[Senate Hearing 105-683]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 105-683


 
        IMPLEMENTATION OF U.S. POLICY ON CASPIAN SEA OIL EXPORTS

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
                   POLICY, EXPORT AND TRADE PROMOTION

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                              JULY 8, 1998

                               __________

       Printed for the use of the Committee on Foreign Relations

                               


 Available via the World Wide Web: http://www.access.gpo.gov/congress/senate


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                     COMMITTEE ON FOREIGN RELATIONS

                 JESSE HELMS, North Carolina, Chairman
RICHARD G. LUGAR, Indiana            JOSEPH R. BIDEN, Jr., Delaware
PAUL COVERDELL, Georgia              PAUL S. SARBANES, Maryland
CHUCK HAGEL, Nebraska                CHRISTOPHER J. DODD, Connecticut
GORDON H. SMITH, Oregon              JOHN F. KERRY, Massachusetts
CRAIG THOMAS, Wyoming                CHARLES S. ROBB, Virginia
ROD GRAMS, Minnesota                 RUSSELL D. FEINGOLD, Wisconsin
JOHN ASHCROFT, Missouri              DIANNE FEINSTEIN, California
BILL FRIST, Tennessee                PAUL D. WELLSTONE, Minnesota
SAM BROWNBACK, Kansas
                     James W. Nance, Staff Director
                 Edwin K. Hall, Minority Staff Director

                                 ------                                

             SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY,
                       EXPORT AND TRADE PROMOTION

                    CHUCK HAGEL, Nebraska, Chairman
CRAIG THOMAS, Wyoming                PAUL S. SARBANES, Maryland
BILL FRIST, Tennessee                JOSEPH R. BIDEN, Jr., Delaware
PAUL COVERDELL, Georgia              PAUL D. WELLSTONE, Minnesota

                                  (ii)



                            C O N T E N T S

                              ----------                              
                                                                   Page

Brzezinski, Hon. Zbigniew, Counselor, Center for Strategic and 
  International Studies, Washington, DC..........................    27
Grossman, Hon. Marc, Assistant Secretary of State for European 
  and Canadian Affairs...........................................     2
Krikorian, Van, Chairman, Board of Directors, Armenian Assembly 
  of America, New York, N.Y......................................    49
Olcott, Martha Brill, Senior Associate, Carnegie Endowment for 
  International Peace, Washington, DC............................    35
Sestanovich, Hon. Stephen R., Special Advisor to the Secretary of 
  State for the New Independent States...........................     7

                                Appendix

Letter from Richard L. Armitage, President, Armitage Associates 
  L.C., Arlington, VA, letter to Chairman Chuck Hagel............    65
Letter from John J. Maresca, U.S. Ambassador (retired) to 
  Chairman Chuck Hagel...........................................    66
Responses of Ambassador-at-Large Stephen Sestanovich to Questions 
  Asked by Senator Sarbanes......................................    67
``Trade and Investment - A Key to Our Global Community,'' remarks 
  by Chairman Chuck Hagel at the Crossroads of the World 
  Conference, Istanbul, Turkey, May 27, 1998.....................    69
Map of Existing and Potential Oil and Gas Export Routes from the 
  Caspian Basin..................................................    71

                                 (iii)



        IMPLEMENTATION OF U.S. POLICY ON CASPIAN SEA OIL EXPORTS

                              ----------                              


                        WEDNESDAY, JULY 8, 1998

                           U.S. Senate,    
     Subcommittee on International Economic
                Policy, Export and Trade Promotion,
                     of the Committee on Foreign Relations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:06 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Chuck Hagel, 
[chairman of the subcommittee] presiding.
    Present: Senators Hagel and Sarbanes.
    Senator Hagel. Good morning. This is the subcommittee's 
third hearing on the Caspian Sea region. Our first hearing last 
year dealt with general economic and political developments in 
this region. Our second hearing, last February, focused on our 
new policy supporting a western main export pipeline. The 
hearing today will look at the implementation of that policy.
    There is little time left before the October 1998 deadline 
for deciding the route for the main export pipeline. I support 
the U.S. policy in this region. I support the administration's 
position. I support the construction of a main export pipeline 
through Azerbaijan, Georgia, Turkey to the Mediterranean. But a 
policy is not enough without a clear, forceful plan for 
carrying it out.
    The development of the western pipeline project will 
support the sovereignty, independence, and cooperation among 
these emerging free market nations. These nations need to 
understand that they have a common future. They need to get 
beyond the past and look to the future. They need to understand 
that through the free market system a gain for one nation does 
not mean a loss for another. They can all benefit.
    A month ago I returned from a trip to the Caspian Sea 
region. In Istanbul, Turkey, I delivered a keynote address at 
the Crossroads of the World Trade and Investment Conference 
hosted by our government's Trade and Development Agency. I was 
in the region for 9 days and visited 5 countries--Turkey, 
Georgia, Armenia, Azerbaijan, and Turkmenistan.
    I came away from the trip hopeful, but concerned. There are 
tremendous opportunities for all of the nations of this region. 
However, the nations of this region and the region's leaders 
need to display the vision and bold leadership necessary for 
their people to enjoy the unlimited future of economic 
opportunity and national independence that will be available to 
all of these nations and to all peoples in this region if they 
understand and address their mutual interests.
    Strong visionary American leadership is also required. 
America is the one country that can help bring these nations 
together. As a distant power, the United States has no imperial 
designs on this region. Our own national interests coincide 
with the national interests of the countries of this region: 
respect for national sovereignty, independence, and economic 
growth.
    Decisions made this year will set the geopolitical and 
economic course of this region for the next century. The United 
States must help these nations realize that potential. If we do 
not, others will surely fill the leadership void.
    Now I would like to welcome our distinguished witnesses 
this morning. We will hear from a variety of viewpoints. We 
will first be hearing from Ambassador Marc Grossman, Assistant 
Secretary of State for European Affairs, which encompasses the 
Caspian Sea region.
    Also on the first panel is Ambassador Stephen Sestanovich, 
Special Advisor to the Secretary of State for the New 
Independent States, the former Soviet republics. Ambassador 
Sestanovich visited the region the week after I was there.
    On the second panel is one of our Nation's most respected 
strategic and foreign policy thinkers, Dr. Zbigniew Brzezinski. 
Dr. Brzezinski also visited the region during my recent trip to 
this area.
    Our final panel will be made up of the respected scholar, 
Dr. Martha Brill Olcott, who has testified before on this 
region, and Mr. Van Krikorian, Chairman of the Armenian 
Assembly. We look forward to your views as well.
    The Ranking Minority Member, my distinguished colleague 
Senator Sarbanes, will be here shortly and he has indicated 
that we should proceed. So with that, we will proceed. Again, I 
welcome our witnesses and am most appreciative of your time 
this morning. So with that, may I ask Secretary Grossman to 
begin.

 STATEMENT OF HON. MARC GROSSMAN, ASSISTANT SECRETARY OF STATE 
               FOR EUROPEAN AND CANADIAN AFFAIRS

    Mr. Grossman.  Senator, thank you very much, and thank you 
for that introduction.
    Ambassador Sestanovich and I this morning will make 
statements to you that I hope will further your efforts in this 
regard, because I think the relationship between the Congress 
and the administration in this area is going to be crucial to 
the kind of success that you seek and we seek as well. So I 
very much appreciate the opportunity to appear before you today 
to talk about America's interests in Caspian Basin energy.
    Senator, you referred to your trip to the region and your 
statement at the Istanbul conference on May the 27th. One of 
the things that I took from that statement was your sentence 
that said that Caspian energy had fired the imagination of the 
entire world. I think that is absolutely right. Your visit to 
the region helped people focus on the importance of developing 
a western route for Caspian gas and oil.
    As I said, establishing the right dialog with the Congress 
I think is going to be vital to our future success. Secretary 
Pena, Under Secretary of State Eizenstadt, Strobe Talbott and 
others have led such a dialog from our side, and your hearings 
and our consultations from time to time I believe have made a 
major contribution to our policy. As part of our dialog with 
the Congress, it is clear that we also support the passage of 
the Silk Road Strategy Act and the repeal of section 907 of the 
Freedom Support Act.
    Senator, if you would allow me, I would like to just step 
back for a moment and review why these Caspian energy issues 
are important to the United States. Bringing Caspian energy on 
line could be one of, as you say, the most significant 
developments of this decade. Done correctly--and that is what 
we hope we are trying to do--bringing Caspian energy to world 
markets can contribute to diversifying energy markets, which 
would obviously benefit our European allies and, as you say, 
benefit Turkey, provide major commercial opportunities for 
American companies, and help develop the emerging market 
economies of both the supplying and the transit states.
    As you just said in your introduction, this is not a zero 
sum proposition. Everybody can win if we do this right. That is 
why in early 1995 we announced a policy to support multiple 
pipelines to bring Caspian energy resources to world markets. 
Our objectives then and our objectives now were: to diversify 
world energy supplies, increasing energy security for the 
United States and for our European allies; to eliminate 
traditional energy monopolies on which many of the countries in 
the region were dependent; avoid the emergence of choke points, 
such as the Bosporus, as the Caspian Sea is developed; and, 
very importantly, to advance opportunities for American 
business and to provide support for the new nations of central 
Asia and the Caucasus, as well as Turkey.
    Deputy Secretary Talbott described our approach to the 
region on the 21st of July last year in a speech over at Johns 
Hopkins as ``cooperative and inclusive,'' one that tries to 
break down barriers and foster regional cooperation.
    We pursue this east-west energy corridor because it serves 
the interests of the regional states and our policy objectives. 
Ambassador Sestanovich will talk about the ties the United 
States is establishing with the emerging states of the Caucasus 
and Central Asia. Let me say at this point that the key to our 
success will be our work with Europe and with Turkey.
    We think that development of Caspian Energy supplies will 
support stable European energy markets and enhance the security 
and the prosperity of Europe, which is a goal obviously in the 
interest of the United States. I think this is especially true 
for Turkey, which represents a natural transit route and where 
a growing economy is creating energy shortages and demand for 
natural gas growing at 14 percent a year.
    Mr. Chairman, I can report that we have made progress 
toward achieving our goals and advancing U.S. interests. 
Secretary Pena's announcement in Istanbul at the same 
conference at which you spoke of a new Caspian Sea initiative 
which will bring together the heads of EXIM, OPIC, and TDA to 
coordinate development and support of projects in the Caspian 
Basin is, we believe, a step forward in realizing our goals. As 
a result of our diplomacy, which Secretary Pena and others have 
led through their engagement, states in the region have begun 
to leave distrust and competition behind, at least on this 
issue, and cooperate more closely. I would say this has been 
especially true in the last 3 months.
    I would also say that Turkey, with much to gain from our 
mutual success, has taken a lead here. Let me give you some 
examples. Turkey successfully solicited Kazakhstan's and 
Azerbaijan's cooperation in committing to transport oil through 
an east-west pipeline and is continuing to work in that 
direction. Turkey organized a conference of foreign ministers 
of the key regional states in March, a very important outcome 
of which was that they endorsed our pipeline strategy.
    Turkey's cooperation is important if we are to accomplish 
our objectives, and that is why President Clinton identified 
energy cooperation as a key element of our bilateral relations 
with Turkey when Prime Minister Yilmaz visited the United 
States last December. Since last December we have conducted 
regular high level meetings to move our agenda forward.
    Our purpose in all of this is to encourage Turkey to 
facilitate the construction of a Baku-Ceyhan pipeline as a 
commercially attractive alternative for transporting Caspian 
oil. Turkey is nearing completion of a feasibility study on 
Baku-Ceyhan that will provide a catalyst for American and other 
investors to initiate Caspian investments.
    This Eurasian transport corridor, including oil and gas 
pipelines across the Caspian to Baku and then the Caucasus to 
Ceyhan, would help us achieve our objectives. It would 
establish Turkey as an important economic bridge between 
Central Asia, the Caucasus, and world markets, improve Turkish 
and European energy security, generate revenue further to 
develop Turkey's energy infrastructure, provide a commercially 
attractive alternative to transport through Iran, and help 
relieve traffic congestion through the Turkish straits.
    We have also worked closely with our allies on our pipeline 
strategy. I think a very important development took place on 
the 18th of May, when at the U.S.-EU summit in London we issued 
a joint statement that highlights the importance of multiple 
pipelines for the secure delivery of Caspian Basin gas and oil 
to world markets. The European Union is supporting two 
assistance projects on its own to help overcome obstacles to 
the construction of transport systems, with the goal of 
facilitating the flow of natural resources westward toward 
Europe. We are working with our European allies on how we can 
best complement each other's efforts to promote pipeline 
projects. Caspian energy will be a major topic at the July 15 
U.S.-EU Senior Level Group meeting at which both Under 
Secretaries Eizenstadt and Pickering will participate in 
Vienna, and in my own consultations with the EU troika now that 
the Austrians are in the presidency of the European Union on 
July the 17th.
    There are some real challenges. We want the regional 
states, as you do, to work more closely with one another. There 
are significant disincentives to doing business in the area. 
There are competing visions on what pipeline routes are right.
    But we will stay engaged and we will work with our European 
allies and we will work with the Turkish government to 
strengthen its leadership and, with Turkey and the countries of 
the Caucasus and Central Asia, pursue east-west energy 
transport routes, to reform internal economic and energy 
policies, and to finish with, shake off, unnecessary regulatory 
and bureaucratic burdens. We think that these reforms will 
facilitate private sector investment to reap the economic 
benefits of the region's oil and gas resources.
    One other point, if I could. That is we will also continue 
our active efforts to dissuade countries from considering Iran 
as an acceptable route for transporting their energy reserves. 
As Secretary Albright said on May 18, we remain ``strongly 
opposed to oil and gas pipelines which transit Iran and as a 
policy matter we will continue to encourage alternative routes 
for the transport of Caspian energy resources.'' In her Asia 
Society speech in the middle of June, she reiterated that ``our 
economic policies, including with respect to export pipelines 
for Caspian oil and gas, remain unchanged.''
    Iran is not only risky as a route for energy; it also keeps 
control of the region's energy reserves in fewer hands, and we 
do not believe that that is in anyone's interest.
    As the Secretary also said, we will examine carefully, 
under the Iran-Libya Sanctions Act and other relevant 
authorities, any new proposals for the construction of 
pipelines and take action appropriate to the circumstances.
    Our goal, Senator, is to advance America's interests in the 
region, promote development, increase trade, strengthen market 
economies, and avoid conflict. We have the determination, we 
have a plan for engagement, and we hope we have the imagination 
to make a good policy succeed.
    After Ambassador Sestanovich's statements, I certainly look 
forward to your questions, to your comments, and very much also 
to your suggestions. Thank you.
    [The prepared statement of Mr. Grossman follows:]
                Prepared Statement of Hon. Marc Grossman
    Mr. Chairman.
    Thank you for the chance to appear before you today to talk about 
America's interests in Caspian basin energy.
    Senator Hagel, as you said in your speech in Istanbul on May 27, 
Caspian energy has fired the imagination of the entire world. Your 
visit to the region helped people focus on the importance of developing 
a western route for Caspian gas and oil.
    Establishing the right dialogue with Congress is vital to 
developing a successful policy. Secretary Pena and Under Secretary of 
State Eizenstat have led such a dialogue from our side, and your 
hearings and our consultations have made major contributions to our 
policy. As part of our dialogue with Congress, it is clear that we 
support passage of the Silk Road Strategy Act and the repeal of Section 
907 of the Freedom Support Act.
    Let me step back for a moment and review why Caspian energy issues 
are important to the U.S. national interest.
    Bringing Caspian energy ``on line'' could be one of the most 
significant developments of this decade. Done correctly, bringing 
Caspian energy to world markets can simultaneously contribute to 
diversifying energy markets (which benefits our European allies 
including Turkey), provide major commercial opportunities for American 
companies, and help develop the emerging market economies of the 
supplying and transit states.
    This is not a zero sum proposition.
    That is why, in early 1995, we announced a policy to support 
multiple pipelines to bring Caspian energy resources to world markets.
    Our objectives were then, and remain, to:

   diversify world energy supplies, increasing energy security 
        for us and our European allies;
   eliminate traditional energy monopolies on which many of the 
        countries in the region were dependent;
   avoid the emergence of choke points such as the Bosporus as 
        the Caspian is developed;
   advance opportunities for American business; and
   provide support for the new nations of Central Asia and the 
        Caucasus, as well as our NATO ally Turkey.

    Deputy Secretary Talbott described our approach to the region on 
July 21 last year in a speech at SAIS as ``cooperative and inclusive,'' 
one that tries to break down barriers and foster regional cooperation.
    We pursue an East-West energy corridor because it serves the 
interests of the regional states and advances our policy objectives. 
Ambassador Sestanovich will talk about the ties the U.S. is 
establishing with the emerging states of the Caucasus and Central Asia. 
Let me say at this point that the key to our success is our work with 
Europe and Turkey.
    Development of Caspian energy supplies will support stable European 
energy markets and enhance the security and prosperity of Europe, a 
goal very much in U.S. interests.
    This is especially true for Turkey, which represents a natural 
transit route and where a growing economy is creating energy shortages 
and demand for natural gas growing at 14% per year.
    Mr. Chairman, I can report that we have made progress toward 
achieving our goals and advancing U.S. interests.
    Secretary Pena's announcement in Istanbul on May 27 of a new 
Caspian Sea initiative, which brings together the heads of EXIM, OPIC, 
and TDA to coordinate development and support of concrete projects in 
the Caspian Basin, is a step forward in realizing our goals in this 
region. And, as a result of our diplomacy, which Secretary Pena and 
others have led through their engagement, states in the region have 
begun to leave mutual distrust and competition behind on this issue and 
to cooperate more closely. This has been especially true in the last 
three months.
    Turkey, with much to gain from our mutual success, has taken a 
lead. Turkey successfully solicited Kazakhstan's and Azerbaijan's 
cooperation in committing to transport oil through an east-west 
pipeline, and is continuing to work in that direction. Turkey organized 
a conference of foreign ministers of the key regional states in March, 
which endorsed our pipeline strategy. We are working right now with 
Turkey to develop a joint approach to Turkmenistan and Azerbaijan to 
bring them into closer cooperation with our efforts.
    Turkey's cooperation is important if we are to accomplish our 
objectives. That is why President Clinton identified energy cooperation 
as a key element of our bilateral relations with Turkey when Prime 
Minister Yilmaz visited in December. And, since last December, we have 
conducted regular high-level meetings to move our agenda forward. We 
encourage Turkey to facilitate the construction of the Baku-Ceyhan 
pipeline as a commercially attractive alternative for transporting 
Caspian oil. Turkey is nearing completion of a feasibility study on 
Baku-Ceyhan that will provide a catalyst for American and other 
investors to initiate Caspian investments.
    The Eurasian transport corridor, including oil and gas pipelines 
across the Caspian to Baku and then the Caucasus to Ceyhan, would help 
us achieve our objectives.
    It would establish Turkey as an important economic bridge between 
Central Asia, the Caucasus, and world markets; improve Turkish and 
European energy security; generate revenue to develop Turkey's energy 
infrastructure, provide a commercially attractive alternative to 
transport through Iran; and help relieve traffic congestion in the 
Turkish straits.
    We have worked closely with our allies in Europe on our strategy.
    At the U.S.-EU Summit on May 18 in London, we issued a joint 
statement that highlights the importance of multiple pipelines for the 
secure delivery of Caspian Basin gas and oil to world markets. The EU 
is supporting two assistance programs to help overcome obstacles to the 
construction of transportation systems, with the goal of facilitating 
the flow of energy resources westward toward Europe. We are working 
with our European allies on how we can best complement each other's 
efforts to promote multiple pipelines. Caspian energy will be a topic 
at the July 15 U.S.-EU Senior Level Group meeting with Under 
Secretaries Pickering and Eizenstat, and in my own consultations with 
the EU troika on July 17.
    Real challenges remain. We want the regional states to work more 
closely with one another. There are significant disincentives to doing 
business in the area. There are competing visions on which routes are 
the most commercially viable.
    The United States will stay engaged. We will work with our European 
allies. We will work with the Turkish government to strengthen its 
regional leadership, and with Turkey and the countries of the Caucasus 
and Central Asia to pursue east-west energy transport routes, to reform 
internal economic and energy policies, and to shake off unnecessary 
regulatory and bureaucratic burdens. These reforms will facilitate 
private sector investment to reap the economic benefits of the region's 
oil and gas potential.
    We will also continue our active efforts to dissuade countries from 
considering Iran as an acceptable route for transporting their energy 
reserves. As Secretary Albright on May 18, we remain ``strongly opposed 
to oil and gas pipelines which transit Iran and as a policy matter, we 
will continue to encourage alternative routes for the transport of 
Caspian energy resources.'' In her Asia Society speech on June 17, she 
reiterated that ``your economic policies, including with respect to the 
export pipelines for Caspian oil and gas, remain unchanged.''
    Iran is not only risky as a route for energy; it also keeps control 
of the region's energy reserves in fewer hands. And that is in no one's 
interest.
    As the Secretary also said, we will examine carefully, under ILSA 
and other relevant authorities, any new proposals for the construction 
of such pipelines and take action appropriate to the circumstances.
    Our goal is to advance America's interests in the region--promoting 
development, increasing trade, strengthening market economies, and 
avoiding conflicts. We have the determination, engagement, and 
imagination to make a good policy succeed.
    I look forward to hearing your questions, comments and suggestions.

    Senator Hagel. Mr. Secretary, thank you. Mr. Ambassador.

 STATEMENT OF HON. STEPHEN R. SESTANOVICH, SPECIAL ADVISOR TO 
     THE SECRETARY OF STATE FOR THE NEW INDEPENDENT STATES

    Mr. Sestanovich. Senator, I want to thank you also for the 
opportunity to review our policy toward the Caspian Basin. As 
you noted, you and I and other witnesses were in the region 
last week, so this is a particularly opportune moment to look 
at where we stand. I might note that your visit reflects 
increased Congressional attention to this region, which is 
certainly an important ingredient of a successful policy.
    I am sure you have heard it said, as I have, that American 
interest in the Caspian is exclusively about energy. It is not. 
If there were no oil or gas there at all, the United States 
would still have important interests in the region. They are: 
to advance the sovereignty, prosperity, and democratic 
development of the countries; to promote regional cooperation 
among them; and to support their integration into international 
institutions and the international economy.
    These are ambitious goals. They reflect the enormity of the 
transformation that began with the breakup of the Soviet Union 
in 1991.
    To serve these goals, the United States is expanding its 
relations with all the states of the Caspian Basin. Thanks to 
the active support of the Congress, we are carrying out aid 
programs worth $372 million in fiscal year 1998. We promote 
democracy, respect for fundamental human rights, the rule of 
law, and open and sound investment and trading regimes. We are 
helping these countries create the legal infrastructures of 
market economies, prepare themselves for accession to WTO. We 
work on issues ranging from nonproliferation to resolving U.S. 
investor problems, from Caspian seabed delimitation to 
counternarcotics, women's issues, environmental protection.
    Regional cooperation and conflict resolution are important 
elements in our strategy toward the Caucasus. We are leaders in 
the group known as the UN's Friends of the Secretary General, 
which addresses the Abkhaz conflict in Georgia. The United 
States is also one of the three co- chairs of the OSCE Minsk 
Group, which is charged with resolving the Nagorno-Karabakh 
conflict. Our efforts on Nagorno-Karabakh and our Caspian 
diplomacy as a whole would be better off without section 907 of 
the Freedom Support Act and I want to take this opportunity, 
Mr. Chairman, to urge its repeal.
    The U.S. is expanding its security cooperation with the 
states of the Caucasus and Central Asia. As members of the 
Partnership for Peace, some of them participated in numerous 
PFP exercises. The countries that formed CENTRASBAT are gaining 
the ability to police peace settlements in this region and 
beyond.
    We have initiated security dialogs with the Caucasus 
states, will soon have similar dialogs with Turkmenistan and 
Kyrgyzstan, and have made security and nonproliferation key 
agenda items of our binational commissions with Uzbekistan and 
Kazakhstan. We are providing assistance, equipment, and 
training to Georgia that will help it to take control of its 
borders as Russian units depart.
    Mr. Chairman, our interest in the Caspian is not defined 
simply by the region's energy resources, but no one doubts 
their significance. Energy could become a source of conflict, a 
lever of control, or an obstacle to progress. Or for the states 
of this region it could become a ticket to prosperity and 
peace, a secure link to the outside world.
    Our multiple pipeline strategy aims to promote these 
positive results. We believe that a commercially viable east- 
west corridor ought to consist of a Baku-Ceyhan oil pipeline, a 
parallel gas pipeline to Turkish markets and beyond, and trans-
Caspian gas and oil pipelines. Support for multiple pipeline 
routes, including the Caspian Pipeline Consortium route through 
Georgia, is as important as any other aspect of our policy for 
securing the economic sovereignty and independence of the 
Caspian Basin states.
    As Ambassador Grossman has said, we have made some real 
progress. Each month this spring has brought significant steps 
forward. In March, as Marc noted, regional foreign ministers 
met in Istanbul to coordinate energy transport policies. In 
April in Washington Turkmen President Niyazov signed a grant 
agreement with the Trade and Development Agency to fund a 
feasibility study for a trans-Caspian gas pipeline. In May 
Secretary Pena and the heads of the three U.S. trade finance 
agencies announced an unprecedented new Caspian Sea initiative 
to facilitate financing of east-west routes.
    In June the Azerbaijan International Operating Company 
began negotiations with potential transit states for the main 
export pipeline, and the CPC obtained land allocation permits 
from Novorossiysk and Krasnodar. This week Russia and 
Kazakhstan signed an agreement dividing the north Caspian 
seabed into national sectors. These are all important steps 
forward.
    Our multiple pipeline strategy is a long-term policy 
initiative. Ultimately, the number and the routes of these 
pipelines will be based on the attractiveness of the markets, 
on the size of supply, commercial viability, and strategic 
calculations. Three pipelines are currently in development: one 
for early oil out of Baku north through Russia, a second for 
early oil west from Baku through Georgia, and the CPC line from 
Kazakhstan through Russia.
    The big question now is what major pipeline comes next. We 
strongly believe that the right answer is to build pipelines 
along an east-west corridor.
    Mr. Chairman, I would like to comment on one issue of 
particular importance to our Caspian Sea policy. As you know, 
Secretary Albright in May issued a national interest waiver 
under the Iran-Libya Sanctions Act in connection with 
investment in South Pars by TOTAL, Gazprom, and Petronas. This 
decision did not and does not change our Caspian energy policy. 
We continue to oppose trans-Iran pipelines for Caspian energy 
exports in the strongest terms. We will carefully examine new 
pipeline construction proposals under ILSA and other relevant 
authorities and take appropriate action.
    Secretary Albright was clear about this in her Asia Society 
speech on June 17th when she said: ``Our economic policies, 
including with respect to export pipelines for Caspian oil and 
gas, remain unchanged.'' Ambassador Grossman quoted this 
statement. We cannot quote it enough.
    In the coming months we will pay particular attention to 
three areas of regional energy cooperation. First, we and the 
Georgians have pursued the idea of an intergovernmental 
framework agreement to strengthen the legal basis for an east- 
west energy transport corridor and reduce investment risks.
    Second, we are trying to facilitate an agreement between 
Azerbaijan and Turkmenistan that would ease the way for trans- 
Caspian pipeline development.
    Third, we are encouraging Russian companies to work 
cooperatively with other investors, particularly in the Caspian 
Pipeline Consortium project. Russia's role will be crucial to 
the development of Caspian resources and transportation routes.
    Mr. Chairman, as you have said, the challenges of Caspian 
energy development, political, economic, commercial, and 
technical, are great. So are the payoffs. We have in place an 
integrated strategy that takes account of the American interest 
at stake. With the support of the Congress, we feel we can 
succeed.
    Thank you. I look forward to the discussion on these issues 
with you.
    [The prepared statement of Mr. Sestanovich follows:]
             Prepared Statement of Hon. Stephen Sestanovich
    Thank you, Senator Hagel, for the opportunity to review our policy 
toward the Caspian Basin. As you know, I was in Tbilisi, Yerevan, Baku 
and Ashgabat last month, so this is a particularly opportune time for 
me to meet with you and your colleagues.
    I'm sure you have heard it said that American interest in the 
Caspian is exclusively about energy. It's not. If there were no oil or 
gas there, the United States would still have important interests in 
the region. They are to:

   advance the sovereignty, prosperity and democratic 
        development of these countries;
   promote regional cooperation among them; and
   support their integration into international institutions 
        and the international economy.

