corporation (OPIC), the Export-Import Bank, and the international financial institutions, could assist foreign investors by insisting that the rule of law be honored and contracts upheld. A boost in Russia’s energy exports also would provide its European and Far Eastern customers with additional energy security in the event that OPEC continues its policy of high prices and production cuts.
Express support for the lifting of U.S. barriers to trade with Russia. The Administration supports Russia’s economic integration with the West, including its membership in the World Trade Organization (WTO). President Putin has declared that Russia will not require any special deals from the WTO, so standard WTO criteria for membership should apply. President Bush should declare U.S. support for Russia’s accession in 2004, provided the negotiations in all sectors are completed successfully.
The U.S. statute known as the Jackson-Vanik Amendment, which denies Russia most favored nation status, is a relic of the Cold War. It was passed in 1974 when the Soviet Union severely limited emigration. Congress suspended application of the amendment after the Soviet Union collapsed. At the Russia summit, President Bush should express his support for a permanent lifting of the Jackson-Vanik restrictions, which Congress could accomplish by attaching an amendment to trade legislation.
Conclusion
The forthcoming U.S.-Russia summits offer both countries a unique opportunity to launch a strategic partnership that would assure greater security in the 21st century. At the summit meetings, both President Bush and President Putin should focus on casting off the baggage that has hampered U.S.-Russia relations in the past, such as Moscow’s ties with Iran and Iraq and other states that sponsor terrorism.
The two leaders will put to rest the legacy of the Cold War by signing a strategic treaty to reduce their nuclear arsenals. Most important, they should expand joint actions in the war on terrorism, as well as establish goals for NATO-Russian cooperation and support policies that further integrate Russia into the global market.
1. "Russia Embraces U.S.-Led Effort," Associated Press, September 25, 2001, at http://wildcat.arizona.edu/papers/95/26/05_4_m.html.
2. For additional information on this issue, see Ariel Cohen, "The Russia-China Friendship and Cooperation Treaty: A Strategic Shift in Eurasia?" Heritage Foundation Backgrounder No. 1459, July 18, 2001.
3. See also Ariel Cohen, "Bringing Russia into a Coalition Against Saddam," Heritage Foundation Executive Memorandum No. 812, April 29, 2002.
4. Brenda Shaefer, "U.S. Needs Russia to Help Contain Iran," at http://www.ksg.harvard.edu/news/opeds/shaffer_russia_iran_oped_latimes_022102.htm; see also "Russia to Pursue Nuclear, Military Cooperation with Iran," Agence France-Press, Moscow, April 3, 2002, at http://www.hindustantimes.com/nonfram/030402/dLFOR70.asp.
5. John R. Bolton, "Beyond the Axis of Evil: Additional Threats from Weapons of Mass Destruction," Heritage Foundation Lecture No. 743, May 6, 2002.
6. For further discussion of this agenda, see Ariel Cohen, "Russia and Eurasia: Promoting Security, Prosperity, and Freedom," in Stuart M. Butler and Kim R. Holmes, eds., Issues 2002: The Candidate’s Briefing Book (Washington, D.C.: The Heritage Foundation, 2002), at http://www.heritage.org/issues/chapters/chapter20_russia.html.
7. "The NATO-Russia `Founding Act’: Stepping Stone or Stumbling Block for a European Security Architecture?" Berlin Information-Centre for Transatlantic Security (BITS), British American Security Information Council (BASIC), Summit Briefing Paper No. 97.1, July 4, 1997, at http://www.basicint.org/founding.htm.
8. Walter Pincus, "Anti-Terror War Binds U.S., Russian Militaries," The Washington Post, May 3, 2002, p. A22.
9. Francescca Mereu, "Russia: Franks Praises Russia Cooperation in Antiterror Campaign," RFE-RL, March 21, 2002, at http://www.cdi.org/russia/198-2.cfm.
10. U.S. Department of Energy, Energy Information Administration, "Country Analysis Briefing," at http://www.eia.doe.gov.
11. Edward L. Morse and James Richard, "The Battle for Energy Dominance," Foreign Affairs, April 2002, at http://www.foreignaffairs.org/articles/Morse0302b.html.