    These ambitious goals reflect the enormity of the transformation 
that began with the break-up of the Soviet Union in 1991 and that, in 
this region, involves the emergence of new institutions in every realm 
of life.
    To serve these goals, the United States is expanding its relations 
with all the states of the Caspian Basin. Thanks to the active support 
of the Congress, we are carrying out aid programs worth $372 million in 
Fiscal Year 98. We promote democracy, respect for fundamental human 
rights, the rule of law, and open and sound investment and trading 
regimes. We are helping these countries create the legal infrastructure 
of market economies and prepare themselves for accession to the World 
Trade organization. We work on issues ranging from non-proliferation to 
resolving U.S. investor problems, from Caspian seabed delimitation to 
counternarcotics, women's. issues and environmental protection.
    Regional cooperation and conflict resolution are important, indeed 
vital elements in our strategy toward the Caucasus. We are leaders in 
the group known as the UN's Friends of the Secretary General, which 
addresses the Abkhaz conflict. The United States is also one of three 
co-chairs of the OSCE Minsk Group, charged with resolving the Nagorno-
Karabakh conflict. The co-chairs visited the region in May and are 
planning another trip later this month. Our efforts on Nagorno-
Karabakh, and our Caspian diplomacy as a whole would be better off 
without section 907 of the Freedom Support Act, and I want to take this 
opportunity, Mr. Chairman, to urge its repeal.
    The U.S. is expanding its security cooperation with the states of 
the Caucasus and Central Asia. As members of the Partnership for Peace, 
some of them have participated in numerous PfP exercises. The countries 
that formed the Central. Asia Peacekeeping Battalion (CENTRASBAT) are 
gaining the ability to police peace settlements in this region and 
beyond. We have initiated security dialogues with the Caucasus states, 
will soon have similar dialogues with Turkmenistan and Kyrgyzstan, and 
have made security and non-proliferation key agenda items of our bi-
natiorial commissions with Uzbekistan and Kazakhstan. We are providing 
assistance, equipment, and training to Georgia that will help it to 
take over control of its borders as Russian units depart. President 
Shevardnadze has contributed enormously to the stability of this region 
and to the progress of Georgia, and we will continue to support what he 
is trying to do.
    Mr. Chairman, our interest in the Caspian is not defined simply by 
the region's energy resources, but no one doubts their significance. 
Energy could become a source of conflict, a lever of control or an 
obstacle to progress. Or it could become a ticket to prosperity and 
peace, a secure link to the outside world.
    Our multiple-pipelines strategy aims to promote these positive 
results. We believe that a commercially viable east-west corridor ought 
to consist of a Baku-Ceyhan oil pipeline; a parallel gas pipeline to 
Turkish markets and beyond; and trans-Caspian gas and oil pipelines. 
Support for multiple pipeline routes, including the Caspian Pipeline 
Consortium route through Russia, is as important as any other aspect of 
our strategy for securing the economic sovereignty and independence of 
the Caspiari Basin states.
    We have made real progress. Each month this spring has brought 
significant steps forward.

   In March, regional foreign ministers met in Istanbul to 
        coordinate energy transport policies.
   In April in Washington Turkmen President Niyazov signed a 
        grant agreement with the Trade and Development Agency (TDA) to 
        fund a feasibility study for a trans-Caspian gas pipeline.
   In May Secretary Pena and the heads of the three U.S. trade 
        finance agencies announced an unprecedented new Caspian Sea 
        Initiative to facilitate financing of east-west routes.
   In June the Azerbaijan International Operating Company. 
        (AIOC) began negotiations with potential transit states for the 
        main export pipeline, and the Caspian Pipeline Consortium (CPC) 
        obtained land allocation permits from Novorossiysk and 
        Krasnodar.
   And this week Russia and Kazakhstan signed an agreement 
        dividing the north Caspian seabed into national sectors.

    Our multiple pipeline strategy is a long-term policy initiative. 
Ultimately, the number and routing of these pipelines will be based on 
the attractiveness of markets, size of supply, commercial viability and 
strategic calculations. Three pipelines are currently in development. 
early oil out of Baku north through Russia, early oil west from Baku 
through Georgia, and the CPC line from Kazakhstan through Russia. The 
big question now is what major pipeline route comes next. We strongly 
believe that the right answer is to build pipelines along an east-west 
corridor.
    Mr. Chairman, I'd like to comment on one issue of particular 
importance to our Caspian Basin policy. As you know, Secretary Albright 
in May issued a national interest waiver under the Iran and Libya 
Sanctions Act in connection with investment in South Pars by TOTAL, 
Gazprom, and Petronas. This decision did not and does not change our 
Caspian energy policy. We continue to oppose trans-Iran pipelines for 
Caspian energy exports in the strongest terms. We will carefully 
examine new pipeline construction proposals under ILSA and other 
relevant authorities and take appropriate action. Secretary Albright 
was clear about this in her Asia Society speech on June 17 when she 
said, ``Our economic policies, including with respect to export 
pipelines for Caspian oil and gas, remain unchanged.''
    In the coming months we will pay particular attention to three 
areas of regional energy cooperation.
    First, we and the Georgians have pursued the idea of an 
intergovernmental framework agreement to strengthen the legal basis for 
an east-west energy transport corridor and reduce investment risks.
    Second, we're trying to facilitate agreement between Azerbaijan and 
Turkmenistan that would ease the way for trans-Caspian pipeline 
development.
    Third, we're encouraging Russian companies to work cooperatively 
with other investors, particularly in the Caspian Pipeline Consortium 
(CPC) project. Russia's role will be crucial to the development of 
Caspian resources and transportation routes.
    Mr. Chairman, the challenges of Caspian energy development--
political, economic, commercial and technical--are great. We have in 
place an integrated strategy that takes account of.the American 
interests at stake. With the support of the Congress, we can succeed.
    Thank you.

    Senator Hagel. Mr. Ambassador, thank you. I again add my 
thanks to each of you for your efforts.
    Since it is just the three of us here, it will be a little 
cozier and I will jump around here a little bit on some 
questions.
    If I could begin with you, Mr. Secretary, and pull up a 
piece of your testimony when you referenced Secretary Pena's 
announcement in Istanbul, and I was there. That was good news, 
bringing the heads of EXIM, OPIC, and TDA together to 
coordinate development in this area in this policy. Take us 
through where we are with that. How does that work? Do we have 
a coordinator? Do they have an office? What happens? What are 
we doing?
    Mr. Grossman.  We have followed up on Secretary Pena's 
announcement, obviously, because it got the right kind of 
publicity, we think, certainly among the governments and in 
commercial areas. There is a Caspian finance working group 
which meets every week. We are taking in now the possibilities 
of American companies interested in using some of the facility.
    We have repeated to everybody one of the most important 
things about that statement, that there is no dollar limit on 
the amount of money that we would be prepared to use in terms 
of EXIM, OPIC, and TDA. We have used this certainly in our 
conversations with the Turks to encourage them to move forward 
on their ability to, as I said in here, facilitate this Baku- 
Ceyhan line.
    So we have stayed very focused on the fact that Secretary 
Pena's announcement gave us, anyway, at the working level a 
very big opportunity and we have tried to make the best of it.
    Mr. Sestanovich. Could I add one point to that, Senator?
    Senator Hagel. Yes.
    Mr. Sestanovich. U.S. companies have already registered 
with OPIC eight projects valued at $10 billion. So the response 
from the corporate sector to this initiative has been extremely 
positive, and I think they particularly, like regional 
governments, appreciate the fact that the U.S. Government is 
putting resources behind a policy that we have said is in our 
interest, that they feel is in their interest. Those resources 
will help the policy work.
    Senator Hagel. Now, is there a coordinator? I know we have 
talked about this before and I know, at least as of yesterday, 
there was not a final decision. But take us through that. The 
coordinator then will be appointed, it is my understanding, to 
coordinate this piece of strategy and the plan and the policy, 
as well as the complete policy; is the that way it is going to 
work?
    Mr. Sestanovich. Well, what we would at this stage, 
Senator, want to make sure happens is that the enhanced 
coordination among all the agencies that are involved in this 
effort, but not simply in the area of financing--there is an 
important diplomatic component to this. Ambassador Grossman 
spoke of the importance of regional cooperation among the 
Caspian Basin states to facilitate an east-west transportation 
corridor.
    That means, as I mentioned, for example, working with the 
Georgian government on their proposal for an intergovernmental 
framework agreement that will create a legal basis here. We 
want to look at enhanced coordination within our government and 
with regional governments across a variety of fronts, because 
it is not just financing that needs to be addressed in order to 
make this corridor a reality. There are many other elements.
    Senator Hagel. Will they be meeting monthly, weekly, for 
example, these three groups that are in at least the finance 
piece of this, OPIC, TDA, EXIM? What I am trying to get at is 
how does this work? This is an interesting concept, a good 
concept, positive, but who is running the train? Is anybody 
driving this?
    Mr. Sestanovich. I met with Jim Harman of EXIM last week to 
talk about this issue. They are enhancing the coordination 
among these three agencies, which have not always acted closely 
together. They are--I cannot tell you the frequency of it, but 
they now have a common project which will require just the kind 
of regular coordination you describe, but not just amongst 
themselves. I want to emphasize that. Coordination with the 
Departments that handle our policy toward the region is going 
to be essential.
    To be frank, from the State Department's point of view, we 
see the availability of resources here as a significant extra 
lever, making our policy--giving it an extra chance of success.
    Mr. Grossman.  If I could just add, I think our object is 
to take the point that you made in your initial statement, 
which is we need a clear, forceful plan here. This plan so far 
I think has been laid out for us anyway--the President is 
involved in it, the Vice President, the Vice President's 
office, the Secretary of State, the Secretary of Energy. I know 
that Steve and I agree on this. As both of your testimony 
talked about, as we now move closer and closer to getting 
pipelines built, getting contracts signed, American companies 
coming in and saying that they want projects, we want to make 
sure that we enhance our coordination all across the 
government, not just in the finance area, to support what you 
want, which is a clear, forceful plan.
    Senator Hagel. It appears to me that at this point we still 
have not really pulled it together. We do not have a 
coordinator. Is that right, yet?
    Mr. Grossman.  That is right.
    Mr. Sestanovich. We are definitely looking at that 
possibility as one way of enhancing coordination, and I think 
there is a recognition at sort of all levels of the government 
of the advantages that that would offer.
    Senator Hagel. Well, you all understand that these 
announcements are positive and good, but if we cannot implement 
them, if we cannot maximize the power and the focus and the 
effort and the talent, then we do not have much.
    Mr. Sestanovich. Can I add one thing here, Senator. I think 
we had very impressive coordination among the agencies on this 
issue. I have sometimes heard it said in conversations up here 
that it is a real drawback that you cannot go to one person 
that is in charge of this policy. But my response to that is 
that really high level policies and issues that involve very, 
very high priority of the United States generally involve the 
participation--you can tell that they are high priorities 
because they involve the participation of more than one agency.
    If you take our relations with NATO, look at the number of 
arms of the U.S. Government that are involved there, or with 
the EU. I think it is a sign of the priority that so many 
different agencies are involved. Now our task is to make sure 
that at this particular stage, with the new task that 
Ambassador Grossman has referred to, we keep that coordination 
at a high level.
    Senator Hagel. Well, it is like everything else. Somebody 
has to be accountable. Somebody has to be responsible. We can 
make announcements and go to meetings and tomorrow it is 
tomorrow.
    What I would like to do--and I know you do not have all the 
answers here and it is not your area of final responsibility, 
but I would like very much if you could provide for the record, 
give us some sense of a process here, what is in the planning 
stages. Could you tell us how we are going to utilize the 
Secretary of Energy's announcement bringing those together?
    To your point, Mr. Ambassador, it is bigger than just 
financing. We understand that. But how is this all going to 
come together and who is in charge after that decision is made? 
We will have more hearings and we will have an opportunity to 
bring up if a coordinator is selected. If a coordinator is not 
selected, then who is going to be in charge? Do we call you up, 
Mr. Ambassador, and you are the one that is going to answer the 
questions?
    So you see what the point is. Thank you.
    Georgia. You mentioned Georgia. Where are we with Georgia's 
problems with Abkhazia? Making progress? Problems? A stumbling 
block?
    Dr. Schneider: One important thing we have been able to do 
with the rapid action by the Foreign Relations Committee just 
last week, Senator, is to get a new Ambassador out to Georgia. 
We were very glad to be able to do that on a fast track, and 
thank you for it. It gave us an opportunity to make sure that 
our communication with the Georgian government was at a high 
level.
    When I was in Georgia last month, I talked about the Abkhaz 
problem with the foreign minister and with President 
Shevardnadze and continue our discussion. We have tried to show 
our support in a number of ways for the Georgian government as 
it deals with this conflict, by making available enhanced 
relief to help them deal with the refugee problem, by offering 
substantial support for their efforts to improve their control 
over their own borders. They are acquiring control this month 
from the Russians over their maritime boundary and will acquire 
control over the coming year over part of their land boundary 
with Turkey.
    We are also working closely with them on energy issues, 
which they consider to be a substantial factor of strengthening 
their own long-term stability. We have on the diplomatic front 
tried to re-energize the effort within what is known as the 
Geneva process under the so-called Friends of the Secretary 
General, to bring the parties together to find a settlement to 
this problem.
    We are rather active on a number of fronts to support the 
Georgian government.
    Senator Hagel. Explain to me what you mean when you refer 
to helping the Georgians control their own borders?
    Mr. Sestanovich. Well, Russian border troops have had 
responsibility for guarding the border. They have agreed with 
the Georgians to turn over that responsibility, as I mentioned, 
this month for the maritime border. To support that, we have 
made available patrol boats, just as one instance.
    Senator Hagel. I saw one boat when I was there.
    Mr. Sestanovich. There will be another soon.
    Senator Hagel. OK.
    Mr. Sestanovich. I used the plural prematurely, Senator.
    Senator Hagel. It is a very precise business, you know, Mr. 
Ambassador.
    Mr. Sestanovich. And they have asked for other equipment to 
help them make effective use of the boats.
    With respect to the land border, they have asked for 
equipment and training which are made available by a variety of 
cooperative programs that the Defense Department, Customs 
Service help them with. We have provided equipment as well. 
This is an important part of establishing sovereignty and we 
want to help the Georgians do it. It is a big task and a new 
one for them.
    Senator Hagel. How many Russian troops are still there?
    Mr. Sestanovich. In Georgia, I cannot give you the number 
right now. Let me get back to you on that. It is a few 
thousand.
    Senator Hagel. And they are drawing them down?
    Mr. Sestanovich. Let me add. There are several different 
categories. There are border troops, there are regular troops 
at, for example, an air base in the north, and then there is a 
contingent of peacekeeping forces under the CIS that has a 
regularly renewed mandate, stationed between the Georgian 
forces and Abkhaz forces.
    Senator Hagel. The Abkhazia issue itself, aside from the 
border guards and other factors, how is that to be resolved? 
Are the Abkhazians convinced that they should be an independent 
entity?
    Mr. Sestanovich. They are--I do not think they speak with a 
single voice on this. The issue to be addressed really is what 
kinds of political relations and economic relations are 
established between them and the central government at Tbilisi. 
It is a matter that is on the agenda, but in discussions 
between the Tbilisi government and the forces that are led by 
Mr. Ardzimba. It is on the agenda of the Geneva process.
    The way in which it can be resolved is by negotiation, we 
hope, and not by force.
    Senator Hagel. Have the Abkhazians given up any land since 
the cease-fire? When I was there--if you recall, you were right 
behind me.
    Mr. Sestanovich. Yes.
    Senator Hagel. I was there right at the beginning of that, 
and it was my understanding--I was very close to the border. It 
was my understanding that the Abkhazians were making some 
significant advances, and my question is again have they pulled 
back or are they still in place where they ended when the 
cease-fire began?
    Mr. Sestanovich. I need to check on that for you, Senator. 
The May 25th protocol established a cease-fire and there has 
been discussions since then of refugee movements. I do not know 
whether the lines have shifted since May 25th. Let me get you 
an answer.
    Senator Hagel. Thank you.
    Mr. Secretary, you obviously weigh in on these as you see 
fit.
    You mentioned Nagorno-Karabakh, which is a huge issue, as 
you know, and you both referenced that. I would be interested 
in each of your analysis on where we are. Are we making 
progress on Nagorno-Karabakh?
    Mr. Sestanovich. Not a lot of progress.
    Senator Hagel. Mr. Ambassador, would you pull that 
microphone a little closer? Thank you.
    Mr. Sestanovich. Yes. Sorry.
    We have, as you know, the OSCE Minsk Group, which is a 
group chaired by the U.S., France, and Russia, with 
representatives that periodically travel through the region in 
order to establish whether there is a basis for negotiation 
among the parties. We have had extremely good cooperation among 
the three, among the three parties, that is among the three co-
chairs.
    But recently there has been a reassessment of Armenia's 
position, which we are digesting, to be honest.
    Senator Hagel. Excuse me. Would you say that again? A 
reassessment of Armenia's?
    Mr. Sestanovich. A reassessment of their approach to the 
diplomatic formula that was worked out by the Minsk Group co- 
chairs last fall.
    Senator Hagel. Was this part of the result of the new 
president?
    Mr. Sestanovich. Well, they have a new president, who has 
done two things: said that he wants the Minsk Group process to 
continue. There had been some people who opposed the 
continuation of the process. He said and told me last month 
that he believes it needs to continue and, not only that, 
believes it can achieve results more rapidly than we had 
thought in the past. We will have to see whether that is true.
    One of the changes that Armenia has argued for in 
reassessing the diplomatic formula worked out by the Minsk 
Group co-chairs last year is to try to put more issues up 
front. They want to front-load an agreement so as to address 
the questions of the status of Nagorno-Karabakh. Azerbaijan has 
said it is prepared to look at such a comprehensive formula, 
but the issue really is going to be whether by front- loading 
we make it easier or harder to get agreement among the parties.
    I would have to say we have not made any progress yet in 
addressing that, but the co-chairs are very active and will 
have another trip through the region at the end of this month. 
I would be very glad to keep you apprised of the results of 
their trip, perhaps after their return.
    Senator Hagel. Mr. Secretary?
    Mr. Grossman.  I do not have anything to add.
    Senator Hagel. Is it not realistic to assume until we get 
some kind of resolution that it is unlikely that the oil 
companies are going to continue to invest in that part of the 
area, or not? Give me, if you would, each of you, your thoughts 
on this. You each have referenced this as a problem. It is a 
problem. We understand that.
    But when I was over there I met with a lot of the oil 
company representatives and I got a very uncertain tone on how 
much further they want to go, for a lot of reasons. Obviously, 
is there enough volume to carry a new pipeline and all the 
economic consequences and factors that have to be played into 
this. But also the stability issue.
    Mr. Sestanovich. Senator, I agree with you that the 
political stability of the region is important to the stability 
of any energy transportation arrangements that are made and has 
to be part of the calculation that companies make, that 
governments make. Moreover, that is not simply restricted to 
Nagorno-Karabakh. The Abkhaz conflict that we talked about is 
part of the overall assessment that one would make.
    I do not generally hear companies saying that they do not 
think an east-west transportation corridor can work without a 
resolution of the Nagorno-Karabakh problem. I think a 
resolution of the conflict would certainly enhance the 
prospects of the region as a whole. I think it would also 
enhance Armenia's ability to benefit from the development of 
the region as a whole, and that is an important consideration 
for Armenia as it weighs its policies.
    Obviously, it wants to benefit from and be part of the 
region's development, rather than isolating itself.
    Mr. Grossman.  If I could just add, just to return to the 
point that you made in your opening statement, that is why we 
see this, and I think you see it as well, as a win-win 
situation. This is not a zero sum game. There are a whole 
series of challenges that we have got to take care of.
    Both of us referred in our testimony to internal 
regulations, and you and I talked about this, in a country like 
Turkey. You have got relations between Turkey and its 
neighbors. We hope that in all of these areas that what we are 
doing by, as you say, having a clear, forceful plan, is we will 
change people's perceptions of what it is to be a success and 
move people forward in this regard.
    That is one of the reasons, as Steve said in his testimony, 
this is not just about energy. It is about our whole approach 
to the area.
    Senator Hagel. Thank you.
    We have been joined by our distinguished ranking minority 
member, Senator Sarbanes. Welcome.
    Senator Sarbanes. Well, thank you very much, Mr. Chairman.
    First before I direct some questions, I just want to make a 
short opening statement. First of all, I appreciate this 
opportunity to examine further the issue of U.S. policy in the 
Caucasus and Central Asia. This is the third such hearing and, 
while I consider this to be an important matter that deserves 
our close attention, I have some concern about what I perceive 
to be an excessive focus on the issue of oil and gas interests 
as the driving force behind this attention.
    This is not to suggest that we ignore the strategic 
importance of maintaining adequate supplies of energy at 
reasonable prices from diverse sources. But I have considerable 
concern whether pipeline politics should overshadow some of the 
larger issues and concerns that we have in any region of the 
world, whether it is Central Asia or the Middle East or 
elsewhere.
    It seems to me the United States has a fundamental interest 
in promoting basic American values and principles, such as 
respect for human rights, democracy, and the rule of law. If 
you are unwilling to subscribe to that as a basic fundamental 
concept, then I would just go on to suggest that the long-term 
goals of peace and stability, security and prosperity, which 
are essentially really to developing these strategic concerns 
on the energy resources, are often unobtainable or meaningless.
    If you are not convinced just on the basic principle, then 
as a pragmatic or practical argument I say to you that, unless 
you can develop a situation that gives you some stability and 
peace and the area, why, it may be a vain exercise.
    So I think it is important that as we develop a strategy to 
gain access to energy supplies from this or any other region we 
proceed from these values and principles as a starting point 
and not as an afterthought. Not only is that the only way we 
can be assured of protecting U.S. interests over the long term, 
it is the best way of ensuring peace, stability, and prosperity 
for the people of the region.
    Now I want to address some questions to our administration 
witnesses. First, and this is moving a little off the subject, 
it is my understanding that one of the most serious security 
concerns for the countries of Central Asia is the threat of 
Islamic fundamentalism. Do you all agree to that? Would you 
share that view, just generally speaking?
    Mr. Sestanovich. I think extremist political movements 
under an Islamic banner can be very destabilizing in the 
region, sure.
    Senator Sarbanes. Now, I am receiving reports that the 
concern in the area is not Islamic fundamentalism so much as 
promoted by Iran, which tends to get a lot of attention in this 
country, but as promoted by the Taliban in Afghanistan. I 
gather so that raises the concern that the U.S., through its 
military support of the mujahedin and of Pakistan has in some 
measure contributed to that threat.
    What has the U.S. done to make clear its abhorrence of the 
Taliban regime in Afghanistan and to ensure that no U.S. 
weapons are supplied to it by Saudi Arabia or Pakistan?
    Mr. Sestanovich. Senator, you catch Ambassador Grossman and 
myself with a question outside our spheres of responsibility, 
but let me answer it in this way. We have, the administration, 
Secretary Albright in particular, has spoken frequently about 
our concerns that policies of the Taliban violate basic human 
rights, just the way that you have said it creates a 
fundamental problem for American policy.
    We do not believe that our policies have supported the 
Taliban in any way. We do not do that. But you are absolutely 
right that the conflict in Afghanistan can be a source of 
instability elsewhere in the region. For that reason, we have 
promoted an effort to bring the parties together, and we have 
been particularly attentive to the issue of the spread of arms 
from the Taliban.
    There are some elements of that that I can get for you 
after the hearing and in particular in closed session.
    Senator Sarbanes. Did you want to add to that, Marc?
    Mr. Grossman.  Just simply in terms of an example. Senator 
Sarbanes, I know that there has been a lot of concern, even in 
the last couple of weeks, about the Taliban, especially their 
treatment of women and young girl children--closing schools, 
not providing the ability for people to go to school. I think 
that both Assistant Secretary Indefurth, Jamie Rubin, and our 
AID people have tried to make as clear as possible along the 
lines that Steve has talked about our fundamental opposition to 
the Taliban's human rights policies and very specifically over 
these past couple of weeks their truly abhorrent way that they 
treat women and young children.
    Senator Sarbanes. Now, we are headed fairly obviously, I 
think, here for a major fight over the so-called Silk Road 
bill. I mean, one important amendment would probably be to 
change its name to the Oil and Gas Interests bill. But leaving 
that aside, to go to the substance of it for a minute, what 
would repeal of 907 authorize you to do that you cannot do 
already?
    What is it that you want to do, since already there has 
been a loosening of 907 to permit aid to nongovernmental 
organizations, aid to support certain kinds of important 
activities, a whole range of activities--humanitarian, rule of 
law, democracy building, and so forth and so on. What is it you 
want to do that you cannot do right now?
    Mr. Sestanovich. Senator, let me answer you in this way. I 
put this question that you raise to our Ambassador in Baku just 
last month. We have been very grateful to the Congress for 
creating these opportunities to enhance our activities in 
Azerbaijan because we think they are part of creating in 
Azerbaijan, helping the Azerbaijanis create modern political 
and economic institutions.
    That is why all the opposition parties in Azerbaijan have 
recently issued a statement calling for the repeal of section 
907. They too see it as part of enhancing democracy in 
Azerbaijan.
    Our ability to provide democracy assistance would have been 
greater if we had had full freedom to do so earlier. Our 
ability to work with democratic parties would have been 
greater. But we now have the chance to do so and that will play 
an important part in our assistance programs in Azerbaijan this 
year during the Presidential election campaign.
    Let me give you an example of one thing that I always use 
and that Ambassador Escodero talks about when we look at kinds 
of programs that we think help create a modern democratic 
state.
    Senator Sarbanes. Let me just interrupt for a second. There 
is nothing now that prevents the National Endowment for 
Democracy or the various sub-organizations that it helps to 
fund from engaging in efforts in Azerbaijan to foster the 
growth of democracy, is there?
    Mr. Sestanovich. There is not and they are very active, and 
we support what they are doing.
    Senator Sarbanes. Let me ask you this question. I want to 
get a little bit of an understanding about Mr. Aliyev. He, of 
course, received a royal welcome not long ago when he came 
here. First of all, I understand he overthrew the 
democratically elected president in order to assume power. Is 
that correct?
    Mr. Sestanovich. The government of--well, there was sort of 
violence throughout the country and President Aliyev was 
returned to power and Elchibey, who was the previous president, 
resigned. You are right about that.
    Senator Sarbanes. Now, Aliyev is the former Politboro 
member, is that correct?
    Mr. Sestanovich. Yes.
    Senator Sarbanes. Was he a KGB general at one point; is 
that correct?
    Mr. Sestanovich. I am not sure what his rank was, Senator.
    Senator Sarbanes. So it is only a difference on the rank, 
not the balance of the characterization?
    Mr. Sestanovich. I believe he was the minister for internal 
affairs in Azerbaijan.
    Senator Sarbanes. Now, I gather Deputy Secretary Talbott 
about a year ago underscored shortcomings in the conduct of 
parliamentary elections in Azerbaijan; is that correct?
    Mr. Sestanovich. We have had questions about elections in 
Azerbaijan and other countries in the region, Senator.
    Senator Sarbanes. And how much concern is there in the 
Department about how valid the Presidential elections scheduled 
for this fall are likely to be?
    Mr. Sestanovich. We have talked to President Aliyev about 
that. I have mentioned it directly myself to him last month. We 
have had or participated in efforts to shape the election law 
that was developed, recently passed by the Azerbaijani 
parliament. We have been working on that with the OSCE and 
European and international NGO's to provide an election law 
that would create fair rules of the road for the elections.
    I think we have made a good deal of progress here, but 
there are still some concerns about how the election 
commission, which plays the crucial role in elections, will be 
constituted.
    We are, more generally, actively encouraging NDI and other 
organizations, as you know, to work with democratic movements 
and parties in Azerbaijan.
    Senator Sarbanes. Why would we repeal 907 in advance of the 
election, over which there is a very large question mark as to 
whether it is going to be open, fair, and honest, as opposed to 
at a minimum at least withholding, to use it as a lever to help 
gain an open, fair, and honest election?
    Mr. Sestanovich. Well, Senator----
    Senator Sarbanes. Will it not be perceived as a major 
victory for the Aliyev government in advance of a very 
important election?
    Mr. Sestanovich. I think it will be perceived as a sign of 
the kind of interest in Azerbaijan that the United States wants 
to show.
    Senator Sarbanes. Well, we have shown a lot of interest. I 
do not think we have a problem in showing interest. That has 
been kind of manifest.
    When did Aliyev visit here?
    Mr. Sestanovich. Last summer, 1997.
    Senator Sarbanes. And who did he see?
    Mr. Sestanovich. The President, and I assume he was here on 
the Hill seeing Senators.
    Senator Sarbanes. Who else did he see in the executive 
branch besides the President?
    Mr. Sestanovich. I cannot tell you, Senator. I was not 
working in the government at the time. I will get you the whole 
list of meetings if you would like.
    Senator Sarbanes. Secretary Grossman, do you know who he 
saw, besides the President?
    Mr. Grossman.  Steve and I did our confirmation hearings 
the same day about a year ago. I would be glad to get you that 
list.
    Mr. Sestanovich. After his visit.
    Senator Sarbanes. Well, anyhow, he started at the top and I 
assume he saw a lot of other people as well. That is a pretty 
royal reception, is it not?
    Mr. Sestanovich. It is a good visit.
    Senator Sarbanes. Now what about this assertion that I 
understand that Azerbaijan has been ranked as the third most 
corrupt developing country? Do you have a comment on that?
    Mr. Sestanovich. I have not seen that. My guess is there 
are a lot of Caspian vying for the honor, sir.
    Senator Sarbanes. Well, let me read from the State 
Department's own human rights report: ``The government's human 
rights record continues to be poor and the government continued 
to commit serious abuses.'' Then, further on: ``The entire 
judiciary is corrupt, inefficient, and subject to executive 
influence.''
    Mr. Sestanovich. Senator, I do not think there is any doubt 
about those reports. Section 907 keeps us from undertaking 
projects in Azerbaijan of the kind that we have undertaken in 
other countries of the former Soviet Union to deal with 
problems of that kind. We want to be able to get on top of 
those.
    I mentioned a moment ago some of the things we would like 
to do. I will give you an example. In other countries of the 
former Soviet Union we have worked with them to create a 
securities exchange commission like our own, to make sure that 
the privatization of state properties actually results in a 
functioning market economy. That is the sort of project that we 
would be eager to undertake, but that is not yet currently one 
of the carve-outs of section 907 that the government--that the 
Congress has allowed us.
    So if your concern is about corruption, I hope you will see 
the new possibilities created for us by repeal of 907.
    Senator Sarbanes. Well, it would seem to me that before we 
even begin to consider that we ought to have a significant 
improvement in the human rights situation and the conduct of an 
honest election. Otherwise you are going to continue to have an 
unstable situation in the country.
    The Human Rights Watch says--let me just quote them: 
``Azerbaijan's human rights record in 1997 continued to be 
dismal, but had no perceptible impact on the unprecedented 
level of involvement by the international community and 
international business in the country. International investment 
activity in the petroleum sector was feverish. The 
international community largely glossed over Azerbaijan's poor 
human rights record in order to protect oil interests.'' Mr.
    Sestanovich. Senator, I am with you on this issue. 
Investment alone, money alone, will not create the kind of 
institutions that will make for a modern Azerbaijan, a 
democratic Azerbaijan, or one that we will have a successful 
long-term relationship with. We are in favor of projects that 
will help us to create, to move toward those goals in the way 
that I have referred to.
    I might note that section 907 is not actually linked to the 
issues that you have talked about, but to the relations between 
Armenia----
    Senator Sarbanes. The blockade of Armenia.
    Mr. Sestanovich. [continuing.] and Azerbaijan.
    Senator Sarbanes. You do not suggest that the repeal of it 
would not send a message about the human rights situation as 
well, do you?
    Mr. Sestanovich. I do not think it would, actually, because 
it will help us to deal with a lot of these issues that you 
have expressed concern about.
    Senator Sarbanes. Suppose we change the basis for 907, keep 
it but just shift its basis, or add to the basis besides the 
blockade the human rights situation. Would you accept that?
    Mr. Sestanovich. I do not think that further restrictions 
on our ability to conduct our relations with Azerbaijan would 
be positive, any more than I would want further restrictions on 
our relations with Armenia, Senator.
    Senator Sarbanes. Well, Mr. Chairman, I see we are not 
getting very far. I did want to put in the record two 
editorials, one from the Washington Post on June 11th, ``White 
House pledge''--let me just quote from it briefly: ``When 
President Clinton invited Azerbaijan's strongman ruler to the 
White House last summer, he opened himself to criticism that he 
was overlooking that nation's lack of democracy in deference to 
its oil wealth. Perhaps to deflect such criticism, the two 
presidents, Mr. Clinton and Azerbaijan's Heidar Aliyev, issued 
a joint statement in which Mr. Aliyev committed himself to 
political pluralism and the holding of free and fair elections.
    ''Now, with the approval of a flawed election law back 
home, that commitment is open to question. Now, how will Mr. 
Clinton respond?``
    It goes on to say: ''Mr. Aliyev, who was Azerbaijan's 
communist party boss in Soviet days, has kept a tight rein on 
politics, television broadcasting, and other aspects of 
society. Now, at age 75, he is expected to run for reelection 
in October. Opposition groups charge that the election law his 
supporters have approved will allow another unfair vote in what 
is becoming an Ajeri tradition. The opposition argues that the 
biggest concern is with the election commission, which will be 
dominated by Aliyev backers. The opposition argues that in such 
circumstances even the best law could be subverted and a fair 
vote cannot be guaranteed. ``If no changes are made, the 
opposition now proposes to boycott the election.''
    [The information referred to follows:]
                           White House Pledge
                  (from the washington post, 6/11/98)
    When President Clinton invited Azerbaijan's strongman ruler to the 
White House last summer, he opened himself to criticism that he was 
overlooking that nation's lack of democracy in deference to its oil 
wealth. Perhaps to deflect such criticism, the two presidents--Mr. 
Clinton and Azerbaijan's Heydar Alieyev--issued a joint statement in 
which Mr. Alivev committed himself to ``political pluralism'' and ``the 
holding of free and fair elections.'' Now, with the approval of a 
flawed election law back home, that commitment is open to question. How 
will Mr. Clinton respond?
    Azerbaijan is one of three small countries that emerged from the 
Soviet Union in the Caucasus region, wedged between the Black and 
Caspian Seas and among Russia, Turkey and Iran. All three have made 
their claims on U.S. attention: Armenia, because of its large diaspora 
population here; Georgia, because of its respected president, Eduard 
Shevardnadze, and its strides toward democratic development; and 
Azerbaijan, because its Caspian Sea reserves have sparked a modern-day 
oil rush. Unfortunately, neither free-market reform nor political 
development has kept pace with the establishment of oil company branch 
offices in Baku.
    Mr. Alivev, who was Azerbaijan's Communist Party boss in Soviet 
days, has kept a fairly tight reign on politics, television 
broadcasting and other aspects of society. Now, at age 75, he is 
expected to run for reelection in October. Opposition groups charge 
that the election law his supporters have approved will allow another 
unfair vote in what is becoming an Azeri tradition. The biggest concern 
is with the election commission, which will be dominated by Aliyev 
backers. The opposition argues that in such circumstances, even the 
best law could be subverted, and a fair vote cannot be guaranteed. If 
no changes are made, the opposition now proposes to boycott the 
election.
    As the two presidents agreed last summer, ``democracy, economic 
reform and other observance of human rights play an essential role in 
ensuring Azerbaijan's continued stability.'' Oil wealth without 
governmental accountability is likely to lead to massive corruption and 
an embittered and impoverished population--not circumstances likely to 
further America's strategic goals in the region. Opposition politicians 
believe that Mr. Lieyev still could be persuaded to uphold his August 
promise if Mr. Clinton makes clear to him that good relations with the 
United States are at stake--and that the August statement was jot just 
intended to save face.

                               __________

                       Second Worst in Azerbaijan
                  (from the washington post, 6/30/93)
    The worst that could happen in the old Soviet empire is that 
Russian nationalists would conspire to restore the old order. Second 
worst is what is conceivably happening in Azerbaijan. The 
democratically elected president is on the run, under political 
pressure from an old discredited Communist and under military pressure 
from a young discredited adventurer. As for the Russians, something 
uncertain but distinctly unhelpful, though perhaps more a matter of 
negligence than of conspiracy, is going on: The battle against the 
elected president has been conducted with Russian arms. The unraveling 
is alarming both for its effect on Azerbaijan and as a precedent for 
other parts of the former Soviet Union.
    The crisis arises from Azerbaijan's struggle against a secession 
campaign opened up by ethnic Armenians in Azerbaijans nagorno-Karabakh 
enclave. In that bitter war, the president, a former dissident 
nationalist floundered; finally he fled Baku. the old Communist party 
and KGB boss Gaidar Aliyev moved in as acting leader. But a warlord who 
had equipped a personal army (partly from weapons somehow left behind 
by departing Russian army units) to fight in Karabakh, turned that army 
into an instrument of his own ambition. First he took on the president, 
and now he is maneuvering against (or is it with?) Mr. Aliyev. 
Cascading domestic as well as foreign frustrations seem to have made 
peaceful democratic development less appealing to many citizens on 
Azerbaijan at the moment than the promise of strong leadership.
    The transition from an authoritarian past has been particularly 
rocky in the old Soviet Muslim and Caucasus republics. Azerbaijan, 
which fits under both labels, has a considerable potential in its oil 
riches and its notable secularism, but these resources have yet to be 
tapped by wise leadership to serve the nation's growth. Before the 
latest interruption caused by the power struggle in Basku. European and 
American diplomats were laboring to bring Azerbaijan and Armenia--as 
well as the Armenians of Karabakh--to the negotiating table. This 
effort remains vital. But so is restoration of leaders legitimated by 
democratic choice. The Yeltsin government is under its own difficult 
but unavoidable obligation to see that no elements of the Russian army 
contribute to the chaos.

    Senator Sarbanes. Is that correct?
    Mr. Sestanovich. That has been discussed.
    Senator, if I might interject here, you will not find us 
hesitant to raise concerns about the conduct of this election. 
We have discussed the election commission and other details of 
this election law repeatedly with the government of Azerbaijan. 
I believe we have had some substantial success in improving the 
law that was passed by the parliament. We are going to keep on 
this case. You need not worry about that.
    I think we have established this year in our comments on 
other elections in this region our credibility on this issue.
    Senator Sarbanes. Is the administration willing to withhold 
action on this legislation until we see what kind of an 
election we have, whether in fact there is an honest shake out 
there?
    Mr. Sestanovich. We are for repeal of section 907, Senator, 
and feel we would have had flexibility to serve our interests 
better had it been repealed earlier.
    Senator Sarbanes. Do you think that Armenia should be 
included, should be a possible candidate for a pipeline route, 
east-west pipeline route?
    Mr. Sestanovich. Multiple pipelines means multiple 
pipelines, Senator. If there were a peace settlement, I think 
President Aliyev himself has mentioned the possibility.
    Senator Sarbanes. Do you think--so you include Armenia, 
then, as a pipeline candidate?
    Mr. Sestanovich. Sure.
    Senator Sarbanes. Now, how is that going to happen if 
Azerbaijan has a blockade? A blockade would stop a pipeline, 
would it not, I assume?
    Mr. Sestanovich. Well, Senator, there is no question that 
the absence of a peace settlement will prevent a pipeline, no 
question about it.
    Senator Sarbanes. Thank you, Mr. Chairman.
    Senator Hagel. Senator Sarbanes, thank you.
    Mr. Secretary, you have had an easy ride this morning. That 
is very unfair.
    Mr. Grossman.  You are about to change that.
    Senator Sarbanes. Actually, I did not direct my questions 
to Mr. Sestanovich. I just put them out there openly and the 
Secretary just seemed to have taken a pass. I did not purposely 
give him an easy ride. He seemed to have availed himself of the 
opportunity.
    Mr. Grossman.  No, no. Besides the difference in this 
table, there is the difference in responsibility. I actually 
thought, Senator, that some of the points you made in the 
beginning about the kinds of principles that one needs to 
subscribe to were sort of leading to a conversation that you 
and I have had on a number of occasions.
    Senator Hagel. Well, maybe we can balance this a little 
bit, Mr. Secretary. Staying a little bit with the theme of 
Senator Sarbanes' last couple of questions regarding pipelines, 
what is the status of the cost overrun as you understand it, 
either of you, from Baku to Poti? When I was there that was a 
very big issue and the oil company representatives were in a 
position not to go much further until that issue had been 
resolved.
    Where are we with that?
    Mr. Sestanovich. I do not think it has been resolved. It is 
a lot of money and affects the calculations that they make 
about going forward with the entire project. It is part of the 
project that needs to be clarified.
    Senator Hagel. Mr. Secretary, anything?
    [No response.]
    Senator Hagel. Then that obviously affects the October 1998 
pipeline decision deadline. Would it not have some impact on 
what we are going to do here about that? Well, let me phrase it 
another way. Do you think that October 1998 deadline will be 
met on a decision?
    Mr. Sestanovich. I would not want to venture a prediction 
on that. There are a number of uncertainties that have to be 
addressed, including, as you mentioned, volumes. One of the big 
questions that companies and governments have is what kinds of 
volumes are we looking at that would make different kinds of 
pipelines viable.
    Mr. Grossman.  And that is of course a deadline that has 
moved over the years. As I said in my testimony, there is still 
a feasibility study to be had on the Turkish side. It seems to 
me all of these pieces, at least as the information as you can 
have it at the time, needs to be in place.
    The other thing that has always struck me in dealing with 
this issue is, not only is there a set of deadlines constantly, 
but of course there is a negotiation going on all of the time. 
Moving the deadlines and studies, of course, are useful back 
and forth on the negotiating track as well.
    Senator Hagel. You do not, either of you, have a sense of 
how this cost overrun is going to be resolved?
    Mr. Sestanovich. Let me get you an answer, a better answer 
on that.
    Senator Hagel. Well, that obviously impacts that route 
going through Poti and the Black Sea, because if they cannot 
finish that and connect that then that too will then play into 
where is the volume.
    Let me go to another point. Senator Sarbanes mentioned 
Iran, and there has been some rumbling certainly immediately 
after the ILSA decision: This is a signal that maybe the 
administration is pulling back a little bit on this issue. Both 
of you hit this directly. Secretary Albright has hit it 
directly. Any possibility that you see of a weakening by the 
Caspian Sea region countries, oil companies? Well, maybe it 
would not be all bad to bring that down through Iran?
    Mr. Grossman.  We do not see that. Of course, we have to 
speak for, obviously, what we believe and what our policy is. I 
think you very correctly picked up from our testimony that 
there is not a change in our opposition to the whole question 
of pipelines across Iran. I think it is worth noting, and both 
of us tried to do this in testimony, that, to step back here, I 
think we have had some considerable success by using the Iran-
Libya Sanctions Act to focus more attention as we have with 
Europeans and the states in the region, and I would say Iran as 
well, on issues of concern to us--weapons of mass destruction, 
terrorism.
    So we tried very hard to use the Iran-Libya Sanctions Act 
as a way to promote our interests.
    The other thing that is very interesting to me, Senator, 
and I guess there is lots of conversation yet to be had about 
this, which goes exactly to your question, is in Secretary 
Pena's speech there in Istanbul I thought the section where he 
talked about the whole issue of commercial viability and 
whether there are not in fact economic and commercial reasons 
to continue to support Baku-Ceyhan and make it a better route 
than Iran--these are not lost on countries, states in the 
region. They are not lost on the companies.
    As he said, you have got capital costs. It is not only a 
matter of capital costs up front, it is a matter of moving oil 
to the Persian Gulf, environmental issues, taxation issues, 
tariff issues. So we think that a combination of strong 
statements by us about what our policy is, our support as we 
have tried to make clear today for an east-west corridor, for 
Caspian oil, and the fact that the economics do not all argue 
for a route south keep us very much inside of this game, and 
people ought to be reaching the conclusion that when we say 
east-west, Baku-Ceyhan as an alternative, that we mean it.
    Mr. Sestanovich. If I could add something to that, Senator. 
I find when I talk to leaders in the region complete agreement 
when I say that letting any country monopolize the 
transportation of energy out of the region is bad for the 
Caspian Basin states. There is no difficultly with that 
proposition whatever. Having Iran dominate it would be 
particularly negative.
    So that is an area where we have got no disagreement with 
these states and where they are not just looking for the excuse 
to do it. They see it as a drawback, a problem. One of the 
advantages of an east-west transportation corridor for them is 
the independence that it offers them over the long term.
    So we are working with governments that share our 
perspective about the advantages here.
    If I could just say an extra word about the cost overrun 
issue that I think may have been a bit confused. A moment ago 
we may have been confusing two different pipelines. The cost 
overruns have to do with the line from Baku to the Georgian 
coast, and the construction of that line continues even while 
the cost overruns are being addressed, I mean who is going to 
bear the burden of those costs.
    That is separate from the long-term decision which needs to 
be made about the main export pipeline in October 1998. That 
decision could be complicated by difficulties in addressing a 
number of cost questions as well as the other issues that I 
mentioned, particularly volumes.
    Senator Hagel. Yes, because they all connect.
    Mr. Sestanovich. Yes. But right now the cost question, the 
cost overrun question, is not stopping the progress of the 
pipeline.
    Senator Hagel. Thank you.
    One last question. Mr. Secretary, you mentioned a couple of 
times just recently, and I am going to read back from your 
testimony, you mentioned Turkey and the feasibility study. From 
your testimony: ``We encourage Turkey to facilitate the 
construction of the Baku-Ceyhan pipeline as a commercially 
attractive alternative for transporting Caspian oil. Turkey is 
nearing completion of a feasibility study on the Baku- Ceyhan 
that will provide a catalyst for American and other investors 
to initiate Caspian investments.''
    Mr. Grossman.  Right.
    Senator Hagel. Could you explain that?
    Mr. Grossman.  Sure. One of the things that I think makes 
the most sense in all this is for American investors to have 
some kind of a baseline. That is why from the very beginning of 
this process, from 1995 and 1996, we encouraged the World Bank 
and the Turks to bring about a feasibility study.
    One of the things that I know that you and I have talked 
about in the past is that the Turks over the years have gone 
through a series of ideas about how this pipeline would be 
built and how it would be financed, but now they are coming up 
with actually putting money on the line, people making big 
decisions.
    We felt that it was the most important thing for the 
international companies, the international community, to have a 
real feasibility study to open up, look at, and debate and 
decide what was reality. We have been encouraging this to be 
completed. We were hoping actually it might be done a couple 
weeks ago and I was hoping to by my testimony catch people's 
attention that we would like this to be done and be done 
quickly.
    Obviously, it has to be right, and I know one of the 
conversations between the company that did it and Turkey at the 
moment is to make sure that it forms this baseline. But we 
think this will be a huge piece of assistance to American 
companies in their own deliberations about what the right thing 
to do is and how to make this route a reality.
    Senator Hagel. Who is paying for that study?
    Mr. Grossman.  It is a World Bank study.
    Senator Hagel. A World Bank study, and it is being done 
with the cooperation and involvement of Turkey and outside 
consulting companies?
    Mr. Grossman.  That is exactly right. It is a European, a 
German company, as I understand it. They got this contract and 
have done this. They are in a conversation with the government 
of Turkey about the final status of the report. But we want 
this report to come out.
    I was not there. I understand that the Turkish government 
was talking about some of the preliminary findings there in 
Istanbul. But I think, for all the reasons that I have 
outlined, it is very important that this come out to be a 
baseline.
    Senator Hagel. Thank you.
    Senator Sarbanes, we have Dr. Brzezinski in the wings here. 
Any further questions you would like to ask?
    Senator Sarbanes. I have one question I want to put. 
Understanding the rationale between multiple transit corridors 
for the movement of oil and gas, is one of the administration's 
objectives to exclude Russia as one such corridor?
    Mr. Sestanovich. No, Senator. The CPC line, which would 
bring oil from Kazakhstan to Russia, should be considered part 
of an east-west transportation corridor, and the Russians 
understand that. We have made clear our support for that line 
and, more broadly, our view that this does not involve a 
conflict between Russian and American interests in energy 
exploitation.
    Senator Hagel. Gentlemen, thank you. We appreciate it. If 
there is anything that you wish to add for the record, please 
do. We will keep the record open for a couple of days, so if 
any of our colleagues wish to submit questions or if Senator 
Sarbanes or I have followup questions we will have the record 
continue open.
    Thank you all very much.
    Mr. Grossman.  Thank you very much.
    Senator Hagel. Dr. Brzezinski, welcome. We said very 
glowing things about you earlier and I know there is no point 
in repeating it. You would just be flattered.
    Dr. Brzezinski: I would love to hear it.Senator Hagel. 
Well, on behalf of this committee, we are grateful to have you 
with us this morning, and thank you for taking the time, and we 
will get right to your testimony.
    Senator Sarbanes, any additional comments? Senator 
Sarbanes. No.

 STATEMENT OF HON. ZBIGNIEW BRZEZINSKI, COUNSELOR, CENTER FOR 
     STRATEGIC AND INTERNATIONAL STUDIES, WASHINGTON, D.C.