04-29-2002
As President George Bush prepares for the upcoming summit with Russian President Vladimir Putin in St. Petersburg and Moscow on May 23-26, he must look for ways to encourage Russia to become a full ally in the war on terrorism and a strategic partner in the new global security environment. This means encouraging Russia to support an effort to make the world safe from the growing threat posed by Saddam Hussein and his weapons of mass destruction (WMD).
In recent private interviews with the author in Moscow, top Russian parliamentary leaders and presidential policy advisers indicated that protecting Russia’s multibillion-dollar interests in Iraq remains a priority, regardless of who is in power in Baghdad. But when asked to choose between Saddam’s friendship and America’s good will, they indicated they would support a U.S. policy to remove Saddam from power. This major policy shift would entail Moscow’s breaking the friendly ties with Saddam’s regime that it has maintained since the 1960s, especially under former Prime Minister Evgeny Primakov (the top Arab affairs expert in Moscow and the former chairman of the USSR Supreme Soviet’s upper house).
A U.S.-led coalition to change the political landscape in Iraq would benefit from Russia’s participation. At the summit, the Administration should secure Moscow’s support by focusing on ways to expand security and intelligence cooperation and to assure the repayment of Iraq’s debt to Russia by any future post-Saddam government.
Breaking with Baghdad. Moscow has supported the U.S.-led war on terrorism. In Afghanistan, for example, it provided U.S. troops with high-quality intelligence and the Northern Alliance with timely arms supplies. It is working with Washington to secure, by May 30, U.N. Security Council approval of a new list of goods restricted for export to Iraq.
Moscow, long Baghdad’s main arms supplier and business partner, began supporting the United States against Iraq after the Soviet Union began to implode. It supported the U.S. coalition in the Gulf War despite Primakov’s efforts to protect Saddam, although the Iraqi dictator was still able to curry diplomatic and economic favor in Moscow throughout the 1990s by providing preferential treatment for Russian companies in oil drilling and refining and by promising billion-dollar contracts to the influential Russian military-industrial complex.
Moreover, according to an aide to former President Boris Yeltsin, Vyacheslav Kostikov, Saddam has bought the support of politicians such as Vladimir Zhirinovsky and his Liberal Democratic Party. Saddam also paid for the lobbying efforts of Russian business tycoons and former senior officials who make millions of dollars reselling Iraqi oil in the gray market and supply Iraq with legal and illicit goods, including military equipment banned under U.N. resolutions. Representative Curt Weldon (R-PA) is among those who have accused Russia of supplying Baghdad with ballistic missile gyroscopes, biological warfare manufacturing equipment, and sophisticated surface-to-air missiles, a financial tie that will require deep determination to break. Others report that Ukraine has sold Baghdad an anti-stealth aircraft radar system called Kolchuga.
Moscow also has important economic interests in Iraq:
A Soviet-era debt of $7 billion to $8 billion, generated by arms sales to Iraq during the Iran-Iraq war. Adjusted for inflation, that debt is worth from $10 billion to $12 billion today.
Lucrative contracts to operate and develop giant oil fields in Iraq, signed by Russia’s major oil company, LUKoil, and the government-owned Zarubezhneft and worth as much as $30 billion over 20 years. These include the Western Qurna oil field and wells already developed by Russian oil companies Slavneft and Tatneft.
Trade in Russian goods under the U.N.-sponsored oil-for-food program, worth between $1 billion and $1.5 billion a year.
Such interests pose significant impediments to Moscow’s severing its ties with Iraq. However, Moscow must understand that its economic interests will not be secure as long as Saddam remains in power.
What the Administration Should Propose. U.S. and Russian policymakers clearly recognize the growing threat Saddam poses to global security. What is needed is a strategy for removing him from power and ushering in a pro-democracy government. To assist the United States, Putin must confront the lingering pro-Iraqi sentiment in the Foreign Ministry, military-industrial complex, and oil lobby. He must demonstrate how Russia’s cooperation in the coalition would benefit Russia. To make Moscow a full partner in the anti-Saddam coalition, the Administration should:
Offer to support the repayment of Iraq’s Soviet-era debt by a future pro-Western government in Baghdad. Alternatively, Washington may consider brokering a deal in which the $100 billion Soviet debt to the Paris Club is reduced by the amount of Iraq’s debt to Russia, or about 12 percent, when Saddam is removed.