    Dr. Brzezinski: Mr. Chairman, Senator Sarbanes, thank you 
for having me. I will make just some brief introductory 
comments.
    First of all, pertaining to my own interest in this area, 
it goes back quite a few years. Even when I was a graduate 
student, I became intensely interested in the national problem 
that I felt was confronting the Soviet Union with increasingly 
insoluble dilemmas, that eventually the aspirations for 
national independence from the non-Russian nations would become 
a very serious problem.
    I first traveled to the Caspian Sea area and to Central 
Asia back in the fifties and I was quite impressed by the depth 
of national feelings among some of the intellectuals and about 
the strength of national traditions within the peoples at 
large. That reinforced my original academic interest in the 
area.
    When I served as Director of the National Security Council, 
I pushed for active U.S. support for the national aspirations 
of the various Soviet peoples on the basis of the view that 
such aspirations could in time create an altogether new 
political situation in the space of the former Soviet Union.
    After the fall of the Soviet Union, I traveled to the newly 
independent countries and I became increasingly convinced that 
their stability and the promotion of some form of regional 
cooperation among them was in fact in the U.S. national 
interest, that this would help to stabilize as well as to 
transform the area occupied previously by the Soviet Union.
    That was the advice I gave to the U.S. Government, and in 
the fall of 1995 I was asked by President Clinton to go to Baku 
to talk to President Aliyev at a time when the initial 
decisions were being made about the export pipelines from 
Azerbaijan. The burden of the message was that the United 
States favored not a single route--we were not seeking monopoly 
for the West--but we also did not wish that there would be a 
monopolistic arrangement by anyone else, and therefore the 
United States favored two pipelines, one to the West, to the 
Black Sea through Georgia to Turkey, and one north, to 
Novorissiysk through Russia. That was the point of view that 
prevailed, with President Aliyev endorsing that.
    In addition to these activities, I have also addressed 
business groups on the subject of the importance of the area. I 
have spoken to boards of directors. I have consulted with 
business firms that are interested in the area, giving them 
advice on the geopolitical conditions that prevail, on sources 
of stability and instability in the region, on the prospects 
for its evolution.
    Let me add tangentially that I do not lobby for any 
business company, I do not represent its commercial interests. 
But I do offer my views on the geopolitical importance of the 
region and the likely role of the United States in it and the 
role of other powers.
    My overall approach is that the United States has a basic 
geostrategic interest in the promotion of stability in the 
region, which stems very much from the importance that the 
region has in terms of potential source of energy, of minerals, 
and this is a perfectly legitimate American interest.
    The United States also has an equally legitimate negative 
interest, namely that the region should not become unstable, 
that the region should not degenerate into what I sometimes 
call the Eurasian Balkans, namely a region of internal 
weakness, internal instability, internal ethnic, national, or 
religious conflicts, all of which can have a suction effect on 
the aspirations of larger powers around the region, such as 
Russia, Iran, Turkey, China, and in a more distant way the 
West, particularly the United States, as well.
    Hence, both the positive and the negative interests of the 
United States requires the need for a reasoned long-term 
strategy toward the region, the purpose of which is to promote 
regional stabilization, regional cooperation, and access to the 
region by the international community, access politically, 
access financially. The best way to achieve that is by a 
multiplicity of access, so that no single power controls access 
in a monopolistic fashion.
    I believe some of the same points were made by you, 
Senator, Mr. Chairman, when you spoke in Istanbul on May 27, 
where you emphasized: ``Regional development and cooperation 
brings regional security and prosperity. We must build on the 
common denominators of mutual interests. Trade and investment 
are building blocks for the world's mutual interests.''
    Then you went on to say: ``The United States must put 
forward a clear, comprehensive, and effective U.S. policy for 
this region, particularly for the development of a western 
route for Caspian Sea oil.''
    I personally feel that in the longer run a major outlet 
from the Caspian Sea Basin through Georgia, through Turkey, and 
through Turkey to Ceyhan on the Mediterranean seacoast, would 
be the best geostrategic outcome. It would be the best, but it 
may not be the only desirable solution. There may be others 
which may to some extent fulfil the same geostrategic as well 
as commercial need. I have in mind a multiplicity of individual 
outlets, namely, in addition to the one to Novorissiysk, 
through Russia, in addition through Georgia to Supca and from 
Supca either through Turkey or additionally north to Ukraine or 
to Romania and thence to Western Europe.
    If there is a peaceful settlement between Azerbaijan and 
Armenia, a pipeline through Armenia directly to Turkey would 
enhance the Armenians' stake also in accommodation. But I would 
also not exclude, nor would I oppose--and I know this is 
controversial--a pipeline from the region south through Iran, 
for it seems to me that it is also in our interest to give Iran 
a stake in regional cooperation. Short of such a stake, we are 
likely to increase the temptation both for Iran and for Russia 
to try to play exclusionary politics in the region, to the 
disadvantage of the region's stability, to the disadvantage of 
the kind of objectives which I believe are in the American 
interest and more generally in the interest of the region and 
of international stability.
    So these, in brief, are some of my introductory comments. 
Obviously, much more specific issues can be addressed. There is 
the problem of internal stability in the region. Georgia has 
recently been the object of some attempts at destabilization, 
including attempts to assassinate the president of Georgia. 
Democratic development in the region is falling short. The 
elections in Armenia were not perfect, indeed far from perfect. 
The democratic situation in Armenia is far from positive. Very 
much the same can be said about Azerbaijan. Very much the same 
can be said about some of the Central Asian countries.
    The process of nation-building and of advancing 
democratization is a very difficult process, given the region's 
history, its experience both with Soviet communism and with 
imperial domination in the past. Hence we are confronted here 
with a region that presents us with many difficulties, but it 
is an important region politically and economically and hence 
one deserving of American strategic attention.
    Thank you very much.
    Senator Hagel. Dr. Brzezinski, thank you.
    Senator Sarbanes, would you like to go first? Go ahead.
    Senator Sarbanes. Well, Mr. Chairman, first let me say to 
Dr. Brzezinski that we are pleased to have him back before the 
committee. Over many years he has given us wise counsel and 
advice. On occasions I differ with him, but whatever he gives 
us is worth serious thought, and we very much appreciate him 
coming here this morning.
    Dr. Brzezinski: Thank you.
    Senator Sarbanes. I want to ask a question that is somewhat 
off in terms of being directly on focus, but I would just like 
to get your thoughts on this. I understand why the 
international community has said that these various borders 
that were established in Soviet communist times are not to be 
altered, because you do not want to throw all the borders up 
for grabs and that would lead to lots of problems. On the other 
hand, it is my perception that many of these arrangements were 
done by Stalin or even by Tito in Yugoslavia to accomplish a 
kind of a divide and rule purpose within the particular 
country.
    Nagorno-Karabakh as I understand it was brought into 
Azerbaijan by Stalin. Of course, that then gave him counter- 
tensions within these countries that increased the ability to 
control, it seems to me, control the situation from the center. 
It is my perception that much the same was done in Yugoslavia. 
So you set up these borders, but you included within them a 
different ethnic minority group, and that set up a tension. The 
center could play against that tension in order to increase its 
control.
    Now, when these republics which were formerly part of a 
country become independent and you take the borders that were 
established largely for internal reasons, to maximize, as I 
perceive it at least, control from the center, you then are 
confronted with these very enhanced ethnic tensions.
    First of all, do you see any merit in that analysis? And if 
so, what if anything can be done about it?
    Dr. Brzezinski: Well, you have raised a very difficult and 
perplexing issue and you have done so in a very thoughtful 
manner. This is a very difficult legacy of the past. We 
confront it not only in the former Soviet Union, not only in 
Yugoslavia, as you have also mentioned; we confront it, for 
example, in Africa, where the borders were drawn by the 
colonial powers and many of these borders were drawn in a very 
arbitrary fashion and in some cases, as you have stated, even 
for the purpose of dividing opponents so that one can rule them 
more effectively. The old maximum, divida et impella.
    I would not be at all surprised if that was the case with 
some of the borders drawn in Central Asia and in the Caucasus 
by the Soviet rulers in the twenties, early thirties in some 
cases. But once this has been said, the question arises can 
this be altered in any reasonable fashion without promoting 
massive turmoil and conflict?
    A number of the borders, for example, between the Central 
Asian countries are also very arbitrary. We have seen the 
outbreaks of truly bloody ethnic conflict, for example in the 
Fergana Valley in Central Asia. The war between Armenia and 
Azerbaijan has clearly been destructive for both countries and 
has inhibited the development of stable nations, the creation 
of stable political institutions, the emergence of democracy in 
both countries.
    I do not have any magic solution for it. But what I do feel 
quite strongly is that we should not open the floodgates to 
changes in these borders by force, because if we do then we are 
likely to see an epidemic, an epidemic of national and ethnic 
conflicts.
    I do have to share--I do have to say that I share the view 
of the administration spokesmen that addressed you before this 
part of our discussion and, at the risk of disagreeing with 
you, Senator Sarbanes, I do think that 907 is not helpful, 
because it pits the United States in effect objectively on the 
one side of what is a very complicated and a very difficult 
issue, an issue which I hope can be resolved over time in a 
constructive fashion.
    But it is more likely to be resolved in a constructive 
fashion if we have the flexibility for dealing with both 
parties and if we can promote regional accommodation from which 
both parties can benefit. I think that is the only way we can 
address these issues.
    Senator Sarbanes. Well, let me just make this observation. 
Then I will move on to another question. You know, 907 was 
amended by the Congress to move from a fairly rigid cutoff to 
allow assistance to move for supporting democracy, Trade and 
Development Agency, the Foreign Commercial Service, for the 
NGO's, and so forth. So it does provide an opening to try to 
accomplish some of those purposes.
    Now, it is true that the rationale for it is the blockade, 
and I think that is a valid rationale. But also I think now 
there is an important rationale that is associated with the 
internal political developments in Azerbaijan, particularly the 
elections coming up.
    Let me ask you this general question. As a matter of 
promoting stability in the region, would you agree that being 
able to have an internal situation that puts in place the rule 
of law, respect for human rights, and a political system that 
allows the opposition to be heard and so forth and to have an 
opportunity to gain power would contribute to stability?
    It is the perennial question, you know. We can go with a 
strong-arm dictator and in a sense that gives us stability, but 
in so many instances in the past that stability has turned out 
to be short-lived. Beneath the apparent stability is breeding 
an intense instability which eventually breaks out, and so we 
are not really building a long-term permanent basis of 
stability.
    Dr. Brzezinski: As a general proposition, what you say is 
absolutely true. I would only add that this is a long-term 
difficult process involving societies that for 70 years were 
dominated by a totalitarian system ruled by one party 
machinery, political machines, intimidated by terror. Political 
opposition was suppressed, whether it is in Azerbaijan or 
Georgia or Armenia or elsewhere in the former Soviet Union.
    So the last seven decades were not exactly schools of 
democracy. Then all of a sudden the system collapses, 
independence is gained. It is rather difficult in these 
conditions to expect quick emergence of a relatively stable, 
well-functioning democratic system. That is why we really have 
not seen that very much in the space of the former Soviet 
Union.
    Georgia I would say is somewhat better than either 
Azerbaijan or Armenia, and better than, I would say, every 
country in Central Asia. Ukraine probably is the only former 
Soviet republic in which you have had a transfer of power from 
one president to another through free elections. I have to add, 
Moldova recently did that, so you have only two out of some 
dozen. But it has not happened anywhere.
    I think it is desirable for the United States to have the 
maximum degree of flexibility in dealing with protagonists such 
as Armenia and Azerbaijan in order to influence their internal 
development. This is why I do feel that we are somewhat 
constrained, though not as much as in the past--you are 
absolutely right in saying that there has been a change--by 
907.
    I would hope that as the process of regional development 
develops some degree of momentum, Armenia can be drawn into it 
so that it also sees a stake in regional development, because 
that seems to me to be the basis for trying to resolve some of 
the problems that you have identified, both the internal 
political problem and the external territorial problem. I see 
no other way. The other way is force, war, and it is going to 
be destructive for the region. Indeed, some of the leaders of 
the region suspect that conflict between them is being abetted 
from the outside deliberately in order to make the new states 
more vulnerable.
    Senator Sarbanes. Do you have any view on this--we are 
getting reports that there is a perception in Central Asia of 
in effect U.S. support for the Taliban through the military 
support we have provided to the mujahedin and so forth, and 
that we have not been able to sort of get across the notion 
that there is somehow not an indirect underlying connection 
there.
    Have you received reports of that sort and what is your 
response to that?
    Dr. Brzezinski: No, I have not. I frankly do not think such 
reports would be accurate. For one thing, the Taliban were not 
a major force in the resistance to the Soviets. They are an 
outgrowth of the situation that developed after the eviction of 
the Soviets. They are a fundamentalist extremist group, but 
they were not supported by the United States. They are an 
offshoot of one of the resistance groups that the Pakistanis 
favored and there is truth in that.
    But I do not have a sense from my contacts with the 
administration that we are in any way actively supporting the 
Taliban. We have recently tried to promote a dialog between the 
different parties to the conflict in Afghanistan.
    I would also add this. While fundamentalism may be a 
potential threat in Central Asia, it is not likely to come that 
much from Afghanistan as such. Afghanistan, given its national 
mosaic, may have some influence on Tajikhistan, to some extent 
in Uzbekhistan, but less on the others.
    In fact, in addition to Iran, which obviously is openly 
fundamentalist, Saudi Arabia and particularly Wihabism, which 
is a phenomenon of fundamentalist Islam, seems to be also 
playing here an active role and seems to be emerging more as a 
challenge to the Central Asian governments, secular 
governments, postSoviet governments, than the Taliban. At least 
that is my reading of the situation.
    Senator Hagel. Dr. Brzezinski, thank you again for being 
with us this morning.
    I want to pick up on a point that you made in your comments 
about the danger of unintended or intended exclusionary policy 
specifically regarding Iran and Russia. Would you embroider 
around that point that you made when you suggested that maybe 
we should construct some scenario here where Iran could be part 
of this Caspian Sea outlet, and how would that happen and how 
would we work that through the current situation?
    Dr. Brzezinski: Well, the bottom line is that ILSA greatly 
restricts our freedom of action. The paradox currently is that 
we are in effect, and for good reason, not enforcing ILSA vis a 
vis our friends, foreign businesses particularly, but 
restricting ourselves. So we are right now, I think, in the 
worst of all worlds. We are not able to impose an effective 
embargo, but we are sustaining it against our own corporate 
interests to the benefit of foreign corporate interests.
    My view is that in the longer run, if we want a stable 
Persian Gulf region and a stable Central Asia, some gradual 
accommodation between the United States and Iran is in our 
mutual interest. I think we can carefully promote it by 
engaging in a dialog, by gradually permitting business 
corporations to engage in trade and investment, and in the 
meantime thereby giving the Iranians some stake in a stable and 
increasingly prosperous Central Asia from which they can also 
benefit.
    I think such a policy is more likely to be productive than 
an essentially ineffective attempt at an embargo, which at the 
same time gives both the Iranians and the Russians more of a 
stake in pursuing a policy of joint collaboration directed 
against western presence in the region.
    I was just reading the other day a rather lengthy study of 
the situation in the region, published in the Diplomategis 
Digesnik, which is the Russian Diplomatic Journal, by a Soviet, 
a Russian scholar, on the subject of Russia, the trans-
Caucasus, and Caspian oil. He quite explicitly addresses the 
question of Russian-Iranian cooperation and of the joint 
interest of these two countries in opposing western influence 
in the region.
    Senator Hagel. Would you focus a little bit on the Russian 
dynamic of this? Well, obviously we are much, much further 
along in our relationships and the dynamics of those 
relationships with Russia than we are with Iran, but if you 
could take us through the Russian scenario a little bit and 
then maybe link those two, the Iran-Russian piece that you 
referred to.
    Dr. Brzezinski: I sense that Russian policy toward the 
region is torn between two basic orientations, and obviously I 
am greatly oversimplifying. One perspective realizes that there 
is a Russian stake in cooperation, that Russia has neither the 
technology nor the capital to really preempt the West in the 
region, given the interest of the countries of the region in 
development, which requires technology and capital. Therefore, 
in that perspective it makes more sense for Russia to 
collaborate, to be a partner, to have a share, a share in the 
pipelines, to have a share in the access, also to provide some 
of the outlets such as through Novorissiysk. I believe that 
some of the Russian energy companies favor that policy, which I 
think is more enlightened, more realistic, more in tune with 
the times.
    There is a second orientation, which is much more 
traditional, and which simply takes the view that if the West 
can be kept out of the region it would be to Russia's benefit 
and hence would like to see only one outlet, through 
Novorissiysk, would like to prevent the stabilization of these 
countries. It might be even inclined and tempted to foster 
internal instability, such as in Georgia, to promote the 
Armenian-Azerbaijani conflict, to stimulate some of the ethnic 
and religious passions of Central Asia.
    This second orientation seems to me to be really against 
the spirit of the times and rooted in a mind set which is well 
summarized by a well-known Russian joke. God comes to a very 
poor peasant and says to him: My dear son, I love you, I want 
to do something for you. What can I do for you?
    This poor peasant says to him: Oh God, my neighbor has four 
cows. I do not have any cows. He has ten sheep. I do not have 
any sheep. He has 12 pigs. I do not have any pigs. God, please 
do me a favor: Kill all of his sheep and pigs and cows.
    Well, that is the attitude of those who say: Keep the West 
out; let us maintain monopoly. I hope it is a losing attitude. 
I think it gradually is the losing attitude, because I sense in 
Russia a change in leadership, which involves also a change in 
mind set. Younger leaders are coming to the fore, more open-
minded leaders, leaders who I hope and suspect sense that 
Russia's future is in international cooperation as a national 
state, and it can be a partner in the development of this 
region, a partner, a participant, and thus a beneficiary.
    But it is still an unresolved issue, because Russian 
politics are very unstable currently, and therefore you also 
see negative manifestations: the insistence on troop bases, the 
insistence on monopolistic exclusionary control over access, 
some temptation to play the ethnic game. Certainly the 
Georgians seem to be convinced that it was someone from Russia 
who was involved in the Abkhazian stir-up recently.
    So the issue is still wide open, and I think our policy 
here has to be persistent, patient, but open-minded. We are not 
trying to keep them out. We are trying to create a framework of 
regional cooperation that will stabilize the region to the 
benefit of the local community particularly, of the global 
economy, and to the benefit of negating the tendencies toward 
conflict which otherwise can become dominant in the region.
    Senator Hagel. If I might just followup on this, do you 
believe the administration's approach to Iran is the correct 
approach?
    Dr. Brzezinski: Yes, I think that its careful prudent 
movement away from dual containment is eminently sensible, 
because dual containment I think really locked us into a policy 
in which we were just freezing ourselves out of the game, so to 
speak. But it has to be pursued carefully. I think Secretary 
Albright addressed it exactly in the right tones of prudent, 
but positive, inclination to engage in a dialog if the other 
side is serious. I think we should persist in that position.
    Senator Hagel. Thank you.
    Senator Sarbanes. You can keep Mr. Brzezinski at the 
witness table all day and get the benefit, but I know we have 
another important panel coming up, so I will desist, Mr. 
Chairman.
    Senator Hagel. Dr. Brzezinski, thank you.
    Dr. Brzezinski: You are welcome very much.
    Senator Hagel. You are, as always, generous with your time 
and we appreciate it.
    Senator Sarbanes. Thank you.
    Senator Hagel. If the third panel will come forward, we 
will begin. Thank you.
    Dr. Olcott, Mr. Krikorian, thank you. It has only been 2 
hours, but I know you have benefited from this insightful 
exchange. So thank you so much for being so patient. We 
appreciate your both being here and look forward to your 
testimony. Dr. Olcott, would you like to begin?

 STATEMENT OF MARTHA BRILL OLCOTT, SENIOR ASSOCIATE, CARNEGIE 
      ENDOWMENT FOR INTERNATIONAL PEACE, WASHINGTON, D.C.