Offer to support Russian companies’ contractual rights to Iraqi oil fields with the post-Saddam government. Russia may fear that these contracts could be annulled by a future government in Baghdad. The United States could improve its long-term security dividend and enhance Russia’s role in the anti-terrorism coalition by recognizing existing Russian energy interests in Iraq.
Begin a more transparent and reciprocal data exchange with Russia on black market oil sales and arms and military technology transfers. For example, Washington and Moscow should exchange data on export licenses and illegal arms transfers to Iraq, including WMD procurement through Russian companies.
Appoint a senior Administration official to negotiate U.S.-Russian understandings on a post-Saddam Iraq. This person should be well-versed in Middle East geopolitics, energy economics, and finance issues. Putin should be asked to appoint a similarly qualified high-ranking official for these negotiations.
Conclusion. U.S.-Russian cooperation on a regime change in Iraq should be mutually beneficial. Helping Putin secure Russia’s economic interests in Iraq would weaken domestic criticism of his support for President Bush’s Iraq policy. Such cooperation would also lessen criticism of the Bush policy toward Iraq in Europe and the Arab world. Finally, it could lay the foundation for a fruitful partnership in the war against terrorism and in efforts to reduce the threat posed by WMD proliferation.
04-23-2002
The repercussions of the failed coup against Venezuelan President Hugo Chavez extended halfway across the world to the shores of the Caspian, where the leaders of the littoral nations are set to meet to discuss dividing the sea’s abundant energy resources. Instability in Venezuela, the world’s fourth-largest oil supplier, has Eurasian states scrambling to seize the moment of opportunity for their own energy sectors.
Like leaders in Turkmenistan, Uzbekistan, Georgia and Azerbaijan, Venezuelan politicians use their countries’ oil riches as leverage when negotiating with the United States and Europe. With the world’s fourth-largest oil supply held hostage, 60-year-old Pedro Carmona became an unlikely coup leader. Carmona, the head of Venezuela’s largest chamber of commerce, had earned a reputation for authoritarian leanings. On April 9, weeks after starting to protest the appointment of Chavez cronies to the board of the state oil company, Carmona and Venezuela’s largest trade union group organized a general strike. Two days later, the military shot at a massive opposition march, killing 16 protesters. The military kicked out Chavez, and appointed Carmona as head of a junta. Carmona promptly dissolved the National Assembly, Constitution, courts and public offices - he later told Venezuelan newspapers he had done this "to facilitate a rapid transition to new elections" - but the plotters soon gave in to popular revolt and reinstated Chavez on Sunday April 14.
The two-day drama echoes the 1991 Russian coup attempt that killed the Soviet Union. Like the Communist bureaucrats who seized and then lost the Kremlin, Carmona blamed staff for his failure, claiming that numerous people wrote and rewrote decrees dissolving public institutions during the chaos. But while the Soviet Union was a foundering economy, Venezuela’s state-controlled oil company is the United States’ third-largest supplier.
Diplomats in Washington are pointing fingers in the wake of charges that the Bush administration failed to adequately condemn an antidemocratic coup. But whatever the diplomatic fallout, energy analysts and foreign policy experts agree that the episode raises serious long-term questions about the political risk in the United States’ three biggest suppliers - Saudi Arabia, Iraq and Venezuela. While nobody suspects Venezuela of harboring terrorists, the coup attempt has made its oil supply seem as vulnerable to manipulation as any Persian Gulf nation’s. This realization is pushing the United States to seek new sources of energy.
Compared to Venezuela, Russia and the Caspian nations look very stable. On April 18, a week after Chavez returned, Russian President Vladimir Putin delivered his State of the Federation address to the parliament. The address focused on the necessity to improve the state bureaucracy and assure faster economic growth and more foreign investment. Moreover, Putin spoke little about Russian foreign policy, generally acknowledging that Russian military competition will be much less important than economic competition.
He dedicated seven out of nine paragraphs to the Commonwealth of Independent States (CIS), clearly making relations with the former Soviet republics a top priority in Russian foreign policy. The leading opportunities for absorbing foreign investment - and some of the most fruitful joint venture prospects between Russia and its former republics - lie in the energy sector. Russia clearly is striving to connect its desire to become a major player in the global energy markets with its dominant role in the "near abroad."
One way to boost Russia’s standing with oil purchasers and would-be oil exporters is to develop private companies’ capacity. CEO Mikhail Khodorkovsky of Yukos Oil, Russia’s fastest-growing company, addressed this on April 16, when he joined Mikhail Friedman and Petr Aven of the Alfa-Group, which includes the Tyumen Oil Company, for a symposium at the US-Russian Business Council. The speakers agreed that Russia’s economy needs to grow more steeply than the 3.5 to four percent annual rate currently forecast by Economic Development Ministry. Critically, in light of Venezuela’s turmoil, they assert that Russia can conduct an energy policy independent from the OPEC cartel, eventually boosting production to the Soviet-era level of around 450 million tons a year.
Other Russians also seem eager to bring modern technology and salesmanship to the nation’s natural resources. Leonid Grigoriev, a prominent Russian economist and an advisor to the Ministry of Energy, says Siberia has the largest coal resources on the planet. He says these can produce competitively priced power if they acquire modern technology. More broadly, the Putin Administration is sparing no effort to organize the post-Soviet countries in the Caucasus and Central Asia into the Eurasian Economic Union (EEU) and Eurasian Energy Community (EEC), which will coordinate oil and natural gas exports from Russia, Kazakhstan, Azerbaijan and Turkmenistan.
Putin often conducts phone conferences with the Kazakhstani president Nursultan Nazarbayev and other regional leaders to discuss energy policy. He also planned to press Azerbaijan, Iran, Kazakhstan, and Turkmenistan toward an agreed method for dividing the Caspian Sea’s resources at the Caspian summit in Ashgabat on April 23.
Even though Putin enjoys more stability and has focused more squarely on energy investment than Chavez, Russian coordination efforts are moving too slowly to make them a short-term substitute for Venezuelan supply. So far, plans to form a unified Central Asian energy network have run into bureaucratic resistance and ineptitude. If Putin overcomes this resistance, these organizations may help him counter-balance the increasingly unstable Gulf producers and increase Russia’s influence along its periphery. This would provide a multiplier to Putin’s geo-economic strategy.
As Venezuela’s reputation founders, many multinational energy firms already have put down stakes in Russia., ExxonMobil, which has strong ties to the Bush administration, has invested over $10 billion in the Sakhalin-1 oil and gas fields and expressed interest in building a natural gas pipeline from Sakhalin to Japan. Royal Dutch Shell is in talks with Gazprom and Russian Prime Minister Mikhail Kasyanov about buying out Gazprom’s share in the giant Sakhalin-2 project, promising to invest $8-10 billion. On April 16, British-American conglomerate BP announced it would spend $375 million to raise its stake in Sidanko, which previously went through a bruising bankruptcy, from 10 percent to 25 percent.
Chaos in Venezuela and violence in the Middle East can only make Russia and Eurasia look increasingly attractive for energy investors. Provided they can steer a common course with leaders in neighboring countries - and can preserve financial transparency - Putin and Russian oil companies may boost their country’s influence by skillfully taking advantage of its competitors’ increasing political risk.
03-18-2002
The US government is putting the best face possible on Uzbek President Islam Karimov’s visit to Washington. Officials from the State Department, National Security Council and the Pentagon stress that Karimov promised to improve Uzbekistan’s human rights record, adding that they believe Karimov is sincere in his desire to promote civil society in the Central Asian nation.