    Dr. Olcott. Thank you very much. It is an honor to be 
invited to testify before you today on U.S. policy toward the 
Caspian region and to have the opportunity to make comments on 
S. 1344. My brief oral presentation and more extensive written 
testimony both offer a more sober view of U.S. opportunities 
for influencing events in this region than many other speakers 
have today and at other Congressional hearings recently.
    My comments--I cannot compete with Professor Brzezinski, 
but my comments are based on some 25 years of experience 
studying the region, frequent travel. In this period I have 
gotten to know many of the region's leaders, its businessmen, 
journalists, professional analysts, as well as hundreds of 
ordinary citizens. I have also gotten to know the region 
through working as a corporate consultant and as a member of 
the board of directors of the Central Asian-American Enterprise 
Fund.
    I have traveled nearly the length and breadth of six of the 
eight countries under discussion and have generally done so 
overland and not simply by air. I visited oil and gas projects, 
new and abandoned factories, and have seen first- hand the 
declining standards of living, health care, and education that 
many in the region are experiencing.
    There is a growing sense of helplessness taking hold among 
the masses in these countries and it is one that an ever more 
insulated elite is generally losing touch with. I, unlike many 
of the other speakers today, am much more confident about the 
prospects of building democratic societies here than we have 
heard.
    It is important to note that the first 5 years of 
transition to independence have generally gone more smoothly 
than was predicted. This relative success, however, is not in 
itself a reason for great comfort. Countries are little 
different from automobiles or airplanes. They will run only so 
long when maintenance is deferred. Moreover, not every 
defective part can be repaired once it is discovered.
    I am afraid that over the next 5 years we will find this 
image all too applicable to developments in these eight states, 
and the proposed legislation as currently written will neither 
press these countries to seriously attack their deferred 
maintenance problems nor will it address in any serious way 
what to do about the defective parts.
    For the remainder of my testimony I would like to touch on 
some of the most serious issues that I see facing these eight 
states, and I will try to do so briefly.
    One, energy and other natural resource income is coming in 
much more slowly than anticipated, and the problems of 
developing these oil and gas deposits are proving to be 
technically much more difficult than earlier assumed. I am not 
talking simply about the pipeline issue, but the actual 
physical problems of developing the oil and gas.
    Over the next 5 to 10 years, none of the predictions, no 
matter how optimistic, of the oil income show the amount of 
wealth coming into the area as sufficient to meet the deferred 
social welfare needs of this region. Moreover, few of these 
states have clear plans to convert this income into projects 
designed to provide for sustainable economic development.
    Two, in this interim period most of these states are likely 
to face a succession struggle. Few of these states have any 
real preparation for a democratic transfer of power, although, 
as I said before, they are capable of developing in democratic 
ways. As detailed in my written testimony, the situation in 
some states is more precarious than in others. But it is 
nonetheless worth noting that for the moment Turkmenistan's 
future depends on the weakened cardiovascular system of one 
man, Sapamirad Niyazov, with no real alternative successors 
identified.
    Three, the crisis in Georgia, on which I am far more 
pessimistic than the other speakers have been today. The crisis 
in Georgia could lead to even greater instability in that 
already deeply divided society. For all the talk of the need 
for peace in Karabakh, the major challenge to a western 
pipeline route is the unconsolidated nature of the Georgian 
nation and state, which is currently held together by a 
fragmenting series of political bargains.
    Four, at the moment there seems little chance of finding an 
acceptable solution to the Abkhaz crisis. While Russia may have 
exacerbated this crisis, it did not--the recent crisis--it did 
not cause it and, unfortunately, it can no longer solve it. 
Greater international mediation is unlikely to solve this 
problem any time soon, given the nature of the gulf which 
currently separates the two parties. It is unlikely to diminish 
Abkhaz interest in anything approaching full independence or 
motivate the Georgians to accept this independence, given how 
many other ethnic communities in Georgia might later pose 
similar claims.
    Five, ironically, the Russian pipeline routes are beset by 
similar problems, as Dagestan, the alternative route to 
Chechnya, is becoming an increasingly more factionalized and 
unstable region.
    Six, while there is increasing talk of regional 
cooperation, including between the Georgians, Azerbaijanis, and 
the various north Caucasian governments, leaders in poor 
control of their own societies generally do not do well at 
addressing regional problems in concert.
    Seven Central Asian regional cooperation has gone a little 
bit further than that in the Caucasian states. There is greater 
cooperation here on water and energy issues, but the bigger 
problems--how to come with the region's integration with the 
broader Muslim world and with its growing narcotics crisis--are 
still not being tackled in any effective way.
    Eight, if these problems are not addressed quickly, then 
over the medium term the states of this region will begin to 
destabilize one another rather than be mutually supportive of 
each other's future development.
    Nine, Central Asian leaders are still confused about how to 
deal with their Islamic heritage, and the recent concern about 
Wihabism is a good case in point. There are certainly radical 
Islamic movements in the region, although they are not Wihabis, 
even if some may receive Saudi funding. Islam is part of 
Central Asia's heritage and this is especially true of the 
Uzbekhs, and its inevitable role in the region must be better 
appreciated by the region's secular rulers.
    Ten, Islamic movements feed on poverty, declining 
educational opportunity, bad health care, and unemployed youth, 
and all of these are in increasingly evidence in Central Asia.
    Eleven, and I am getting to the end: postSoviet Central 
Asia is one of the few places in the postWorld War Two world 
where universal literacy is declining and universal health care 
has been withdrawn. Since this is coupled with the region's 
growing problem of official corruption, which in most countries 
reaches from the highest level of the government down to the 
lowest, the end result is a sure-fire recipe for public 
cynicism.
    Twelve, cynicism is what makes the region's leaders fearful 
of holding free and fair elections. They already know that 
scoundrels get voted out, and this fear will not be mediated by 
the U.S. Government allocating more money for civic education.
    Thirteen, my penultimate point, what makes the situation 
more frightening is that few of these nations have developed an 
effective state-managed monopoly of force. This makes them 
unlikely candidates to successfully police their borders, let 
alone the internal problems they face within them, any time 
soon or to be able to put down movements of mass popular 
protest. Foreign partners, including the kinds of programs 
suggested in the proposed legislation, foreign partners who 
offer only minimal assistance in these tasks are unlikely to be 
successful in bridging these gaps.
    Finally, fourteen, it also means that they are currently 
incapable of managing or even successfully assisting an 
effective narcotics traffic prevention program. Over the past 
few years, opium growing, heroin processing, and drug 
trafficking play an even greater role in the economy of Central 
Asia and the north Caucasian republics than previously, and 
this is becoming a difficult problem to reverse and will fully 
undermine further moves to democracy if we do not move toward 
it quickly.
    Thank you.
    [The prepared statement of Dr. Olcott follows:]
             Prepared Statement of Dr. Martha Brill Olcott
    The West has discovered the Caspian, and the billions of dollars of 
oil and gas reserves which lie beneath its sea as well as below its 
near and distant shores. The value of these resources has made Western 
businessmen and politicians keenly interested in the fate of the three 
states that contain most of the region's oil and gas--Kazakhstan, 
Turkmenistan, and Azerbaijan--as well as the other newly independent 
nations through which these resources will need to transit on the way 
to Western markets.
    Now most large western oil companies are hoping to secure a 
``piece'' of the Caspian, to help them supply markets in Europe and 
Asia through the first quarter of the twenty-first century. This has 
meant that in six short years ``conventional wisdom'' in western policy 
circles concerning these states has shifted 180 degrees. Azerbaijan and 
the Central Asian states have gone from being seen as inconvenient 
additions to the international scene to being seen as potential 
strategic assets.
    The souring of US-Russian relations combined with the heightened 
attention given to the region's vast energy reserves has led to a new 
set of priorities in the Caspian region. US policy-makers are now 
strongly committed to these states freeing themselves from dependency 
on Russia, and doing this without growing closer to neighboring Iran, 
the other logical but underutilized outlet to global markets. We also 
are encouraging these states to develop alternative security 
arrangements to complement the Russian-dominated CIS military 
agreements as well as to concentrate on developing ties with the global 
economy, even if for now these come at the expense of good trade 
relations with CIS partner states.
    If the leaders of the Caspian states follow all this advice, US 
policymakers maintain, they will be serving their countries' best 
interests. But it is far from clear that this is the case, or even that 
this change in policy orientation is in the best interests of the US, 
or the long4erm interests of the western firms so eager to do business 
in the Caspian region.
    This change in US and western attitudes is likely to affect the 
kinds of states which emerge in the region, and not necessarily for the 
better. In the short-run it makes these states more likely to survive, 
as Russia has effectively been put on warning to not become the 
neighborhood bully. Yet Russia's influence in this region may have been 
exaggerated. The greatest sources of instability seem certain to lie 
within these states themselves, and seem certain to be further 
stimulated if the income from energy sales does not manage to trickle 
down from the elite to the masses. The Caspian states would certainly 
not be the first place where leaders use the national wealth for their 
own personal benefit and then expect the west to help buffer them from 
the actions of angry masses as well as from the intervention of 
neighbors who seek to serve as patrons for disgruntled elements in the 
population.
    The sharply declining standards of living throughout the region, 
the increasing levels of corruption, the refusal of almost all of the 
region's leaders to prepare for a stable and democratic transfer of 
power all speak to the risks ahead. US policy-makers are not taking 
adequate stock of these challenges, at least if we intend for the 
Caspian to be an area of vital national interest. All this suggests 
that current US interest in the region may be little more than 
diplomatic posturing, that we will ``fold our tents and depart'' if the 
investment climate sours, leaving the people of the Caspian states to 
cope on their own with the consequences of their leaders actions.
                     Reassessing the Caspian States
    Initially there was very little optimism in western policy circles 
about what the collapse of Soviet rule in this part of the world 
brings. The new states of Central Asia and the Caucasus seemed rife for 
being overtaken by that fatal combination of drugs, guns, and Islamic 
extremism. Even at birth the neighborhood was already a deadly one; the 
Armenians and Azerbaijanis were fighting over Karabakh, the Georgians 
and the Abkhaz had clashed over the boundaries and definition of the 
Georgian state, and the Tajiks were beginning to fight between 
themselves over who should rule and whether the state should be a 
strictly secular one.
    The presence of so many contested theaters helped contribute to a 
western predisposition to look to Moscow to guide these states into 
more stable and democratic futures, and play the role of policeman if 
good guidance failed. The situation in Tajikistan was particularly 
disturbing. Its porous border with Afghanistan raised the specter of 
the fighting in the two states somehow becoming conjoined and 
threatening the stability of the other Central Asian states. So when 
Russia decided to intervene in autumn 1992 to try and restore order 
they did so with tacit US support. All this, of course, was before 
Chechnya, and the very partisan way in which Russia tilted the balance 
toward the Abkhaz in Georgia, threatening the survival of that nation 
and newly elected President Eduard Shevernadze's physical survival as 
well.
    These latter actions led US and other western leaders to begin 
wondering whether Russia was demanding too great a role, and whether 
Moscow sought to reap the benefits of an empire without sustaining most 
of the costs of maintaining it. The numerous bottlenecks that Chevron 
encountered in trying to negotiate a pipeline across Russia to ship 
Tengiz oil to market began to look to outside observers like key 
figures in Russia's political establishment were more concerned to 
cripple Kazaldistan economically than to extract fair transit fees. 
This impression was further strengthened when Russian leaders began to 
challenge contracts signed between western firms in both Azerbaijan and 
Kazakhstan, saying that the Caspian wasn't these nations' to develop; 
Caspian Sea reserves had to be divided and developed through agreements 
made by all the littoral states. Russia's hold over transit routes made 
their objections more than mere idle threats.
    These developments led to a reassessment in US policy to the 
region. While the rhetoric of US policy is still much the same, the 
interpretation of the policy has changed substantially. While the US is 
committed to these states preserving their independence, introducing 
market economies and developing democratic institutions, the initial 
fire a fairly tentative hold on power, and Armenian President Lev Ter-
Petrosian felt pressured to resign in February 1998, in part because 
his irregularity filled 1996 election made it harder for him to rebuff 
criticism of his conciliatory policy on the Karabakh dispute.
                  The Emergence Of The Caspian States
    Certainly the Caspian leaders have done a far better of securing 
the independence of these states than most observers thought possible 
four or five years ago, but this does not mean that they will be as 
successful with the challenges that lie ahead. One of the problems, 
though, is that there is no agreed on formula for evaluating 
developments in this region, or for predicting with much assurance what 
problems sustaining independence over the mid-term is likely to create.
    For all the talk of throwing off the Russian ``imperial yoke'' the 
Caspian states are not going through a traditional decolonization 
experience. The Soviet Union was not simply the ``heir'' to the Russian 
Empire, but a transformed version of it, simultaneously a quasi-empire 
and a deformed multinational state twisted by the ruling ideology and 
the dominating role of the communist party. The Caspian states are all 
creations of the Soviet experience, and their current elites are the 
explicit products of it. Some of these states have better established 
mythologies of nationhood than others do, but unlike the Baltic nations 
or the countries of Central Europe, all of the Caspian states lack a 
history of independent statehood.
    At the time of independence the Soviet republics had become weak 
quasi-states, a kind of imitation states, each with a president, a 
Prime Minister, a council of ministers, and quasi-democratically 
elected national and local legislatures. They also had a locally 
administered and highly developed network of social services, including 
a school system which was sufficient to sustain universal literacy and 
offered free secondary and higher education, as well as a virtually 
free health-care system which penetrated (albeit unevenly) to the most 
remote rural regions.
    While the Soviet republic structure had been set up to facilitate 
Moscow's administration of these regions, it made the institutional 
transformation from republic hood to statehood smoother than was 
initially expected. Added to this was the effect of the changing 
politics of the late Soviet era, which created new nationalist-oriented 
mind sets among masses and elites alike, giving powerful incentives for 
the governing elite of the Caspian republics to transform themselves 
into national figures. Those who had ``blood on their hands'' from 
doing Moscow's bidding--such as the communist bosses in Georgia, 
Armenia and Azerbaijan--were driven from power at the very time when 
the elites were getting strong new economic incentives to hold on to 
it.
    Talk of economic reform had stimulated both public and private 
claims of ownership to the Caspian states enormous economic potential. 
Oil and gas reserves are only a part of this region's great wealth. 
Kazakhstan has vast reserves of aluminum, copper and chrome, while 
collectively Uzbekistan, Kazakhstan, and Kyrgyzstan account for some 40 
percent of the USSR's vast proven gold deposits and Uzbekistan and 
thrust of our policy is that time is on our side, that direct foreign 
investment is generally coming in quickly enough to enable these states 
to make a successful transition to independence.
    The hope is that revenues will be used in ways that serve the long-
term economic interests of these states and that governments will use 
their royalties and profits to create a diversified economy, a sound 
tax base, and a responsible social policy. True, there is increasing 
concern about the growing problems of corruption in the region, but 
there is little anxiety that the situation might somehow become one 
which is beyond fixing, where disorder in one or more countries 
undermines regional security more generally.
    Even if US policy-makers still express concerns to the various 
Caspian leaders in private, and it seems certain that they do, there is 
relatively little reason to think that their advice is being heeded. 
Over time the region's leaders have gotten more adept at rebuffing the 
implied conditionality of early US policy in the region. The shift in 
US policy has not made these men less democratic, it simply has made 
them less apologetic about their behavior. At the same time too, one 
gets the sense that many US policy-makers may also be coming to accept 
one of the basic premises of at least the Central Asian rulers, that 
their Asian peoples are little suited to democracy by tradition or 
temperament.
    Now many in the west seem to find these arguments more attractive 
than they did several years ago, as the attraction of a ``strong hand'' 
applied in Islamic societies has grown in the face of violence in 
Algeria, the Taliban advance in Afghanistan, and the continued 
simmering of Islamic extremist-inspired violence throughout the Middle 
East, the former Soviet Union, and now even in parts of Europe and the 
US. After all, a large part of the reason why the US continues to press 
for the isolation of Iran is because of Teheran's continuing support 
for these kinds of groups.
    So US leaders seem to have become comfortable dealing with the 
former communist leaders turned nationalist types that still run 
virtually all these societies, and to see them as more predictable and 
hence preferable to the alternative elites who are trying to bubble up 
from economic, political, and social forces that were released by the 
Gorbachev reforms as much as by independence. Some of these presidents 
have always been highly attractive figures to western audiences, such 
as former USSR foreign minister Eduard Shevernadze, or Kyrgyzstan's 
Jefferson-spouting physicist turned politician Askar Akaev. Over time, 
most of the others have also evolved into more worldly-wise political 
leaders, supported in part by advice from Western advisors and their 
own increasingly more sophisticated diplomatic representatives.
    Certainly, it is also the case that virtually all the leaders of 
the Caspian states seem firmly entrenched in their Presidential 
offices. Presidents Karimov and Nazarbaev, who chose to have their 
mandates extended through referendum the last time around, are now 
talking about participating in competitive elections in 2000, and 
President Aliev will face reelection in September 1998. Of course, 
President Rakhmonov of Tajikistan still retains behind these words has 
all but disappeared. Six years ago, we treated these states 
differentially based on their progress in achieving a democratic 
transition. While we rushed to recognize all these states, Kyrgyzstan, 
Kazaldistan and Armenia got US embassies first, in a measure designed 
to nudge the other five toward embracing democratic principles more 
enthusiastically. While no one would deny that practical politics also 
played a role in this decision--Kazakhstan had nuclear weapons and 
Armenian Americans are a potent lobbying force--the US government did 
continue to send out clear signals that the newly independent states 
would be treated differentially. Presidents Karimov and Niyazov were 
denied access to President Clinton during their earliest trips to the 
US, because of their lack of progress in human rights in particular.
    Now the behavior of US policy makers sends a different message. 
Presidents of the energy-rich states are now welcome official visitors 
in Washington, regardless of how undemocratic their regimes are. 
Pipeline politics has come to eclipse concerns over sustaining 
macroecnomic reforms, and fear of political instability has begun to 
clearly overshadow our commitment to the cause of popular political 
empowerment.
    This does not mean that we have abandoned our earlier commitments, 
just that we don't hold leaders accountable when they backslide or make 
little headway in implementing democratic reforms.
    US and most other forms of international assistance is still 
targeted toward projects designed to promote structural economic 
reforms, as well as the legal environment necessary for a rule of law 
and the protection of private property. Kyrgyzstan , Kazakhstan, 
Georgia, and Armenia have received the disproportionate share of this 
aid, as the commitment to a radical restructuring of society remained 
greatest in these countries.
    The US also continues to help all these states (except Azerbaijan 
which is still covered by Congressional Resolution 907 B) overhaul 
their education and social welfare systems. Here too the emphasis is on 
redesigning these systems to increase their long-term viability, by 
transforming them from state-sector to private-sector funded and 
managed activities. This aid is not primarily designed to help them 
meet existing social welfare needs. But the amounts of money devoted to 
these projects remain pitifully small, and no matter how much 
congressional interest in these areas is increasing, the sums available 
for allocation will inevitably be a fraction of the funds necessary to 
help these societies cope with the task of successfully educating and 
economically integrating their overwhelmingly young and rural 
population while still providing for their pension-age citizens.
    The economic crises and social welfare challenges that all these 
states face are severe but there is nothing in the US policy to convey 
a sense of panic. In the official US view none of the Caspian states 
are seen as beyond saving, including war-torn Tajikistan, which is now 
showing signs of possibly emerging from five years of sporadic fighting 
with an increasingly more factionalized polity than the one which led 
to the war. The Turkmenistan are major international cotton producers. 
Powerful nationalist movements developed in Armenia, Azerbaijan, and 
Georgia and even in the politically more passive Central Asian 
republics the state leaders began to stake out a direct claim to manage 
the resources in their domain.
    The speed with which independence came may have been unexpected, 
but whatever their lack of international experience, the new heads of 
state were quick to grasp what an extraordinary opportunity 
independence meant for them personally and for those they chose to 
empower as they directed the privatization process in their now 
sovereign states. At the same time, it was not intuitively obvious to 
them how to capitalize on this new advantage. For all their political 
shrewdness and administrative acumen, the Caspian leaders lacked the 
kind of basic knowledge of what the world beyond their borders looked 
like and how it functioned. Victims of the ideological system which had 
produced them, the first post-Soviet heads of state were far less 
worldly than the post-colonial leaders of the 1940s, 1950s, and 1960s 
had been. Most had little knowledge of the most elementary questions of 
finance and trade, not to mention the more complex ones of how the 
global market functioned in the energy sector, in precious metals, or 
in most other commodities. All these questions had been handled by 
specialists in Moscow, people with whom most of the new Caspian leaders 
and their close associates generally had little direct contact.
    It is not surprising then that the first few years of independence 
were characterized by a number of false starts in attracting foreign 
economic investment. The leaders of most of these countries began to 
get advice from a variety of sources, ranging from prominent Western 
businessmen and politicians, to friends and acquaintances who had 
emigrated and then ``made'' it in the west, including advisors and 
technicians sent from Moscow.
                   Accepting International Direction
    Progress was erratic in the first few years, as the coming undone 
of the Soviet Union was not a seamless process and required that each 
of these states come to terms with Russia as well as with each other. 
In Tajikistan, Georgia, and Azerbaijan it sharply exacerbated 
protracted and violent struggles between competing elite groups for 
control, while normal state-building in Armenia was suspended due to 
the ongoing conflict over Karabakh and the accompanying blockade by 
Azerbaijan.
    Russia did not appear as a disinterested party in any of these 
disputes, which only made the other Caspian states more nervous in 
their dealings with Moscow. The other Central Asian states were 
concerned that the Tajik crisis might be a harbinger to similar 
struggles in their own country, which made Russian security guarantees 
all the more necessary. At the same time though, none of these states 
wanted to accept Russian economic domination as the price for these 
guarantees.
    So the first few years were dominated by a testing process between 
Moscow and the ``good'' Caspian states (Georgia and Azerbaijan were not 
active members of the CIS during that period). The international 
community was still a rather passive actor in the newly independent 
states. Diplomatic recognition was offered but substantial assistance 
was largely deferred while the international financial institutions and 
various aid agencies of western democracies studied the situation to 
figure out the most effective ways to intervene.
    The parameters of the economic autonomy of the Caspian states began 
to be increasingly clear after the collapse of the ruble zone in late 
1993. By then the international community was also mobilizing for 
action. Kyrgyzstan was the first of these states to accept an economic 
recovery program designed by the international financial institutions 
and donor nations, and introduced its own currency in May 1993. 
Kazakhstan followed quickly thereafter, but international recovery 
programs were not made available to Uzbekistan until 1995, to Armenia 
and Georgia until 1996, and to Azerbaijan and Tajikistan in 1997. By 
that time the Kyrgyz were already on their second three year program, 
but the Uzbek program was in suspension, and the Turkrnen were still 
struggling to get their economy in a state of sufficient readiness to 
be assisted.
    The timing of international intervention reflected the receptivity 
of the various states to macroeconomic reforms. Kyrgyzstan has been the 
test case for international intervention. It was the first to embrace 
the case of privatization and moved quickly to create legal guarantees 
for local and private property owners. Kyrgyzstan was moved quickly to 
establish a banking system, to reform the tax structure, and to limit 
government spending to what it could raise from investment, tax, and 
foreign assistance. A similar reform package was introduced in 
Kazakhstan, where the government has gone even further to try and meet 
the expectations of the international community, engaging in a 
systematic overhaul of social welfare delivery systems as well.
    Kazakhstan's new pension system is being hailed by many as the 
model for other newly independent states, as over a 45 year period it 
will gradually replace the current pay-as-you-go system with private 
pension funds that will be supported through investments on the new 
Kazakh securities exchange. All this assumes a dynamic and fully 
privatized Kazakh economy, stimulated by foreign investment and 
sustained over time by the burgeoning Kazakh investors themselves.
    The Georgians only began to pay serious attention to questions of 
economic restructuring after Eduard Shevernadze took over as President, 
and the Azerbaijanis whose oil income has been used to fund their 
economic restructuring--have accepted far more international guidance 
under Geidar Aliev's rule than during that of his predecessors. The 
Uzbeks and the Turkmen have been the slowest to accept international 
guidance on these questions. Initially both thought that they had 
enough resources to do it ``their way,'' and both introduced their new 
currencies without benefit of IMF stabilization programs.
    The Uzbeks, who were using the sale of gold reserves to bolster 
their failing som, gave up and invited the IMF in, only to abandon the 
agreed on strategy a year later when they sharply restricted the 
convertibility of the som, even for most foreign investors. The Uzbek 
government maintains that it is still eager to attract foreign capital 
and promises to sharply reduce the currency restrictions by late 1998 
or early 1999. The Tashkent government has made no secret of its 
contempt for the ``wildness'' of the privatization process in Russia 
and even in neighboring Kazakhstan, so their go slow policy suggests a 
desire to strongly influence the makeup of the winners and losers in 
the process.
    The Turkmen are still in the process of negotiating with the IMP, 
and like the Uzbeks, they have long favored subsidized prices over 
freely convertible currencies. Like Azerbaijan, gas-rich Turkmenistan 
was an energy producer in the Soviet period. As such, the Turkmen 
government intuitively turned to the Russians, and looked to their 
long-term partner Oazprom to help them develop their reserves and 
market their products in the west. But the two quickly clashed over 
terms, as Russia wanted the Turkmen to provide gas to the cash poor CIS 
states, and leave the more solvent European markets to Oazprom. This is 
what pushed the Turkmen government to try to integrate directly in the 
global markets, and to invite in the international financial 
institutions to help them with the process. Here too there is little 
enthusiasm for transparency, but the economy of Turkmenistan is so much 
more fragile than that of Uzbekistan and the elite with capital for 
investment so much narrower that they still remain fully within the 
government's control.
    Concerns about transparency have regularly surfaced in all the 
Caspian states. It has been a particular problem in Kazakhstan, whose 
press has been granted some discretion in discussing such matters. The 
privatization process is furthest along in Kazakhstan, with over three 
quarters of all enterprises in the country in private hands by late 
1997, including over half the nation's large enterprises. The more 
valuable the commodity, the less transparent the process has been. 
While Kazakhstan has been more conscientious about putting valuable 
resources up for development through tender, the results of these 
tenders have sometimes seemed inexplicable. While there have never been 
serious allegations about inappropriate behavior on the part of major 
western oil firms, there is no shortage of rumors concerning powerful 
middlemen who transport suitcases of currency to leading political 
figures. Kazakhstan metallurgy industry has been scandal-ridden as 
well. Contrary to the advise of foreign economic experts, several large 
processing plants were transferred to management companies, which 
turned them over for privatization only after their stockpiles of 
valuable resources were sold off.
                Relying On Foreign Investment In Energy
    Foreign economic investment is intended to be the cornerstone of 
the Caspian states' economic recovery, and the lack of transparency in 
the region rightfully continues to make many potential investors wary, 
while the promise of large potential rewards clearly is bringing many 
others in. For all the negative publicity about corruption in 
Kazakhstan, the government's two Eurobond offers were quickly 
oversubscribed. Overall, the Caspian states have made steady progress 
in attracting direct foreign investment. Not surprisingly this 
investment is going disproportionately into the three oil and gas rich 
states, and Kazkhstan leads all the newly independent states in the 
amount of investment on a per capita basis. However these investment 
figures can be somewhat misleading as a measure of the long-term 
economic prospects in the region. They are a better indicator of 
western interest in developing the Caspian oil and gas reserves than 
they are a measure of the ability of western firms to do so.
    There are enormous hurdles which must be met before the ``oil 
dollars'' begin rolling in, and much can change in these states in the 
interim period. Some earlier problems have begun to fade as Russia 
seems to be accepting the idea that the undersea resources of the 
Caspian will be divided into national sectors. However, the most 
critical issue constructing additional pipelines to move oil and gas 
from these states is moving forward only slowly.
    Russia is trying to maintain its monopolist advantage in transit, 
and is against routes which bring competing sources of oil and gas to 
Russia's export markets. At the same time though, Russia's own 
political and economic fragmentation has made it difficult for Moscow 
to ``deliver'' on Russian transit routes. Russia's republic and oblast 
leaders want to maximize transit fees. The Russian oil and gas 
industry, with its powerful semi-privatized firms, Gazprom, Lukoil, not 
to mention, Transneft--which still has a monopoly over the pipelines 
themselves--all have their own corporate interests to protect. When all 
these competing forces come together you get an almost insolvable 
problem. While everyone seems sure that oil and gas will eventually 
flow from the region, no one can say with much certainty how soon and 
at what cost.
    Although the Azerbaijani International Oil Consortium (AIOC) that 
is developing the 510-million-ton-rich Azerbaijani Chirag, Azeri, and 
Gunashli fields seems committed to a western transport route through 
Georgia and Turkey, the route is a costly one, could require subsidies 
from either the US or Turkish governments, and will not be developed if 
it passes through or borders on a zone of constant conflict. While the 
Georgian government may ask for NATO security guarantees for the 
proposed pipeline across its territory, it is hard to imagine that NATO 
member states will provide them to Tbilisi.
    For now the only firm route for ``big'' oil is the Caspian Pipeline 
Consortium (CPC) a pipeline across Russia. Moreover, there is little in 
the history of that project to reassure western investors. The 
negotiations over the CPC became so bogged down that for a while it 
looked like Chevron might even pull out of the Tengiz project, despite 
the enormous size of the deposit and Chevron's nearly decade long 
negotiations to secureit. Mobil's entry into the transaction in 1996 
injected more capital into the deal and allowed the pipeline consortium 
to be redefined to the satisfaction of both the Russians and the 
Kazakhs. Even now, though, the final transit terms are still not 
resolved, and the project has experienced continual delays, with 
Chevron relying on a series of costly stopgap measures to keep some oil 
flowing and some revenues coming into Kazakhstan's coffers.
    While it is clear that alternative pipelines will eventually 
emerge, it is still not fully clear how much new oil the existing 
markets will bear. Until the actual investment in extraction is made, 
western firms are free to pay the appropriate fees and back away from 
their promised investments. While this is unlikely to happen throughout 
the Caspian region, it is certainly possible that some of the more 
costly to exploit deposits could be abandoned if the price of oil 
continues to drop and new markets come on line more slowly than 
anticipated.
    It is important to remember that the pipeline issue will not be 
decided in a vacuum. If financing a major pipeline through Iran becomes 
politically feasible, so would be developing Iranian oil and gas. In 
the next decade Iraqi oil might also become available for development, 
and it will be cheaper and easier to develop and market than much of 
the resources in the Caspian region. For now Saddam Hussein seems an 
intractable and immortal force, but it is unclear which will come 
first, his departure or peace in Afghanistan. The latter is a 
prerequisite for shipping oil and gas from Central Asia on to Pakistan 
and India. Moreover for this southwest route to be financially 
attractive there must be access to the Indian and Pakistani markets, 
which adds another difficult to obtain condition to that of peace in 
Afghanistan.
                       A Population Under Stress
    For now, income from the energy sector remains below projected 
levels. In 1997 Kazakhstan experienced the first substantial increase 
in oil production since independence, and Azerbaijan experienced 
increases as well , while Turkmenistan's gas industry remained 
seriously depressed, although production increased somewhat. 
Turkmenistan's crisis is certainly the most severe. They have been 
forced to accept a barter arrangement for partial payment with Ukraine 
rather than see their market for natural gas collapse entirely, and 
their new pipeline across Iran requires them to cost-share construction 
through payment in kind, which effectively sharply limits the income 
from current exports.
    The partial recovery in the oil and gas industry is part of a more 
general economic recovery. The GDP's of all of these countries, except 
for Tajikistan, finally began to increase in 1996. Many including 
Kazakhstan in particular experienced even larger increases in 1997. 
However, some caution is warranted in looking at these increases, as 
they oftentimes do not speak to the scale of the recovery which is 
necessary before these countries begin to experience any sort of 
meaningful economic recovery.
    Take the case of Georgia, whose 11 percent increase in the GDP is 
being trumpeted as a sign that the Shevernadze government is turning 
this country around, an argument which is critical to the defense of 
Georgia as an ideal and stable transit point for Azetbaijani oil. Such 
an argument ignores the near totality of Georgia's economic collapse in 
the years of the Gamsakhurdia government and subsequent war with the 
Abkhaz separatists. Even marginal improvements in the Georgian economy 
produce enormous increases in the GDP. Although the lights and heat may 
be on again in Tbilisi and the return to energy production is part of 
what is included in this figure these recent increases are not 
realistic indicators of a sustainable economic recovery.
    Industrial production must be restored, agricultural exports 
reestablished, and new jobs created for this turnaround to be 
sustained, and on all those counts the situation in Georgia is still 
problematic. It is clearly for this reason that Georgia is campaigning 
so hard to be the main transit point for the AIOC's ``big oil'' for 
without this guaranteed source of income it is hard to imagine Georgia 
being in a position to repay its mounting international obligations. 
Even with the assistance that Georgia has received, the standard of 
living has dropped precipitously in what was previously considered one 
of the better places to live in the USSR, because the climate was mild 
and food was generally abundant by Soviet standards. However, since 
independence the per capita food consumption of meat, milk and eggs has 
dropped dramatically in Georgia; only the populations of Armenia and 
Tajikistan seem to have fared worse than the Georgians have.
    Diets appear to be deteriorating across the Caspian region, even in 
the more affluent states of the region such as Kazakhstan, which has 
had the strongest combined foreign investment and internationally 
funded economic reconstruction program. Kazaldistan's population was 
always better nourished than that of the other Caspian states, which 
was a reflection of the generally higher standards of living that the 
more industrialized areas of the Soviet Union enjoyed. Even now with 
their deteriorating diets, an average Kazakh still eats better than 
people did in most parts of the USSR at the time of its collapse. The 
Kazakh population though still has a strong feeling of relative 
deprivation, as the Kazakhs, like everyone else in the Caspian region 
are consuming significantly less meat, milk and eggs, and more grain 
products than previously. In addition, the Kazakhs are spending a far 
greater percent of their disposable income on food--up to two thirds 
now, or twice the previous level. The pricing structure in Kazakhstan 
is closest to world standard, but the salaries are higher there as 
well. The relative expenditures on food have risen even more quickly in 
some other countries--Azerbaijanis and Tajiks now pay on average almost 
eighty percent of their income on food.
    Given that the Soviet press was filled with articles in the late 
1980s on how precariously balanced were the lives of most rural Central 
Asians--their bad diets, despoiled environment and declining health 
care--it is clear that their lives have only further deteriorated. It 
is difficult to get reliable information on the percent of the 
population that currently lives in poverty. In the late Soviet-era the 
Tajiks and Turkmen were considered the poorest in the region, and while 
there are no official statistics which bear this out, first-hand 
accounts from the region suggest that this is still the case. 
Proportion of the population that lives below the poverty line is 
certain to be dangerously high, given the better statistical reporting 
from more affluent neighboring countries. In Kyrgyzstan, approximately 
sixty percent of the population live in poverty, which is defined as 
living at under a $1 per day, while the International Red Cross reports 
that 73 percent of all Kazakhs live on less than $50 per month, which 
is the Kazakhstan government definition of poverty.
    The worsening of the diet of most people has helped speed the 
deterioration in public health. The population has become more rundown 
at the very time that public health services and sanitation are 
deteriorating. Here the evidence is more anecdotal than systematic, but 
over the past several years there have been reports of epidemics of 
typhus, cholera, hepatitis, polio, and now tuberculosis. The latter is 
especially serious in Kazakhstan where a virulent strain has become 
entrenched among the population, and the government was recently forced 
to close a major tuberculosis facility because of financial problems. 
The national pharmaceutical industry was in serious decline just prior 
to the collapse of the USSR. However, after one country split into 
twelve, routine childhood immunizations became more difficult to obtain 
for the countries that lacked pharmaceutical production facilities, had 
nothing to barter with their neighbors, and were forced to use scarce 
currency reserves to keep protect the health of their populations.
    In the last few years some international assistance has been 
targeted to address this issue, but as remote health care facilities 
close down in part due to growing shortages of doctors and parents keep 
ill-clad children home from unheated schools, the increased prevalence 
of long-eradicated childhood diseases will not be easily reversed. The 
Kazakh government recently announced a free inoculation program for 
children up to age five, but it remains to be seen how fully it will be 
funded.
    Diseases among livestock have also become more prevalent because of 
the high cost of inoculations, and brucellosis has spread. 
Deteriorating sanitary conditions have speeded up the spread of typhus, 
cholera, and hepatitis especially in rural areas where the rising 
entrance fees at public bath houses (as well as inflated soap prices) 
have put weekly baths out of the reach of many with large families. 
There have also been cases of bubonic plague reported in parts of 
northern Kazakhstan, and there are fears that Almaty may be vulnerable 
because of the city's large rat population.
    Energy shortages have compounded many of the health and sanitation 
problems. Uzbekistan has periodically cut off gas supplies to southern 
Kazakhstan and much of Kyrgyzstan for non-payment, while northern 
Kazakhstan has experienced severe electricity shortages do to disputes 
with Russian providers. Turkmenistan has regular brown-outs in much of 
the country. These shortages affect homes and schools as well as 
factories in the Caucasus as well.
    One of the last publicized aspects of the economic crisis that 
these states are in is the deteriorating state of public education. 
Although there is little reference to this on the public record, Kazkli 
and Kyrgyz officials estimate that about a third of all school age 
children simply don't attend school anymore in winter. This figure is 
probably even higher in countries where fuel shortages are more severe. 
It is undoubtedly far higher in Tajikistan, where the education system 
in the parts of the country most affected by the civil war is reported 
to be in near complete disarray. It is somewhat lower in Uzbekistan 
where authorities have made a concerted effort to provide subsidized 
school lunches and targeted schools to meet broader public health 
needs.
    Secondary education is in an even more serious trouble, for here 
curricular issues are no less important than those associated with the 
deteriorating physical plant. In all the newly independent states there 
has been a shift to expanded and improved education in the local 
language, at the expense of education in Russian, which had previously 
been the favored language for advanced and specialized education.
    This switch in language of instruction, and the move away from 
Russian history and culture, is one reason for the steady exodus of 
Russians and other Europeans from these countries over the last several 
years. This can help in the process of national consolidation of these 
states, as it makes the states more mono-ethnic, and creates new 
opportunities for upward mobility among previously disadvantaged 
groups.
    None of these states, though, have the financial resources for a 
complete overhaul of their educational systems and in many places it 
has been easier to quietly close schools than to revamp them. One of 
the first victims was the old Soviet vocational-technical education 
system, which was almost exclusively a Russian language one. The 
severity of the crisis in secondary education varies substantially from 
country to country; Georgia and Armenia had relatively comprehensive 
secondary and higher education systems in their national languages, 
while Kazakhstan and Kyrgyzstan have tried hardest to keep the existing 
Russian language education system most intact. Overall, though, there 
is a growing tendency to transform the old 12 grade system into a 9 
grade one.
    The end result is that tens of thousands of undereducated fifteen 
year olds are being dumped into a saturated unskilled workforce 
annually. Uzbek authorities have began openly talking about the long-
term risk that this poses for the state, but the dangers are as real in 
those countries whose governments are silent about the problem. The 
population of these eight states is disproportionately young, according 
to the 1989 census over half of the titular nationalities were under 
21, 50 this problem is not one which is going away anytime soon.
    Higher and advanced specialized education is faring better in many 
of these countries, especially since this is an area in which these 
states are receiving targeted international assistance. While all of 
the states of the region are pressing their seriously belabored school 
systems to introduce universal English language curriculum to enable 
future generations to receive ``international'' education, Kazakhstan 
and Kyrgyzstan appear to be serving the current generation best, with 
merit based scholarship programs for foreign study and state as well as 
foreign funding of new institutions offering western style advanced 
education in business and economics.
    At the other extreme is Turkmenistan, which recently closed the 
Academy of Sciences to concentrate all the state's education resources 
in the state university. But as with so much else in the country, 
educational reform has had to bear the direct imprint of Turkmenbashi 
(head Turkmen), as President Niyazov prefers to be called, who seems 
more concerned with the size and grandeur of university buildings than 
with the educational curriculum.
    In fact, grandiose public building projects have been a particular 
attraction for Central Asia's leaders, arguing that their people need 
new symbols of independence to be proud of. Only Kyrgyzstan's President 
Akaev has eschewed the region's trend, adding some modest new memorials 
to victims of Soviet and Russian rule to supplement the old Soviet 
monuments. By contrast President Karimov spent millions of dollars 
building a massive museum of Timur in Taslikent, which touts his 
philosophy of state craft as appropriate for the ``reborn'' Uzbek 
state.
    Karimov's efforts though are modest by comparison to the massive 
mosques, museums and palaces being built in Ashgabat. Many of these new 
structures form part of the orchestrated cult of personality around 
President Niyazov, whose face is on the various denominations of the 
Turkmen manat, save for the smallest ones, which were deemed unworthy 
of this honor.
    President Naaarbaev has engaged in the most ambitious public 
construction of all, moving Kazakhstan's capital to Akmola, now called 
Astana. Billions of dollars are eventually to be spent turning this 
windswept small provincial city into a model twenty-first century 
capital, and the government transfer was made with break-neck speed, 
less than three years after the original decision. While Kazkh 
authorities justify the decision as necessary to maintaining the 
internal cohesion or this land giant of a state, and have managed to 
raise much of the costs of new construction from firms eager to win 
government favor, the budget is little able to stand the cost of a 
government which shuttles back and forth between the two capitals, or 
the expense of lodging legislators and ministries officials in dorms, 
service apartments and hotels in Astana. The new capital city also puts 
a severe strain on the north's overcommitted energy resources, and 
leaving local provincial officials searching for ways to heat and light 
their own less essential public buildings.
    Kazakhs may take pride over the fact that President Nazarbaev now 
has 2 presidential palaces and 2 state-built vacation homes, and that 
as a tennis buff he has seen to their as well as his own needs by 
sponsoring the creation of a new world-class public tennis courts in 
Astana. But they probably also find it distressing that coverage of the 
dedication of the new capital went on against a background of 
simultaneous press accounts of pregnant strikers collapsing during 
protests over unpaid wages in a failing phosphorous factory in southern 
Kazakhstan.
                           The Coming Threats
    The ``shock'' of transition is the next challenge which each of 
these states must withstand, for only Armenia has undergone a peaceful 
and quasi-democratic political transition. The principle of choosing 
leaders through competitive elections seems better established in the 
Caucasus than in Central Asia, but this in itself does not make the 
region a stable one. The boundaries of all three states are still 
contested and those who are challenging these boundaries are unlikely 
to be appeased through the incentives of pipeline politics or foreign 
economic investment more generally.
    Regional initiatives are doomed to defeat as long as the status of 
the Karabakh remains unresolved and the progress of Minsk negotiating 
group of the OSCE seems sure to be slowed by Karabakh leader Robert 
Kocharian's victory in Armenia's presidential election. Fortunately 
though, the internal political problems of each of these three states 
generally have little impact on their neighbors.
    Georgia seems certain to have the most difficult transition in the 
region. In many ways it is not yet a consolidated nation, but a 
collection of semi-sovereign enclaves, whose leaders have generally 
accepted the authority of President Eduard Shevernadze. The status of 
Abkhazia remains unresolved, and will remain difficult to entangle as 
long as the north Caucasian republics of the Russian federation 
including Chechnya are still working out their status with Moscow. Most 
of these disputes have become mutually reinforcing, with arms supply 
lines cutting across national boundaries. The routing of pipelines 
across these territories will only increase the value of political 
autonomy for the leaders of these various national communities. The 
ongoing Abkhaz crisis makes the government in Thilisi more vulnerable 
to pressure from other ethnic and regional groups; the recent 
unsanctioned clashes between Georgian insurgents and Abkhaz fighters 
only serve to highlight the difficulties that President Shevernadze has 
controlling his own population. Even a democratically elected successor 
to Shevemadze will still have to come to terms anew with the leaders of 
Ajaria and Southern Ossetia, and try to appease the frustrated 
ambitions of rival Georgian groups.
    Geidar Aliev's successor in Azerbaijan should face a somewhat 
easier problem, if he is chosen in even a quasi-democratic way. 
However, if Aliev holds an undemocratic presidential election in 1998 
and then tries to put his son in charge, then Azerbaijan could once 
again degenerate into the kind of civil disorder that helped bring 
Aliev back to power in 1993. Azerbaijan is no less complex a society 
than Georgia is, and too potentially wealthy a state to become the 
exclusive hereditary preserve of a single elite group. Moreover, as 
long as Azerbaijan has multiple exists to market through Russia, 
through Georgia and Turkey, and possibly someday through Iran it will 
be able to continue to benefit from its vast oil reserves.
    The five states of Central Asia are potentially more interdependent 
than those of the Caucasus. Here the greatest risk is the states 
imploding from within, and the ``fallout'' crossing national 
boundaries. We have already seen some of this in Tajikistan. Although 
the war in Tajikistan did not create the domino effect that many 
feared, Kyrgyzstan and Uzbekistan have had to cope with an unwelcome 
refugee burden (generally their own conationals) generated by the 
crisis.
    Even more serious is the growing drug trade across the region, 
particularly problematic in southern Kyrgyzstan, which most attribute 
to the porousness of the Tajik-Afghan border. Heroin as well as opium 
is now both transiting and being produced in Central Asia. Poorly paid 
border guards and policemen are easy prey for those interested in 
moving this deadly cargo.
    Serious social unrest in Uzbekistan, even if of a much smaller 
scale than the civil disorder in Tajikistan, would pose a risk to all 
the other Central Asian states. The situation in Uzbekistan seems 
stable enough today, but the society will come under great stress at 
the time of political succession. Karimov's putative heirs will be the 
ones who pay if the Uzbek president guessed wrong when he opted for 
economic stabilization over the macroeconomic reform program suggested 
by the IMF and World Bank experts. There is virtually no institutional 
preparation for a democratic transition in Uzbekistan, which raises the 
prospect of a free-for-all developing as Karimov's strength diminishes. 
Given that Uzbekistan is the center of Central Asia's religious 
revival, religious themes will be invoked as groups jockey for support. 
Secular political elites may also choose to make common cause with 
radical Islamic activists who remain very powerful in the densely 
populated Fergana Valley even after years of government efforts to 
reduce their influence.
    Uzbekistan's government has created the most pervasive and 
effective security force in the region and is clearly able to deal 
summarily with small pockets of resistance, but is unlikely to be able 
to deal effectively with mass resistance, or with the kind of disorder 
that would accompany a shift in drug routes through Uzbekistan. Efforts 
to control widespread unrest would inevitably lead to ``spill-over'' of 
the opposition into Kyrgyzstan and Tajikistan and possibly into 
neighboring Kazakhstan as well. If Islamic groups should take power in 
Uzbekistan or even if a secular regime should opt for visible religious 
coloration, there is sure to be impact in all three of these 
neighboring states.
    Southern Kazaklistan and southern Kyrgyzstan would both be strongly 
affected, and deepest latent anger at deteriorating economic conditions 
could turn into widespread and potentially violent public protest in a 
very short period of time. Kazaldistan's former Prime Minister Akezhan 
Kazhegeldin publicly warned of this possibility in March 1998, and 
although there was an element of political posturing on the part of 
this possible presidential candidate, the same point is being made with 
increasing frequency by local political observers.
    Kazakhstan could and should have an orderly political transition, 
but the opportunity for personal enrichment that is afforded those who 
hold power is an enormous temptation for those close to President 
Nazarbaev. Over the past several years, Kazakhstan has become a 
steadily less democratic state, with a far weaker legislature and far 
stronger presidency than Kyrgyzstan or the Russian Federation has, 
although it is still a far more pluralistic society than either 
Uzbekistan or Turkmenistan. Kazakhstan is roughly as democratic as 
Azerbaijan, but it is less immune from outside influences. Kazlistan's 
large Russian population and long border with Russia means that Moscow 
will never be a disinterested observer with regard to developments 
here. The pace of economic recovery is sure to effect the nature of the 
transition which occurs, for if government efforts to sponsor the 
development of small and medium size businesses succeed, there should 
be a large enough middle class to support a stable transfer of power 
regardless of how undemocratically it is orchestrated.
    Barring major unrest in neighboring Uzbekistan, there should be a 
relatively smooth transition from President Akaev to his successor. The 
small country's elite has shown relative skill at sorting things out 
behind closed doors which has helped make Kyrgyzstan' 5 elections the 
freest in the region. Turmoil here would have relatively little 
consequence on neighboring states. The Kyrgyz do however, control much 
of the water supply to neighboring countries, and thus have some 
leverage to exert in regional affairs.
    Turkrnenistan is the most unpredictable of the Central Asian 
states, and in the short-run potentially the most unstable. President 
Niyazov's health is uncertain, and the problem of succession is one 
which cannot even be discussed let alone planned for in this extremely 
tightly controlled state. The elite here is quite small, and mirrors 
the clan cleavages of Turkmen society, but they have been allowed very 
little room for economic development and political maneuvering. Those 
from the larger and more powerful clans would be able to make effective 
use of popular disaffection. A protracted political struggle here could 
focus on plans for foreign development of Turkrnenistan's resources, 
with existing contracts proving as long- or as short-lived as the 
reputation of a deceased leader in a lawless state.
                         What If Things Go Sour
    It is hard to know just how effective a force western governments 
are likely to be in influencing the outcome of events in the Caspian 
region. Obviously we have a capacity for military intervention should 
we choose to do this. The US took pains to demonstrate this when the 
82nd Airborne organized jump that took them from Georgia to Kazakhstan 
in September 1997 as part of the training process for CENTBAT, the 
joint Uzbek, Kazakh, and Kyrgyz conflict peacemaking force which is 
being sponsored by NATO's Partnership for Peace.
    However, the reluctance with which the US and other western nations 
have committed to the use of force in recent years is testimony to how 
great a gap must be bridged for military capacity to become military 
engagement. The Caspian region is Russia's back-yard, and Western 
leaders have taken pains to convince the Russians that the competition 
over development of Caspian energy is a commercial competition. As 
eager as we are to see the region's various inter-state and internal 
conflicts be resolved, in order to help facilitate the rapid flow of 
oil and gas, the OSCE states have moved cautiously toward 
internationalizing the various ongoing negotiations, and have yet to 
press for peacemaking or peacekeeping forces to be expanded beyond the 
confines of the CIS states. Any formal use of force by a western power, 
even in the cause of protecting western investments, would be 
interpreted by Russia as a hostile act, and would have grave 
consequences for the future of NATO and evolving European security 
relations.
    At the same time Russia is also no longer free to use force with 
impunity in the Caspian region. The various Caspian states are still 
bound to Russia through a variety of bilateral and multi-lateral 
security agreements, but any Russian intervention that was not at the 
explicit request of the state involved would have potential consequence 
for Moscow's evolving relationship with the west.
    Russia's policy-makers, though, might still choose to intervene in 
the Caspian, even at the risk of suffering the wrath of the west. 
Nonetheless, they are likely to be increasingly more reluctant to do 
so. Intervention would have to bring with it the prospect of enormous 
commercial gain, such as the compensation for helping one Turkmen group 
come to power over another. Alternatively, Moscow would have to be 
confident that their failure to intervene would in and of itself 
constitute a threat to Russian security.
    A variety of situations could lead them to the latter conclusion, 
including inter-ethnic violence in northern Kazakhstan, serious 
fighting between the Georgians and the Abkhaz, or even the prospect of 
radical Islamic groups taking power in Uzbekistan. It is also possible 
that Russia might decide that none of these scenarios pose a direct 
threat to their own national security, and they would opt to more 
tightly seal their own borders instead. While Russia originally scoffed 
at the cost of turning their former inter-republic boundaries into 
secured international ones, they have now begun the slow and expensive 
process of trying to do this.
    With each passing year the likelihood grows that the Caspian states 
will have to assume full responsibility for their own security needs 
before too long. The US, Turkey, and other western states have been 
willing to provide some officer training and other limited military 
assistance designed to gradually wean these states away from exclusive 
dependence on Russian assistance or Russian compatible command and 
control systems. But none of these countries are anywhere near ready to 
defend themselves against a formidable external enemy and most seem 
ill-prepared for prolonged engagement with a determined internal enemy.
    This ``security gap'' will certainly restrict the options available 
to western powers interested in maintaining friendly regimes in the 
Caspian, regimes that will guarantee the security and be willing to 
continue to service their western loans. Despite the current US public 
posture, should it become an all-or-nothing choice between military 
intervention and writing off these debts and investments, the arguments 
against military intervention are almost certain to prevail over the 
impulse to protect our assets.
    In fact, it seems that the west has made an even more callous 
choice about the Caspian region, although there is little in the public 
rhetoric to suggest that this might be the case. While western policy-
makers may talk about the Caspian region as one of new and real 
strategic importance, we see this area as little more than a back-up 
for the potentially much vaster reserves in the more strategically 
located Persian Gulf region. In an energy hungry world, the Caspian 
resources are certainly worth trying to ``snare,'' but the west will 
only help develop them if we can do so at a reasonable cost.
    Loans for economic restructuring are on offer as well as grants to 
help them develop the legal infrastructure necessary to secure property 
and some limited humanitarian assistance to help them get over the 
worst shocks of funding their own social welfare systems. We are even 
willing to provide money for ``civic education,'' although we are not 
necessarily interested in holding these states to the standards of 
developing democracies. But the impetus for economic change must come 
from within these societies themselves, as must the internal fortitude 
necessary to make the transition to even quasi-western and quasi-
democratic states. If it does not then the strategic importance of the 
Caspian will soon become yesterday's news as everyone knows that these 
same resources will once again be available for development when a more 
enlightened set of rulers come around.

------
Note: Some of the material in this testimony appeared in modified form 
in my article ``The Caspian's False Promise,'' Foreign Policy, Summer 
1998, pp.94-113.

    Senator Hagel. Dr. Olcott, thank you. Mr. Krikorian.

   STATEMENT OF VAN KRIKORIAN, CHAIRMAN, BOARD OF DIRECTORS, 
          ARMENIAN ASSEMBLY OF AMERICA, NEW YORK, N.Y.

    Mr. Krikorian. Thank you, Senator Hagel, Senator Sarbanes. 
I guess I can say good afternoon at this point.
    If Dr. Olcott characterized her testimony as optimistic, I 
guess the best----
    Dr. Olcott. Sober.
    Mr. Krikorian. Sober, or not as pessimistic. I would like 
to characterize mine hopefully as realistic, and I will hit 
just the highlights of what is in my written testimony and try 
not to read what has been spoken before.
    I am testifying as the Chairman of the Board of Directors 
of the Armenian Assembly. I would like to thank you for the 
opportunity to be heard and for your attention to this part of 
the world.
    There is no question that U.S. policy has been derailed in 
our national objectives of establishing democracy, the rule of 
law, open economies, and civil society in the countries of the 
Caspian region. That derailment should be corrected, and I want 
to be very clear here. We have no question that commercial 
entities ought to be able to pursue their economic interests on 
legal and commercial bases and the U.S. Government must support 
U.S. businesses seeking fair treatment in foreign countries. 
But the U.S. Government should not be in the business of 
pushing bad deals or in the business of compromising U.S. 
principles every time a foreign government, especially the kind 
of foreign governments that we are talking about, decides to 
politicize a commercial issue or a commercial interest.
    Confusion over what the U.S. Government should be pursuing 
was initially caused, apparently is still being caused, by 
reports that we now know were grossly exaggerated, about the 
Caspian's oil reserves constituting a strategic alternative to 
the Persian Gulf and elsewhere. Based on that faulty premise, 
the U.S. crossed the line from promoting our principles to 
promoting misguided parties and misguided principles.
    From new reports that have been publicly available out of 
Houston by the Baker Institute, London by the International 
Institute for Strategic Studies, and Geneva by Petro 
Consulting, we now know that, instead of the 200 billion 
barrels of oil in the Caspian, a figure which has been loosely 
used, and valued at $4 trillion, including by the State 
Department, we are really talking about between 15 and 30 
billion barrels of proven reserves, maybe. I say maybe because 
that characterization of those barrels of oil as proven comes 
from the Soviet period, which political analysts, I am sure 
like Dr. Brzezinski and his associates, and natural resource 
companies who have been involved in the region are confirming 
were inflated, and they were inflated for political purposes, 
to tell the world that the Soviet Union had a lot more 
resources than it really did.
    The most recent drilling results in offshore Azerbaijan are 
actually showing no oil. Interesting. One of those sets of 
drilling results was in part of an area touted as having four 
billion barrels of oil. The projections of potential reserves 
will have to be adjusted downward as well, and this is 
occurring in a period of reduced oil prices.
    The designated markets for south Caspian oil are in Asia 
and parts of Europe, but not the United States. While there is 
a lot of natural gas, especially in Turkmenistan, markets are 
as big a problem as pipelines. In addition, there are the 
environmental, political, and legal issues that many others 
have raised, as well as the budget problems that the early oil 
pipeline from Baku to Supca is having.
    Problems like that are going to continue and make these 
investments uneconomic. But all in all, the cold truth today is 
that no one can guarantee that the storied Caspian will reduce 
U.S. gasoline prices or have any effect on our strategic need 
to ensure multiple sources of oil.
    Based on promoters' hype, however--and I am not saying that 
everyone talking about those figures is a promoter or is hyping 
it, but the truth is that, based on promoters' hype, the 
primacy of the goals for which the cold war was fought and won 
have dramatically been replaced by the primacy of the goals of 
those promoters' individual financial gains, and the influence 
of U.S. principles and the perception of the U.S. as an honest 
broker are lower now than at any point since the breakup of the 
Soviet Union.
    That is most evident with respect to our policy toward 
Azerbaijan. U.S. companies, the State Department, and other 
government officials have actually, hopefully not 
intentionally, but have actually entrenched institutionalized 
corruption in Azerbaijan and elsewhere. They have also helped 
to grow and perversely promoted as a form of democracy the 
revolving door of U.S. Government officials involved in the 
region and sanctioned the kind of behavior that shocks most 
Americans, and I can cite a few examples.
    You will recall that when Armenians in Nagorno-Karabakh 
were taking the spears for challenging the Soviet system that 
put them under foreign domination, they had not only the 
support but also the encouragement of the U.S. Government. So 
when the U.S. was able to increase its role, the potential to 
act as an honest broker was highly appreciated. When the 
President appointed a special Ambassador, Jack Maresca, to 
mediate the conflict, there was a profound sense of hope.
    Imagine the reaction, then, when upon leaving government 
service Ambassador Maresca went to work for one of the major 
oil companies, lobbying Washington to ingratiate itself with 
Azerbaijan. That sent a message about U.S. rhetoric and 
reality.
    You may also recall that when Congress passed section 907 
it did so with the explicit support, not the opposition but the 
support, of the Bush Administration. I can say that 
definitively because I negotiated the final language of section 
907 with Ambassador Armitage in 1992. The compromise, the 
agreement that we reached, included the administration's 
support for that legislation, and at the House committee 
meeting on September 21, 1992, which adopted what became the 
final version, in an explicit exchange with Congressman 
Broomfield Ambassador Armitage was asked whether the 
administration supported this legislation, specifically section 
907, and he said yes.
    The Bush Administration and a bipartisan Congress supported 
907 because it was and is a reasonable, principled response to 
outrageous behavior. Upon leaving government service, though, 
Ambassador Armitage joined so many other former Bush 
Administration officials by enthusiastically lobbying for 
repeal of section 907. Instead of observing the law, prior and 
present administration officials have been at work to 
circumvent it, while promising Azerbaijan that Congress would 
repeal it. That sends a message about rhetoric and reality as 
well, and in the whole debate about whether the law has worked 
or not frankly is a controlling issue as far as I am concerned, 
because the law was never really enforced.
    There are examples of others in government who have acted 
similarly, but the point is that U.S. principles and U.S. law 
with respect to Azerbaijan are not being implemented 
consistently with the stated policies or national interests of 
the U.S. The proof is in the results.
    We have heard talk about corruption and in fact the 
newspaper accounts and U.S. diplomats will acknowledge that 
corruption is a problem. We know that the president runs the 
country basically as a private syndicate. We know that upon 
assuming office following a coup, he initiated a massive 
offensive against Armenia and Nagorno-Karabakh. We know about 
his political record. In fact, I can summarize it by saying 
that he was one of the guys we fought in the cold war.
    What I would hope would be as troubling as anything to the 
Members of Congress, though, is his personal behavior, and that 
was recounted in David Remnick's book, ``Lenin's Tomb.'' 
Accused of sexual assault, he was shielded from prosecution 
essentially by a decision by the communist party. To my mind, 
that always gives one pause when one thinks about exactly who 
one is dealing with.
    You know that a leading opposition candidate for this 
fall's Presidential election is living in exile. He is afraid 
to return because he thinks he will be killed, and he is 
probably right. In the meantime, President Aliyev was honored 
by luminaries and supplicants from the U.S., promoted as a 
democrat, and even welcomed in the White House, without mention 
of coming to terms with his past or present crimes.
    It was also noted, and I will not go into it again, that 
supporting this kind of a regime is exactly what tends to get 
the United States in trouble, what tends to get our commercial 
interests in trouble over the long term; that no one can 
predict what the future will bring, but political succession is 
inevitable. Considering that the oil contracts were 
renegotiated not only after President Elchibey took power, but 
also after President Aliyev took power, it is reasonable to 
expect that when political succession occurs in Azerbaijan 
there will be a new call for renegotiating contracts. As a 
taxpayer, I can say that I believe that Congress and the 
administration ought to be a little more careful with 
taxpayers' money before allowing agencies like OPIC, EXIM Bank, 
and other agencies to take risks there.
    The bottom line legal conclusion on exploitation and 
transit use of the Caspian is that all five littoral countries 
have to conclude a treaty. Each of those countries has 
different limitation and different problems. It is perfectly 
foreseeable to see that a treaty that may make sense for 
Azerbaijan and Kazakhstan may not make sense in Russia, and who 
knows where Iran will end up.
    It is also constructive to realize that demanding sectoral 
division of the Caspian will not change the law or that legal 
reality. Investments being made on that assumption, that 
sectoral division will occur, are at risk, and companies are 
making those investments with their eyes wide open.
    This pipeline debate actually brings home the point that so 
many people in our opinion have been getting backward. 
Development of the Caspian's energy potential, whatever it is, 
is not going to lead to democratization, stability, and 
regional integration. Those things have to start first, and it 
is in the U.S.' primary interest to see that they take hold in 
this continuing period of transition from the Soviet era.
    We can start by taking down the ``For Sale'' sign that 
private interests have put in front of the U.S., by setting a 
better example when dealing with regional problems, and by not 
buying romanticized notions of what the region is or what it 
holds. Each of the countries that emerged from the Soviet Union 
is different in increasingly important ways. Regional groupings 
for development of energy environmental matters do not 
correspond to regional groupings for development or other 
political matters. The differences in national and regional 
developments ought to be better appreciated if the U.S. as a 
nation is going to do what we set out to do.
    Finally, I want to use this opportunity, which I do 
appreciate, to correct a perception about Armenia that is 
commonly accepted and repeated. Specifically, the President, 
Robert Kocharian, is often misquoted as stating at a public 
event that Armenians would sabotage pipelines. I spoke with 
someone who was present when the quote was purportedly made and 
is a definitive source on what was said. The quote was totally 
incorrect, categorically incorrect.
    Armenians are, however, suffering from the absence of 
common sense and fair dealing being applied to the region. We 
know from the experts that the Baku-Ceyhan pipeline through 
Armenia saves at least $600 million off of what was estimated 
as the $2.3 billion price tag and is the most stable long- term 
route, with the added benefit of encouraging Turkey to be a 
better neighbor.
    We hear that U.S. policy is to encourage decisions based on 
commercial principles, regional integration, stability, and 
such, but no one has put a real proposal on the table. Instead, 
Armenians are consistently criticized for not embracing 
solutions to the Nagorno-Karabakh conflict that we know from 
bitter experience, in most of our cases bitter personal 
experience, put us at risk of another genocide.
    Thank you.
    [The prepared statement of Mr. Krikorian follows:]
                 Prepared Statement of Van Z. Krikorian
    I am testifying as the Chairman of the Board of Directors of the 
Armenian Assembly of America, and I would like to start by thanking you 
for this opportunity and for your attention to this part of the world. 
There is no question that U.S. policy has been derailed from our 
national objectives of establishing democracy, the rule of law, open 
economies, and civil society in the countries of the Caspian region. It 
is now time to wake up from the pipe dreams purveyed by special 
interests. Commercial entities should be able to pursue their economic 
interests on legal and commercial bases and the United States 
government must support U.S. businesses seeking fair treatment in 
foreign countries. However, the government should not be in the 
business of pushing bad deals or in the business of compromising U.S. 
principles every time a foreign government decides to politicize a 
commercial issue.