Karimov ended his US visit on March 14 with several stops in New York, including a brief visit to the downtown site where the World Trade Center buildings once stood. The same day in Washington, officials gave Karimov’s performance high marks. The Uzbek leader has faced widespread criticism in recent years for a crackdown on basic rights in Uzbekistan. But Bush Administration officials insisted that Karimov recognized domestic rights conditions in Uzbekistan needed to improve. The Uzbek leader also admitted that his government had to relinquish total control over the economy.
"He is not stupid," one US official said. "He delivered a surprisingly intelligent speech to the business community; and his remarks to President Bush were quite sincere - unless he deserves an Oscar for acting."
Some advocates have worried that by stepping up aid to Uzbekistan after joining the war on terrorism, the United States would reward Karimov’s repressive rule. One official, speaking on background, disputed that notion. "He understands that he has a problem with human rights, and he openly said so. He owes the United States his security, if not his survival," the official said. "I don’t think he will string us on and lead us by the nose."
Karimov certainly seemed humbled, according to note-takers, at his meetings with President George W. Bush and Secretary of State Colin Powell. The Uzbek leader repeatedly voiced appreciation for the Americans’ respectful and low-key tone, say government officials with knowledge of the meetings. Karimov gave a clear-cut promise to "improve behavior" in the future.
"If only anyone explained these things to me this way before," Karimov reportedly lamented, "we would be along the way to implement these reforms... These issues are our responsibility. We will follow through on what we signed. I understand that Uzbekistan needs it, not the United States."
US officials said both Bush and Powell stressed to Karimov that without significant improvements on human rights and economic liberalization, the US Congress will not be receptive to further allocations of economic and security assistance.
US officials suggest that Karimov has already moved to fulfill his pledge to improve the country’s democratic climate. Prior to arriving in Washington, the Uzbek government registered a human rights organization, and released over 800 political prisoners from prison. Human rights organizations have praised Karimov’s recent moves, but say they alone do not comprise a liberalization trend.
Karimov’s actions follow a big increase in American aid. In the current supplemental 2002 US assistance budget, Uzbekistan is about to receive over $155 million - $83.5 million above the aid allocated prior to the September 11 attacks. The US Export-Import Bank also inked a fresh $55 million credit facility for small and midsize Uzbek businesses during Karimov’s visit. About one-half the aid total will consist of security assistance, including communications gear for the Uzbek military and programs aimed specifically at improving border patrols. The remaining half of aid would be devoted to a wide variety of socio-economic areas, including programs to combat the spread of HIV/AIDS, the environmental rehabilitation of the Aral Sea basin and improvements in social services in the Ferghana Valley, Central Asia’s agricultural heartland and center of radical Islamic sentiment.
In Washington, Karimov also reached out to the international financial institutions, such as the World Bank and the International Monetary Fund (IMF), after repeatedly snubbing these organizations’ advice for years. The IMF closed its offices in Uzbekistan in 2001, citing frustration over the Karimov government’s reluctance to carry out essential reforms, including the convertibility of the local currency, the som.
The Bush Administration officials who deal with Uzbekistan on a daily basis told EurasiaNet that they understand that they must pursue human rights and political liberties in the name of security. Without security, there will be no investment; but without investment, there will be no economic development. However, they also stressed that in the middle of the war on terrorism, security takes the front seat.
Karimov remains concerned about national security and in Washington held meetings with top defense department officials. Indeed, the centerpiece of his visit was the signing of a Declaration of Strategic Cooperation. The Pentagon has taken a lead in cooperating, training and supplying the Uzbek military. Despite the rumored death of Islamic Movement of Uzbekistan leader Juma Namangani during the anti-terrorism campaign in Afghanistan, Karimov is anxious to keep building the Uzbek military’s capacity.
Even if the IMU cannot reconstitute, Hizb-ut-Tahrir, a radical Islamist party, which advocates the overthrow of Karimov’s regime, could help foment anti-government unrest. The Strategic Cooperation pact includes a promise by Americans to "regard with grave concern any external threat" to the Uzbek government. Hizb-ut-Tahrir already causes grave concern both for the Karimov regime and for the US government, American diplomats stressed.