The Difference Between 15 and 200 Billion Barrels of Oil Is Not 
        Insignificant--Especially in the Caspian

    The confusion over what the U.S. government should be pursuing was 
initially caused by reports that we now know were grossly exaggerated 
about the Caspian's oil reserves constituting a strategic alternative 
to established resources in the Persian Gulf and elsewhere. Based on 
that faulty premise, the U.S. crossed the line from promoting our 
principles to promoting misguided parties. Now, we must try to get on 
the right track.
    From new reports out of Houston by the Baker Institute, London by 
the International Institute for Strategic Studies, and Geneva by Petro 
Consultants, we now know that instead of the 200 billion barrels of oil 
in the Caspian, a figure which has been used loosely and which was 
valued at four trillion dollars ($20 price per barrel) by the State 
Department, we are really talking about between fifteen and thirty 
billion barrels of proven reserves, with a real oil price of fifteen 
dollars per barrel or less. We also know that even those figures on 
proven reserves are from the Soviet period which political analysts had 
suspected and now natural resource companies are confirming were 
inflated.
    The most recent drilling results in offshore Azerbaijan are 
actually showing no oil--just gas condensate; interestingly, one of 
these sets of drilling results was in part of an area touted as having 
four billion barrels of oil. The projections of potential reserves will 
have to be adjusted downward as well, and this is occurring in a period 
of reduced oil prices. Well over 50 percent of what oil there is 
appears to be in Kazakhstan. The designated markets for South Caspian 
oil are in Asia and parts of Europe but not the United States, and 
while there is a significant amount of natural gas, especially in 
Turkmenistan, markets are as much a problem as pipelines.
    In addition, environmental and political pitfalls with regard to 
getting the oil to markets are becoming a bigger problem. The recent 
earthquake in Ceyhan serves as a reminder that the entire Caspian and 
Caucasus region is earthquake prone. The early oil pipeline from Baku 
to Supsa is significantly over budget and there is a dispute over who 
will pay for the overrun which is in the range of hundreds of millions 
of dollars. The Baku-Ceyhan pipeline which has been most actively 
promoted for strategic reasons already appears to be too expensive of a 
proposition unless it can also be used for oil from Kazakhstan. Trans-
Caspian underwater pipeline proposals as well as the particularities of 
the Caspian's environment and water level trigger even more 
sensitivities. All in all, the cold truth today is that no one can 
guarantee that the storied Caspian will reduce U.S. gasoline prices.

Taking the United States on a Dangerous Ride

    Based on promoters' hype, however, the primacy of the goals for 
which the Cold War was fought and won have dramatically been replaced 
by the primacy of the goals of the promoters' individual financial 
gains. Considering the stakes, this transformation must be reversed. 
The influence of United States principles and the perception of the 
U.S. as an honest broker are lower now than at any point since the 
break up of the Soviet Union. This is most evident with respect to our 
policy toward Azerbaijan.
    United States companies, the State Department, and other government 
officials have not only entrenched institutionalized corruption in 
Azerbaijan and elsewhere, but have also helped it grow and actually 
promoted it as a form of democracy. Indeed, the revolving door of U.S. 
government officials involved in the region has sanctioned the kind of 
behavior that shocks most Americans. Let me cite specific examples.
    The United States plays an important role in resolving the Nagorno 
Karabagh conflict through the OSCE, which itself is being tested in the 
process. You will recall that when the Armenians in Nagorno Karabagh 
were taking the spears for challenging the Soviet system that put them 
under foreign domination, they had not only the support but also the 
encouragement of the U.S. government. So, when the U.S. was able to 
increase its role, its potential to act as an honest broker was highly 
appreciated.
    When the President appointed a special ambassador, Jack Maresca, to 
mediate the conflict, there was a sense of hope among many that the 
American style of fair play would make a positive contribution. 
Proposals which were unacceptable in light of the region's realities 
were nevertheless accepted as they were made in good faith because they 
came from a U.S. ambassador. Imagine the reaction in the region, then, 
when Ambassador Maresca upon leaving government service went to work 
for one of the major oil companies lobbying Washington to ingratiate 
itself with Azerbaijan. This sent a message to every country in the 
region about U.S. rhetoric and reality.
    You should also recall that when Congress passed Section 907 of the 
Freedom Support Act in 1992, it did so with the explicit support of the 
Bush Administration. I can say that definitively, because I negotiated 
the final language of Section 907 with Ambassador Richard Armitage. The 
agreement we reached included the Administration's support for the 
legislation, and, sure enough, at the House Committee meeting on 
September 21, 1992 which adopted the final version of Section 907, in 
an explicit exchange with Congressman Broomfield, Ambassador Armitage 
told the world that the Administration supported Section 907. The Bush 
Administration and a bipartisan Congress supported 907 because it was 
and is a reasonable, principled response to outrageous behavior. Upon 
leaving government service, Ambassador Armitage joined so many other 
Administration officials by enthusiastically lobbying for repeal of 
Section 907. Instead of observing the law, prior and present 
Administration officials have been at work to circumvent it, while 
promising Azerbaijan that Congress would repeal it. This too sent a 
message about rhetoric versus reality and also makes charges that the 
law has not worked ring hollow.
    There are examples of others in government who have acted 
similarly, but the point is that stated U.S. principles and indeed U.S. 
law, in particular with respect to Azerbaijan, are not being 
implemented consistently with the stated policies or the national 
interests of the United States. The proof is in the results.
    Control Risks Group has ranked Azerbaijan as the third most corrupt 
developing country. Off-the-record or anonymously in the press, 
diplomats and company officials acknowledge that corruption abounds in 
foreign investment deals. Yet the Justice Department allows the Foreign 
Corrupt Practices Act to lay dormant, securities regulators do not act, 
and, as we learn more that investors were misled on the amount of oil 
in the Caspian, Congress is now considering legislation, namely the 
Silk Road Strategy Act, that accepts the faulty and inflated numbers on 
Caspian reserves.
    The president of Azerbaijan essentially runs the country as a 
private syndicate. Upon assuming office, he immediately initiated a 
massive offensive against Armenia and Nagorno Karabagh. He was a KGB 
general and rose to be a Soviet Politburo member; he is responsible for 
ethnic cleansing, political repression, and major atrocities. Had it 
not been for the vote of the Communist Party, as David Remnick 
recounted in his book Lenin's Tomb, he would have been appropriately 
punished for sexual assault. A cult of personality right out of the 
Soviet manual has been imposed on the people of Azerbaijan who will not 
see the economic benefits of any oil rush, and a leading opposition 
candidate for this fall's presidential election is living in exile with 
a legitimate fear for his life if he returns. Other opposition 
candidates for this fall's elections have stated they will not compete 
because of Aliyev's rigged election law, and Azerbaijan has been in 
gross violation of the CFE treaty without any consequences. Yet, Heydar 
Aliyev is honored by luminaries and supplicants from the U.S., promoted 
as a democrat, and even welcomed in the White House without a mention 
of coming to terms with past or present crimes.
    The U.S. has substantial experience in dealing with strongmen like 
Heydar Aliyev. The experience shows that whatever short-term benefits a 
particular company or U.S. diplomacy may gain, there is a public 
backlash that follows. U.S. political and economic interests can end up 
paying a fairly high price for compromising American principles which 
value clean government, fair play, and respect for human rights. Let's 
not be surprised when the backlash hits if the U.S. continues to repeat 
the mistakes of the past. If U.S. policy aims at establishing secure, 
independent, democratic and economically viable countries in the 
region, sadly implementation is missing the mark. Even though many 
people do not want think about it, political succession is inevitable. 
In Azerbaijan, no one can predict what that will bring, but considering 
that Aliyev renegotiated oil contracts when he took over through a coup 
and one of the current candidates is calling for canceling existing 
contracts if he wins, Congress and the Administration ought to be more 
careful with taxpayers' money before allowing OPIC, ExIm Bank and other 
agencies to take risks there.

Bootstraps May Not Work in the Caspian

    The bottom line legal conclusion on exploitation and transit use of 
the Caspian Sea is that all five littoral countries--Russia, 
Azerbaijan, Kazakhstan, Iran, and Turkmenistan--must conclude a treaty. 
Each of the five countries has different interests and different 
limitations. For example, both houses of the Russian legislature must 
ratify any treaty on the Caspian, and it is easy to see how that could 
be a problem, even if campaigning for the next round of elections in 
Russia had not already begun. Iran presents a special case, where 
different policies collide and implementation is impossible to predict. 
But simply recognizing that it is a wild card reaffirms that unilateral 
action in the Caspian could well set off conflicts that neither the 
United States nor the region needs.
    It is also constructive to realize that demanding sectoral division 
of the Caspian will not change the law or the reality. Investments made 
based on the assumption that sectoral division will occur are at risk, 
and the pipeline and other options on the table today for resolving the 
issues and removing the risk are obviously not enough to bring all the 
parties together.
    Pipeline routes similarly implicate legal, political, economic, 
security, and other issues, with no easy way out. The existing northern 
route through Russia was always subject to sabotage for political 
reasons and simple theft to feed the illegal refineries in Chechnya. 
Those risks were recently supplemented when the Chechen government 
threatened to stop the flow of oil unless Russian war reparations are 
paid and when conflict heated up in Dagestan. In fact, security and 
stability are significant issues whether pipelines go north, south, 
west, or east. Instead of spending time and money pushing alternative 
pipeline routes, it should be clear that the U.S. would be better off 
remaining above that debate and focusing on resolving the conflicts and 
building the foundations for democratic structures in which the types 
of impediments pipelines now face would be eliminated.
    The pipelines debate actually brings home the point that so many 
people have been getting backwards. Development of the Caspian's energy 
potential is not going to lead to democratization, stability, and 
regional integration; those things have to start first, and it is in 
the U.S. primary interest to see that they take hold in this period of 
continuing transition from the Soviet era.

Honesty is the Best Policy

    We can start by taking down the ``For Sale'' sign that private 
interests have put in front of the United States, by setting a better 
example when dealing with regional problems, and by not buying 
romanticized notions of what the region is or what it holds. Each of 
the countries that emerged from the Soviet Union is different in 
increasingly important ways. Regional groupings for the development of 
energy or environmental matters do not correspond to regional groupings 
for development of other matters. The differences in national and 
regional developments ought to be better appreciated if the U.S. as a 
nation is going to do what we set out to do.
    Finally, I want to use this opportunity to correct a perception 
about Armenia that is commonly accepted and repeated. Specifically, the 
President, Robert Kocharian, is often misquoted as stating at a public 
event that Armenians would sabotage pipelines. I spoke with someone who 
was present when the quote was purportedly made and is a definitive 
source on what was said. The quote was totally incorrect. Armenians, 
however, are suffering from the absence of common-sense and fair 
dealing being applied to the region. We know from the experts that the 
Baku-Ceyhan pipeline through Armenia saves $600 million off a an 
estimated $2.3 billion price tag and is the most stable longterm route 
with the added benefit of encouraging Turkey to be a better neighbor. 
We hear that U.S. policy is to encourage decisions based on commercial 
principles, regional integration, stability, and such, but no one has 
put a proposal on the table. Instead, Armenians are criticized for not 
embracing solutions to the Nagorno Karabagh conflict that we know from 
experience put us at risk of another Genocide.
    Thank you.

    Senator Hagel. To each of you, thank you very much.
    Dr. Olcott, if I could begin the questioning with you. Your 
testimony was not particularly uplifting in any way you measure 
the dynamics of that area, and I would like to give you an 
opportunity to, if you can, tell this committee what would be 
your policy? Should we not develop the energy resources, or 
should those resources be developed there?
    How would you go at this? Give us some of your sense. You 
told us all the things wrong, but what is right, if anything? 
But more importantly, how would you come at it or what should 
we be doing?
    Dr. Olcott. Thank you for the opportunity. I obviously 
think the region is one of great potential. I am just a 
realist, and I think we should go into it knowing more about 
the region we are going into.
    I think the energy resources have to be developed. I 
support the idea of multiple pipelines, but I think that the 
notion of cutting Russia out is a foolish one. I think that the 
region's long-term stability depends on having some outlet 
through Iran. This might not be the right time for it, but 
ultimately I think that that is an important outlet for the 
region. It cuts transport to Europe significantly, not just for 
oil, but for all sorts of other goods.
    I am very uncomfortable with the western pipeline because I 
think that it depends inordinately on the stability of Georgia, 
which I see as a highly unstable state. I think that we have to 
do more for democracy-building. We have to do--I am very much 
in favor of the push for privatization in the region, and 
Kazakhstan and Kyrgyzstan have gone much further than the other 
states in this way.
    But the way we are coping with the social welfare benefits 
in these societies is with western style deferred maintenance 
projects. We are now focusing U.S. aid on a Kazakh pension 
program that is designed to make it self-sufficient in 40 
years, but we are not coping with the deferred health costs of 
the--the deferred costs of the pension--helping them cope with 
the deferred pension payments today and the deferred health 
costs.
    So we are building up this social pressure in the society. 
I think if we are going to be serious about acting in the 
region we have to act--if I use the word ``aggressively'' that 
sounds neo-imperialistic, but I think we have to have a more 
concerted, well thought out strategy that is more than simply 
developing the oil of the region.
    We have to work with these states to develop good projects 
for sustainable economic development. The problem of dropping 
education--President Krimov talked about it: In Uzbekhistan, 
about 100,000 young people a year at age 15 are being thrown 
out of schools with no possibilities of employment. We are 
building up proto-revolutionary situations in this part of the 
world. This is happening in Kazakhstan, this is happening in 
Kyrgyzstan.
    So I am all for the development of oil, but I think that we 
have to be--if we say we are going to be strategic or quasi-
strategic partners of these states, we have to go in and really 
help them think--work with them more aggressively thinking 
through the long-term security problems, the long- term 
internal security problems that they face, improving education 
systems, and not be afraid of tackling the problem of 
corruption.
    What we are are pussyfooting with a bunch of very corrupt 
leaders, because we do not want to risk them getting angry at 
us and giving America----
    Senator Hagel. Let me please interrupt just for a moment. 
That is all interesting, but give me two or three examples of 
how we would change our policy, tangible programs focus. How 
would we start to get at this? You said a number of things 
about all the problems in each of the countries and so on, but 
give me some examples of how we get at this.
    I do not think anybody disagrees with your general points 
here.
    Dr. Olcott. Funding for secondary education in some of 
these countries.
    Senator Hagel. Where does the money come from?
    Dr. Olcott. Well, we should be working with them to use 
their oil income to work toward it.
    Senator Hagel. That means they have to develop energy 
resources, if we are going to be working with them to get 
income.
    Dr. Olcott. Or even more equitable tax systems.
    Senator Hagel. But they do not have any money to tax.
    Dr. Olcott. They do have money to tax, and we are not 
really pressing on the corruption issue in these societies.
    Senator Hagel. How do we get at the corruption issue?
    Dr. Olcott. In 3 minutes?
    Senator Hagel. Take as much time as you like.
    Dr. Olcott. The problem is we do not know nearly as much 
about these societies as we pretend we know, and we have not 
done--in Kazakhstan alone, which is the country that I know the 
best of the whole region, we have allowed whole hosts of major 
privatization of mineral resource deals to go forward under 
very corrupt conditions, with very little of the money going 
into the public treasury.
    There has been no, to the best of my knowledge, no pressure 
on the government to go out and collect this money and put it 
back into the budgetary process. That is one very small 
example.
    I am uncomfortable in a public hearing listing the list of 
corrupt transactions that I know have occurred in the region 
where there has been no followup. But there are millions of 
dollars of money being stolen in each of these countries that 
could go into public funding, that could go into the education 
system, the health care system, that are now escaping into the 
pockets of the officials.
    It is not just Azerbaijan, as was pointed out. It is all 
throughout. It is throughout almost all of the region. There is 
very little--because of the politics being dominated by energy 
at this point, there is very little pressure right now on these 
regimes to clean up their act. You hear way too much that 70 
years of communism makes them incapable of understanding 
democracy and there is just very little follow- through of the 
paper trail of these bad privatizations.
    It would be embarrassing to list to you the government 
officials in these countries who have profited from these 
transactions, who have made vast personal fortunes. Many of 
them are outside of the country, and stolen from their own 
population, the money that could be going to solve some of 
these problems.
    Senator Hagel. Thank you, thank you.
    Senator Sarbanes.
    Senator Sarbanes. Well, thank you, Mr. Chairman.
    Dr. Olcott, are you all right on time? I understood you had 
something.
    Dr. Olcott. I had a lunch, but they will wait for me.
    Senator Sarbanes. Fair enough.
    First of all, let me say Dr. Olcott has been a student of 
this area for many, many years. In fact, we have a lot of sort 
of instant experts on the region now, and I do want to 
acknowledge the fact that long before all of these various 
importances attached to this region she was doing some very 
careful and thoughtful analysis and commentary about it.
    This is a diversion, but I am just kind of curious. Is 
there any rationale at all for shifting the capital of 
Kazakhstan to Istana?
    Dr. Olcott. There are three reasons for it, I would say. 
One was that it really does consolidate the position of the 
Kazakh population. The other was there really were ecology 
problems of growing and making Almati grow.
    But the third one I think was a classic corruption issue, 
that what Nazarbayev did was transfer enormous amounts of 
leverage in giving out contracts to people who then became 
enormously personally loyal to him. So fortunes were made on 
the transfer of that capital as well.
    How you would rate the three factors I think depends upon 
your degree of cynicism. But I think that all three really 
played a role in the transfer of that capital.
    Senator Sarbanes. Do any of them have enough validity to 
justify the kind of expenditure and the diversion of resources 
that is being devoted to that purpose?
    Dr. Olcott. Personally, I think it is the worst decision he 
made as president. I think it created a growing sense of 
disillusionment even among ethnic Kazakhs about what their 
independence was about. It did not make them anti- 
independence, but it made them much less loyal to Nazerbayev, 
and they are very loyal to Nazerbayev.
    That move to Istana is one with a lot of hidden figures. 
There has been a lot of talk about how it has only been built 
with foreign money. But all the costs of moving the legislators 
back and forth to Istana--and they go back and forth every week 
and they are housed in Istana at government expense, and this 
is a government that has a very strained budget right now.
    It is not a government that is doing everything wrong. It 
is trying to make pensions even, it is trying to improve health 
care to some degree. But it is taking money away from social 
needs that are much more pressing. Kazakhstan has one of the 
highest tuberculosis rates in the world right now. It has near-
epidemic tuberculosis. All this at a time when you have these 
singing and dancing ladies glorifying the new Kazakh state and 
the what will ultimately be billions of dollars of money spent 
to move a capital faster than any capital has been moved in a 
developed society.
    Senator Sarbanes. Now, I have a perception that one of the 
things that is happening in the region is being absolutely 
oblivious to any other important calculations other than access 
to oil and gas and therefore tolerating practices that in the 
developed world have obviously been ruled out of hand, so that 
in a sense the government policy is to indulge the private 
interests that are seeking to gain this access, even though it 
then results--it may result in high levels of corruption, 
internal development that is truly not long-range in terms of 
putting the country on a stable and prosperous basis.
    Do you share that perception?
    Dr. Olcott. I share that perception, and I would argue it 
is not even good for American business, that American business 
is being pushed into an unstable region faster than we are able 
to ensure the stability of the business community; that if what 
we want is American oil and gas companies to play an active 
role in development of Caspian reserves, which I think is 
something we should want, then we should want the American 
business community to be going in under conditions of greater 
stability, with a government that is more aware of the causes 
of instability and more able to address that instability.
    I am all for American involvement there, and I am not 
implying that American firms have behaved in inappropriate 
ways. But I do not think they are going to stay the long course 
as the region shows itself to be unstable. So I see it as sort 
of an empty policy in two ways. We do not appreciate the 
difficulties of stability in the region. The businesses that 
are trying to work in the region have a much greater sense of 
the instability of the region and they are not going to dump 
good money after bad as projects begin to fail and as 
governments begin to go down.
    Senator Sarbanes. Now, taking the immediate short-run 
outlook and picking up on the chairman's question about, well, 
what can be done sort of practically, how important do you 
consider it to be that the Presidential election to be held in 
Azerbaijan this fall be an open, fair, and honest election, in 
terms of how conditions in that country are going to develop 
thereafter?
    Dr. Olcott. I think it is critical that it be a free and 
fair election. What concerns me most is that if the election is 
not free and fair, then President Aliyev will try to have his 
son replace him, and that will be a long-term scenario for 
disaster in Azerbaijan.
    I think all the elections that are held in the region we 
should push to be free and fair, but I think that is one, since 
it is coming up first, that is one where we get to show our 
backbone, particularly because the implications of not having a 
free and fair election I think are very dangerous for the long-
term consequences of the stability of the state.
    Senator Sarbanes. What can the U.S. do to underscore the 
importance of this and to move the situation toward a free and 
fair election?
    Dr. Olcott. I think we should be working with the 
opposition groups to urge them to run regardless. I think that 
we should continue to pressure for improving the election law. 
We should continue to pressure for changing the composition of 
the electoral commission. I think we really should make it--we 
should help create an atmosphere where it is safe for 
opposition figures to return to the country. We should make it 
clear to Aliyev that if these people die in mysterious car 
crashes or their houses blow up by accident from natural gas, 
that we will view him with great suspicion, that accidents 
happen but it is hard to believe that accidents happen so 
fortuitously.
    So I think that the opposition should be urged to contest 
the election. I think it is always good when the opposition can 
agree on one candidate or two among themselves. But I think a 
free and fair election is what is needed in Azerbaijan.
    Senator Sarbanes. Could I just put one question to Mr. 
Krikorian?
    Senator Hagel. Yes.
    Senator Sarbanes. Some have suggested that the new 
president of Armenia, Mr. Kucharian, is not open to or anxious 
to arrive at a resolution of the disputes with Azerbaijan, and 
I wonder how you would respond to that criticism?
    Mr. Krikorian. Totally incorrect. I have spoken with him 
myself directly about it. He has a different style than 
probably diplomats are used to, though. He is putting all of 
his cards face up on the table and he is saying: Here is what I 
will give you and here is what I will not give you; if you want 
to talk seriously about resolving this dispute, I am ready to 
do it this year.
    He is saying: You know what? In every other conflict in 
every other part of the world, the people that are actually 
fighting with each other are talking with one another. In this 
conflict, however, Azerbaijan refuses to directly negotiate 
with Nagorno-Karabakh without preconditions. Certainly they 
have said that, well, if Nagorno-Karabakh officials accept all 
of our conditions, then we will negotiate with them, which is 
hardly a way to start.
    It is hard to imagine meeting a more serious or honest guy. 
His foreign minister is in line with that. I hope that you have 
had a chance to meet with him. I think that virtually everyone 
who has met with him has come back with that same impression, 
of frankly not playing games. The president came out of a war 
zone, defended his house, his family's houses, from what would 
be devastation, and is a straight shooter among straight 
shooters.
    If I could also just take a quick opportunity to respond to 
Senator Hagel's question, what should the U.S. be doing, I 
think it is frankly to start depoliticizing some of these 
business issues. I do not think that oil companies ought to be 
carrying the U.S. Government so tightly with it when it goes to 
pursue some of these things that it wants to pursue, and that 
was the example that frankly worked, that was used in the 
Middle East, and allowed oil to be extracted from there. The 
U.S. Government was not brought in until fairly late in the 
game. The decisions were made on commercial bases, where people 
knew what the risks were going to be, and they made their 
business decision.
    If they are being treated unfairly, it is a different 
story. They should be protected. But in terms of carrying all 
of the baggage of the sins of this government or the problems 
of this country or that country, I think we should take a step 
back from politicizing issues a little bit.
    Thank you.
    Senator Hagel. Mr. Krikorian, may I pick up on your point. 
Do you really believe that our American energy companies are 
interested in developing resources in the Caspian Sea as a 
front person for the American Government, in fact that the 
American Government is dictating their presence their? Is that 
what you implied or said?
    Mr. Krikorian. No, no, that was not.
    Senator Hagel. What did you mean by that?
    Mr. Krikorian. What I was saying was that I believe that 
the oil companies are bringing the U.S. Government with them, 
that their interests--they are tieing the U.S. Government to 
their interests more than they ought to be, not that they were 
working on behalf of the U.S. Government. I have no question 
that they are working on behalf of their own commercial 
interests. But the extent to which they have drawn the U.S. 
Government, the entire U.S. Government, into that is the 
problem.
    Senator Hagel. Do you not believe that those oil companies, 
as some would suggest, being mercantilists or capitalist 
mercenaries, would have their own self-interest in mind first? 
And that leads me into the next question, if you could answer 
as well. Your numbers that you cited, interesting numbers--I 
had not heard of these, the Houston Baker Institute--
essentially really questioning what the oil companies' numbers 
show.
    I guess the other part of that question is, if the oil and 
gas and the volumes and all the other dynamics that go into 
exploration to develop profit are not there, why would our oil 
companies be there?
    Mr. Krikorian. I think that is what you are seeing. I think 
you are seeing and you are going to go into a period where they 
muddle through.
    Senator Hagel. They are investing billions of dollars. Oil 
companies, no company, can do that without some pretty 
significant cost benefit analysis and risk assessment analysis.
    Mr. Krikorian. Well, we could take a look at exactly what 
they are investing versus what they promised to invest. I think 
if we take a look at exactly what they are investing, we will 
see that you are not quite up to billions of dollars yet. I 
think they have promised----
    Senator Hagel. Have you looked at the books? Have you seen 
what they have invested?
    Mr. Krikorian. I have just seen the general statistics on 
it and I know the terms of their contracts.
    Senator Hagel. You know, these are public companies, so you 
can get that information.
    Mr. Krikorian. I know that. I would be surprised if they 
are in the billions of dollars.
    Senator Hagel. Well, they are.
    But let me go back to the first question I asked----
    Mr. Krikorian. I guess we should also distinguish between 
the different parts, investment in Kazakhstan, investment in 
Turkmenistan, are we talking about offshore or onshore? If we 
are talking about offshore Azerbaijan, you have this very clear 
example of two drill holes and no oil.
    Senator Hagel. But they are continuing to build pipelines 
and invest money there. My question is do you really believe 
they would do that if they felt that there was not much return 
or potential return? Or what would be their motive?
    Mr. Krikorian. I do not think they are doing it as quickly 
as everyone thinks. I think--I do not think they are doing it 
as quickly as everyone thinks. I think before they can justify 
to their shareholders investing anything close to billions of 
dollars they are going to have to have a lot more in their 
proven reserves categories, and not proven based on what old 
Soviet statistics showed. Actually, those statistics are in the 
State Department's report to Congress last year. They are going 
to wait and prove them up themselves if they can, and so far it 
has not happened.
    Senator Hagel. Thank you.
    Let me ask you a question, Dr. Olcott. You had mentioned in 
your testimony and then in response to some questions about 
corruption being rampant in all countries.
    Dr. Olcott. Virtually.
    Senator Hagel. Virtually. Which countries would you 
exclude, where there is no corruption in the Caspian Sea area, 
the Caucasus?
    Dr. Olcott. I would say that there is different levels of 
corruption. Probably Kyrgyzstan would be the least corrupt. In 
the three where there are vast reserves--Kazakhstan, 
Azerbaijan, and Turkmenistan--the level of corruption is the 
highest. Uzbekhistan is the trickiest to talk about because of 
the long-existing second economy, so it is hard to know what is 
continuing patterns of corruption and what is new corruption.
    Senator Hagel. Is there corruption in Armenia?
    Dr. Olcott. In the Armenian case you do not have the same 
reserves and I do not have the same data base.
    Senator Hagel. No, I am not asking----
    Dr. Olcott. So I just do not have that same information.
    Senator Hagel. But would you say, just offhand? You have 
been extolled as an expert in this area.
    Dr. Olcott. But I am not extolled on--you can extol me on 
the six countries that I have worked with for 35 years.
    Senator Hagel. But you do not know about Armenia?
    Dr. Olcott. But I cannot talk about the levels of 
corruption in Armenia.
    Senator Hagel. Levels of corruption or no corruption? There 
are levels of corruption in the Armenian government?
    Dr. Olcott. There are levels of corruption everywhere in 
the former CIS. But whether it touches the kinds of corruption 
that you find in the Caspian states, that I just cannot say.
    Senator Hagel. So it is a matter of degrees of corruption?
    Dr. Olcott. Yes, but when you have poverty levels rising at 
almost the same level, at almost the same speed, in states that 
are being touted as enormously rich, the social upheaval factor 
that you are creating in those states is much greater than in 
states, like Armenia and Georgia, which are not being touted as 
states that are on the verge of great wealth. So the three that 
are touted on the verge of great wealth have much greater 
social risk because of the growing poverty.
    Senator Hagel. Thank you.
    Senator Sarbanes.
    Senator Sarbanes. Mr. Chairman, I just want to make one 
observation. This Baker Institute policy study, which I think 
is an important study, I just want to quote from it. It says: 
``In short, the Caspian Basin is not going to be the ace in the 
hole for international energy security. The region is by no 
means the only major oil and gas province in play that can help 
diversify world oil supplies and reduce reliance on the Persian 
Gulf. Substantial reserves remain to be exploited in Africa, 
South America, and offshore Asia, and particularly the payoff 
in terms of magnitude of incremental supply to global markets 
would be much higher if greater efforts were applied to unlock 
the significant resources lying in Mexico and Russian Siberia, 
rather than similar efforts in Central Asia and the Caucasus.''
    They make the point that the huge distance from Central 
Asian and Caucasus hydrocarbon reserves from the world's major 
energy-consuming regions requires a considerable financial 
investment to bring them to market. The countries of the region 
are landlocked, and it goes along with that analysis and it is 
developed.
    But I think it is important to put this whole thing in 
context. There has been a kind of a fixation, I think, and I am 
all for developing additional alternative energy resources and 
figuring out how to bring them to market, but I think we ought 
to maintain some sense of perspective in this matter, as I said 
in the outset.
    Let me close. I again want to thank--this is a very 
thorough, comprehensive statement Dr. Olcott has submitted to 
the committee and which she quickly summarized. I do want to 
thank you very much for the obvious time and effort that went 
into this prepared statement.
    Senator Hagel. We both, on behalf of the committee, are 
grateful for your testimony and thank you for your patience. We 
are grateful.
    [Whereupon, at 12:41 p.m., the subcommittee was adjourned, 
subject to the call of the Chair.]