Because of these concerns, some in the US human rights community recognize that in order to pursue specific liberalization measures, or to get notorious cases of persecution reversed, it may be worthwhile to work through the Pentagon. "The US military has a unique channel of communication with the Karimov regime," says one congressional staff member who is deeply involved in promoting democracy in Uzbekistan.
However, the Pentagon is primarily focused on future geopolitical engagement in Uzbekistan, irrespective of the human rights climate. In their meeting, Karimov and Secretary of Defense Donald Rumsfeld discussed the future of American bases in Central Asia. The US government’s official position is that it does not seek permanent bases in Central Asia. At the same time, officials say they want access to former Soviet facilities for an indefinite period - at least as long as the war on terrorism is continuing. Such a formula is vague enough to keep everyone in the region nervous, but it avoids a direct clash with Russia over regional spheres of influence. In October 2001 Russia requested - and conducted - consultations with the United States over the future of Central Asia. The second round of consultations will take place in Moscow in April.
According to sources present at Karimov’s talks with Bush, Powell and Rumsfeld, the Uzbek ruler’s main worry - and warning - was about Iranian meddling in Afghanistan. Karimov apparently believes that Tehran will try to undermine stability there by exploiting centuries-old ethnic rivalries, in order to undermine the United States and its allies. If that scenario were to materialize, the United States would need to act as a more solicitous friend to players throughout the region, including Karimov himself. As one American diplomat said, "if you thought politics make strange bedfellows, try war - it makes stranger ones."
02-19-2002
Reports that al Qaeda fighters, possibly including Osama bin Laden himself, have found refuge in Georgia are stoking pressure for outside military intervention. Top Russian officials are once again hinting that Moscow may feel compelled to intervene militarily to contain Islamic radicals in Georgia. Georgian President Eduard Shevardnadze is categorically opposed to Russian intervention in the Pankisi Gorge, but he has indicated that he would consider a Georgian-US joint operation.
The top US diplomat in Georgia, Philip Remler, helped focus attention to the brewing crisis in the Pankisi with an announcement that al Qaeda fighters had infiltrated the region. Georgian leaders have not disputed Remler’s assertion.
In recent days, Russian officials have fueled concerns with speculation that bin Laden may be among those on the loose in the Pankisi Gorge - a claim that Georgian officials deny.
Since mid-January Georgian security have attempted to crack down on criminality in the Pankisi area. But the February 17 kidnapping of four Georgian police officers on duty in the region underscores the weakness of the state’s authority.
Russian Defense Minister Sergei Ivanov warned that Georgia’s chaotic conditions warranted the launch of an immediate anti-terror offensive. If Georgia is incapable of conducting such operations, Ivanov hinted the Russian military could take matters into its own hands.
"On the one hand, it is, of course, sovereign Georgia’s business," Ivanov told the Interfax news agency. "On the other, [should we really] sit and wait and see how tensions mount there and how this region is turning into a mini Chechnya, or mini Afghanistan?"
The prospect of Russian intervention clearly does not appeal to Georgian officials. Shevardnadze on February 18 described the idea of a Russian operation in the Pankisi area as "unacceptable."
At the same time, Shevardnadze announced that Tbilisi was considering a joint security operation with the United States. "As for the possibility of a future joint action with the U[nited] S[tates] special forces in the Pankisi Gorge, we haven’t yet had systematic discussions on that," Shevardnadze confessed. "But, if it becomes necessary, we have been and remain ready for dialogue."
In his announcement about the presence of Islamic radicals in Georgia, Remler indicated that Washington was willing to enhance security cooperation with Georgia. The timing of his comments, some analysts believe, may have been designed to forestall a Russian military move in Georgia.
Most regional analysts and policy makers have known that the Pankisi Gorge has served as a haven for Chechen separatists and other Islamic radicals since the first Chechen war (1994-1996). The Chechen fighters and terrorists connected with Afghanistan are allied with the radical Chechen field commanders Shamil Basaev, Ruslan Gelaev and Khattab.