                            A P P E N D I X

                              ----------                              

                          Armitage Associates L.C.,
                                       Arlington, VA 22209,
                                                     July 31, 1998.
The Hon. Chuck Hagel,
346 Senate Russell Office Building,
Washington, DC 20510.

    Dear Senator Hagel: Let me begin by thanking you for sending me 
various floor speeches and remarks that you have recently delivered 
regarding U.S. foreign policy. It is very refreshing to hear 
unapologetic statements regarding the need for strong U.S. leadership 
in the international community. I applaud your efforts.
    The purpose of my letter is to respond to testimony given on July 
8, 1998 before the International Economic Policy, Export and Trade 
Promotion Subcommittee regarding Caspian Sea Oil Exports. I felt 
compelled to respond in writing to you because I fear that an incorrect 
statement given by Mr. Van Krikorian, if left unchallenged, may be 
taken as fact. It is my hope that you will share this information with 
your colleagues to remove any doubts on the position of the Bush 
Administration in 1992 regarding Section 907 of the FREEDOM Support 
Act.
    In his testimony, Mr. Krikorian stated that,

        You may recall, that when Congress passed Section 907, it did 
        so with the explicit support--not the opposition, but the 
        support of the Bush Administration. I can say that definitively 
        because I negotiated the final language of section 907 with 
        Ambassador Armitage, in 1992. The compromise--the agreement 
        that we reached, included the Administration's support for that 
        legislation. And at the House Committee meeting on September 
        21st, 1992 which adopted what became the final version, in an 
        explicit exchange with Congressman Broomfield, Ambassador 
        Armitage was asked whether the administration supported this 
        legislation, specifically, Section 907, and he said yes And 
        upon leaving government service, though, Ambassador Armitage 
        joined so many other former Bush Administration officials, by 
        enthusiastically lobbying for repeal of section 907.

    My reaction to Mr. Krikorian's statement was both a `yes' and a 
`no.' The `yes' is in response to the fact that Mr. Krikorian, then 
Director of Government and Legal Affairs for the Armenian Assembly, and 
I did work together to develop language regarding the prohibition of 
U.S. Government assistance to Azerbaijan which would eventually become 
Section 907. Although I cannot cite the reported exchange with 
Congressman Broomfield on September 21, 1992 which Mr. Krikorian notes 
in his testimony, the `no' is in response to Mr. Krikorian's statement 
that the Bush Administration supported this legislation.
    As I recall, in May 1992, the Senate Foreign Relations Committee 
passed an amendment which severely restricted U.S. assistance and trade 
with Azerbaijan until Azerbaijan lifted all blockades against Armenia. 
As the point-man for the Administration however, I fought against the 
amendment, apparently to the surprise and perhaps chagrin of the 
Armenian Assembly.
    Recognizing that some form of aid restriction would be imposed 
regardless of the State Department's efforts and further recognizing 
that the White House was unable to lend its leadership to this issue 
amid a presidential campaign, I negotiated with the Armenian Assembly, 
as a collective representative of over 14 American-Armenian 
organizations, in order to craft the least offensive language that the 
Administration could obtain at the time. Hence, my comment (at a June 
1992 hearing at a House Foreign Relations Committee) that the Bush 
Administration did not object to the 907 language was partly correct--
we did not object to the language that we helped to negotiate--but we 
certainly did strenuously object to any provision which prohibited the 
U.S. Government from addressing the Armenian-Azerbaijani conflict as an 
even-handed mediator and impeded the Administration from conducting 
U.S. foreign policy in an unfettered manner. Any person representing 
the President would also object, of course, to any fetters on 
Presidential prerogative.
    To this day, I personally regret that the Bush Administration was 
unable to fight Section 907 effectively. Had I known that Section 907 
would still exist in 1998, perhaps more persuasive arguments could have 
been made to combat this provision. However, given the circumstances in 
1992, I was only able to mitigate the damage that has been done to the 
role of the U.S. Government in this vital region.
    Finally, regarding Mr. Krikorian's final comment about my apparent 
reversal on Section 907 now that I am in the private sector, I can only 
say that my position continues to be remarkably consistent in both 
public and private sector capacities: I strongly oppose Section 907. I 
have testified regarding this matter as a private citizen well before 
any clients had engaged me regarding Caspian Basin activities.
    As President of Armitage Associates, one of my firm's principal 
activities is help develop private sector humanitarian assistance 
programs to assist the most vulnerable and needy citizens of Azerbaijan 
which, ironically, Section 907 has prohibited. For example, I have been 
honored to be involved with the Texaco Corporation in a program to 
purchase medical supplies and equipment and provide technical 
assistance in order to create a regional blood bank in Baku something 
which, in better circumstances, could also benefit the citizens of 
Armenia. Indeed, many other U.S. companies, such as Unocal, Amoco, 
Exxon and others, also have stepped forward to provide urgently needed 
aid. While these companies should be commended for their efforts, in no 
way should it be a substitute for U.S. Government leadership in this 
area.
    It is my sincere hope that this letter has provided some additional 
clarity on this controversial subject. If you have any questions or 
comments regarding this letter, please do not hesitate to contact me. 
Although I am traveling to Baku next week, I would be very happy to 
discuss this issue with you at greater length upon my return. With very 
best wishes,
            Sincerely,
                                       Richard L. Armitage,
                                                 President.

                               __________

                                                     July 22, 1998.
Senator Chuck Hagel
Chairman,
Subcommittee on International Economic Policy, Export and Trade 
Promotion,
Foreign Relations Committee,
United States Senate,
Washington, DC.

Dear Senator Hagel: I am writing with regard to the hearing on Caspian 
Oil Exports which was conducted by your Subcommittee on July 8, 1998. 
During that hearing one of the witnesses, Mr. Van Krikorian of the 
Armenian Assembly, attacked me by name. This letter is intended to 
correct the record.
    Mr. Krikorian used innuendo to imply that my role as the first 
American mediator of the conflict over Nagorno-Karabakh was somehow not 
impartial because of the fact that after leaving government service I 
joined an oil company. His remarks, and their implications, are totally 
unjustified, and are damaging to my reputation. The facts are as 
follows:
    I spent more than thirty years as a United States Foreign Service 
Officer. In 1991-92, as the Soviet Union broke up, I was the United 
States Ambassador to the Conference on Security and Cooperation in 
Europe (CSCE--now called the OSCE). I immediately took action to bring 
the newly-independent states of the former USSR into the CSCE, and 
personally resolved the last obstacles to membership for Armenia. I 
made several dangerous trips to Nagorno-Karabakh and its region, where 
a bloody conflict was already raging. I subsequently was instrumental 
in creating a negotiation aimed at resolving that conflict. This 
negotiation, called the Minsk Group, had the initial success of 
bringing all the parties to that conflict to the negotiating table.
    I put a lot of effort into finding a solution to the conflict, as 
any participant in those negotiations would confirm. I was scrupulously 
impartial in identifying possible compromises, using my best judgment 
as a neutral mediator. I also tried mightily to get the U.S. Government 
more interested in the areas of the Caucasus and Central Asia. However, 
when I realized that the parties to the conflict were not prepared to 
make the compromises necessary for a peaceful settlement, and that the 
U.S. Government, still very much focused on its policy toward Russia, 
was unwilling to take a leadership role in the Caucasus, I asked to be 
relieved of this assignment and left government service.
    As a private citizen I have fostered a number of conflict-
resolution organizations, and was President of a research institute 
focused on the former Communist countries. About a year ago I accepted 
appointment as Vice President for International Relations of a major 
energy development company. In this position I have worldwide 
responsibilities for the company's relations with foreign governments. 
However, I am not a lobbyist with the U.S. Government, and am not even 
resident in the United States. My views on the Caucasus and Central 
Asia, and in particular on the conflict over Nagomo-Karabakh, have not 
changed.
    I believe attacks like the one Mr. Krikorian made on me have the 
unfortunate effect of discouraging people to undertake the role of 
mediator in conflicts like the one over Nagomo-Karabakh. Such work is 
by its nature difficult, dangerous, obscure and often thankless. If the 
United States is to carry out its responsibilities as the Worlds 
leading power, however, it must be prepared to use its influence for 
mediation of the many conflicts in remote areas, which produce misery 
and desolation for the peoples involved. The American diplomats who 
carry out such efforts should be encouraged, not criticized.
    I believe Mr. Krikorian owes me, and the many American diplomats 
who have carried out such difficult assignments, a public apology.
    The effort of your Subcommittee to focus public attention on the 
Caucasus and Central Asia is laudable, and I hope you will continue it. 
Fortunately there is a growing realization of the importance of these 
regions, for the United States, and for the World.
    With best personal regards.
            Sincerely,
                                           John J. Maresca,
                        United States Ambassador (retired).

                               __________

                          U.S. Department of State,
                                      Washington, DC 20520,
                                                     July 29, 1998.
Hon. Jesse Helms, Chairman,
Foreign Relations Committee
U.S. Senate.

    Dear Mr. Chairman: Following the July 8, 1998 hearing at which 
Ambassador Stephen Sestanovich testified, additional questions were 
submitted for the record. Please find enclosed the responses to those 
questions.
    If we can be of further assistance to you, please do not hesitate 
to contact us.
            Sincerely,
                                    Barbara Larkin,
                                       Assistant Secretary,
                                               Legislative Affairs.

Enclosure: As stated.

Responses of Ambassador-at-Large Stephen Sestanovich to Questions Asked 
                          by Senator Sarbanes
    Question. What can't we do under section 907 of the FREEDOM Support 
Act?
    Answer. The following are some, but not all, examples of the types 
of assistance we cannot provide to Azerbaijan due to section 907 of the 
FREEDOM Support Act:

   Anti-corruption assistance
   Counter-narcotics programs
   Economic reform assistance, including tax reform, 
        development of rational and transparent budgeting procedures, 
        development of a commercial code and tariff regulations and 
        other regulations aimed at improving the economic life for all 
        Azerbaijanis as well as encouraging investment
   Programs to enhance environmental protection and clean up 
        devastated areas
   Programs that promote membership and participation in 
        international organizations such as the World Trade 
        Organization and Partnership for Peace
   Programs that promote regional cooperation among 
        governments; USAIDs Caspian environment program is one example.

    Our ability to work in areas such as these will help us pursue our 
security, energy and commercial interests in Azerbaijan, but assistance 
programs are not the only area hindered by section 907.
    Section 907 serves as a disincentive to a peaceful settlement of 
the Nagorno-Karabakh conflict
    It plays into the ``zero-sum'' thinking in the Nagorno-Karabakh 
conflict, a counterproductive view that the U.S. has been working hard 
to dispel.
    Question. Is the USC aware of any U.S. arms being supplied via 
Pakistan and Saudi Arabia to support the Taliban/
    Answer. No. The USC is not supplying arms to support the Taliban 
through either of these countries or through any other country.Question 
Submitted for the Record
    Question. How are cost overruns on Baku-Poti pipeline going to be 
resolved?
    Answer. The commercial dispute between the Azerbaijan state oil 
company SOCAR and the Azerbaijan International Operating Company (AIOC) 
over responsibility for cost overruns on construction of the western 
early oil pipeline from Baku to Supsa will be resolved through ongoing 
negotiations between SOCAR and AIOC.
    The United States has encouraged both parties to resolve this 
commercial dispute through negotiation and to proceed with plans to 
build a main export pipeline. In the meantime, construction continues 
on the western pipeline. The western route should be operational in 
early 1999.
    Question. Has Abkhazia given back territory to Georgia that it took 
in recent fighting?
    Answer. The territory in the Gali region of Abkhazia is part of the 
region claimed by the authorities of Abkhazia. It remains a part of the 
security zone monitored by the CIS Peacekeeping Force and UNOMIG. 
Internally displaced persons who had returned to this territory in 
recent years fled once again as a result of the May hostilities. The 
status of this territory remains an issue of contention between the 
parties.
    Question. How many Russian troops are in Georgia?
    Answer. There are three different categories of Russian troops in 
Georgia:

   Russian border troops--somewhat less than 4,000
   Defense Ministry troops stationed at four Russian bases on 
        Georgian territory - about 9,000
   Peacekeeping troops:
        CIS Peacekeepers in Abkhazia - 1500
        Russian peacekeepers in South Ossetia - 500

    A treaty on Russian military bases on Georgian territory was signed 
by President Shevardnadze and then Russian Prime Minister Chernomyrdin 
in 1995. Although the two countries' parliaments have not ratified the 
treaty, as recently as April 30, President Shevardnadze said that the 
Russian military bases ``exist on the basis of an agreement between the 
two countries and their future fate will depend on how the agreements 
are fulfilled.'' Russia is supposed to assist Georgia in building a 
national army and to support the restoration of Georgia's territorial 
integrity. Russian bases are located at Tbilisi, Batumi, Akhalkalaki, 
and Gudauta--the latter in territory controlled by separatist Abkhazia.
    Currently an Agreement of 1994 for the Stay of Russian Frontier 
Forces in Georgia provides for the Russian Border Troops in Georgia. 
There is a signed agreement for Georgian assumption of Coast Guard 
responsibility on its Black Sea Coast as of July 1, 1998; Russia has 
already sharply reduced its maritime presence in Georgia. Both Georgia 
and Russia have said there is agreement in principle on the phased 
total withdrawal of Russian border guards. The Head of the Georgian 
Border Guards, Gen. Chkeidze, has stated that this May the frontier 
agencies of Georgia and Russia will consider a draft of a Treaty on 
Border Cooperation. This will draw on the ongoing talks between Georgia 
and Russia relating to the further presence of Russian border troops in 
Georgia and their functions.
    At the April 29 CIS Summit, the CIS leaders, including President 
Shevardnadze, agreed to extend the CIS peacekeepers in Georgia until 
July 31, 1998 and appointed Maj. Gen. Sergey Korobko as Commander of 
the CIS PKF.
    In Georgia there are approximately 15,000 Russian troops, including 
about 9,000 Defense Ministry troops there pursuant to a 1995 basing and 
air defense agreement (signed by the Georgian president and Russian 
prime minister but not yet ratified by the two parliaments). This is a 
subject of ongoing negotiations between the Russian and Georgian 
governments.
    Somewhat less than 4,000 of these are border guards, stationed 
there under a 1994 agreement on border guards. Georgia will assume its 
own coast guard responsibility effective July 1, 1998 under a separate 
agreement.
    There are also about 1,500 Russian CIS peacekeeping troops in 
Abkhazia and another 500 in South Ossetia included under another 
agreement.

                               __________

        ``TRADE AND INVESTMENT--A KEY TO OUR GLOBAL COMMUNITY''
                  Remarks by U.S. Senator Chuck Hagel
    Crossroads of the World Conference Istanbul, Turkey May 27, 1998
    I am grateful for the opportunity to speak to you today on an issue 
that is vital not only to the United States, and this region of the 
world, but to all of the world as we prepare to enter the next 
century--trade and investment. Trade and investment are the keys to the 
next century.
    It is most appropriate that the name of this conference is, ``The 
Crossroads of the World''--a crossroad being the place where roads meet 
and decisions are made. But this region is more than a crossroads in 
geography. We are at a crossroads of history and human endeavor.
    Central Asia, the Caucasus and Caspian Sea region have risen on the 
world stage at a most unique time. Never in the history of man have we 
had a world so full of opportunity. With the collapse of Communism and 
the rise of vibrant new nations in this region, we have an opportunity 
to transcend centuries of conflict. The nations of this region will 
build new opportunities for their people through commerce, trade, joint 
projects, free markets, and respect for their neighbors. The magic of 
the free market is that a gain of one country does not mean a loss for 
another. We can all gain and thrive by working together.
    One project has fired the imagination of the entire region--indeed 
the entire world. And rightly so! The Caspian Sea basin contains the 
world's greatest reserves of oil and gas outside of the Persian Gulf. 
But unlike every other major petroleum discovery, the resources have no 
easy access to the sea, and therefore no easy access to world markets. 
It is a testament to the people and nations of this region that they 
are working to solve this problem in a way that will turn disadvantage 
into an economic opportunity. But a westward export corridor will do 
more than create economic growth in the region. It will also help build 
peace, stability, security, strengthen national independence, provide 
more opportunities for all nations of this region, and connect this 
region to the world. It will help further develop what President 
Shevardnadze has called the Eurasia Corridor.
    I want to stress the importance of understanding the dynamics of 
the ``big picture''--the realization that the world is interconnected. 
The nations of the world are living in a global community--underpinned 
by a global economy. Economic and p0litical stability in this region of 
the world is connected to the rest of the world. Farmers and ranchers 
in my state of Nebraska are directly affected by the development and 
growth of markets in this area and around the world. Economics, 
markets, communications, trade, investments, and politics are all 
interconnected.
    Taking advantage of the opportunities of this brave new world will 
require vision and leadership. Bold leadership--bold leadership with 
the vision to see through the haze of the present and into the 
possibilities of the future. Nations must not be held captive to the 
past. This will require leadership that is wise enough to seize the 
moment and move nations forward. Nations of today are not the nations 
of yesterday. We must rise above past differences and old conflicts. 
This is not without risk. But the risk must be taken.
    International trade connects the crossroads. Trade binds nations 
together in strategic and political alliances. Throughout history trade 
and commerce have been key instruments that have helped break down 
totalitarian governments, dictatorships and opened the doors to 
democracy and higher standards of living for all people. Trade and 
international investment have helped pave the way for peace in many 
areas of the world. Democracies do not go to war with other 
democracies. Last week we witnessed the referendum for peace in 
Northern Ireland ending 29 years of bloodshed. The prospects of 
economic growth and investment in the region played a significant role 
in this historic vote. The countries of Eastern Europe opened the doors 
to free markets which guided the move towards democracy and freedom. 
Trade and democracy are interconnected. And China reminds us that 
freedom does not grow in isolation--trade leads to more open societies. 
Trade and investment lead to political and economic stability.
    The need to build stability, sovereignty and territorial integrity 
in Central Asia is essential. We have a unique opportunity in this part 
of the world to build regional economic cooperation. Let us not 
squander this opportunity. We have the chance to make the world more 
stable, more secure, more democratic--a world safer for our children 
and grandchildren.
    Regional development and cooperation brings regional security and 
prosperity. We must build on the common denominations of mutual 
interests. Trade and investment are building blocks for the world's 
mutual interests.
    This important conference gives us the forum to share common 
visions, exchange ideas and common goals, and move forward in 
strengthening our global community.
    As Chairman of the United States Senate Foreign Relations 
Subcommittee on International Economic Policy, Export and Trade 
Promotion, I haveheld a number of hearings on the Caspian Sea oil 
pipeline. This area of the world is continuing to offer more and more 
opportunities to American companies. The growth and development of this 
area's infrastructure along with the economic and political stability 
of the region are important to U.S. interests. The United States must 
put forward a clear, comprehensive and effective U.S. policy for the 
region, particularly for the development of a western route for Caspian 
Sea oil. Another piece of that was put into place by Secretary Pena's 
announcement. But this is more than just an infrastructure project--
this is about building and strengthening regional economic cooperation 
and understanding. We have the ability to build and strengthen 
international cooperation on all levels. The stability of the region 
will benefit not only those in the area but around the world.
    The nations of the world are truly interdependent. We must work 
together--toward achieving our common goals--toward achieving a world 
that is economically and politically stable--where free trade and 
democracy flourish, but not at the expense of national sovereignty.
    National identity and sovereignty must not be sacrificed in the 
process. And it need not be. Peoples and nations are anchored by their 
cultures. There will never be peace and stability with artificial 
nations and compromised cultures. We must be careful as we pursue the 
trade and investment which will allow all nations to prosper in this 
crossroads. For this crossroads Sits atop the fault line of 
civilization.
    We face unlimited horizons. We are all up to the task. We are up to 
the challenge. For they represent the best of our cultures, our 
peoples, our technologies, our spirit and our mutual interests.
    Ladies and gentlemen, thank you.