The Kremlin has complained for years that the Shevardnadze government has covered up the Pankisi situation. According to a March 2001 report by the popular Georgian TV channel Rustavi-2, Pankisi has become a supply base to which the Georgian Ministry of State Security has transported Turkish aid to the Chechen separatists. According to the Georgian Minister of State Security Valery Khaburdania, the radical pan-Turkist Grey Wolves were the conduit of assistance to the Chechens.
In the past, Moscow’s complaints about the flow of aid to Chechens via the Pankisi did not draw any reaction from Washington. Senior officials in the US Department of State now say they are facing a dilemma on Pankisi. On the one hand, securing independence and territorial integrity of Georgia is at the top of the US agenda for the Caucasus. On the other hand, improving relations with Russia, especially concerning the conduct of anti-terrorism operations, has become a strategic priority.
According to the Georgian official, Azeri security officials tipped off Georgian authorities about the terrorist penetration. Georgian security officials announced February 9 that two foreigners with apparent ties to Khattab had been arrested.
The Trump Administration used the Defense Production Act as the basis for an executive order issued March 20, 2025 to sharply increase U.S. critical minerals production. Government agencies were given their marching orders, including directives to:
This executive order came on the heels of the creation of the National Energy Dominance Council, chaired by Secretary of the Interior Doug Bergum, in mid-February. The Trump team appears to be in a big hurry. The pressure is on. There are good reasons for this, and the key driver may be China.
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Today, disparate Trump policies —more muscular American diplomacy, less soft power, higher tariffs, and the quest for cheap energy — are being tested together in Venezuela. The pro-Russia, pro-China, and pro-Iran far left Maduro regime in Caracas has long been a thorn in the side of the United States in the often-neglected Latin American theater.
The first Trump Administration focused heavily on applying pressure to the country to minimize its benefits from oil exports in the U.S. American economy. Now, early in President Trump’s second term, he is reviving efforts to weaken the Chavista dictatorship by imposing secondary tariffs of 25% on all imports from countries that buy Venezuelan oil, starting on April 2nd. Additionally, on March 29th, the U.S. informed foreign partners of Venezuela’s state-owned oil company, Petroleos de Venezuela (PVDSA), that it plans to revoke authorizations issued by the Biden Administration for them to export Venezuelan oil and byproducts, putting further pressure on Venezuela’s ability to export.
While such measures will have certainly gotten Venezuelan President Nicolás Maduro’s attention, targeting that country’s most profitable industry may be insufficient to implement the president’s agenda.
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The Trump Administration is skeptical about green energy, to put it mildly. The remarks of U.S. Energy Secretary Chris Wright at CERAWeek 2025, the most influential energy conference in the U.S., summarized one of the key reasons, "Beyond the obvious scale and cost problems, there is simply no physical way that wind, solar, and batteries could replace the myriad uses of natural gas." While this statement highlights one of the limits to scaling renewables, there are still several reasons for U.S. industry to make a concerted effort to remain at the forefront of battery storage. Although currently unable to support a wholesale energy transition, battery storage can help reduce electricity costs, compete with rivals technologically, and ensure that Chinese interests are excluded when batteries are powering critical infrastructure and industries.
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Over three years after Russia invaded Ukraine, some European countries were still reliant on Russian gas. While the war in Ukraine compelled most of the European Union to diversify its energy imports and avoid buying gas from Moscow, certain countries, whether motivated by domestic politics or geography, such as Slovakia, Austria, and Hungary, continued buying. In January 2025, Ukraine stopped allowing the transit of Russian gas to the EU via the Urengoy–Pomary–Uzhgorod pipeline (also known as the Brotherhood pipeline) after its contract expired. This has pushed Europe to continue decoupling from Gazprom.
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The U.S. Supreme Court heard oral arguments earlier this month regarding the legality of the Nuclear Regulatory Commission’s intent to license a high-level nuclear waste storage site in West Texas. This is a case with potentially seismic consequences. The suit, initiated by the state of Texas and Fasken Oil, a local company, alleges that the NRC is overstepping its authority by licensing the new facility. The storage of nuclear waste has been a controversial topic in the United States for decades. This court case may decide the future of America’s civilian nuclear program and its green ambitions.
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